ChazenTHE BEST OF Global Insights

ASIA

01 BREAKOUT NATIONS TO WATCH Four Asian countries are set to take off.

08 INDIA HAS A NEW GOVERNMENT. NOW WHAT? Social programs got India only so far. Now it’s time to spur growth.

09 HOW GE DOES BUSINESS IN CHINA CEO Mark Hutchinson opens up about the promise and peril.

THE BEST OF Chazen Global LETTER FROM THE DIRECTOR

There’s so much one could say Insights about Asia, in all its depth and variety. Looking back at the stories published in Chazen Global Insights, the e-­­newsletter Breakout Nations Spotlight on Asia’s big four of the Chazen Institute of to Watch 01 emerging markets International Business, it was hard to select which of our articles best represent Surprising statistics and informed this diverse, chaotic region. Asia Insights So we let you, our readers, choose. 02 analysis with a practical bent What you see in this issue are the most popular stories on Asia over the past 18 months. Four often-overlooked Looking at the ones that made the cut, I’m struck Beyond the Usual Suspects: countries that are expected by the multiplicity of ways business leaders Where Asia Is Growing to grow more than 5 percent are approaching opportunities there. Mark 04 annually in the short term Hutchinson, for example, speaks from the vantage point of success—he’s president and CEO of GE ­China—and offers advice for protecting intellec- tual property, a prime concern for anyone entering the market. Meanwhile, policy makers, such as Shusong Ba, who leads the Finance Institute at the Development Research Center of the State Council of China, sound a cautionary note about what this influx of new commerce means to China’s labor force. And Columbia Business School’s resident Nobel laureate, Joseph E. Stiglitz, wonders whether China can get its state/market balance right. But there’s plenty of upside, too. Investors looking for deals may want to look beyond the Seoul usual suspects. How about Philippines or Sri Lanka? Ruchir Sharma builds a compelling case for why these unsung nations are worthy of Getting China’s State- Has China gone too far in its investment attention. Read more on the next page. Market Balance Right 0 reliance on the marketplace? We hope you’ll consider the Chazen Institute of International Business your gateway to the Tough questions remain on how to support China’s burgeoning people and ideas that transform the global Financing China’s Cities 07 population while improving its marketplace. We sponsor a robust schedule of insufficient infrastructure. speakers and panels, support major research, and play a vital role in the global education agenda at India Has a Social programs got India Columbia Business School. To stay up to date on New Government. only so far. Now it’s time all we do, drop us a line at [email protected] Now What? 08 to spur growth. and ask to be added to our mailing list.

Best regards, How to Fix China’s SOEs need a stronger market dose, says a State-Owned Firms 10 food company CEO.

Wei Jiang Lessons from an The head of India’s fastest growing hotel chain shares insights for retiring rich. Director, Chazen Institute of International Accidental Entrepreneur 11 Business and Arthur F. Burns Professor They’re not what you think. of Free and Competitive Enterprise, Columbia Business School How GE Does A CEO’s frank view of protecting Business in China 12 intellectual capital RUCHIR SHARMA is head of ECONOMIC EXPECTATIONS emerging markets and global macro at Morgan Stanley Investment Management.

BREAKOUT NATIONS TO WATCH

Some countries When most of us think and English-speaking. Its average annual per-person of “breakout nations,” GDP income of $2,500 leaves room for growth. are poised to grow the BRIC juggernauts faster than market come to mind. But SOUTH KOREA Ruchir Sharma, head Sharma calls South Korea the gold medalist of emerging expectations. of emerging markets markets thanks to its “rare ability to stay at the cutting Four of the top 10 for Morgan Stanley edge of fast-changing industries” such as robotics, Investment, offers a aerospace, and biotech. Unlike Taiwan, the country has are in Asia. more nuanced view spawned genuinely global brands. As for political risk, in his book, “Breakout Sharma wrote that South Korean leaders have assumed Nations: In Pursuit of the Next Economic Miracles” the North is doomed to failure. The government has kept (2012, W.W. Norton). “The biggest mistake markets debt down to just 34 percent of GDP as part of its prepa- make is extrapolation. We assume a trend will continue ration to “absorb the high cost of rebuilding the North.” ad infinitum,” he says. Although he doesn’t predict any superpowered SRI LANKA economy will rival the BRICs in the next three to five Even during its disastrous civil war, Sri Lanka managed years, Sharma does identify four Asian countries, that an average annual growth pace of nearly 5 percent. As will 1) grow faster than market expectations, and 2) beat it rebuilds over the next decade and creates a new trade their peer groups, the two conditions that he says create regime with neighboring countries, Sri Lanka could a breakout nation. (Other breakout nations include achieve 7–8 percent annual growth. – Sharon Kahn emerging markets of The Czech Republic, Nigeria, Poland, and Turkey. Among developed countries, he ASIA’S BIG FOUR BREAKOUTS names Germany and the United States.) Per Capita GDP (in thousands of USD) INDONESIA 2.5 3.5 Noting that Indonesia was the Asian country hardest THE PHILIPPINES INDONESIA hit by the crisis of 1997–1998, Sharma says it had regained its mojo by 2011, calling it “by far the best-run large commodity economy.” The world’s fourth-most 3.0 23.5 populous nation has a large enough domestic market to SRI LANKA SOUTH KOREA generate demand and less of a post-crisis debt problem than any other big emerging market.

