It has been the custom in modern Europe to regulate, upon most occasions, the payment of the attorneys and clerks of court according to the number of pages which they had occasion to write; the court, however, requiring that each page should contain so many lines, and each line so many words. In order to increase their payment, the attorneys and clerks have contrived to multiply words beyond all necessity, to the corruption of the law language of, I believe, every court of justice in Europe.
Adam Smith, Wealth of Nations
When you’ve got two such thought provoking and controversial authors as Matt Ridley and Bill Easterly in a single blog, the results can never be boring. Here’s Matt Ridley reviewing Easterly’s latest book, “The Tyranny of Experts”:
Imagine that in 2010 more than 20,000 farmers in rural Ohio had been forced from their land by soldiers, their cows slaughtered, their harvest torched and one of their sons killed — all to make way for a British forestry project, financed and promoted by the World Bank.
Read the rest of Matt Ridley’s Review at The Rational Optimist website.
According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works, and certain public institutions, which it can never be for the interest of any individual, or small number of individuals to erect and maintain; because the profit could never repay the expense to any individual, or small number of individuals, though it may frequently do much more than repay it to a great society.
Adam Smith, Wealth of Nations
What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalisation of which was nearly complete in practice.
The Economic Consequences of the Peace
John Maynard Keynes
Before we dig into the key findings presented at Sida’s latest event in their “Development Talks” series, it’s worth asking the question about what we mean by Global Value Chains (or GVCs as they will have us call them) in the first place.
When we look at a manufactured good, whether it’s a car, video game or Barbie Doll, it will no doubt have the words “made in” somewhere on the packaging, followed by a specific country. But this has always been misleading, and in today’s ever more complex world it is arguably even more so.
Leonard Read’s amazing analogy of I, Pencil (written in the pre-digital world of 1958), helps us to visualise the seemingly unending chain of materials, labour and specialisation necessary to produce something as simple as the humble pencil. In this sense GVCs have been with us since the dawn of time, when the first merchants crossed the seas in sail boats and rafts with various goods to trade with their neighbours. What’s new therefore is not so much the paradigm but the reach, speed, complexity, spontaneity and sophistication of GVCs.
Couple this with the continued rise of “intermediate goods” – each of which are necessary for the production of other goods – means that countries can in today’s world now specialise down to the level of “products within products”, rather than just looking to make the end-products themselves. And with these new possibilities come a whole tangle of new opportunities and challenges.
What follows are the top ten takeaways from the recent panel discussion on this subject featuring Malin Ljunqkvist (Swedish National Board of Trade), James Zhan (UNCTAD), Evdokia Moise (OECD), Marion Jansen (WTO), Frank Matsaert (TMEA) and Tobias Fishcer (H&M).
1. Rise of FDI in the Developing World
According to the latest World Investment Report from UNCTAD, the road to recovery for Foreign Direct Investment (FDI) remains bumpy. Levels have still to return to their pre-global recession highs, mostly due to the continued perceived fragility of the global market coupled with policy uncertainty. Despite this, 2012 did see the rise of FDI investment into the developing world, when for the first time these countries accounted for more than 50% of global FDI flows.
2. The Rise and Rise of GVCs
Today more than 60% of global trade is accounted for by trade in intermediate goods, and the majority of this trade is carried about by Transnational Corporations (TNCs), which takes place within their network of affiliates, contractual partners and arm’s length suppliers.
3. Going in the Wrong Direction?
As one of the key factors preventing countries from trading effectively is protectionism, it comes as somewhat of a concern to see that the current trend is for more protectionist polices, not less. Since 2000 there has been a steady decline in the number of liberal/trade friendly policies from a peak of 94% in 2001 to around 75% in 2012. Conversely there has been a steady rise in restrictive/regulative trade policy, rising from 6% to 25% over the same period.
4. Role of Efficient Trade
In order for a country to play a part in the growing GVC market, it needs an efficient export and import process. As the number of goods needed to manufacture a finished item steadily increases, there is also a growing need to make sure that the array of intermediate goods needed can be speedily and cheaply expedited through customs.
