Brazzil Magazine - September 06, 2006
“While the American Dream Is Outsourced Brazil Drives the World into the Future”
Written by Ricardo C. Amaral
Never in the history of the world have we had an economic revolution similar to the one that it is under way today. The global reallocation of economic power from the current superpower - the United States - to the new emerging powers of the future such as China, Brazil, India, Russia and the Arab Gulf countries is mind-boggling.
Brazil with its vast supply of natural resources will benefit greatly from this global economic revolution, and today any smart investor should invest in Brazil and be in the ground floor of this great long-term investment opportunity.
Brazil has a young economy in the areas of manufacturing, agriculture, and services. We can say that today Brazil's economy is comparable to a small company with a great potential for growth in the future.
In contrast, the United States (where billions of petrodollars have been parked temporarily waiting for better long-term investment opportunities) has an old and aging economy - with a very mature and declining manufacturing base that is struggling to carry the heavy load of its legacy costs, such as pension and health care obligations; these costs are related to a large number of retirees from the old American economy.
The agricultural portion of the US economy depends heavily on US government subsidies to be able to survive. And today its service industry and the remaining manufacturing are being outsourced out of the United States at the speed of light to countries such as India and China among many other countries around the world.
We can say that today the United States economy is comparable to a very large company that is fast becoming obsolete and many of its viable and surviving parts are leaving the United States through outsourcing for better opportunities around the world including Brazil.
On a daily basis, the lifeline of the American economy is being exported overseas - including its R&D, American "know how" and with it the potential of future innovations. Everybody knows that this is going on, but still there is a major disconnect between the perception of what people think is happening and the actual speed of this process and economic revolution.
To help us understand what is happening today we need to take a close look at two giants of economic thought.
First, John Maynard Keynes, a British economist who lived from 1883 to 1946 - considered by many people to be the greatest economist of the last century. His Keynesian Economics is an economic theory stating that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.
Any government that adopts Keynesian economics believes it is the government's job to smooth out the bumps in business cycles. Intervention would come in the form of government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax hikes in good times, in order to curb inflation.
Keynesian theory had its origins in his passionate attachment to the free market and Keynes would be right at home in today's market-driven, free trade-oriented world.
In my opinion, John Maynard Keynes can be considered the most influential economist in the last 70 years in relation to the development of the major industrial economies in the world. He would be number one on my list of influential economists up to 2005.
Second, but in the beginning of the new millennium - from 2006 on - the number one position of the most influential economist belongs to another outstanding economist: Joseph A. Schumpeter a giant in the history of economic thought. In a very short period, almost overnight, Schumpeter became the most relevant and important economist for the 21st century.
Joseph A. Schumpeter, an Austrian economist who lived from 1883 to 1950 - his economic theory of "creative destruction" will have the greatest economic impact on countries around the world in the future, and will help explain why globalization will speed up and will rearrange the global economy on the coming years.
In 1983, Peter Drucker wrote the following on "Modern Prophets" about Schumpeter's "creative destruction" economic theory: "Schumpeter insisted that, innovation - that is, entrepreneurship that moves resources from old and obsolescent to new and more productive employments - is the very essence of economics and most certainly of a modern economy.
Schumpeter's Economic Development does what neither the classical economists nor Marx nor Keynes was able to do: It makes profit fulfill an economic function. In the economy of change and innovation, profit, in contrast to Marx and his theory, is not a Mehrwert, a "surplus value" stolen from the workers. On the contrary, it is the only source of jobs for workers and of labor income.
The theory of economic development shows that no one except the innovator makes a genuine "profit"; and the innovator's profit is always quite short-lived. But innovation in Schumpeter's famous phrase is also "creative destruction." It makes obsolete yesterday's capital equipment and capital investment. The more an economy progresses, the more capital formation will it therefore need.
