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The World and BRAZIL · RUSSIA · INDIA · CHINA · SOUTH AFRICA

BUSINESS MAGAZINE

There is no smart method but to be very intelligent. The 2013 Smart List •

Finest Minds & Best Universities of the Emerging World

Special Knowledge Issue


There are many indicators that enable us to assess the state of affairs at home and in the world as a whole. However, to view potential one has to conduct a thorough analysis of the primary sources of development, which include education. If education is not taken into account there is no point in talking about human capital, the quality of which varies with time. The same can be said about the level of education. In this century people need knowledge and skills that differ to those required in the past century. Modern education systems should meet these needs. At the same time, society has to have a need for educated people and be ready to engage them. Everyone wants to know when BRICS GDP will equal that of the United States and the European Union combined. But it is no less important to know what these countries will be like in the future, including social, cultural and technological characteristics; which development models they will adopt and how the mentality and work ethic of their citizens will transform. The development of education in the BRICS countries is one of the key factors that let us make predictions about the items in the above-mentioned list. The idea that creating and supporting schools and universities that can compete globally must be a key national strategic priority and in one way or another is a part of the programme of every head of state and has been discussed ad nauseam. Nevertheless, little is actually done in this sphere. Education changes at a snail’s pace and leaders often lack the consistency and patience required to bring their programmes to fruition as the achievement of fast results takes priority. Investing in educational institutions is a good example of sensible, pragmatic long-term planning, even if it results in losses. In a sense, education is an issue of national security and is the guarantee that countries (especially developing ones) will have enough ideas and educated citizens to ensure that they continue to progress. There is no such thing as superfluous effort when it comes to education. Besides this, I can say from personal experience that projects related to education are warmly welcomed by people who have changed the world for the better. Ruben Vardanian, Chairman of the Editorial Board of BRICS Business Magazine

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“Be not afraid of growing slowly, be afraid only of standing still”. This Chinese saying gives us an insight about the developed and emerging world over this last half century. It is important not to underestimate the prospects of China and other developing markets as well as to overestimate prospects of Western Europe, and vice-versa. Business and investors seek practical answers and insights. EY launched its Emerging Markets Center to provide leaders, investors and companies with knowledge and insight of this ‘new’ economic world. And, to correctly interpret data pertaining to demand, investments and opportunities to see and understand the ‘whole’ picture. This completely aligns with the BRICS Business Magazine. We are natural allies in understanding and the interpretation of the multilayer reality of rapid-growth markets to be bridged and linked together. Media plays a primary role in this process as information transforms into ideas when it is presented as storytelling. Karl Johansson, EY Regional Managing Partner

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Chairman of the Editorial Board Ruben Vardanian

BUSINESS MAGA ZINE

Cover page quotation: T.S. Eliot Photos & illustrations by: East News, MEDIACRAT, ITAR-TASS, Fotobank Lori, RIA Novosti, AP/Fotolink, Fotobank, Reuters Registered as № ФС77-51070. 19,000 copies. BRICS Business Magazine is a registered trademark of MEDIACRAT. © 2013 MEDIACRAT. All rights reserved. No part of this publication may be reproduced or transmitted in any language, in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage or retrieval system, without written permission. The views expressed in articles are the authors’ and not necessarily those of BRICS Business Magazine. Every effort has been made to represent faithfully the views of all contributors and interviewees. The publisher accepts no responsibility for the content of advertising materials, errors, omissions or the consequences thereof. www.bricsmagazine.com

Factual Error There was a factual error in BRICS Business Magazine No. 3, “12 Most Wanted” – the article stated that Sergei Galitsky was the owner of Kuban FC whereas in actual fact he owns Krasnodar FC. The magazine apologizes to readers and Sergei Nikolaevich Galitsky for the error.

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Executive Editor Evgeny Arabkin

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Photo Editors Evgeniya Sutyrina (chief), Elena Ilina Photo Retouchers Ivan Smirnov, Irina Molotova Sub-editors Ekaterina Litonina (chief), Irina Kuznetsova Proofreaders Anna Simonian, Ekaterina Ospennikova, Marina Karnovich Translators Alexandre Ponomarev (Translations into English), Victor Bereznoi (Translations into Portuguese), Shen Jingjing (Translations into Chinese), Alexander Bakaev (Translations into Russian) Copy Editor Edward Coulson Business Development Director Alexei Medvedev International Relations Director Xavier Ronot Senior Business Development Manager Denis Ilyashov Commercial Director Garry Jilavian Deputy Commercial Director Alisa Gevorkian Ad Sales Director Maria Filippova Client Relations Director Daria Figurkina Marketing Director Madina Besolova Advertising Agency Relations Manager Karina Petrova PR-Director Kristina Topilskaia

Publisher Arman Jilavian

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experts and contributors

Robert J. Shiller 2013 Nobel Laureate in Economics, Sterling Professor of Economics at Yale University

Jorge G. Castañeda Former Secretary of Foreign Affairs of Mexico, Global Distinguished Professor of Politics and Latin American and Caribbean Studies at New York University

R aghur am R ajan Governor of the Reserve Bank of India

K enneth Rogoff Thomas D. Cabot Professor of Public Policy at Harvard University, former Chief Economist of the International Monetary Fund

R icar do Hausmann Former Minister of Planning of Venezuela, Professor of the Practice of Economic Development of Harvard University

Joschka Fischer Former Foreign Minister and Vice Chancellor of Germany

Javier Solana President of the ESADE Center for Global Economy and Geopolitics, former Secretary General of NATO

Jaswant Singh Former Minister of Finance, Foreign Minister and Minister of Defence of India

Dani Rodrik Albert O. Hirschman Professor of Social Science at the Institute for Advanced Study

Andr és Velasco Former presidential candidate and Finance Minister of Chile

Alexander Bazarov Member of the Executive Board and Senior Vice President of Sberbank of Russia, Deputy Head of Sberbank CIB

Saskia Sassen Robert S. Lynd Professor of Sociology Co-Chair of the Committee on Global Thought, Columbia University

Andr ei Sharonov Dean of Moscow School of Management SKOLKOVO, Moscow city’s Mayor Advisor

Bill Hutchison Executive Director of EY’s Center for Smart City Innovation, Chairman of i-CANADA Alliance

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experts and contributors

Char les Robertson Global Chief Economist at Renaissance Capital

Wilson Nunes Martins Governor of the state of Piauí, Brazil

Sergey Zhvachkin Governor of Tomsk Oblast, Russia

Zola Tsotsi Chairman of the Board of Directors at Eskom Holdings

Li Tie Director-General of the China Center for Urban Development

Victor Sadovnichy Rector of Lomonosov Moscow State Univercity, Academician of the Russian Academy of Sciences

Nikolay Kropachev Rector of Saint Petersburg State University, Professor of Criminal Law

Denis Konanchuk Head of the SKOLKOVO Education Development Centre

Jane Playdon Education Writer for TopUniversities.com

Ndubuisi Ekekwe President of the First Atlantic University

Eugenia Slouchak Managing Partner at Europe Finance

Alexei Chaplygin Education Ranking Director at Interfax

Justin McGuir k Winner of the Venice Architectural Biennale’s Golden Lion Award, columnist for The Guardian

Vasily Baburov Urbanist and architecture critic

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contents

№4, 2013–2014

Pessimists are already seeing a replay of the late-1990s Asian crisis or, worse, an emergingmarket echo of the 2008-2009 crisis in the advanced countries.

The global economy isn’t growing. We see that the U.S. is growing, although it is far from impressive. Chinese growth rates are high, but it’s clear that a slowdown is happening.