THE PHILIPPINES President Benigno “Noynoy” Aquino III was originally THE TAKEAWAYS dismissed as the unimpressive son of a legendary father who was assassinated by Marco supporters and 1 Within a huge pool of 2 For rapid growth, it is much a mother who was once president. But he is delegating competitors, only a few nations easier to be poor. To grow power and passing reforms. This island nation has the beat the game by growing 10 percent from an average faster than rivals in their own annual personal income of world’s fifth-largest share of natural resources. Half the income class. $1,000, a nation needs to earn population is under 21, and Filipinos are well educated an extra $100 per person.

ASIA 01 TRENDS

Asia Insights

TWO TOOLS FOR SPOTTING A BREAKOUT NATION

Ruchir Sharma, author of The Four Seasons Index $1,000 “Breakout Nations: In Pursuit The average cost of a night’s stay at a $800 of the Next Economic Miracles” luxury hotel acts a proxy for gauging (see story on page 1), has some competitiveness. As a whole, Asia $600 was “strikingly reasonable,” writes offbeat ways to predict which $400 Rates (USD) Rates emerging market will succeed. Sharma, especially compared with some commodity capitals.*­ $200

*Rates are based on hotel websites as of July 2014. If the city has no Four $0 Seasons, the author used a comparable hotel. Source: Breakout Nations Dubai London Moscow Mumbai Jakarta New York BangkokShanghai Mexico City Buenos Aires Johannesburg

The Billionaires’ Index Total Net Worth of Country’s Billionaires (as % of GDP) Emerging countries that share their wealth rather than consolidate it among a Russia 29.2 Philippines 6.0 small number of billionaires are more apt Malaysia 20.1 Indonesia 4.6 to develop a middle class. And ideally the India 17.2 Korea 4.0 wealthy class “should emerge predomi- % nately from productive economic sectors, Taiwan 14.6 China 4.0 40 not cozy relationships with politicians,” Brazil 6.5 writes Sharma. Asian emerging markets Four out of 10 respondents from generally fare well on this scale. Source: Breakout Nations; IMF World Economic Outlook, April 2011 China and India named corruption as a top barrier to their country’s economic growth. WHO’S CONFIDENT NOW? 06% Last fall, the Chazen Institute polled 549 Columbia Business School alumni and additional China respondents expect their business professionals on “Prospects & Challenges 3.9 country to grow this year at a for Major Economies 2014.” Respondents from 6 percent annual GDP rate. However, emerging markets of Brazil, China, and India On a scale of 1–6, China tied with their estimate is well below the IMF’s as well as seven developed markets were asked to Germany as the country most 8.2 percent forecast. Respondents respond to issues surrounding their government confident in its own government. from India were also unenthusiastic and their nation’s growth. Some findings: The United States came in at 2.7, just in their 4.5 percent forecast, above France (2.6) and India (2.4), compared with the IMF look forward the lowest scoring national group. of 6.2 percent.

02 ASIA gsb.columbia.edu/chazen TWO REASONS WHY CHINA WILL CONTINUE TO GROW

THE SEX RATIO MOTIVATOR THE LATECOMER ADVANTAGE For most nations, including the United States and Emerging economies can achieve innovation and industrial Germany, the natural ratio of young men to young upgrades by imitatating and importing existing technol- women is one to one. In a few countries—China, ogies. In contrast, developed countries, which lead the Singapore, Vietnam, India, Korea, and Switzerland—the ­frontiers of technology, must invest in costly and risky R&D young-men-to-young-women ratio is above one. China to birth these innovations in the first place. happens to have the highest ratio in the world right Justin Yifu Lin, Professor and now—about 1.15. That means that one out of every nine Honorary Dean of the National young men cannot find a wife, or even a date. % School of Development at Peking Shang-Jin Wei, 07 University and a recent speaker former director of at the Chazen Institute’s N.T. Wang Chinese provinces the Jerome A. Chazen Distinguished Speaker Forum, with worse-than- Institute of International China still has the says “the latecomer’s advantage” the-national-average Business and the N.T. potential to grow allows developing countries to more than 7 percent Wang Professor of harness cheap technology to sex ratio imbalance each year through tend to produce Chinese Business and narrow the income gap. The Growth more entrepreneurs. Economy at Columbia Commission [an independent body Business School, argues 2028 chaired by Nobel laureate Michael Newly incorporated that actions young men Spence that brought together 22 privately owned and their parents are policy-makers, academics, and business leaders] indicates firms are more willing to take to avoid 13 economies took full advantage of their latecomer status numerous and involuntary bachelor- after World War II to grow at least twice as fast as developed grow much faster in hood can contribute to countries for 25 years or longer. regions where the higher productivity and China became one of the group of 13 after 1979 when economic growth rates. economic historian Angus Maddison estimated China’s per marriage market is Because relative capita GDP at $6,725 in 1990 dollars. That was 21 percent of more competitive. wealth is a competitive per capita GDP in the United States, roughly the same gap weapon on the marriage that existed between America and Japan in 1951, Singapore market, Chinese men are more willing to work hard, in 1967, Taiwan in 1975, and South Korea in 1977. Their take risks as entrepreneurs, postpone consumption, and annual growth rates averaged between 7.6 percent and save and invest. In fact, Chinese provinces with worse- 9.2 percent over the subsequent two decades. than-the-national-­average sex ratio imbalance tend Based on to produce more entrepreneurs. Newly incorporated advances made by “The latecomer’s advantage” privately owned firms are more numerous and grow that group, China allows developing countries much faster in regions where the marriage market is still could grow more competitive. faster than 7 percent to harness cheap technology Standard textbooks fail to capture this demo- each year though to narrow the income gap. graphic feature, and contribute to unfounded ­pessimism 2028. “To realize its about China’s growth potential. Wei’s prediction: potential as a latecomer,” says Lin, “China needs to deepen “China’s GDP will double in size in about a decade. Many its market-oriented reforms, address various structural people now overly pessimistic about China will start to problems, and develop its economy according to its compar- revise their views in the first half of the next decade.” ative advantages.”

