Month: September 2013

The Wall Street Takeover, Part 2

By James Kwak

Five years later, and things seem marginally better in some areas (the CFPB exists), significantly worse in others (LIBOR, money laundering, London Whale, etc.). There has been some debate recently about whether we have a safer financial system today than before Lehman collapsed. But the fundamental issue, as Simon and I discussed in 13 Bankers, is whether our political system will put the interests of society at large ahead of the interests of large financial institutions. On that score, there is little to be encouraged about.

In 2002, Art Wilmarth wrote a mammoth (262 pages) article titled “The Transformation of the U.S. Financial Services Industry, 1975–2000.” In that article, he identified many of the key trends in the financial sector—consolidation, deregulation, breakdown of Glass-Steagall, complex products, increased risk-taking—that would not only produce a financial crisis but make it so destabilizing for the economy later in the decade. Now he has written a shorter (164 pages) article, “Turning a Blind Eye: Why Washington Keeps Giving into Wall Street,” on the key question: why our government doesn’t do anything about it, even after the financial crisis.

Continue reading “The Wall Street Takeover, Part 2” →

Starting With Chile

By Simon Johnson

This is a summary of class #5 in Entrepreneurship without Borders, a course at MIT Sloan.  For links to the course syllabus and summaries of earlier sessions, see this post.

Chile has experienced strong and relatively sustained economic growth in recent decades.  The economy has also proved more resilient to outside shocks (including to the price of copper, the largest export) than many others.  This is a case of good macroeconomic management, including by the central bank.  But there remains the question of how to create enough jobs and increase income levels – including for people at the lower end of the income distribution.

Start-Up Chile is an innovative approach to changing the culture about new ventures (see these FAQS).  By enticing would-be entrepreneurs with relatively small grants to spend at least 6-7 months in Chile, this initiative hopes to create role models and stronger connections between young Chilean people and global business opportunities.  If the entrepreneurs move on – as many do – perhaps this just helps build Chile’s position in global networks.  See this recent assessment, or the organization’s own 3 minute video pitch. Continue reading “Starting With Chile” →

Entrepreneurial Endeavor

By Simon Johnson

Below is a summary of points from Class #4 of Entrepreneurship without Borders, a course at MIT Sloan.  Use this link to look at earlier sessions.

The conventional view about entrepreneurship in emerging markets is that it is difficult or perhaps impossible for new start-ups to have a great deal of impact.  Local markets are dominated by big players who have a great deal of power and who can make life difficult for young competitors (e.g., a frequent complaint in South Korea).  Weak institutions, such as contracts that are hard to enforce, tip the balance towards large incumbents – many of which are based on a long-standing family business.

There is also often a culture (social norms and expectations) that does not view failure as a positive learning experience.  And access to capital and other critical inputs (e.g., talented workers) may be limited or not available to entrepreneurs at a price that makes the firm viable – or that allows for rapid growth.

Endeavor is an organization that works hard to address these issues, particularly by creating a local and global network of people who want to help entrepreneurs.  These communities have done very well in some countries – including in South America (see this visual representation of Endeavor’s impact in Argentina).  Continue reading “Entrepreneurial Endeavor” →

Thinking About Doing Business

By Simon Johnson

In class #1 of Entrepreneurship without Borders (at MIT Sloan) we discussed attitudes towards starting a new business.  In many countries, people want to become entrepreneurs, but they can access only limited types of opportunities.  Relatively small established elites, often with strong political connections, are able to mobilize the resources needed to build a company that can do well.  Class #2 focused on the details of the current situation in Portugal – the macroeconomy will presumably begin to improve and the basic enforceability of legal contracts seems fine, but we do yet see a breakthrough in companies being created by new entrepreneurs.  Below is a summary of the discussion in class #3.

The World Bank’s Doing Business indicators offer a rich set of data with many insights into the various barriers facing small and medium-sized business – as well as potential entrepreneurs.  These numbers provide a first-pass comparison across countries focused on (a) regulation, and (b) contract enforcement.

Singapore and Hong Kong are the impressive leaders of the pack (see Table 1.1 on page 3 of the executive summary of this report).  Countries can grow with an unfavorable environment, measured in this way, but this is more likely with a great deal of natural resources (e.g., offshore oil in Angola, ranked #172).  For most countries, it would be wise to look for a set of reforms that make it easier to do business.

Experience in Georgia since the mid-2000s is encouraging.  The government used the Doing Business indicators and related work to target their priorities – and made a great deal of progress, for example in terms of reducing the number of licenses required (for all kinds of activities) and creating a legal fast-track for applications (i.e., pay a premium and get your passport faster). Continue reading “Thinking About Doing Business” →

Where are the European Entrepreneurs?

By Simon Johnson

This post is based on class #2 in my MIT Sloan course, Entrepreneurship Without Borders.  An edited version appeared this morning on the NYT.com’s Economix blog.

Europe today is relatively rich on average, and there is undeniable potential for further convergence towards Northern levels in use of technology, organization of firms, and productivity levels.  We witnessed some impressive economic improvements over the past 20 years as Eastern Europe left behind its communist system – in part due to the creation of dynamic new firms (e.g., in Poland) and in part as a result of investments by foreign companies (e.g., in Hungary).  But the extent of North-South productivity convergence within Europe has proved disappointing since the formation of the euro area in the late 1990s.