OPINION

18 20 22 24 26 28 30 32 34 36

Syria’s Balkan Tragedy  Disgruntled Democracies  Bubbles Forever  Postindustrial False Start  Europe’s Smart Asian Pivot  Are Emerging Markets Submerging?  Emerging Markets’ Nirvana Lost  The End of the Emerging-Market Party  Hundred Shades of India  Big Game. No Rules 

Joschka Fischer Jorge G. Castañeda Robert J. Shiller Dani Rodrik Javier Solana Kenneth Rogoff Andrés Velasco Ricardo Hausmann Raghuram Rajan Jaswant Singh

ECONOMY

38 44 48

The Economics of Anxiety and Happiness Emulating the Future  Developing in the Dark 

Charles Robertson Vladimir Volkov

PORTRAIT

18

54 58

“They Said Poverty Would Always Be with Us. Well Maybe Not”  Gebrselassie Intends to Lead Ethiopia with a Message: Anything is Possible 

Daniel Howden David Smith

THE SMART LIST

62

58

The Greatest Minds of the Developing World

EDUCATION

78 81 84 86 88 90 94

Green vs. Brown  BRICS Education in the Global Race  The Power of Knowledge  From Russia with a Degree  The New Gunpowder  Searching for the Meaning The Clash of Academic Civilizations  14

Denis Konanchuk Jane Playdon Alexei Chaplygin Viktor Sadovnichy, Nikolay Kropachev Ndubuisi Ekekwe Evgeniy Pakhomov


contents

Today we have billions of dollars being invested in transforming our cities, towns and rural districts into ‘smart cities,’ ‘intelligent communities,’ ‘living cities,’ ‘sustainable cities’ and ‘green cities.’ Even the names are confusing. What’s happening?

China is as challenging to global companies as it is important. Even when the economy cools down, it is creating opportunities for scale that are unmatched anywhere else.

URBANISM

98 106 110 116 120 126 128

In the Urban Net  How Smart is Your ‘Smart City’ and Why Should You Care?  Role Model  A Beauty That Could Not Save the World  Seven Pieces of Good News The Celestial Empire Goes Urban  Slum, Willing and Able 

Saskia Sassen Bill Hutchison Vasily Baburov Alexander Alexeev Li Tie Valeriya Khamraeva

PRACTICE

132

How to Beat China in China 

Phil Leung, Weiwen Han and Raymond Tsang

INVESTIGATION

140 126

Admit It. You Love Cheap Clothes and You Don’t Care About Child Slave Labour  Gethin Chamberlain

FINANCE

144

Alternative Brazil 

Eugenia Slouchak

Welcome to Piauí  Siberian Rules 

Wilson Nunes Martins Sergey Zhvachkin

POWER

153

146 148

ANTI GLOSSY BRICS

153 168 176

Edge Сity. Driving the Periphery of São Paulo  Claustrophobia A Map of Inequality

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Justin McGuirk


OPINION

Joschka Fischer —■—

Syria’s Balkan Tragedy If the agreement to resolve the Syrian issue is implemented impeccably, Barack Obama may be nominated for the Nobel Peace Prize. However, the opposite scenario is also highly likely, with Syria running the risk of reliving the tragic history of Bosnia.

Indeed, there are only bad options for the U.S. in Syria. Military intervention has no visible end point and would only increase chaos. But staying out will produce nearly the same result and dramatically shake America’s credibility in a crisis-ridden region, with serious consequences for the future. Furthermore, deployment of chemical weapons invites escalation. Most people in the West regard Syria’s civil war as a continuation of the sectarian violence in Iraq. But Syria is not Iraq. America’s president is not searching for excuses to start a war; Assad’s chemical weapons are not a fanciful pretext. The scale of the violence in Syria underscores the risk implied by inaction. Of course, there is no denying the dangers associated with a military intervention: regional expansion of the conflict, the deaths of many more innocent people, and the strengthening of extremist forces among the rebels, to name only a few. But all of this has been happening already, and it will continue to happen, especially without American military intervention. The civil war will escalate further, because it is part of a larger contest for supremacy between Iran and its Shia allies and Saudi Arabia, Turkey, and the other Sunni countries.

Pacifist doctrines may say otherwise, but combining diplomacy with the threat of military force is a highly effective tactic, as we have just seen in Syria. It was the credibility of the United States’ threat of military intervention that seems to have led Syrian President Bashar al-Assad to cut a deal brokered by his main allies, Russia and, less directly, Iran. Assad now appears prepared to give up his chemical weapons in exchange for remaining in power. But what will happen to America’s credibility, and that of the West, if the agreement falls apart? The deal struck by the U.S. and Russia triggered widespread relief in most Western capitals, where political leaders simply are not prepared for military intervention, even if Syria’s government is killing its own people with poison gas (on this score, the agreement amounts to a confession by Assad). After a decade of war in Afghanistan and Iraq, the West would rather stay at home; neither the U.S. nor the United Kingdom – nor most other NATO members – wants to become entangled in another Middle East conflict that cannot be won. Joschka Fischer is Former Foreign Minister and Vice Chancellor of Germany. 18


Syria’s Balkan Tragedy

© Project Syndicate

If Obama fails, Syria will not be a second Iraq, but more likely a repetition of the Bosnian calamity. For years, the war in Bosnia and Herzegovina escalated, alongside a ‘diplomatic process’ marked by a series of broken promises, culminating in the massacre at Srebrenica of thousands of civilians supposedly under United Nations protection. In the end, intervention was necessary anyway

Obama committed a fateful error when, for domestic political reasons, he decided to ask the U.S. Congress to agree to a limited punitive military strike. A defeat in Congress – entirely foreseeable – would have been a foreign-policy disaster. And, though the Russian diplomatic initiative (based on a joint proposal with Iran) averted this disaster, everything has its price. That price is not necessarily a gain in prestige for the Kremlin. The true risk implied by the U.S. deal with Russia lies elsewhere. It was not weakness or helplessness that induced Obama to play for high stakes. If he succeeds – Syria’s chemical weapons are destroyed, a peace conference ends the civil war, a transitional government takes power, and the U.S. and Iran launch direct negotiations about Iran’s nuclear program and regional stability in the Middle East – he will truly deserve his Nobel Peace Prize. If Obama fails, however, Syria will not be a second Iraq, but more likely a repetition of the Bosnian calamity. For years, the war in Bosnia and Herzegovina escalated, alongside a ‘diplomatic process’ marked by a series of broken promises, culminating in the massacre at Srebrenica of thousands of civilians supposedly under United Nations protection. In the end, intervention was necessary anyway. Are the U.S. and its European allies prepared for a scenario in which the agreement with Russia breaks down and Syria’s chemical weapons are not destroyed under international control? This is the decisive moral and political question for the West. If and when the time comes, it had better have an answer.

If the U.S. had not responded to the Assad regime’s use of chemical weapons, the entire world would have asked what a U.S. guarantee is worth if an American president’s ‘red line’ is crossed without consequences. In Jerusalem, Tehran, and other Middle East capitals, as well as on the Korean Peninsula and in other global hotspots, the consequences would be (and probably already are) dire. From the outset of the Syrian conflict, the U.S. and its European allies have lacked a strategy. Is their goal to end the civil war or bring about regime change? And who or what should take Assad’s place? Or does the West aspire to reach a compromise with Russia and Iran that would leave Assad’s regime in place? The latter goal would shift the axis of U.S. policy in the Middle East, with far-reaching strategic consequences, because such a compromise could only be reached at the expense of America’s Sunni allies. Even if Russia and Iran are pursuing separate agendas in supporting Assad, both countries’ interests are inextricably connected to the continuation of the regime, not necessarily to Assad’s political survival. For Russia, regime change in Syria – its last military outpost in the region – would be another bitter defeat; for Iran, it would mean losing its most important ally in the Arab world, implying even deeper isolation. Thus, in contrast to the West’s temporizing, the strategy of Assad’s allies is clearly defined: military victory for the regime, backed by ample supplies of weapons and, in the case of Iran, Lebanese proxy troops from Hezbollah on the ground. No4, 2013–2014

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OPINION

Jorge G. Castañeda —■—

Disgruntled Democracies The wave of public unrest that engulfed Latin America came as a logical consequence of the problems caused by the rapid economic growth of the region’s countries.

presidents, despite their undeniable competence, are watching their approval ratings plummet. These paradoxes are both perplexing and revealing. For starters, they reflect an economic growth problem. Chile’s economy has performed well over the past two years, despite low world copper prices; but its annual growth rate is nowhere near that of the previous 25 years. The economic balm applied to old social and cultural wounds is losing its effectiveness. Similarly, while Brazil’s economy remained relatively resilient after the 2009 recession, growth slowed almost to zero last year. Growth rates last year in Colombia and even Peru, which has performed better than any other Latin American country since 2000, also dropped significantly. And Mexico, the worst-performing of the five economies over the last 15 years, has outdone itself; this year, growth is expected to reach barely 1%, if that. At the same time, while all of these countries built the political and judicial institutions needed to consolidate their transitions to democracy – from Brazil’s in the mid-1980s to Mexico’s in 2000 – these institutions have become (and in some