ASIA 03 ASIA OVERVIEW

BEYOND THE USUAL SUSPECTS: KEY: % GDP GROWTH China Slowdown China’s double-digit growth rate has given 1.0-1.9 way to a 7.4 percent target this year—and the WHERE ASIA IS GROWING contagion affect means the rest of Asia could 2.0-2.9 catch the flu. The correlation between the Chinese economy and greater Asia is decidedly 3.0-3.9 growing as China becomes less an assembly hub and more an importer, trading especially 4.0-4.9 with its neighbors. The IMF calculated that the South Korea on an Even Keel spillover effect of every 1 percent reduction in Managing just a 2.8 percent GDP growth 5.0-5.9 GDP Chinese growth translates to a 0.3 percent increase in 2013, South Korea has not shone as decline in the rest of Asia. brightly as it did early in the 2000s. The country 6.0-6.9 But wait. The IMF is applauding China’s faces rising household and corporate debt, slower-growth policies, indicating that a 10 income inequality, and an aging population. 7.0-7.9 MONGOLIA percent growth rate is not sustainable. What’s Still, the IMF predicts increasing exports and Note: Map data more, such a sizzling pace requires government prudent management will keep Korea on the based on 2015 stimulus and a debt buildup. The upshot: It’s path to 3.7 percent growth this year, followed projections. not the rate of growth but the quality. by several years of 3.8 percent GDP increases.

JAPAN SOUTH KOREA

India’s New Approach Although India’s economy doesn’t overly influ- ence nearby countries, the IMF is optimistic that CHINA new Prime Minister Narendra Modi’s policies will help point that country toward stronger growth.

NEPAL BHUTAN

The Impact of the U.S. and TAIWAN Other Developed Nations The challenge here is twofold: Investors who BANGLADESH INDIA once chased emerging market returns could MYANMAR rotate into (presumably safer) developed MARSHALL LAO ISLANDS country debt once it pays higher yields. And, P.D.R. for Asia’s sovereigns, corporations, and house- holds, more-expensive borrowing—triggered MICRONESIA by rising interest rates—could jack up debt/ THAILAND equity ratios. VIETNAM However, orderly tapering in conjunction CAMBODIA with developed market growth will likely have a PHILIPPINES positive effect, causing the United States and Europe to import more Asian goods. As far as borrowing goes, corporate leverage has remained stable throughout Asia SRI LANKA BRUNEI KIRIBATI in recent years, putting the region in better DARUSSALAM PALAU shape than some other parts of the world. Still, the IMF estimates that about 20 percent of MALAYSIA corporates shoulder much of Asia’s borrowing Myanmar Growth Promises MALDIVES TUVALU TONGA burden. Should interest rates rise by a basis The new darling among investors, Myanmar has a positive outlook—but buffers are thin, point, the IMF calculated, 10 percent of corpo- SINGAPORE rate borrowers would see their debt/equity the IMF warns. Reforms need to stay on ratio balloon to 40 percent. Household debt track, the revenue base needs to broaden, VANUATU SAMOA could also increase, particularly when it comes and the country needs to reduce reliance on to home prices. natural resources. INDONESIA

PAPUA NEW GUINEA FIJI SOLOMON Learn More: To download the IMF’s “Regional Economic Outlook: Asia & Pacific” report, ISLANDS TIMOR-LESTE click on this link or go to www.imf.org/external/pubs/ft/reo/2014/apd/eng/areo0414.htm. 04 ASIA gsb.columbia.edu/chazen BEYOND THE USUAL SUSPECTS: WHERE ASIA IS GROWING

Asia is revving its engines again. Look for better than 5 percent growth in Indonesia, Japan: The Waning of Abenomics By most accounts, the economic policies of Malaysia, and the Philippines— MONGOLIA Shinzō Abe have reignited internal investment in Japan. The IMF forecasts a respectable 1.4 as well as frontier economies percent GDP growth for 2014. But, as the major such as Vietnam and Myanmar. stimulus wanes, Japan faces the prospect of falling back into barely perceptible growth and deflation. Even taking China and India out of the equation, That stuck-in-the-mire outcome is less JAPAN “Asia will remain the world’s most dynamic region,” SOUTH KOREA crucial to the rest of Asia than it was not too said Changyong Rhee, director of the International long ago, though. As China’s influence grows, Japan’s is fading. Monetary Fund’s Asia and Pacific Development department. Introducing this year’s “Regional Overview and Frontier Perspectives” report at a CHINA recent Chazen Institute talk, Rhee cited GDP growth forecasts for the region of above 5 percent for the Frontier Economies: Red Hot next few years, and emerging Asia besting 6 percent. Challenges faced by Mongolia, Lao PDR, Cambodia, Sri Lanka, Bangladesh, and Vietnam Still, Rhee warned, “now is not the time to be NEPAL BHUTAN are to avoid overheating and curb imbalances. complacent,” indicating specific risks that could