Thus what the classical economists - or the accountant or the stock exchange - considers "profit" is a genuine cost, the cost of staying in business, the cost of a future in which nothing is predictable except that today's profitable business will become tomorrow's white elephant. Thus, capital formation and productivity are needed to maintain the wealth-producing capacity of the economy and, above all, to maintain today's jobs and to create tomorrow's jobs.
Schumpeter's "innovator" with his "creative destruction" is the only theory so far to explain why there is something we call "profit." The classical economists very well knew that their theory did not give any rationale for profit. Indeed, in the equilibrium economics of a closed economic system there is no place for profit, no justification for it, no explanation of it. If profit is, however, a genuine cost, and especially if profit is the only way to maintain jobs and to create new ones, then capitalism becomes again a moral system.
The question in Schumpeter's economics is always, is there sufficient profit? Is there adequate capital formation to provide for the costs of the future, the costs of staying in business, the costs of "creative destruction"?
The basic question of economic theory and economic policy, especially in highly developed countries, is clearly: How can capital formation and productivity be maintained so that rapid technological change as well as employment can be sustained? What is the minimum profit needed to defray the costs of the future? What is the minimum profit needed, above all, to maintain jobs and to create new ones?"
History Background
Let me give you first a history background to set the stage to show why this economic revolution is under way today, and why this couldn't have happened before our time at the speed that is happening today. There are many factors that are coming into play that help us understand this revolutionary economic evolution of the capitalist system.
After the end of World War II, with the reconstruction of Europe under way, a large pool of US dollars ended up with European banks as a result of the Marshall Plan, and this new pool of US dollars become known as Eurodollars. After World War II the US dollar also became an important part of many countries foreign currency reserves.
One thing we have to keep in mind: since the end of World War II until the fall of the Soviet Union in 1991, the United States benefited a great deal from the fact that most communist countries and its satellites stayed away from the international financial markets. For all practical purposes, during almost 50 years until the collapse of the Soviet Union in 1991, the communist countries did not compete with the United States for the pool of money available for investment from around the world.
Since the collapse of the Soviet Union, in theory the U.S. has a lot more competition from other countries than in the past for this pool of money available for investments on the international financial markets. But the people from countries around the world are still operating under their old mindset and they have been financing the US government's humongous budget deficits. Global insecurity regarding terrorism created an unique situation in the last five years in which the United States has been allowed the hogging of almost 90 percent of total global savings - year after year.
This unique situation can't continue much longer and an investor's mindset has finally started to change. There is a real possibility that in future years the competition will become very tough, and a large portion of this pool of global investment money will go to other countries instead of the United States.
It takes time for people to change their old mindset and old theories and start adapting to the new circumstances and realities of the new global economic environment - mainly today when we have a new and unique global economic structure as never seen before.
Technology Changed Everything
Right now, we are in the middle of a historical turning point. In the last few years we had a revolution in technology, and today we can do things that were not viable only two years ago. In the late 1990's a few corporations including Global Crossing connected the entire world with fiber optics, combine that with the advances we had in broadband technology, and in Internet telephony technology, plus all the latest developments related to computer technology, storage capability, faster computers, powerful computer chips, and you have a new cheap communications system around the world like we have never seen before.
Outsourcing has been around for a long time, but now for the first time in the history of the world, because the price of communications is so low: you can transfer huge amounts of data, and use the telephone 24/7 for a very low cost. Until recently the costs of international telephony, for talking of transferring data was very expensive and did not make economic sense to transfer overseas a lot of company operating functions.
Because of this technological revolution, only in the last year or so did it start making economic sense to outsource everything in sight. With the current technology, we can outsource probably 50 percent or more of all American jobs to a cheaper country such as India, China, Brazil and a zillion other places around the globe.
Today the United States is not outsourcing only jobs that Americans don't want to do. The US corporations today are exporting millions of hi-tech jobs as fast as they can. At the same time, China and India are moving very fast into the future. They are investing heavily in R&D and they are developing the new state-of-art software, and the future in electronics. Today, there is something revolutionary and new regarding outsourcing; and it moves at the speed of light.