In 2011 and 2012, tens of thousands of students demonstrated in Santiago, Chile, demanding greater access to higher education. Earlier this year, hundreds of thousands of Brazilians marched in São Paulo, Rio de Janeiro, and Belo Horizonte, calling for improved public health services, better schools, and cheaper, more efficient public transport. And Colombians and Peruvians from all walks of life (especially peasants, farm owners, and mineworkers), as well as Mexican school teachers, occupied the centers of Bogotá, Lima, and Mexico City, disrupting inhabitants’ daily lives and creating serious problems for the authorities. These countries, once models of economic hope and democratic promise in Latin America, have become examples of democracies without legitimacy or credibility. Although they have made significant social progress in recent years, they have become centers of popular unrest. And their Jorge G. Castañeda is Former Secretary of Foreign Affais of Mexico, Global Distinguished Professor of Politics and Latin American and Caribbean Studies at New York University. 20


Disgruntled Democracies

© Project Syndicate

Chile, Brazil, Mexico,Colombia and Peru, once models of economic hope and democratic promise in Latin America, have become examples of democracies without legitimacy or credibility. Although they have made significant social progress in recent years, they have become centers of popular unrest. And their presidents, despite their undeniable competence, are watching their approval ratings plummet

and well-paid jobs – have not been met. If they cannot even enter the luxurious new stadiums to see their national team play, they will not be happy. Similarly, although Mexico has experienced rapid population growth and significant standardof-living improvements over the last 15 years, many believe that they are not getting what they deserve – or what they were promised. Teachers are furious at being blamed for the wretched state of the country’s education system and view Peña Nieto’s ‘educational reform’ law as an excuse to limit the power of their unions while avoiding genuine institutional reform. Mexico City’s middle-class residents – who wield disproportionate influence countrywide – are also incensed, both at the teachers for disrupting their lives and at the federal and local authorities for failing to restore order. Against this background, the credibility of Mexico’s political institutions is rapidly eroding. But there is a more fundamental issue at play that stems from the accumulated imperfections of representative democracy in countries where social and economic conditions are less than ideal. When post-authoritarian excitement abounded and rapid economic growth prevailed, these imperfections were manageable; now, with the former fading and the latter a memory, they have become immense challenges. This problem transcends Latin America. As observers like Joshua Kurlantzick have pointed out , a global shift away from representative government, driven by increasingly disillusioned middle classes, is underway. For elected leaders, the dilemma is that there are no simple solutions – and little public patience for more complex ones.

cases always have been) remarkably insulated from popular demands. As a result, the protests took these countries’ seemingly responsive presidents by surprise. Indeed, Colombia’s Juan Manuel Santos Calderón and Brazil’s Dilma Rousseff – both skilled and experienced politicians – were utterly unprepared for their countries’ protests. Likewise, Mexico’s Enrique Peña Nieto and Peru’s Ollanta Humala, who have otherwise seemed to be perceptive leaders, failed to sense the gathering storm. As the Chilean economist and politician Carlos Ominami put it: “The children of democracy have become the prime movers of change; the social movement they represent lacks political leadership, and the country’s political forces have practically broken off all their connections to the social world.” This year, Chile will hold its sixth consecutive democratic election, with two women – former labor minister Evelyn Matthei and former centerleft president Michelle Bachelet (both daughters of high-ranking military officers) – currently leading in the polls. Whoever wins will have to choose between deeply transforming Chile’s institutions and letting social unrest spin out of control. Brazil faces a similar trial, as next year’s soccer World Cup and the 2016 Summer Olympics test the resilience and adaptability of the social and macroeconomic frameworks that have shaped the country’s development for almost two decades. To be sure, proactive anti-poverty programs, loose credit, a commodity-export boom, and heavy government spending (financed by an equally heavy tax burden) lifted millions out of poverty. But the expectations of the emerging middle class – including efficient infrastructure, high-quality education and health services, No4, 2013–2014

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OPINION

Robert J. Shiller —■—

Bubbles Forever Market bubbles are not unlike epidemics. They grow and subside, but they are never over. Like in short novels, nobody knows what to expect in the end.

The Banco de la República, Colombia’s central bank, maintains a home price index for three main cities: Bogotá, Medellín, and Cali. The index has risen 69% in real (inflation-adjusted) terms since 2004, with most of the increase coming after 2007. That rate of price growth recalls the U.S. experience, with the S&P/CaseShiller Ten-City Home Price Index for the U.S. rising 131% in real terms from its bottom in 1997 to its peak in 2006. This raises the question: just what is a speculative bubble? The Oxford English Dictionary defines a bubble as “anything fragile, unsubstantial, empty, or worthless; a deceptive show. From 17th  century onwards often applied to delusive commercial or financial schemes.” The problem is that words like ‘show’ and ‘scheme’ suggest a deliberate creation, rather than a widespread social phenomenon that is not directed by any impresario. Maybe the word ‘bubble’ is used too carelessly. Eugene Fama certainly thinks so. Fama, the most important proponent of the ‘efficient

You might think that we have been living in a post-bubble world since the collapse in 2006 of the biggest-ever worldwide real-estate bubble and the end of a major worldwide stock-market bubble the following year. But talk of bubbles keeps reappearing: new or continuing housing bubbles in many countries, a new global stockmarket bubble, a long-term bond-market bubble in the United States and other countries, an oilprice bubble, a gold bubble, and so on. Nevertheless, I was not expecting a bubble story when I visited Colombia. But, once again, people there told me about an ongoing real-estate bubble, and my driver showed me around the seaside resort town of Cartagena, pointing out, with a tone of amazement, several homes that had recently sold for millions of dollars. Robert J. Shiller is 2013 Nobel Laureate in Economics, Sterling Professor of Economics at Yale University, and cocreator of the Case-Shiller Index of U.S. residential real estate prices. He is the author of Irrational Exuberance, the second edition of which predicted the collapse of the real-estate bubble. 22


Bubbles Forever

© Project Syndicate

One problem with the word ‘bubble’ is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reinflate

Because bubbles are essentially socialpsychological phenomena, they are, by their very nature, difficult to control. Regulatory action since the financial crisis might diminish bubbles in the future. But public fear of bubbles may also enhance psychological contagion, fueling even more selffulfilling prophecies. One problem with the word ‘bubble’ is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reinflate. It would seem more accurate to refer to these episodes as speculative epidemics. We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking. This is what happened in the bull market of the 1920s in the U.S., with the peak in 1929. We have distorted that history by thinking of bubbles as a period of dramatic price growth, followed by a  sudden turning point and a major and definitive crash. In fact, a major boom in real stock prices in the U.S. after ‘Black Tuesday’ brought them halfway back to 1929 levels by 1930. This was followed by a second crash, another boom from 1932 to 1937, and a third crash. Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

markets hypothesis,’ denies that bubbles exist. As he put it in a 2010 interview with John Cassidy for The New Yorker, “I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.” In the second edition of my book Irrational Exuberance, I tried to give a better definition of a bubble. A “speculative bubble,” I wrote then, is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” This attracts “a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.” That seems to be the core of the meaning of the word as it is most consistently used. Implicit in this definition is a suggestion about why it is so difficult for ‘smart money’ to profit by betting against bubbles: the psychological contagion promotes a mindset that justifies the price increases, so that participation in the bubble might be called almost rational. But it is not rational. The story in every country is different, reflecting its own news, which does not always jibe with news in other countries. For example, the current story in Colombia appears to be that the country’s government, now under the wellregarded management of President Juan Manuel Santos, has brought down inflation and interest rates to developed-country levels, while all but eliminating the threat posed by the FARC rebels, thereby injecting new vitality into the Colombian economy. That is a  good enough story to drive a housing bubble. №4, 2013–2014

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OPINION

Dani Rodrik —■—

Postindustrial False Start Contemporary emerging economies leave out the stage of industrial development much faster than early industrializers used to. The social, political and economic consequences of this process are not clear.