TAIWAN derail Asia’s momentum. “Macro-prudential policies should be part of the tool kit to deal with risks and BANGLADESH INDIA external shocks,” he said. Overall, he suggested, MYANMAR MARSHALL Asian countries should maintain a relatively accom- LAO ASEAN Trajectory ISLANDS P.D.R. The Association of Southeast Asian Nations modative monetary policy stance, although China (Indonesia, Malaysia, Philippines, Singapore, needs to rein in credit expansion. – Sharon Kahn and Thailand) represents “a new growth pole,” MICRONESIA THAILAND achieving a stable 5 percent growth in 2014, the IMF forecasts. The trajectory would be even VIETNAM % GDP GROWTH IN ASIA CAMBODIA higher if Thailand were out of the mix. That PHILIPPINES country’s political tension is dragging growth COUNTRY 2013 2014 2015 Indonesia 5.8 5.4 5.8 down to near zero, although Thai potential is in line with the rest of the ASEAN bloc. ASIA 5.2 5.4 5.6 India 4.4 5.4 6.4 ADVANCED 2.1 2.3 2.2 7.2 6.5 6.5 COUNTRIES Philippines SRI LANKA BRUNEI KIRIBATI DARUSSALAM PALAU 7.7 7.5 7.3 Japan 1.5 1.4 1.0 China OTHER MALAYSIA 4.1 3.6 3.6 6.5 6.7 6.8 Singapore NATIONS*

MALDIVES TUVALU TONGA Korea 2.8 3.7 3.8 Note: 2014 and 2015 data are projected. Taiwan 2.1 3.1 3.9 SINGAPORE *Bangladesh, Bhutan, Brunei EMERGING Darussalam, Cambodia, Fiji, Kiribati, 6.5 6.7 6.8 ECONOMIES Lao P.D.R., Maldives, Marshall Islands, VANUATU SAMOA Micronesia, Mongolia, Myanmar, Nepal, Thailand 2.9 2.5 3.8 Palau, Papua New Guinea, Samoa, INDONESIA Malaysia 4.7 5.2 5.0 Solomon Islands, Sri Lanka, Timor- Leste, Tonga, Tuvalu, and Vanuatu Vietnam 5.4 5.6 5.7 Source: IMF PAPUA NEW GUINEA FIJI SOLOMON ISLANDS TIMOR-LESTE ASIA 05 GLOBAL GOVERNANCE JOSEPH E. STIGLITZ, a Nobel laureate in economics, is University Professor at Columbia University. His most recent book is “The Price of Inequality: How Today’s Divided Society Endangers Our Future.”

GETTING CHINA’S STATE-MARKET BALANCE RIGHT

Has China gone too far in its When China began and does so in most market economies, for good reason. its reforms more than America’s privately based healthcare system is expen- reliance on the marketplace? three decades ago, the sive, inefficient, and achieves far worse outcomes than direction was clear: those in European countries, which spend far less. the market needed to play a far greater role in resource A more market-based system is not the direction allocation. Today, many of China’s problems stem from in which China should be going. In recent years, the too much market and too little government. Or, to put government has made important strides in providing it another way, while the government is clearly doing basic health care, especially in rural areas, and some some things that it should not, it is also not doing some have likened China’s approach to that of the United things that it should. Kingdom, where private provision is layered atop a Worsening environmental pollution, for example, public base. Given the relatively small role of private threatens living standards, while inequality of income healthcare provision in the UK, the country has what and wealth now rivals that of the United States. is essentially a public system. Corruption, meanwhile, pervades public institutions Likewise, although China has already made and the private sector alike. All of this undermines progress in moving away from manufacturing toward trust within society and in government—a trend that is a service-based economy (the GDP share of services particularly obvious with respect to, say, food safety. exceeded that of manufacturing for the first time in Such problems 2013), it still has a long way to go. Already, many indus- could worsen as China tries are suffering from overcapacity, and an efficient “Embracing America’s restructures its economy and smooth restructuring will not be easy without profligate materialist away from export-led government help. growth toward services China is restructuring in another way: rapid urban- lifestyle would be a and household consump- ization. Ensuring that cities are livable and environmen- disaster for China and tion. Clearly, there is tally sustainable will require strong government action room for growth in to provide sufficient public transport, public schools, the planet.” - JOSEPH E. STIGLITZ private consumption; public hospitals, parks, and effective zoning, among but embracing America’s other public services. Continued on page 13 p profligate materialist lifestyle would be a disaster for China and the planet. Air quality in China is already putting peoples’ lives at THE TAKEAWAYS risk; global warming from even higher Chinese carbon emissions would threaten the entire world. 1 Many of China’s 2 Chinese living 3 To pay for problems today standards could its growth, the A BETTER BALANCE stem from too much increase if more government should There is a better strategy. For starters, Chinese living market and too little resources addressed impose taxes on standards could increase if more resources were allo- government. large deficiencies the environment, cated to redress large deficiencies in health care and in health care, income, and education, and property. education. Here, government should play a leading role, urbanization.

06 ASIA gsb.columbia.edu/chazen SHUSONG BA is a 2014 Lulu Chow Wang Senior Visiting Scholar at Columbia Business INFRASTRUCTURE School. He is the deputy director-general of the Financial Research Institute at the Development Research Center of the State Council. Dr. Ba is also chief economist of the China Banking Association and deputy secretary of the China Institute of Macroeconomics.