5. GVCs do Not Just Chase the Lowest Price
While the cost of labour is an important factor in GVC location, it is by no means the most important. Other factors – such as quality, reliability, stability and competency – are more important when considering the locations of intermediate manufacture and services. It is therefore in the interest of the TNCs themselves to see improvements on these fronts. Increasingly it is the level of “Human Capital” (the level of skills, education and competency in a society) which is the deciding factor.
6. Bringing It All Home
Developing Countries that participate in GVCs typically see a GDP per capita growth rate of 2% above the average of those developing countries that do not participate in GVCs. However it is not a given that some of the benefits of GVCs stay with the domestic market: the right policies and legislation need to be in place to ensure this happens (such as tax legislation).
7. Uphill Struggle
Developing Countries often have weak enabling environments, such as poor infrastructure, limited technology, corruption and debilitating institutions, which can severely limit their participation in GVCs. In some countries transport cartels can push up the price of products considerably, as well as slow down the delivery chains and speed to market. This in turn restricts their countries desirability as a GVC location.
8. The Hurdles are Cumulative
“Thick” Borders hinder the efficiency of trade and the movement of goods, and as many goods typically pass through several borders on their travels, the knock-on effects are cumulative, not singular. This can make cooperation at the regional level (Regional Value Chains, or RVCs) all the more important, particularly for land-locked countries. In order for this to happen, more work needs to be done on customs control, anti-corruption, port facilities (including ship-to-shore technology), standards harmonization and the reduction of NTBs (Non-Tariff Barriers), the latter of which are designed to indirectly restrict the flow of goods.
9. Wealth Generation
The benefits that TNCs can bring to the domestic markets involved in GVCs includes such things as a stable income, knowledge and technology transfer, jobs for women, and demands for improvements in local conditions. Tobias Fischer told a revealing story about the changes he has seen over the last decade alone. When he first travelled to Bangladesh, the HR “department” at the local supplier was an old man with the ability to read and write, who kept lists of employees on scraps of paper. Fast forward to 2013 and now you’ll find 23 year old Fatima, who can not only read and write very well, but who is also fluent in English, holds a graduate degree, and sits in a comfortable office operating HR software written in the local Bangladeshi language.
10. More Specialisation
By only being involved in a small part of the value chain, countries can further specialise their resources and “pick and choose” where their comparative advantage might reside. However who does this “picking and choosing”, and who and what is best placed to do it, remains a moot point.
- Global Value Chains and Developing Countries (Kommerskollegium)
- World Investment Report 2013 (UNCAD)
- Twitter #developmenttalks
If you thought technology was already disruptive enough, here’s the news. We’re just getting started.
The Roman Rallying sequence in the Top Gear Middle East Special is an exhilarating example of the old world rubbing up against the new. As Jeremy Clarkson and Co charge around the sacred Jordan hippodrome in their battered sports cars, they inevitably start to kick up a lot of ancient dust. Clarkson starts to worry: “someone’s gonna see this dust, and then they’re gonna come, and then there’ll be anger and rage“.
There was a time when Bitcoin was able to rub up against the old financial world without anyone noticing. Now that time has gone. They’re simply kicking up too much dust to go unnoticed any more. Take the recent seminar at Stockholm’s School of Economics as a case in point. A simple two hour session featuring the current figurehead of the Bitcoin movement, Jon Matonis, turned out to be their quickest selling and most oversubscribed event in their 100 year history. But for those who know even a small amount about Bitcoin, this comes as no surprise. How could anyone resist a story involving giant stone money, gold, aliens, and the possibility of displacing some of the most significant polices of modern governments with an algorithm?
International Man of Mystery
Let’s start with a little background check. It’s a given nowadays that the most innovative internet technologies no longer emerge from the R&D labs, but from the world’s student dorms. The case of Bitcoin is no different. Well, not entirely different anyway. The twist in this particular story is that the originator – who goes by the name of Satoshi Nakamoto – is closer in style to the techno duo Daft Punk than Mark Zuckerberg. According to modern folklore, Nakamoto could be a combination of any of the following: a gifted Japanese student (or even group of students); a graduate of Trinity College Dublin called Michael Clear; and/or a group of international entrepreneurs who filed a patent for something very similar to Bitcoin only 72 hours before the domain was registered. However all attempts so far to arrive at a real person have ended in either denials or dead ends. Perhaps this is as it should be. All this anonymity is entirely fitting for a distributed P2P network that champions the (somewhat contradictory) dual principles of open source and cryptography. The simple fact that no one seems to own Bitcoin means everyone does.