25–27% in the middle third of the 20th century, deindustrialization set in, with manufacturing absorbing less than 10% of the labor force in recent years. In Sweden, employment in manufacturing peaked at 33% in the mid-1960s, before falling to the low teens. Even in Germany, often regarded as the strongest manufacturing economy in the developed world, manufacturing employment peaked around 1970, at close to 40%, and has been steadily declining ever since. As Harvard University’s Robert Lawrence has argued, deindustrialization is common and predates the recent wave of economic globalization. Only a few developing countries, typically in East Asia, have been able to emulate this pattern. Thanks to export markets, South Korea industrialized exceptionally rapidly. With manufacturing’s share of employment rising from the low single digits in the 1950s to a high of 28% in 1989 (it has since fallen by ten percentage points), South Korea underwent in three decades a transformation that took a century or longer in the early industrializers. But the developing world’s pattern of industrialization has been different. Not only has the process been slow, but deindustrialization has begun to set in much sooner. Consider Brazil and India, two emerging economies that have done comparatively well in the

Most of today’s advanced economies became what they are by traveling the well-worn path of industrialization. A progression of manufacturing industries – textiles, steel, automobiles – emerged from the ashes of the traditional craft and guild systems, transforming agrarian societies into urban ones. Peasants became factory workers, a process that underpinned not only an unprecedented rise in economic productivity, but also a wholesale revolution in social and political organization. The labor movement led to mass politics, and ultimately to political democracy. Over time, manufacturing ceded its place to services. In Britain, the birthplace of the Industrial Revolution, manufacturing’s share of employment peaked at around 45% before World War I and then fell to just above 30%, where it hovered until the early 1970s, when it began a precipitous decline. Manufacturing now accounts for slightly less than 10% of the workforce. All other rich economies have gone through a similar cycle of industrialization followed by deindustrialization. In the United States, manufacturing employed less than 3% of the labor force in the early nineteenth century. After reaching Dani Rodrik is Albert O. Hirschman Professor of Social Science at the Institute for Advanced Study. 24


Postindustrial False Start

Thanks to export markets, South Korea industrialized exceptionally rapidly. With manufacturing’s share of employment rising from the low single digits in the 1950s to a high of 28% in 1989, South Korea underwent in three decades a transformation that took a century or longer in  the early industrializers

U.S., Britain, Germany, and Sweden began to deindustrialize, their per-capita incomes had reached $9,000–11,000 (at 1990 prices). In developing countries, by contrast, manufacturing has begun to shrink while per-capita incomes have been a fraction of that level: Brazil’s deindustrialization began at $5,000, China’s at $3,000, and India’s at $2,000. The economic, social, and political consequences of premature deindustrialization have yet to be analyzed in full. On the economic front, it is clear that early deindustrialization impedes growth and delays convergence with the advanced economies. Manufacturing industries are what I have called ‘escalator industries’: labor productivity in manufacturing has a tendency to converge to the frontier, even in economies where policies, institutions, and geography conspire to retard progress in other sectors of the economy. That is why rapid growth historically has always been associated with industrialization (except for a handful of small countries with large natural-resource endowments). Less room for industrialization will almost certainly mean fewer growth miracles in the future. The social and political consequences are less fathomable, but could be equally momentous. Some of the building blocks of durable democracy have been byproducts of sustained industrialization: an organized labor movement, disciplined political parties, and political competition organized around a right-left axis. The habits of compromise and moderation have grown out of a history of workplace struggles between labor and capital – struggles that played out largely on the manufacturing shop floor. Given premature deindustrialization, today’s developing countries will have to travel different, as yet unknown, and possibly bumpier paths to democracy and good governance.

last decade or so. In Brazil, manufacturing’s share of employment barely budged from 1950 to 1980, rising from 12% to 15%. Since the late 1980s, Brazil has begun to deindustrialize, a process which recent growth has done little to stop or reverse. India presents an even more striking case: manufacturing employment there peaked at a meager 13% in 2002, and has since trended down.

© Project Syndicate

One’s own way

It is not clear why developing countries are deindustrializing so early in their growth trajectories. One obvious culprit may be globalization and economic openness, which have made it difficult for countries like Brazil and India to compete with East Asia’s manufacturing superstars. But global competition cannot be the main story. Indeed, what is striking is that even East Asian countries are subject to early-onset deindustrialization. Consider China. In view of its status as the world’s manufacturing powerhouse, it is surprising to discover that manufacturing’s share of employment is not only low, but seems to have been declining for some time. While Chinese statistics are problematic, it appears that manufacturing employment peaked at around 15% in the mid1990s, generally remaining below that level since. China is a very large country, of course, with much of its workforce still in rural areas. But most migrant workers now find jobs in services rather than in factories. Similarly, it is extremely unlikely that the new crop of manufacturing exporters, such as Vietnam and Cambodia, will ever reach the levels of industrialization attained by the early industrializers, such as Britain and Germany. An immediate consequence is that developing countries are turning into service economies at substantially lower levels of income. When the No4, 2013–2014

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OPINION

Javier Solana —■—

Europe’s Smart Asian Pivot Shifting eastwards, Europe must be smart, acting as a single force rather than sticking to bilateral agendas.

constituting one third of its total trade. Trade with China alone is worth more than €1 billion per day, second only to trade with the U.S. Moreover, the E.U. has a somewhat paradoxical asset at its disposal: it is not a Pacific power and does not carry the burden of great-power status in Asia. Far from being a weakness, this is precisely the source of the E.U.’s potential strength in Asia, for it provides a degree of diplomatic agility that the American heavyweight cannot muster. In attempting to execute its strategic pivot, the U.S. is haunted at virtually every turn by its status as a historical hegemon, a military power, and the guarantor of its Asian allies’ security. Even when rebranded as a ‘rebalancing,’ America’s eastward shift is inevitably met with suspicion by some Asian countries, particularly China. Europe, by contrast, can use its agility to perform a ‘smart pivot.’ The E.U. must engage with Asia on at least three mutually beneficial fronts, with trade being the most important. The trade-liberalization agreements that the E.U. has in the pipeline with Asia’s vibrant economies (including South Korea, Singapore, Malaysia, India, Vietnam, Japan, and Thailand) are more ambitious in scope than previous bilateral deals. As large-scale regional freetrade arrangements take shape, the E.U. continues to signal unequivocal commitment to free trade through sophisticated bilateral agreements.

For the first time in centuries, the focus of the global economy is shifting to the East. The United States has commenced its ‘pivot’ to Asia, and its relations with China, in particular, seem constantly to be flirting with Thucydides – the historical pattern that suggests that a rising power will inevitably collide with a reigning power. But, with the U.S. and China regarding each other warily in the foreground of world affairs, where does Europe fit in? The European Union is at a critical historical juncture, one that demands its own pivot eastward – a coherent and decisive Asian strategy that builds on Europe’s strengths. Although the E.U.’s population is only one fifth the size of that of China and India combined, and its military presence in Asia is minimal, its €12.6 trillion ($16.8 trillion) economy is the world’s largest. This has not gone unnoticed by Asia’s governments, which are heavily dependent on economic growth to meet their young and growing populations’ demand for jobs and prosperity. Currently, Asia is the E.U.’s main trading partner, surpassing North America and Javier Solana is President of the ESADE Center for Global Economy and Geopolitics. He has also served as the E.U. High Representative for Foreign and Security Policy, as Secretary-General of NATO, and as Foreign Minister of Spain. 26


Europe’s Smart Asian Pivot

Economic relations between states foster interdependence, decreasing the risk of conflict. But if conflict does erupt, the cost is far higher. When the territorial dispute between Japan and China over the Senkaku/Diaoyu islands flared anew last year, Japanese auto exports to China plummeted 80% in just three months

China is facing increasing pressure (particularly from the U.S.) to assume a global political role that corresponds to its economic weight. Here, China could find an excellent partner in Europe, either in a G3 format with the U.S. or in focused bilateral cooperation. Consider the Middle East. China and Europe might find common cause in the vacuum left as America’s domestic energy revolution weakens its commitment to the region. As China’s reliance on Middle East energy resources grows – 90% of the region’s oil exports will go to Asia by 2035 – the need to deepen engagement with oil-producing states will become more acute. Europe, the Middle East’s experienced neighbor, could be China’s strategic partner in this endeavor. Japan is another Asian giant regaining confidence, following Prime Minister Shinzo Abe’s energetic stimulus program. As Japan takes unprecedented trade-liberalization steps in the Trans-Pacific Partnership negotiations with the U.S. and other economies in Asia and the Americas, and boosts its regional engagement, Europe must maintain its strong ties with the world’s third-largest national economy. The ambitious bilateral trade agreement now under construction is expected to boost exports in both directions by up to one third. In any comprehensive strategy for engagement with Asia, the E.U. is only as strong as its parts. Though country-to-country engagement with Asia’s rising powers may be tempting, and while China often prefers bilateral dealings, renationalization of E.U. members’ foreign policies would be counterproductive. A thickly woven cord is needed to keep Europe reliably anchored as it points eastward, whereas separate strands would withstand only a limited degree of strain in the turbulent years ahead.