FINANCING CHINA’S CITIES

As China moves to Increased urbaniza- Then China must redefine the roles of the central tion is the central and local governments in delivering services. A more an urban landscape, tenet of China’s centralized system will allow workers to move more central questions long-term economic freely within the country without losing access to plan. The strategy critical services. remain regarding addresses income how to provide inequality while WHO PAYS FOR URBANIZATION? boosting domestic Providing public services is only half of the equation, social services for demand for Chinese though. Financial reform must also address funding the goods and services, country’s expanding infrastructure needs. Historically, all and how to pay thereby reducing local governments have depended on land sales for for infrastructure. the country’s most of their revenue. However, this source of income dependence on is declining from a peak of 7.5 percent of China’s gross exports. Meeting this objective, though, will require domestic product in 2010 (almost equal to the rest of all implementing a basket of political and economic other income for local governments) to just 1.2 percent reforms aimed at helping local governments deliver the of GDP by 2012. infrastructure and public services that a growing urban Unfortunately, China’s current system bans local population will demand. governments from issuing bonds, even to finance capital expenditures. Continued on page 13 p A COUNTRY OF CITIES Between 1978 and 2012, China’s urban population grew MORE PEOPLE IN CHINESE CITIES from 18 percent to 52.7 percent of its citizens. By 2030, an estimated 65 percent to 70 percent of the country’s Total Population Urban Population (in billions) (in billions) population, or nearly 1 billion people, will be living in cities, all of which will need massive infrastructure and 1.5 social services. Key is erasing inequalities between long-time city residents and newcomers. In China’s current two- 1.2 tiered society, hundreds of millions of people moving into the cities are not allowed to share in the same 0.9 public services, such as education and health care, that the cities’ native residents enjoy.

Fortunately, policymakers have determined 0.6 that all citizens should receive equal access to social services. The first step is to de-link public services from a person’s hukou, or household registration, which 0.3 grants services only to residents from the states in which they are registered. Regional governments shy from registering new migrants because they don’t

want to add to their financial loads, and migrants often 2000 2005 2010 2015* 2020* 2025* 2030* 2035* 2040* 2045* 2050*

aren’t ready to give up ties to their home states. *Estimate | Source: The World Bank

ASIA 07 GROWTH JAGDISH BHAGWATI, University Professor ARVIND PANAGARIYA is the Jagdish at Columbia University, is a fellow at the Bhagwati Professor of Indian Political Council on Foreign Relations in the United Economy, International and Public Affairs, States. He is widely recognized as the and Economics at Columbia University’s intellectual pioneer of India’s reforms. School of International and Public Affairs.

INDIA HAS A NEW GOVERNMENT. NOW WHAT?

Social programs got India only so far. Now it’s time to spur growth.

On the eve of the May landslide electing Narendra the proportion of its citizens who live below the poverty Modi as India’s new prime minister, two Columbia line from more than half of the population in the late University economists received accolades of a different 1970s to roughly one-fifth today, the country’s growth sort: Jagdish Bhagwati, professor of economics, law and rate has stalled in recent years. international affairs, and Arvind Panagariya, professor If their ideas sound familiar, there’s a reason: of economics, shared the prestigious George S. Eccles they contain echoes of trickle-down economics Prize for Excellence in Economic Writing for their as popularized by Margaret Thatcher and Ronald book, “Why Growth Matters: How Economic Growth Reagan. But Bhagwati and Panagariya note the issues in India Reduced Poverty and the Lessons for Other in India are vastly different from those of more Developing Countries” (2103, PublicAffairs). developed countries. The book challenges notions of protectionism and wealth redistribution that have been India’s THE HOT ISSUES guiding forces. Although India has been able to cut The authors comment on items certain to be on Modi’s agenda:

Labor Laws 4 STEPS TO UNDERSTANDING Restrictive labor policies have severely handicapped WHY GROWTH MATTERS India’s competitiveness in global markets, say the authors. For example, it is “impossible for an indus- 1  Governments need revenues to support infrastructure and trial establishment with 100 or more workers to lay social programs. off or retrench workers even if it is unprofitable and is therefore forced to close the unit,” the book states. The 2  Since the poor can’t afford these programs, and since raising writers continue: “The burdensome labor laws explain taxes is not popular, the economy needs to generate wealth why entrepreneurs in sectors such as apparel, in which that can, in turn, grow businesses and throw off rupees. labor costs account for more than 80 percent of total costs, choose to stay tiny.” For the same reason, foreign 3  A rising economy means more and better paying jobs and a investors tend to take their business to less expensive larger pie to share with the government even when the tax emerging markets. rate stays the same. Infrastructure Modi has indicated willingness to redirect government 4  Eventually taxes can be directed to alleviate poverty. money spent on social programs to infrastructure such as roads, airports, and especially electricity generation.

08 ASIA gsb.columbia.edu/chazen City of Gangtok in Sikkim, India

“The inefficiencies caused by pre-reform policies hurt not the rich, but the poor and the lower middle class...because the rich manage to insulate themselves against the inefficiencies.”

- JAGDISH BHAGWATI AND ARVIND PANGARIYA, IN WHY GROWTH MATTERS

Indeed, as chief minister of Gujarat, he routinely INDIA’S POVERTY RATIO found a way around political and regulatory barriers to grow the state’s economy at 10 percent a year over 60%

the past decade, often double that of India as a whole. 40%

20% Source : Authors’ construction Corruption based on estimates in Mukim The other priority on Modi’s agenda must be and Panagariya 0% attacking corruption with institutional reforms 1977–78 1983 1987–88 1993–94 2004–05 2009–10 and enforcement. Noting that business reforms may take a while to work their magic, Bhagwati says corruption must be dealt with immediately. “For India to deliver growth, this is an issue that can’t vS wait 25 years.” INDIA CHINA 50 vs 17 65 vs 74 WHICH IS HEALTHIER? Infant Mortality* Life Expectancy Still, the prospect of Modi’s election makes the co- ­ *2009 †2008 (per 1,000 live births) at Birth* authors of “Why Growth Matters” optimistic. “If GDP growth could reach 10 percent on a consistent basis, $ vs $ vs vs India could become the third largest economy in 1.2 3.7 230 38 1.9 0 the world in 15 or 20 years,” says Panagaiya. In fact, Per Capita Income* Maternal Mortality† Death from Malaria† “since India has more people, it’s entirely possible that (in thousands of USD) (per 100,000 live births) (per 100,000 population)