So What’s Different This Time Around?
The world has seen innovation in ICT and Finance before. In fact, Sweden itself can even claim to be a bit of a world leader in the field. While things like iZettle’s iPhone dongle, and services such as Tink, Flattr and Klarna may seem (and indeed are) groundbreaking, they are still little more than a smart interface into the traditional banking world. As such they’re not creating a new game so much as simply making it more efficient to play the old one – and taking their cut to do so too. What’s cool about Bitcoin is that it’s inventing a totally new ball game altogether.
Here’s the rub. In the world as we know it, each institution, credit card, bank or financial service has it’s own ledger (or set of ledgers), and every time we ask them to transfer some money in or out of our accounts they do so by adjusting their ledgers. And when they adjust those ledgers, they charge a (not insignificant) transaction fee. Not only that, increasingly these transactions are electronic, and that means they’re tagged with our identity too. Depending on your point of view, this could be either good for tracking criminals and/or a convenient tool for governments to snoop on what their citizens are up to.
Bitcoin does two significant things which drive this traditional paradigm into the sand.
First, it makes the transactions anonymous, much like cash transactions. Any transactions you make on Bitcoin are not coupled to your identity. That’s bad news for nosey governments.
Second, it has only one giant ledger in the cloud, so the transaction costs of transfers are as close to zero as you can get, and (because of Moore’s Law) they will keep falling. Essentially, in the Bitcoin universe, there is no difference in the transaction costs between a) buying a loaf of bread at your local store, or b) sending millions of Bitcoins through the ether from one side of the planet to the other. The cost for both is more or less zero.
But before we get all excited about hopping up and down on the graves of clearing houses, banks and other financial middleman, it’s worth mentioning that there’s actually a really sound reason why these kind of institutions exist in the first place. Convenience.
Convenience is the reason we buy our chewing gum and cigarettes from the local store and not from the out of town cash and carry. Even though we know the local store charges a premium, that’s still better than hopping in the car and driving across town for a small purchase. The same logic applies to the world of traditional banking. However unreasonable a transaction cost may be, it’ll still be cheaper than hopping on a plane with a sack full of cash. What makes the Bitcoin solution unique here is that it sidesteps this issue by making all financial transactions equally convenient. From the perspective of both the buyer and the seller that’s a very attractive proposition – from the perspective of the (possibly soon defunct) middlemen, it’s a nightmare. The emergence of Bitcoin is going to make a lot of very powerful, influential and traditional middlemen-style institutions very nervous.
Jon Matonis tells a great story to demonstrate just how different Bitcoin is to the traditional money world. When he gave a talk on Bitcoin at the monumental premises of Swift HQ in Brussels – one of the world’s largest central clearing houses – he asked if he could see the “live transactions” that roll through their computers every nano-second of every day. He was told that the ledger (the bank of computers doing the work) was private and kept in a locked room. By contrast not only is the Bitcoin clearing system totally decentralised, it is also public. Very public. In fact it’s so public you can even watch the transactions as they happen in realtime on the web, and, because the entire enterprise is driven by open source and thereby open to the creative talents of the dorm world, you can even listen to it.
One other big paradigm shift in the Bitcoin world is around credit. In the Bitcoin world, there simply is no fictional money. This would make fractional banking (the method by which banks lend out more money than they actually have in reserves) almost impossible. In the Bitcoin world, banks would only be able to lend the money they actually have. Perhaps loans would be spread across Bitcoin’s distributed network, much like crowdfunding? However it works in practice, the impact of reduced credit on a world currently addicted to the stuff is anybody’s guess.
The key point about Bitcoin’s decentralised nature vs the centralised nature of the traditional money world is worth exploring in more detail. It’s also where our story takes a slight off-road detour into Area 52 territory.