But trade flows are vulnerable. Of course, economic relations between states foster interdependence, decreasing the risk of conflict. But if conflict does erupt, the cost is far higher. When the territorial dispute between Japan and China over the Senkaku/Diaoyu islands flared anew last year, Japanese auto exports to China plummeted 80% in just three months.

© Project Syndicate

Architecture of prosperity

Herein lies Asia’s specific paradox: a high level of economic integration has not given rise to regional institutions that can support the stability required for sustained prosperity. Instead, Asia remains deeply scarred by unsettled disputes, periodic fits of nationalism, and contested borders, all of which tend to be amplified by apprehension stemming from the asymmetric rise of some of its powers. Regional integration is a recipe for long-term stability in Asia, and a second line of engagement for the E.U. In Europe, once torn apart by war, armed conflict among E.U. member states is now almost unthinkable. The E.U.’s institutional architecture facilitated the pivot from devastating and recurrent wars to peace and prosperity. But creating that architecture is a daunting task, which has taken Europe decades and is still ongoing. Successive quandaries and crises have revealed the flaws in the E.U.’s institutional design, and each (painstaking) upgrade has made the European project that much stronger. With no hint of paternalism, and recognizing its status as a workin-progress, the E.U. should increase its engagement with Asia’s existing structures and lend its knowhow where possible – for example, in ASEAN’s shift toward a three-pillared design (political-military, economic, and socio-cultural) by 2015. On the global front, the E.U. and China may find themselves to be natural partners on key issues. No4, 2013–2014

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OPINION

Kenneth Rogoff —■—

Are Emerging Markets Submerging? The economic slowdown in the emerging markets is merely a warning shot indicating that things may get worse.

ongoing current-account deficits, such as Brazil, India, South Africa, and Indonesia. Fortunately, a combination of flexible exchange rates, strong international reserves, better monetary regimes, and a shift away from foreign-currency debt provides some measure of protection. Nonetheless, years of political paralysis and postponed structural reforms have created vulnerabilities. Of course, countries like Argentina and Venezuela were extreme in their dependence on favorable commodity prices and easy international financial conditions to generate growth. But the good times obscured weaknesses in many other countries as well. The growth slowdown is a much greater concern than the recent asset-price volatility, even if the latter grabs more headlines. Equity and bond markets in the developing world remain relatively illiquid, even after the long boom. Thus, even modest portfolio shifts can still lead to big price swings. Until recently, international investors believed that expanding their portfolios in emerging markets was a no-brainer. The developing world was growing nicely, while the advanced countries were virtually stagnant. Businesses began to see a growing middle class that could potentially underpin not only economic growth but also political stability. Even countries ranked toward

With economic growth slowing significantly in many major middle-income countries and asset prices falling sharply across the board, is the inevitable ‘echo crisis’ in emerging markets already upon us? After years of solid – and sometimes strong – output gains since the 2008 financial crisis, the combined effect of decelerating long-term growth in China and a potential end to ultra-easy monetary policies in advanced countries is exposing significant fragilities. The fact that relatively moderate shocks have caused such profound trauma in emerging markets makes one wonder what problems a more dramatic shift would trigger. Do emerging countries have the capacity to react, and what kind of policies would a new round of lending by the International Monetary Fund bring? Has the eurozone crisis finally taught the IMF that public and private debt overhangs are significant impediments to growth, and that it should place much greater emphasis on debt write-downs and restructuring than it has in the past? The market has been particularly brutal to countries that need to finance significant Kenneth Rogoff is Thomas D. Cabot Professor of Public Policy at Harvard University, former Chief Economist of the International Monetary Fund. 28


Are Emerging Markets Submerging?

© Project Syndicate

The global banking system is still weak in general, and particularly so in Europe. Across the Atlantic, the political polarization in Washington is distressing, with another debt ceiling debacle looming. Today’s retreat to advanced-country asset markets could quickly revert to retreat from them

world prepared? Here, too, there is serious cause for concern. The global banking system is still weak in general, and particularly so in Europe. There is considerable uncertainty about how the IMF would approach an emerging-market crisis after its experience in Europe, where it has had to balance policies aimed at promoting badly needed structural change in the eurozone and those aimed at short-run economic preservation. That is a topic for another day, but the European experience has raised tough questions about whether the IMF has a double standard for European countries (even those, like Greece, that are really emerging markets). It is to be hoped, of course, that things will not come to that. It seems unlikely that international investors will give up on emerging markets just yet, not when their long-term prospects still look much better than those of the advanced economies. Besides, the current sentiment that the eurozone has gotten past the worst seems exceedingly optimistic. There has been only very modest structural reform in countries like Italy and France. Fundamental questions, including how to operate a banking union in Europe, remain contentious. Spain’s huge risk premium has almost disappeared, but its debt problems have not. Meanwhile, across the Atlantic, the political polarization in Washington is distressing, with another debt ceiling debacle looming. Today’s retreat to advanced-country asset markets could quickly revert to retreat from them. The emerging-market slowdown ought to be a warning shot that something much worse could happen. One can only hope that if that day should ever arrive, the world will be better prepared than it is right now.

the bottom of global corruption indices – for example, Russia and Nigeria – boasted soaring middle-class populations and rising consumer demand. This basic storyline has not changed. But a narrowing of growth differentials has made emerging markets a bit less of a no-brainer for investors, and this is naturally producing sizeable effects on these countries’ asset prices. A step toward normalization of interest-rate spreads – which quantitative easing has made exaggeratedly low – should not be cause for panic. The fallback in bond prices does not yet portend a repeat of the Latin American debt crisis of the 1980s or the Asian financial crisis of the late 1990s. Indeed, some emerging markets – for example, Colombia – had been issuing public debt at record-low interest-rate spreads over U.S. treasuries. Their finance ministers, while euphoric at their countries’ record-low borrowing costs, must have understood that it might not last. Yes, there is ample reason for concern. For one thing, it is folly to think that more local-currency debt eliminates the possibility of a financial crisis. The fact that countries can resort to double-digit inflation rates and print their way out of a debt crisis is hardly reassuring. Decades of financialmarket deepening would be undone, banks would fail, the poor would suffer disproportionately, and growth would falter. Alternatively, countries could impose stricter capital controls and financial-market regulations to lock in savers, as the advanced countries did after World War II. But financial repression is hardly painless and almost certainly reduces the allocative efficiency of credit markets, thereby impacting long-term growth. If the emerging-market slowdown were to turn into something worse, now or in a few years, is the No4, 2013–2014

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OPINION

Andrés Velasco —■—

Emerging Markets’ Nirvana Lost The falling prices for raw materials, the flight of capital from the emerging markets, the drop in exchange rates… It seems that fortune that used to smile upon the developing countries in recent years no longer favours them. And they have nowhere to run from these economic hardships.

foreign capital. Pessimists are already seeing a replay of the late-1990s Asian crisis or, worse, an emerging-market echo of the 2008–2009 crisis in the advanced countries. What the hardest-hit economies have in common are large external deficits. Abundant capital inflows caused their exchange rates to appreciate, making imports cheap and unleashing consumption (and sometimes investment) booms that eroded their trade balances, even as rising commodity prices boosted the value of their exports. Now the cycle is being reversed and exchange rates must depreciate to facilitate external adjustment. Anticipating that change – and the prospect of higher interest rates closer to home – foreign investors are taking flight, hastening and sharpening the exchange-rate plunge. That is the bad news. The good news (fingers crossed) is that a full-fledged emerging-market financial crisis is unlikely. For one thing, this time was different with regard to fiscal behavior. Commodity-rich governments did not spend the entire windfall and more, as they had done during earlier commodity booms. So government debt and the resulting financial vulnerability are not as high as they were in the past.