India could exceed China.” – Sharon Kahn Source: “Why Growth Matters”

ASIA 09 CORPORATIONS FRANK GAONING NING is chairman of COFCO Corp., China’s largest food conglomerate. He has been recognized five times as one of the 25 Most Influential Leaders by Chinese Entrepreneur Magazine.

HOW TO FIX CHINA’S STATE-OWNED FIRMS

SOEs need a stronger Many of China’s state-owned companies in strategic sectors, including power, trans- enterprises (SOEs) “have lost portation, telecom, banking, and, to a large degree, food. market dose, says a top direction,” said Frank Gaoning Answers, Ning said, may lie in additional reforms, China executive. Ning, chairman of COFCO Corp., increased incentives to managers, and more privatiza- China’s largest food processor and tions in sectors deemed less key to national security. one of its largest SOEs. “Many are losing money, are not competitive, and have been slow to embrace environ- SOME PRACTICAL STEPS mental change.” Numerous industries, including Ning’s own company, which reported $1.6 billion net his own, have too much capacity: “In the food sector, profits in 2013 on revenues of $35 billion, seems to have we have too many soybeans, too much corn processing, found some answers to the state-ownership dilemma. too many plants making aluminum cans for packaging.” Since its founding in 1952, COFCO has transitioned from Last year, at a talk given at the China Business a small trading firm to a conglomerate controlling all Initiative under the auspices of the Chazen Institute, aspects of the (literal) food chain, from growing crops Ning acknowledged two significant problems with and raising animals to processing, transportation, and managed economics. First, state control is not condu- even operation of port facilities for export. COFCO, cive to innovation. Recognizing this, the current an acronym for China National Cereals, Oils and Chinese government has instituted reforms to entice Foodstuffs Corp., has also expanded into real estate, creativity. “We’re waiting to see if they will be effective,” developing residential properties, shopping centers, said Ning. and hotels within China. Along the way, the company has adopted ­efficiency SLOW-COOKED GROWTH and innovation measures as well as management The second big problem is right in Ning’s wheelhouse. carrots and sticks. Although COFCO isn’t publicly A managed economy meant to provide jobs “creates traded, seven of its subsidiaries are. It spent some COFCO product COFCO size, not productivity in the SOEs,” he said. The so- $3 billion on R&D last year, hiring 400 PhDs. Recently called Beijing Consensus acknowledged this issue COFCO began a Gross Profit Sharing (GPS) bonus some 20 years ago and instituted often-extreme program for all employees. Managers get incentives efficiency measures, including but are also held accountable through its Replacement “The effect is like closing outmoded operations and on Evaluation (ROE) plan. “Every year,” said Ning, “the laying off thousands of redundant lowest scoring 5 percent of our top 100 managers must 100 people running employees. be replaced.” The effect “is like 100 people running from from a tiger. Nobody That painful era paved the a tiger. Nobody wants to be caught.” way for privatization of about 95 COFCO is scouring the globe to increase the food wants to be caught.” percent of SOEs. By listing in Hong supply for a China that’s increasingly interested in Kong, New York, and London, and nutrition and taste as well as food safety issues. Ning - FRANK GAONING NING answering to shareholders, the expects to tap foreign sources through import agree- state-owned enterprises have the incentive and means ments, but COFCO will also explore M&A. Last year, for to adopt market standards and strategies. example, the company acquired 51 percent of Chinese Of course, the government still owns major yogurt operations from the French Danone Group. positions in most former SOEs, so China’s transforma- “We’ve improved a great deal over the years,” Ning tion to a market economy is hardly complete. And the said. But, like China’s managed economy model, COFCO state maintains 100 percent ownership of about 50 “is not finished yet.” – Sharon Kahn

10 ASIA gsb.columbia.edu/chazen After earning degrees in electrical engineering and an MBA, LEADERSHIP PATU KESWANI worked with Tata Administrative Service before launching Lemon Tree Hotels in 2002. Today the chain operates 25 hotels in 15 cities in India, employing about 3,000 people.