In the meantime American workers should get used to getting jobs at the new Wal-Mart wages with almost no benefits - instead of working for the "American Dream," as in the past, in the future these workers will be working for the new American economic equivalent of the "Titanic."
It is a very hard task for any government to create strategies for creating new jobs all the time in the economy, and no country can afford to lose the jobs that they already have. Any job is worth saving, because not everyone in the country will become a rocket scientist, or a software engineer. The country needs to create millions of new jobs every year including jobs for the semi-literate population. And job creation is a very important function and a responsibility that most governments from around the world have to fight for all the time.
Outsourcing
On December 18, 2005 The New York Times published an article "Want to Know a 'Dirty Little Secret'?" by Steve Lohr, and the article said: "...Last Monday, at a dinner at the Waldorf-Astoria in New York, Mark R. Anderson, editor of The Strategic News Service, a technology newsletter, sounded like a traitor to his class. He was speaking to a group of technology executives and venture capitalists, fans of Mr. Anderson but also champions of outsourcing.
"The current research on outsourcing, Mr. Anderson said, tends to be static and understates the trend. "The actual outflow of jobs is huge and growing," Mr. Anderson said. "I call this the CEO's dirty little secret. When people really find out what's happening," he added, "our view of India will change dramatically.""
In recent years IBM went from being a major technology company to becoming what we can call "IBM the Outsourcing Company on Steroids" - IBM is in the position to outsource, and at a very fast rate, a large number of good paying jobs out of the United States into India and other lower cost countries around the world.
Today India is becoming so important to IBM that in June 2006 a very important meeting that traditionally has been held in New York, for the first time was held instead in India.
On June 5, 2006 The New York Times published an article "India Becoming a Crucial Cog in the Machine at IBM" - and the article said:
"BANGALORE, India - The world's biggest computer services company could not have chosen a more appropriate setting to lay out its strategy for staying on top.
"On Tuesday, on the expansive grounds of the Bangalore Palace, a colonial-era mansion once inhabited by a maharajah, the chairman and chief executive of IBM, Samuel J. Palmisano, will address 10,000 Indian employees. He will share the stage with A. P. J. Abdul Kalam, India's president, and Sunil Mittal, chairman of the country's largest cellular services provider, Bharti Tele-Ventures. An additional 6,500 employees will look in on the town hall-style meeting by satellite from other Indian cities.
"On the same day, Mr. Palmisano and other top executives will meet here with investment analysts and local customers to showcase IBM's global integration capabilities in a briefing customarily held in New York. During the week, the company will lead the 50 analysts on a tour of its Indian operations.
"The meetings are more than an exercise in public and investor relations. They are an acknowledgment of India's critical role in IBM's strategy, providing it with its fastest-growing market and a crucial base for delivering services to much of the world.
"...In the last few years, even as the company has laid off thousands of workers in the United States and Europe, the growth in IBM's work force in India has been remarkable. From 9,000 employees in early 2004, the number has grown to 43,000 making IBM the country's largest multinational employer.
...IBM is growing not only in size by adding new hires, but also in revenue. The company's business in India grew 61 percent in the first quarter of this year, 55 percent in 2005 and 45 percent the year before."
The Multinational Corporation
Today we know that the reality is multinational corporations don't have national loyalties, they are in business to make money, and the bottom line is what matters most.
These multinational corporations have plants and businesses all over the world, and their shareholders are scattered throughout the world. The stock of many of these public companies is traded in more than one stock exchange, and a lot of foreigners are part owners of these corporations.
Some people in the United States believe that corporations have to be patriotic and have to act as good "US citizens." But that way of thinking is rapidly changing and a growing number of major American companies are planning to reincorporate in Bermuda, or in other tax heaven; a move that would save them millions of dollars in taxes. Among these companies is Connecticut-based tool manufacturer Stanley Works for example. A few years ago, they estimated that the move from Connecticut to Bermuda would have shaved about US$ 30 million off Stanley Works' annual tax bill.