In the 1970s, the great Yale University economist Carlos Díaz-Alejandro used to say that the combination of high commodity prices, low world interest rates, and abundant international liquidity would amount to economic nirvana for developing countries. Back then, no sensible economist believed that such a state of grace could ever arrive. Yet arrive it did, and over the last decade commodity-rich countries like Brazil, Indonesia, Russia, and South Africa enjoyed its abundant benefits with abandon. But now nirvana seems to be ending: commodity prices are down, and the mere possibility that the U.S. Federal Reserve may end its policy of quantitative easing has raised market interest rates in the rich countries and sent funds fleeing from once-fashionable emerging markets back to safe havens in the North. Stock markets and currencies are plunging, and not just in commodity-rich emerging countries, but also in others, like India and Turkey, that had sucked in huge flows of Andrés Velasco is former presidential candidate and Finance Minister of Chile, Professor of Professional Practice in International Development at Columbia University’s School of International and Public Affairs. 30


Emerging Markets’ Nirvana Lost

© Project Syndicate

In some countries, conservative governments viewed industrial promotion as some dirigiste relic from the past, and avoided it. In others – Brazil comes to mind – left-leaning governments practiced industrial promotion in such a heavy-handed and erratic way that they ended up weakening whatever it was they wanted to promote. The time has come to pay for these mistakes

history suggests that countries seldom – if ever – get rich by doing just that. Commodity-rich advanced economies like Canada, Norway, or Australia export lots of natural resources, of course, but they also export many other goods and services. That is not true of Chile, Peru, or Colombia – or even of Brazil, with its much larger population and more developed industrial base. To make matters worse, unlike their Asian counterparts, Latin America’s economies are not integrated into regional and global value chains. A producer in Indonesia, Malaysia, or the Philippines can easily take advantage of the local currency’s depreciation to sell more electronic components to an assembly plant in China with which it has a long-standing and well-developed supply relationship. A business in Concepción, Arequipa, or Medellín, by contrast, must seek new customers in new countries, which takes time and money – and may not succeed. Latin American governments could have used the opportunities afforded by the global commodity and liquidity booms to diversify their economies, working with local business communities to move into new products and sectors. They did not. In some of these countries, conservative governments viewed industrial promotion as some dirigiste relic from the past, and avoided it. In others – Brazil comes to mind – left-leaning governments practiced industrial promotion in such a heavy-handed and erratic way that they ended up weakening whatever it was they wanted to promote. The time has come to pay for these mistakes. ‘Nirvana’ is defined as the state of freedom from suffering. For emerging markets that state is over, but in some cases their citizens – still feeling rich from cheap money and high export prices – have no inkling of the suffering that may be upon them. For the sake of political stability, governments would be well advised to inform them.

These countries’ private sectors have borrowed significantly but, as the Nobel laureate economist Paul Krugman has been pointing out, leverage and dollar debt are lower (as a share of national income) than they were at the outset of the 1990s Asian crisis – and at the start of the 1980s Latin American crisis, for that matter. So, in my view, the question is not whether these countries’ financial sectors will explode, but whether their growth trajectories will implode. When commodity prices are sky high and money is cheap and plentiful, economic growth is almost inevitable. In Latin America over the last decade, countries with sound macroeconomic policy frameworks, like Colombia, Peru, and Chile, grew rapidly. But so did Argentina, a country whose government seems to start every day wondering what more it can do to weaken economic institutions and damage long-term growth prospects. Now that nirvana is over, where will growth come from? To answer that question, it helps to note, as Harvard University’s Ricardo Hausmann has done recently, that some of the emerging economies’ recent growth was illusory. Wall Street became enamored with the rapidly rising dollar value of these countries’ national income, but that rise had more to do with strong commodity prices and appreciating exchange rates (which raised the value of their output when measured in dollars) than with sharp increases in actual output volumes. During the boom years, structural transformation in many emerging economies, particularly in Latin America, was limited. Countries like Ireland, Finland, and Singapore – and also South Korea, Malaysia, and Indonesia – export different goods (and to different markets) than they did a generation ago. By contrast, Chile’s export basket is pretty much the same as it was in 1980. There is nothing wrong with exporting copper, wine, fruit, and forest products. But economic No4, 2013–2014

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OPINION

Ricardo Hausmann —■—

The End of the Emerging-Market Party Enthusiasm for emerging markets has been evaporating this year, and not just because of the U.S. Federal Reserve’s planned cuts in its large-scale asset purchases. Emergingmarket stocks and bonds are down for the year and their economic growth is slowing. To see why, it is useful to understand how we got here.

the growth in the amount of real stuff that these economies produced. But that would be mostly wrong. Consider Brazil. Only 11% of its Chinabeating nominal GDP growth between 2003 and 2011 was due to growth in real (inflation-adjusted) output. The other 89% resulted from 222% growth in dollar prices in that period, as local-currency prices rose faster than prices in the U.S. and the exchange rate appreciated. Some of the prices that increased were those of commodities that Brazil exports. This was reflected in a 40% gain in the country’s terms of trade (the price of exports relative to imports), which meant that the same export volumes translated into more dollars. Russia went through a somewhat similar experience. Real output growth explains only 12.5% of the increase in the U.S. dollar value of nominal GDP in 2003–2011, with the rest attributable to the rise in oil prices, which improved Russia’s terms of trade by 125%, and to a 56% real appreciation of the ruble against the dollar. By contrast, China’s real growth was three times that of Brazil and Russia, but its terms of trade actually deteriorated by 26%, because its manufactured exports became cheaper while its commodity imports became more expensive. The share of real growth in the main emerging countries’ nominal U.S. dollar GDP growth was 20%.

Between 2003 and 2011, GDP in current prices grew by a cumulative 35% in the United States, and by 32%, 36%, and 49% in Great Britain, Japan and Germany respectively, all measured in U.S. dollars. In the same period, nominal GDP soared by 348% in Brazil, 346% in China, 331% in Russia, and 203% in India, also in U.S. dollars. And it was not just these so-called BRIC countries that boomed. Kazakhstan’s output expanded by more than 500%, while Indonesia, Nigeria, Ethiopia, Rwanda, Ukraine, Chile, Colombia, Romania and Vietnam grew by more than 200% each. This means that average sales, measured in U.S. dollars, by supermarkets, beverage companies, department stores, telecoms, computer shops, and Chinese motorcycle vendors grew at comparable rates in these countries. It makes sense for companies to move to where dollar sales are booming, and for asset managers to put money where GDP growth measured in dollars is fastest. One might be inclined to interpret this amazing emerging-market performance as a consequence of Ricardo Hausmann is Professor of the Practice of Economic Development at Harvard University, where he is also Director of the Center for International Development. He is former Minister of Planning of Venezuela and former Chief Economist of the Inter-American Development Bank. 32


The End of the Emerging-Market Party

© Project Syndicate

For most emerging-market countries, however, nominal GDP growth in the 2003-2011 period was caused by terms-of-trade improvements, capital inflows, and real appreciation. The same dynamics that inflated the dollar value of GDP growth in the good years for these countries will now work in the opposite direction: stable or lower export prices will reduce real growth and cause their currencies to stop appreciating or even weaken in real terms. No wonder the party is over

The same can be said of capital inflows and the upward pressure that they place on the real exchange rate. After all, foreign investors are putting their money in the country because they expect to be able to take even more money out in the future; when this occurs, growth tends to slow, if not collapse, as happened in Spain, Portugal, Greece, and Ireland. In some countries, such as China, Thailand, South Korea and Vietnam, nominal GDP growth was driven to a large extent by real growth. Moreover, according to the soon-to-be-published in Harvard Atlas of Economic Complexity, these economies began producing more complex products, a harbinger of sustainable growth. Angola, Ethiopia, Ghana and Nigeria also had very significant real growth, but nominal GDP was boosted by very large terms-of-trade effects and real appreciation. For most emerging-market countries, however, nominal GDP growth in the 2003–2011 period was caused by terms-of-trade improvements, capital inflows, and real appreciation. These meanreverting processes are, well, reverting, implying that the buoyant performance of the recent past is unlikely to return any time soon. In most countries, the U.S. dollar value of GDP growth handsomely exceeded what would be expected from real growth and a reasonable allowance for the accompanying BalassaSamuelson effect. The same dynamics that inflated the dollar value of GDP growth in the good years for these countries will now work in the opposite direction: stable or lower export prices will reduce real growth and cause their currencies to stop appreciating or even weaken in real terms. No wonder the party is over.