LESSONS FROM AN ACCIDENTAL ENTREPRENEUR

The head of India’s fastest-growing hotel 3. Balance risks and rewards. “There’s no reward for independent thinking in most organiza- chain shares insights for retiring rich. tions,” he learned. “If you make $10 million for a big company, They’re not what you think. you may get a $10,000 bonus. As an entrepreneur, you may make $20 million for that big idea” (by selling the company or He calls himself an accidental entrepreneur, but Patanjali going public). A corollary: “Business is always about mitigating (Patu) Keswani, chairman of Lemon Tree Hotels, is being risk. So learn to enjoy risk.” modest. In fewer than a dozen years, he’s built India’s ­fastest-growing hotel chain. Keswani shares lessons he’s 4. Never compete on an even playing field. learned along the way. Land and debt are so costly in India that building a luxury hotel is only marginally more expensive than 1. Inspiration = Leadership. constructing a cheap one. But going up against the After getting his MBA, Keswani joined Tata big guys seemed pointless, so Keswani devised Administrative Service, aiming to “get lost his big idea: a midmarket hotel. in the massive conglomerate and live He scraped together enough capital to comfortably.” Instead he was named fund that first hotel and had every inten- executive assistant to CEO Russi Mody, tion of becoming rich, then retiring. “But who became a role model. “The man the team said ‘build a second hotel!’” he hardly worked,” Keswani recalls, “but recalls. After three hotels, Keswani was he knew how to inspire,” beginning approached by a private equity firm. with knowing the names and birthdays Which led, of course, to more lessons. of all his employees. 5. Don’t lowball. 2. You’re never too important By 2006, Keswani had invested about to pick up the trash. $3 million in his company, “so I said we were As a 26-year-old manager at Taj Group of valued at $200 million.” To his amazement, the Hotels, Keswani met Ronnie Lobo, vice president venture capitalist said, “Okay, we’ll buy you!” Stained glass window of of operations, who taught him that the top guy is Lemon Tree Premier’s logo But the day before the deal was to close, the responsible for the details. As they strolled through a representative called to renegotiate price. “I said, sprawling hotel complex, “his eyes were on the ground, and ‘I don’t want to work with you!’” says Keswani. Soon, investors he picked up anything he found on the floor,” Keswani recalls. more to his liking appeared, allowing Lemon Tree’s growth “The hotel was cleaner than a hospital.” to continue. At the end of the 1990s, Keswani was approaching age 40 and figured he needed $2 million to retire rich. His first attempt 6. Execute brand excellently. involved losing $370,000 in the futures market in seven days. According to the company website, “Like the fruit [the hotels] Keswani regrouped and decided to become an entrepre- are named for, Lemon Tree Hotels are fresh, cool, and sparkling neur. The reason dealt with… another lesson: with zest.” Continued on page 13 p

ASIA 11 JOINT VENTURES MARK HUTCHINSON, president and CEO of GE China since 2011, is a British native who graduated from the University of Queensland in Brisbane, Australia.

HOW GE DOES BUSINESS IN CHINA

Straight talk Mark Hutchinson, president and CEO of GE China, Has being both a competitor and doesn’t sugarcoat the challenges that China faces— partner with state-owned enterprises from a CEO or the difficulties his company continues to slam been difficult? who oversees 27 up against. But, when Chazen Global Insights “We don’t joint-venture our core technology— spoke to him in 2013, he was counting on doubling our engines or healthcare devices. Instead we joint ventures in GE China’s revenues over the next three years. think about where we want access in China and this challenging where we can team up with a Chinese company What advice would you give about how that can contribute to global markets. We have market to do business in China? some 27 joint ventures with state-owned enter- “When one of our customers thinks about coming prises. Take avionics, where a local partner gives to the Chinese market, I say, look, don’t do it alone. us access to the Chinese market and, since GE Talk to people who have been here a while. It is not number one or two globally, enables us to could be the US Embassy, it could be agencies like go global together. the Export-Import Bank, it could be us or other “Creating joint ventures in China hasn’t multinationals. We’ll give you some ideas of been without pain and agony. But we’ve gotten who you should be partnering with or where you to the point where we’re comfortable with our might locate. partners. Joint ventures are hard because you “Also, send someone for a year to get a feel bring two majorly different cultures together, for the place, and maybe not to Shanghai or Beijing especially when you might have alignment at but to other cities undergoing major growth. GE a senior, state level, but dealing with the has been in China 100 years but we’ve become day-to-day stuff is a different animal. more of a local company in the last 10 years. “Aggressive competition happens if there’s Of our 20,000 employees, 99 percent are local.” a commodity aspect of the business, which is why we push joint ventures where we can How have you approached contribute high-end, value-added technology. R&D in China? An example is wind. We compete heavily with “It is important to innovate with Chinese needs in local wind producers. But they do the lower- mind. Much of our focus is on making products end commodity products and we do the more more affordable. Rather than strip down high-end technically advanced turbines.” machines and get rid of the bells and whistles, we’re designing from the ground up. For example, How do China’s growth plans in healthcare devices, we have worked with local fit with GE’s focus? doctors to make a CT scanner smaller in size so “The government’s five-year plan that came that it can fit into the rural hospital room and be out in 2012 focused very much on clean energy, a lot more cost effective. To extract shale gas, the universal health care, and universal transporta- technology used in the United States doesn’t work tion. Those three themes are kind of what we with the Chinese geology, so we’re working quite do, between our work on renewable energy hard on designing equipment appropriate for here. equipment, healthcare devices, and engines. “Innovations we make here eventually The economy in China is slowing down, but will creep into GE products in the United States the three areas that we are in mean we’ll grow and Europe.” 20 percent this year.”. – Sharon Kahn