Americans went nuts about Stanley Works' move to Bermuda. But for how long will Americans be able to stop Stanley Works' from reincorporating in Bermuda to save US$ 30 million dollars in taxes per year? Do you know how many tools Stanley Works' has to sell around the world to get that extra profit for the shareholders of that corporation?
In five years, we are talking about at least US$ 150 million dollars in extra profits for their shareholders. It is a lot of money, and that story applies to most US multinational corporations. With the profit cannibalization that is going on all around because of the Wal-Martization of the American businesses, it is just a matter of time for us to see an exodus of these corporations from the United States to major tax heavens.
The Legacy of the Soviet Union
In 2003 the book, "After the Empire - The Breakdown of the American Order" by Emmanuel Todd (Columbia University Press - February 2004) was a best seller in Europe. Among a number of interesting facts mentioned in his book Mr. Todd identified something very important regarding the communist Soviet Union that will create a major problem for the United States in the future regarding the new US service/technology economy; an area that today the United States claims to have an advantage over the rest of the world.
The Soviet Union under its communist ideology placed a high value on education, as a result, after the collapse of the Soviet system they left behind as its legacy, a large number of very well educated people not only in the Soviet Union but also on its communist satellite countries. And the United States with their declining education system will have a hard time competing in the future with all these very well educated people left behind by the dying communist world. American companies are taking advantage of this large pool of very well educated people and they have been outsourcing jobs from the United States to Russia, Hungary, Check Republic and so on...
The English Language
Besides the major advances in technology, the English language makes it easier for companies to implement the outsourcing process of American jobs to other countries. American companies of all sizes are not wasting time and they are outsourcing a massive number of jobs from the United States to India, China, and many other countries around the world. These are countries that have not only the lower costs, but the people can communicate very well in English; and that alone helps simplify and speed up the outsourcing process of jobs out of the US economy.
The job market in the United States is under attack in three major ways: First, the United States is exporting good paying jobs to other countries via outsourcing. Second, by the permanent replacement of jobs by new technologies; in this case jobs disappear forever.
Third, is eliminating jobs by mergers and acquisitions where the major goal to achieve a profit on these deals is by the elimination of thousands of jobs in the merged companies.
One result of all these trends is a net reduction of salaries and benefits for US workers at almost all levels, (except for a few people on top of the management pyramid) which in turn will result in lower taxes paid by these people to the state and federal government.
Today, American companies don't have another choice other than help the self-destruction of the current American capitalist economic system. This self-destruction is happening on a daily basis and a lot faster than most people realized in the United States.
Anyone can see the evidence of this self-destruction on a daily basis on the news; all kinds of American corporations are repudiating on the promises that they made to their employees regarding pensions, and health care costs and so on. These trends will have a major negative impact on an increasing number of people in the American population: you worked your entire life and thought that you had a pension and other benefits to support you in your old age, then the American corporations changed the rules of the game and decided to say, "sorry, but you are out of luck, we can't afford paying you your pension just find another way to pay your bills." Today, there are 40 million retirees in the United States, and there are another 77 million baby boomers coming very fast down the pipeline.
This change of policy by the American companies in the United States will have a major negative impact in the lifeline of its capitalist system, since this pension money is very important in the creation of the pool of money available for investment in the American capitalist system.
The Forbes Magazine cover story on the issue dated March 13, 2006 "Private Inequity," gives a detailed account of how the "private equity firms" or "leveraged buyout funds" operate in the economy as parasites, or blood suckers - and these companies are milking the American economic system dry, making their money by gutting these companies, pillaging everything in sight; including their pension funds, and by eliminating jobs and closing many parts of the business. And they do that on the regular basis, year after year.
The Forbes article said: "Driven by greed, private equity firms or leveraged buyout funds have been making a lot of money over the years - There would be no reason for people to complain if these financiers were building enterprises and creating jobs. But they do not make their fortunes by discovering new drugs, writing software or creating retail chains. They are making all this money by trading existing assets.