Southern peripheral Europe is now in the midst of a serious economic crisis – precipitated by the realization that sovereign debt may actually be quite risky.  The immediate financial market pressure receded last year when the European Central Bank indicated that it will intervene to keep yields (i.e., interest rates on government debt) at manageable levels, but there is still the critical question of when growth will turn – and what rate of growth is sustainable in the medium term. Continue reading “Where are the European Entrepreneurs?” →

How VCs Are like Colleges

By James Kwak

College application essays? They’re all the same. That’s according to Rick Clark, the head of admissions at Georgia Tech, who kicks off this past weekend’s episode of This American Life by, in part, mocking the tired trope of “idealistic teenager goes to Central America to help the people there but becomes transformed by the experience.” Clark, however, is self-aware enough to realize that the colleges are equally bad: the glossy brochures they send out to high school students, trying to attract their application fees if not their tuition checks, are all exactly the same in virtually every respect.

This reminded me of what it’s like trying to raise money from venture capitalists. The number one thing they care about is your sustainable competitive advantage (unless you’ve already started a successful company, in which case they’ll write you a check to deliver peanut butter sandwiches by text message, but you don’t need their money anyway). Why, if your idea is so good, won’t big company X (in our case, SAP or Oracle) just copy you and crush you? It’s like they all took the same class in business school and only paid attention for the first fifteen minutes.

Then, at the end of the meeting (occasionally at the beginning), they talk about themselves and why you should want their money as opposed to the equally green money of the identical-looking, khakis-wearing, bicycle-riding people on the other side of Sand Hill Road. They really focus on improving operations; they sit on a small number of boards; they care about developing entrepreneurs; blah blah blah. They all have exactly the same pitch. But they can get away with it because they have the thing that matters: money. The one VC I liked the most was the only one who said, “Basically, we’re the money, and we try not to mess things up too much.”

(The rest of that TAL episode is a fantastic story about Emir Kamenica and how he made it from being shot at in Bosnia to going to Harvard—so good I almost took the wrong exit on the way to work yesterday.)

Non-Lessons of the Financial Crisis

By James Kwak

As the fifth anniversary of the Lehman bankruptcy approaches, the Internet is filling up with reflections on the financial crisis and the ensuing years. My main feeling, as expressed in my latest Atlantic column, is amazement at how little we seem to have learned. Looking back, the period in late 2008 and early 2009, when it was obvious that the financial sector would have to change in important, structural ways, now seems like a naïve, youthful delusion. Sure, there are some new rules around the margins, but for the most part little has changed—not just in the financial sector itself, but more importantly in the political and ideological landscape that shapes regulatory policy.

Of course, this isn’t simply the product of collective amnesia. It’s the result of the fact that ideas are shaped by money and political power. And that’s where little has changed.

Entrepreneurship Around the World: An MIT Course

By Simon Johnson

“Entrepreneurship Without Borders” is an MIT Sloan class, primarily designed for MBA students.  The course looks at economic growth, financial crises, and the distribution of income through the details of entrepreneurship in various parts of the global economy.  Below is a summary of class #1, from September 4, 2013.  The full running order of classes is here; all readings are freely available, with the exception of Harvard Business School cases.  The course consists of 12 sessions through mid-October, and summaries or other perspectives will appear regularly in this space. 

Entrepreneurship is a broad and sometimes amorphous concept, particularly when we try to compare business conditions around the world.  Who has a lot of entrepreneurs and what does that mean?  Should policymakers always want more people to start their own firms?  Who exactly is an entrepreneur and does using the same definition make sense in all places?

The Global Entrepreneurship Monitor (GEM) has done a great service by bringing clarity and some transparent data into this discussion.  (The specifics below refer to their 2012 report.)

A particular strength is that GEM looks, through opinion surveys, at what the broader public believes about starting their own business – including whether they think there are opportunities, whether they have the right personal capabilities to be an entrepreneur, and whether they are afraid of failing. Continue reading “Entrepreneurship Around the World: An MIT Course” →

Who Cares About the National Debt?

By James Kwak

Not Greg Mankiw. Or, to be precise, not “Republicans.”

This past weekend Mankiw wrote a column for the Times laying out the arguments for a carbon tax. They are so well known and so obviously correct that I won’t bother repeating them. (A tradable permit system could work equally well, depending on how it is designed.)

In addition, many people think that the national debt is a serious long-term problem. A carbon tax (or a tradable permit system where permits are auctioned off) would obviously bring in revenue. In White House Burning, we estimated this at about 0.7–0.9 percent of GDP by the early 2020s (citing Metcalf, Stavins, and the CBO).

Continue reading “Who Cares About the National Debt?” →

A Bit of Obvious Advice

By James Kwak

People occasionally ask me what it takes to succeed in the business world (since they assume at least that I know some successful people). Luck probably belongs at the top of that list. But I have a very clear idea of the most valuable skill to have in business (in part because I don’t really have it): the ability to pick up the phone, call someone, and convince her to do something that is in your interests—even though she has no other reason to do it.

I’m not saying this should be the most valuable skill in business. People like me would prefer it if all decisions were made on the basis of factual evidence and logical reasoning. But they’re not. And the people whom I have seen become very successful are the ones who are hard to say “no” to, whether in person or on the phone. How they do it can vary: some do it with charisma, some with logic, some with sheer stubbornness.  But they can all do it.

Continue reading “A Bit of Obvious Advice” →