Until recently, SETI (the project who’s aim is to Search for Extraterrestrial Intelligence) has been the number one global distributed computing network. However now that Bitcoin is on the rise, it’s been bumped down to second place. In fact the surge in Bitcoin’s distributed computing power is like nothing we’ve ever seen before. As Bill Gates said, “Bitcoin is a technological tour de force“.
This distributed nature also makes it incredibly resilient. Imagine if the SWIFT building above was somehow taken out, either physically or by attacks on it’s network. That would more or less cripple the money exchange markets that depend on it. Compare that to Bitcoin. The loss of a few computers in any given country on the network makes no difference – the system simply adjusts and life carries on as before. In this regard Jon Matonis likes to draw a comparison between Bitcoin and the ancient Rai Stones that were used on the island of Yap, Micronesia. These huge stone wheels were used to demonstrate the wealth on the owner and serve as a public record of significant transactions. Even though the ownership of any given stone would change over time, as long as people knew where it was, the physical location of the Rai Stone did not matter. In fact one Rai Stone even sank to the bottom of the sea during a voyage, but as the villagers could all agree it still existed, the stone was still able to be used.
A Dismal Science No More?
Despite the fact that we’ve already covered the mysterious origins of Bitcoin, its power to reduce transaction costs to zero, and its distributed, anonymous nature, we’ve still only scraped the surface of its disruptive powers. What it can potentially do to governments is mind blowing.
While some progressive governments (such as Germany) have already embraced the power of Bitcoin, the majority remain sceptical. Some – such as the government of Thailand – have even opted to ban it (and good luck with that…).
So why all the worry and hoo-hah?
Here’s the punchline. Bitcoin would not only effectively sidestep a government’s monetary policy, it would severally restrict its fiscal policy too. But what does this mean in practice?
For those of us who are not economists, we can explain it this way. First, on the monetary side of the equation, governments often like to reserve the option of setting the base lending rate (or discount rate) themselves through a central bank. They’re also keen on printing more money if needed to help pay for stuff, and they like to control the markets by buying and selling their own bonds (known as open market operations). In the Bitcoin world, it is the Bitcoin algorithm which controls the flow of new Bitcoins, not a central bank. This would make it much harder (if not impossible) for governments to rely on the fictional money they’ve grown so use to. That’s goodbye to quantitative easing for starters.
Second, on the fiscal side, as income gets harder and harder to trace back to individuals, governments would have to switch taxation to the consumption side of the equation. In turn this would rather limit the governments supply of tax revenues, and may even force them to get real about balancing their books.
As Al Gore has wryly noted, “I think the fact that within the Bitcoin universe an algorithm replaces the functions of [the government] … is actually pretty cool.”
So now we’ve looked at the potential impacts on governments, we’re done, right? No.
Some of the most exciting implementations of all this kind of new technology isn’t happening in the old world, but the new. While the EU and the States are mired in government bureaucracy, restricted by powerful lobbying bodies, and stunted by military units run with half an eye on health and safety regulations, Africa and Asia are leapfrogging a lot of these issues to implement some truly original solutions.
At the Stockholm seminar, we also got to hear from the amazing Pelle Braendgaard who runs Kipochi. He told us about the everyday use of digital currencies like M-Pesa in Kenya, and how people there who have been let down by the traditional banking sector have found an exchange lifeline with digital currencies that run on old cellphone technology and sim cards. M-PESA in effect gives a banking-like infrastructure to those people who would otherwise be “off the grid” and operating in the System D economy. Imagine the possibilities for anyone in Africa or Asia to either wire money in our out of the country for free (or as good as), while at the same time sell their goods without having access to a bank account. They could also shop around for a loan on a global scale, and even pay for their groceries at the local store in the same currency.
So What Happens Next?
The exponential rise of Bitcoin will no doubt start to generate some heat from here on in. It’s only a matter of time before we see the traditional gatekeepers start to cry foul. No doubt we’ll see a lot of anger and rage in the courtrooms. At least in the west. In Africa and Asia we’ll probably see things take off a little quicker. I predict it will only be a few years from now before we see Bitcoin (or other similar digital currencies) emerge as the exchange of choice for the majority of people otherwise denied access to the established money structures. And when that happens, prepare for the world to shake.