...Moreover, some buyout shops ply rape-and-pillage tactics at their new properties. They exact multimillion-dollar fees advising businesses they just bought. They burden a target company with years of new debt, raised solely to pay out instant cash to the buyout partners.
...More politely known as a dividend recapitalization, this quick-buck ploy, entirely legal, paid out $18 billion in instant gratification to new owners last year, Standard & Poor's says. Now and again corporate carnage follows, as thousands of employees lose their jobs, long-term prospects are diminished and the business files for bankruptcy, stranding minority investors and debt-holders.
... Globally, 2,700 funds are raising half a trillion dollars in cash to invest; this will bankroll them for $2.5 trillion in deals in 2006..."
Hedge funds also are competing with the "private equity firms" or "leveraged buyout funds" for these get rich quick type of schemes.
The New American Business Strategy
To make things even worse, today, bankruptcy has become an important part of an acceptable business strategy in the United States; this new tool being used by corporations it is an easy way to eliminate liabilities and all kinds of costs, and people should not be surprised when companies such as General Motors, and Ford finally file for bankruptcy in the near future.
What is happening to the US economy today is best illustrated by the fact that some 20 years ago the largest US employer was General Motors. And workers at General Motors earned, and still earn today, a good living wage. Today, the US largest private employer is Wal-Mart. And that is what has happened to the American economy. We have gone from a General Motors economy where workers earned decent wages and benefits to a Wal-Mart economy where people earn low wages and very poor benefits.
With the current technology, we can outsource probably 50 percent of American jobs to a cheaper country such as India, China, and a zillion other places around the globe and that can be achieved under today's technology, never mind the new technologies that are being developed and will be used in the near future. Today, there is something new and revolutionary about outsourcing: it moves at the speed of light.
Why Invest in Brazil?
In 2005, the Middle East oil exporting countries harvested an estimated US$ 400 billion dollars as a current account surplus. The Bank for International Settlements in its December quarterly review found that a smaller share of the oil windfall is being invested in Western banks this time around - the BIS speculates that the petrodollars are going into hedge funds, private equity funds and regional stock markets.
Who's not sharing in the current petrodollar windfall at the same rate as in the 1970s? If you guessed the United States, you're right. The BIS noted that evidence suggests "a smaller share of investable funds has been channeled into U.S. securities in the most recent cycle. "Why don't they invest in the US?" The basic reason, surely, is that investors think they'll do better in the booming emerging markets than in a flat US equity market.
The new oil boom is here to stay in the foreseeable future, and not many people are questioning the durability of the oil boom itself. Many analysts doubt it will end soon because of the new world market demand for the product, and the new appetite for spending in Dubai. Also other Gulf states will require producers to maintain oil prices indefinitely at US$ 50 to US$ 80 a barrel or even higher.
The Financial Times published an article on January 5, 2005 that said: "Brazil's decision to pre-pay its outstanding debt to the International Monetary Fund and the governments of the Group of Seven industrial nations says a lot about the country's improving circumstances. But it also points to the more confident fashion in which emerging countries are evolving in the world economy. This presents a challenge to more traditional international economic players, such as the G7 and the IMF, in adapting to the new structural realities of the global system.
"... Brazil has chosen to use part of its foreign exchange holdings to repay all its liabilities to the IMF and members of the "Paris club" of country creditors. The decision reflects the rapid improvement in Brazil's international reserve position, driven by a large trade surplus, growing influx of foreign direct investment and high portfolio flows.
"It is also the result of prudent financial management, which consistent with the country's growing wealth now emphasizes more sophisticated asset-liability management techniques.
"Underlying Brazil's decision is its growing economic self-confidence. Sound macroeconomic management, anchored by a cautious fiscal regime and responsive monetary policy, is increasingly hard-wired into the sociopolitical framework. The need for external financial support is lessened by the country's growing ability to "self insure" - through large reserve holdings and a declining and less volatile stock of debt.