The three phenomena that boost nominal GDP – increases in real output, a rise in the relative price of exports, and real exchange-rate appreciation  – do not operate independently of one another. Countries that grow faster tend to experience real exchange-rate appreciation, a  phenomenon known as the Balassa-Samuelson effect. Countries whose terms of trade improve also tend to grow faster and undergo real exchange-rate appreciation as domestic spending of their increased export earnings expands the economy and makes dollars relatively more abundant (and thus cheaper). Real exchange rates may also appreciate because of increases in capital inflows, which reflect foreign investors’ enthusiasm for the prospects of the country in question. For example, from 2003 to 2011, Turkey’s inflows increased by almost 8% of GDP, which partly explains the 70% increase in prices measured in dollars. Real appreciation could also be caused by inconsistent macroeconomic policies that put the country in a perilous position, as in Argentina and Venezuela. Distinguishing between these disparate and interrelated phenomena is important, because some are clearly unsustainable. In general, terms-of-trade improvements and capital inflows do not continue permanently: they either stabilize or eventually reverse direction. Indeed, terms of trade do not have much of a long-term trend and show very pronounced reversion to the mean. While prices of oil, metals, and food rose very significantly after 2003, reaching historic highs sometime between 2008 and 2011, nobody expects similar price increases in the future. The debate is whether prices will remain more or less where they are or decline, as food, metals, and coal prices have already done. No4, 2013–2014

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OPINION

Raghuram Rajan —■—

Hundred Shades of India When judging about India’s economy people tend to run to extremes. Meanwhile, stripping out both the euphoria and the despair will probably bring us closer to the truth about the country.

that its policymakers, like those in all major emerging markets, injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared. So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption. Moreover, India’s institutions for allocating natural resources, granting clearances, and acquiring land were overwhelmed during the period of strong growth. India’s investigative agencies, judiciary, and press began examining allegations of large-scale corruption. As bureaucratic decision-making became more risk-averse, many large projects ground to a halt. Only now, as the government creates new institutions to accelerate decision-making and implement transparent processes, are these projects being cleared to proceed. Once restarted, it will take time for these projects to be completed, at which point output will increase significantly. Finally, export growth slowed not primarily because Indian goods suddenly became uncompetitive, but because growth in the country’s traditional export markets decelerated. The consequences have been high internal and external deficits. The post-crisis fiscal-stimulus packages sent the government budget deficit soaring from what had been a very responsible level in 2007–2008. Similarly, as large mining projects stalled, India had to resort to higher imports of coal and scrap iron, while its exports of iron ore dwindled.

Indian cricket fans are manic-depressive in their treatment of their favorite teams. They elevate players to god-like status when their team performs well, ignoring obvious weaknesses. But when it loses, as any team must, the fall is equally steep and every weakness is dissected. In fact, the team is never as good as fans make it out to be when it wins, nor as bad as it is made out to be when it loses. Its weaknesses existed in victory, too, but were overlooked. Such bipolar behavior seems to apply to assessments of India’s economy as well, with foreign analysts joining Indians in swings between over-exuberance and self-flagellation. A few years ago, India could do no wrong. Commentators talked of ‘Chindia,’ elevating India’s performance to that of its northern neighbor. Today, India can do no right. India does have serious problems. Annual GDP growth slowed significantly in the second quarter to 4.4%, consumer price inflation is high, and the current-account and budget deficits last year were too large. Every commentator today highlights India’s poor infrastructure, excessive regulation, small manufacturing sector, and a workforce that lacks adequate education and skills. These are indeed deficiencies. And they must be addressed if India is to grow strongly and stably. But the same deficiencies existed when India was growing rapidly. To appreciate what needs to be done in the short run, we must understand what dampened the Indian success story. In part, India’s slowdown paradoxically reflects the substantial fiscal and monetary stimulus Raghuram Rajan is Governor of the Reserve Bank of India. 34


Hundred Shades of India

India’s slowdown paradoxically reflects the substantial fiscal and monetary stimulus that its policymakers, like those in all major emerging markets, injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared

but certainly not bad for what is likely to be a low point in economic performance. The monsoon has been good and will spur consumption, especially in rural areas, which are already growing strongly, owing to improvements in road transport and communications connectivity. The banking sector has undoubtedly experienced an increase in bad loans, but this has often resulted from delays in investment projects that are otherwise viable. As these projects come onstream, they will generate the revenue needed to repay loans. In the meantime, India’s banks have enough capital to absorb losses. Likewise, India’s public finances are stronger than they are in most emerging-market countries, let alone emerging-market countries in crisis. India’s overall public debt-to-GDP ratio has been on a declining trend, from 73.2% in 2006–2007 to 66% in 2012–2013 (and the central government’s debt-to-GDP ratio is only 46%). Moreover, the debt is denominated in rupees and has an average maturity of more than nine years. India’s external debt burden is even more favorable, at only 21.2% of GDP (much of it owed by the private sector), while short-term external debt is only 5.2% of GDP. India’s foreignexchange reserves stand at $278 billion (about 15% of GDP), enough to finance the entire current-account deficit for several years. That said, India can do better – much better. The path to a more open, competitive, efficient and humane economy will surely be bumpy in the years to come. But, in the short term, there is much low-hanging fruit to be plucked. Stripping out both the euphoria and the despair from what is said about India – and from what we Indians say about ourselves – will probably bring us closer to the truth.

An increase in gold imports placed further pressure on the current-account balance. Newly rich consumers in rural areas increasingly put their savings into gold, a familiar store of value, while wealthy urban consumers, worried about inflation, also turned to buying gold. Ironically, had they bought Apple shares, rather than a commodity (no matter how fungible, liquid, and investible it is), their purchases would have been treated as a foreign investment rather than as imports that add to the external deficit.

© Project Syndicate

Theory of minor deeds

For the most part, India’s current growth slowdown and its fiscal and current-account deficits are not structural problems. They can all be fixed by means of modest reforms. This is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade. But India does not need to become a manufacturing giant overnight to fix its current problems. The immediate tasks are more mundane, but they are also more feasible: clearing projects, reducing poorly targeted subsidies, and finding more ways to narrow the current-account deficit and ease its financing. Over the last year, the government has been pursuing this agenda, which is already showing some early results. For example, the external deficit is narrowing sharply on the back of higher exports and lower imports. Every small step helps, and the combination of small steps adds up to large strides. But, while the government certainly should have acted faster and earlier, the public mood is turning to depression amid a cacophony of criticism and self-doubt that has obscured the forward movement. Indeed, despite its shortcomings, India’s GDP will probably grow by 5–5.5% this year – not great, №4, 2013–2014

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Opinion

Jaswant Singh —■—

Big Game. No Rules China, India and Japan are stepping into a great game, with Asia’s key superpower’s status at stake. The problem is there are scant rules in place to manage how it will be played.

long-smoldering disagreements and threaten to destabilize the regional status quo, countries throughout Asia are reconsidering their strategic positions. For example, the Philippines is revamping its security strategy by enhancing co-operation with the United States – China’s counterweight in the region – only two decades after it closed two major American military installations, the naval base at Subic Bay and Clark Air Base. Vietnam, too, has strengthened its ties with the U.S. And, after decades of absence, America has resumed training programs for Indonesia’s military. More significantly, Japan’s leaders are now openly debating ways to transform the country’s postWorld War II pacifism into a much more assertive nationalism. In fact, in August, the Japan Maritime Self-Defense Force unveiled the helicopter destroyer Izumo, whose structure and capabilities resemble those of an aircraft carrier, with possible offensive applications. This emerging strategic shift will likely have far-reaching consequences, raising the stakes of Sino-Japanese sparring over islands in the East China Sea.