12 ASIA gsb.columbia.edu/chazen Continued from page 06 • Getting China’s State-Market Balance Right

One major lesson that should have been learned from the Instead, the authorities should boost revenue by imposing envi- post-2008 global economic crisis is that markets are not self- ronmental taxes (including a carbon tax), a more comprehensive regulating. They are prone to asset and credit bubbles, which progressive income tax (including capital gains), and a property inevitably collapse, imposing massive social costs. tax. Moreover, the state should appropriate, through dividends, China, one hopes, will not take the deregulation route that a larger share of the value of State Owned Enterprises, some of America followed. Liberalization of deposit rates led to America’s which might be at the expense of these firms’ managers. savings and loan crisis in the 1980s. Liberalization of lending rates The question is whether China can maintain rapid growth— encouraged predatory behavior that exploited poor consumers. though somewhat slower than its recent breakneck pace—even Bank deregulation led not to more growth, but simply to more risk. as it reins in credit expansion, confronts weak global demand, The issue is not just the pacing and sequencing of liberaliza- restructures its economy, and fights corruption. In other countries, tion, as some suggest; the end result also matters. The challenge such daunting challenges have led to paralysis, not progress. for China’s leaders is to devise effective regulatory regimes that The economics of success is clear: higher spending on urban- are appropriate for its stage of development. ization, health care, and education, funded by increases in taxes, could simultaneously sustain growth, improve the environment, HOW TO RAISE MONEY and reduce inequality. If China’s politicians can manage the That will require the government to raise more money. Local implementation of this agenda, China and the entire world will governments’ current reliance on land sales is a source of many be better off. of China’s economic distortions and much of its corruption. © Project Syndicate, 2014.

Continued from page 07 • Financing China’s Cities

Under a pilot program introduced in 2011, four Chinese In the end, though, an provinces—Shanghai, Guangdong, Zhejiang and Shenzhen— effective solution would include issued a limited number of short-term bonds. Expanding this equal access to public services program would not only open up a critical revenue source for across all of society, which all regional governments, it also would create an important would promote migration and market for private investors. help workers integrate more fully into urban life. The move- CREATING EQUALITY AND EFFICIENCY ment of labor, enterprise and Some reforms should be easier to implement, such as creating capital would become more effi- a bond market for local governments. Other reforms, such as cient as they flow to the places shifting some tax collection authority from the central govern- and industries with the highest Downtown district over- ment to local jurisdictions and the introduction of a property rates of return. looking the Huangpu River in Shanghai tax, will take longer. © Project Syndicate, 2014.

Continued from page 11 • Lessons from an Accidental Entrepreneur In keeping with its hip culture, the company hangs framed jokes 8. Hire for the future, not the present. in unexpected locations around the hotels. And although each “Business models and capital can be commoditized,” says Keswani, hotel is different, all have a crisp, modern feel. who says employees make the difference. He points to three kinds Meanwhile, Keswani tinkered with the mid-market concept of employees: those who wonder what happened, those who to create Lemon Tree Premier (which he describes as a four-star watch things happen, and those who make things happen. Lemon hotel with five-star service) and Red Fox, a step down from the Tree trains staff to embody the friendly brand. “We need to move original model. the first group toward the third group,“ he says.

7. Pursue the triple bottom line: profits, people, The lessons, in turn, have led to three new business opportuni- and the planet. ties that capitalize on India’s growing middle class. Based on In 2007, Keswani learned that, on average, people with disabil- experience raising and spending capital, Keswani is setting up an ities live 20 fewer years than the general population, and most asset management company. He is also establishing a vocational live in poverty. “Once they get a job, those disadvantages disap- training service. Finally, he is translating the Lemon Tree model to pear,” he says. Today, about 5 percent of Lemon Tree’s 300,000 affordable urban housing. employees are speech and hearing impaired, a figure Keswani Oh, and he also plans to take Lemon Tree public. Stay tuned expects to reach 40 percent by 2020. for more lessons. – Sharon Kahn

ASIA 13 About the Chazen Institute

PROMOTING THOUGHT LEADERSHIP

The Chazen Institute sponsors a robust Chazen Global Insights, the institute’s The Entrepreneurship and schedule of speakers and panels, including signature e-newsletter, features Competitiveness in Latin America the Sir Gordon Wu Distinguished Speaker interviews with newsmakers and policy Program is a yearlong course of study Forum, which focuses on China’s economy leaders and presents new thinking on for entrepreneurs in Latin America. and business practices, and the Nand international markets, economic policy, Each participant develops and implements and Jeet Khemka Distinguished Speaker and cross-border strategy. www.gsb. a project to improve his or her company. Forum, which offers perspectives on India. columbia.edu/chazen/globalinsights www.gsb.columbia.edu/chazen/ecla www.gsb.columbia.edu/chazen/events

TRAINING THE NEXT GENERATION OF GLOBAL LEADERS

The Global Immersion Program links the United Arab Emirates that acquaint School and Hong Kong University of classroom learning with real-world participants with other cultures and Science and Technology. www.gsb. challenges. Classes meet for half a term economies and lay the groundwork for columbia.edu/chazen/exchange in New York prior to a one-week visit to internships and international careers. the country of focus. www.gsb.columbia. www.gsb.columbia.edu/chazen/ The Chazen Language Program offers edu/chazen/immersion studytours noncredit, eight-week language courses for the Columbia Business School Chazen Study Tours, organized by The Chazen MBA Exchange Program community. www.gsb.columbia.edu/ students, are 7- to 10-day tours to such sends students to one of 25 partner chazen/language countries as India, Japan, Korea, and universities including London Business

SUPPORTING MAJOR RESEARCH

The Chazen Institute awards annual Access to Columbia’s resources is The Lulu Chow Wang Senior Visiting grants to faculty members and PhD offered to international scholars, doctoral Scholar Program brings senior Chinese students who conduct research with candidates, and leading business academics, business executives, and significant cross-border implications. practitioners for their research. www. government officials to Columbia Business Recent projects include a study of how gsb.columbia.edu/chazen/scholars School to foster dialogue and scholarly entrepreneurs manage financial risk, and exchange. www.gsb.columbia.edu/chazen/ development of an index that measures wangscholars an organization’s social capital. www.gsb. columbia.edu/chazen/research/grants

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