"This phenomenon is not limited to Brazil. It is also evident in a number of other emerging economies and will likely spread further. As a result, several countries will probably join the "Brics" (Brazil, Russia, India and China) in having greater influence on global economic and financial flows."
The article also said that this change will affect the investment decisions of the oil exporters - and I am sure that Brazil is at the top of their list for the investment of the Arab Gulf states current petrodollar windfall.
Another trend that is underway is: in a very short period of time China is becoming the most important business partner of Brazil. China has been quickly replacing the United States' influence in Brazil and in other South American countries such as Venezuela, Chile, and so on.
Conclusion
I wrote most of this article in October of 2005, and came back to it a number of times since then, revising it and moving it along, but I got stuck and I had a problem on how to finish the article and how to convince people why to invest in Brazil.
I am aware that Schumpeter's "creative destruction" economic theory and many of the other things that I mentioned above would also affect the Brazilian economy. But only recently I finally realized where lies Brazil's major economic advantage in the coming years, Brazil's energy policy puts Brazil in a class by itself.
It is ironic that I am making a case for the Arab Gulf Nations to invest their petrodollars in Brazil. What sets Brazil apart today and gives Brazil a major advantage when compared with the United States and many other competing countries?
It is a fact that the Brazilian economy is becoming almost isolated from another oil shock since Brazil adapted its economy to be independent from oil as much as possible - and Brazil in 2006 for the first time in its history will export oil instead of being a big oil importer - only ten years ago Brazil used to import about 40 percent of its total oil needs.
Brazil has become a case study and a model of a successful energy policy to most countries from around the world on how to become independent from oil, create less pollution and achieve all these goals in an efficient and profitable way. Today, the Brazilian economy is not being affected as much as everybody else by the latest sky rocketing price of oil; the result of the increased world demand for that product and also by the escalating US/Iran nuclear crisis, among other things.
The Brazilian government decided to bite the bullet about 30 years ago when the world had the last major oil crisis. It took 30 years for Brazil to develop a very innovative, very profitable, and efficient Ethanol industry that replaced the old system and Brazil's dependence on foreign oil.
Risk is an important factor when people are deciding where to invest their money.
Today, the United States economy is increasingly dependent on oil that comes from places that are in the middle of a sectarian civil war as is the case of Iraq. Or from places that are becoming increasingly hostile to the United States such as Iran, Nigeria, Venezuela, Ecuador, Colombia, Saudi Arabia and many of the gulf countries in the Middle East. Many of these sources of oil that fuel the American economy can be cut overnight without prior notice.
With global warming causing havoc all over the world the Brazilian energy policy or something similar to it is looking great and it is the way to go for the sake of our planet and of future generations.
Besides, oil is too valuable of a commodity to be wasted as fuel for cars, trucks and other types of transportation. The oil producing countries should concentrate their efforts and R&D in developing new ways to use their valuable commodity such as in making plastics and other more useful products of the future. Oil is too valuable of a commodity to be wasted as we do waste it today, and I am sure that high quality R&D will find new and better uses for oil in the future.
I am sure that future generations will look back in history and ask themselves: "What were past generations thinking when they wasted so much of a valuable commodity such as oil to power their cars?"
After we take in consideration everything that I mentioned in this article, there is no doubt in my mind, that today Brazil offers one of the great investment opportunities in our planet for anyone who is thinking about the future.
In a world that is becoming aware very quickly of global warming and the resulting harming effects of it that gives Brazil a major economic advantage since Brazil has already implemented the energy policies that other countries will adopt in the future.
Today Brazil is already way ahead of the pack, since Brazil has made many of the adjustments required and has adapted its economy to the new energy environment of the future.
Copyright © 2006 by Ricardo C. Amaral. All rights reserved.
He can be reached at:
brazilamaral@yahoo.com
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Published also at:
“While the American Dream Is Outsourced Brazil Drives the World into the Future”
Written by Ricardo C. Amaral
http://www.brazzil.com/component/content/article/171-september-2006/9684.html
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