Nowadays, many people seem to be more relaxed than ever about nationality, with the internet enabling them to forge close connections with distant cultures and people. But states remain extremely sensitive about their borders’ inviolability. After all, territory – including land, oceans, air space, rivers, and seabeds – is central to a country’s identity, and shapes its security and foreign policy. States can respond to territorial disputes either by surrendering some aspects of sovereignty, thus weakening their power and influence, or by adopting a more robust national defense strategy aimed at fending off current challenges and precluding future threats. Today, many Asian countries are choosing the latter option. Consider the territorial disputes roiling the Indian Ocean and other East Asian regions, sparked by China’s repeated – and increasingly assertive – efforts to claim sovereignty over vast maritime areas. As China’s incursions reignite Jaswant Singh is former Minister of Finance, Foreign Minister and Minister of Defence of India. 36


Big Game. No Rules

© Project Syndicate

While Japan’s tense relationship with China dominates headlines worldwide, the strategic rivalry between China and India is more likely to shape Asian power dynamics in the coming decades

Bangladesh, and it has been directly involved in financing and constructing Indian Ocean ports in Myanmar, Sri Lanka, and Pakistan. Just as China is helping to develop Pakistan’s port of Gwadar, India is helping to develop Iran’s Chabahar port 70 kilometers (43.5 miles) away. Chabahar is useful not only to counter China; it will serve as a vital link for India to transport goods to Afghanistan, Central Asia, and beyond. India could even develop a major communications hub with the port as its nexus. Moreover, India is working to safeguard its naval superiority over China. In August, the reactor aboard India’s first indigenously built nuclear submarine, INS Arihant, was activated, bringing the country one step closer to realizing its long-sought goal of a ‘nuclear triad’ – the capability to launch nuclear weapons from land, air, and sea. Just three days later, India launched the aircraft carrier INS Vikrant. But, as The Economist observed, “rarely does nemesis follow hubris so quickly.” Indeed, just two days after the Vikrant’s launch, explosions at the naval dockyard in Mumbai sank INS Sindhurakshak – one of the ten Kilo-class submarines that form the backbone of India’s aging conventional-submarine fleet – killing 18 crew members. Perhaps China’s apparent economic, strategic, and military advantages will prove less significant than many believe – especially given continuing uncertainty over the terms of America’s strategic ‘pivot’ toward Asia. Indeed, with the U.S. on their side, either Japan or India could conceivably tip the scales in its own favor. But one thing is clear: a great game is beginning among Asia’s great powers, and there are scant rules in place to manage how it will be played.

But, while Japan’s tense relationship with China dominates headlines worldwide, the strategic rivalry between China and India is more likely to shape Asian power dynamics in the coming decades. And recent events suggest that China knows it. In April, a platoon of Chinese People’s Liberation Army (PLA) border-security personnel crossed the so-called ‘line of actual control’ into India’s Depsang Valley in Ladakh to erect an encampment, where they remained for almost three weeks. China’s leaders have yet to explain what prompted the incursion – but there is no shortage of speculation. Some claim that the local PLA commander initiated the stand-off, while others contend that China’s new president, Xi Jinping, was using the transgression to assert his authority over the PLA. The incursion has even been linked to the scandal surrounding Chongqing’s disgraced former Communist Party chief, Bo Xilai, who had close ties with high-ranking PLA and security-services officers. But the most likely explanation is the simplest one: China was deliberately asserting its authority over the disputed border. As it stands, India and China are openly competing for influence in Sri Lanka, Myanmar, Nepal, and Bangladesh. So far, they have largely relied on economic and commercial mechanisms – especially rival port and pipeline projects – to secure their positions. China is not allowing its economic slowdown to derail its efforts to enlarge and modernize its navy and expand its commercial interests around Eurasia’s southern rim. It has been investing or demonstrating interest in deepwater port projects in Kenya, Tanzania, and No4, 2013–2014

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The Economics of Anxiety and Happiness Banker Alexander Bazarov knows more about the crisis than many. He looks beyond the world of finance and economics in order to show the technological, social and psychological root causes behind many of the developments of the modern world. But as he is Member of the Executive Board and Senior Vice President of Sberbank of Russia and Deputy Head of Sberbank CIB, business obviously comes first.

So I spent 21 out of those 33 years studying. If you omit seven years of carefree childhood, then that’s 28 years out of 33. So by that age I had worked for only five years. And the question arose: Will I ever start properly working? Now the study-work model itself is turning into the model of being an eternal student – you learn something and then it is already out of date. Obviously this creates a feeling of instability. Feelings are very important for a person. However, today’s system for evaluating things is based on materiality instead of feelings. We consider developed countries to be the ones that have high GDP per capita, yet GDP per capita has no relation whatsoever to human feelings. The first time I saw a color television was in 1974, when Zorya Voroshilovgrad reached the final of the USSR Football Cup. I watched that match. The purchase of that television was a  big event. Now people of my generation have televisions everywhere in their homes, from the

You are well informed about the current transformation of the global economic system and the development of a new paradigm. Could you speculate on what the crisis really is, and on what would be an adequate reaction to it from your industry? The essence of the crisis is that volatility is unusually high, the speed at which all processes are taking place has increased, and the volume of information has grown – and that no one is ready to live and work with this yet. Students of technical universities are facing the problem that by the time they have graduated, more than a third of their knowledge is already obsolete. This means that people will have to spend increasingly more time keeping themselves updated. This concerns humanities students to a lesser extent, and students of technical sciences to a greater extent. I counted that by the age of 33, I had studied for ten years at school, five years at university, three years at grad school and three years abroad. 38


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Feelings are very important for a person. However, today’s system for evaluating things is based on materiality instead of feelings. We consider developed countries to be the ones that have high GDP per capita, yet GDP per capita has no relation whatsoever to human feelings

who is the minority now? In the past people used to say, ‘Why aren’t you working? There must be something wrong with you.’ Now it’s, ‘Why are you working? There must be something wrong with you.’ How does that relate to the financial industry? In a very direct way. It’s a service industry; it gives people what they want. But the case is that, increasingly, people either don’t want anything or they want something different. That’s the reason why the entire financial sphere is going through an extremely serious transformation. This is visible in the retail sector, where many new players and possibilities have appeared. For example, nonfinancial institutions have sprung up that allow people to perform payments. Mobile phone operators are competing for that market. In the past five years I haven’t been to a bank once on personal matters, because I can do everything remotely. Is the system changing? Definitely. I am not sure how this transformation will pan out, but I am certain that the significance of offices and real estate will sharply decline. Practically all the things that I have encountered in my 50 years on this Earth are now obsolete. I was 27 when I first saw a mobile phone. Now young people don’t need anything besides a cell phone. I wanted to give my children watches. Their reaction was, “What do we need them for? Our cellphones can tell the time.” These phones also have cameras and hundreds of useful programs that replace various other devices. Imagine how many people involved in producing those devices are worried about losing their jobs.

kitchen to the corridor. Somebody has four TVs, another has eight. And are they happier as a result? No, of course not. Yet, according to GDP figures, everything is getting better. In Qatar they have moved on to measuring different indicators. They’re interested in the level of happiness. That is something that I truly believe in. The move away from material values in favor of feelings is a move in the right direction. Obviously they are both linked, but are in no way identical. For the past century we have believed that the more of something we possess, the better. Now, this idea is highly questionable. Judging by the people with whom I socialize, superfluous real estate is a massive headache. It’s foolish to own a house in London that you don’t even visit three to five times a year. It’s also stupid to have a house by the sea that you don’t even visit for two months in summer. In other words, the amount of freedom one enjoys is curtailed. For example, somebody wants to holiday in Mauritius, but they already have a house in France. This doesn’t add any happiness. That’s at the top end of the scale. At the opposite end there’s a different story. Thanks to the internet, social networking and technology, it’s now possible to live in a thought-up, virtual world. This is the philosophy: As long as I have a roof over my head and something to eat, then I can live in my virtual world. If that’s what you believe in, then why work and why set yourself long-term career goals? All the more so if 40% of what you learnt for five years at university is already out of date. Perhaps it’s not worth studying? In Greece, youth unemployment has hit 60%. So who exactly is the majority and No4, 2013–2014

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what they have to lose. If you have nothing to lose except the possibility of not achieving your goals, then you have nothing to worry about. But they have something to lose, and they see these trends and admit that they don’t understand, can’t manage to get things done, and hate their work. So stop doing it; who is forcing you? You’re part of the richest 0.001%, the people that everyone envies. So just quit doing what you don’t like doing. What must the service-oriented financial industry do to adapt to all of this? Follow the client. We’re currently working on our strategy. One of its key ideas goes like this: By changing ourselves, we change our clients. You can’t get people to go where you aren’t willing to go. You can’t speculate on harmony and happiness if you yourself are totally unhappy. You have said that the client is changing you, and not the other way round. It’s dialectic. It’s not a question of either/or; it’s always both, because there is no medal that has only one side. Obviously we are following the client, but instead of just moving, we should be in charge of the movement. I think that people must want that. You probably recall that Steve Jobs expressed himself in a similar way: That doesn’t exist yet, but I’ll create it. He had a vision which he brought to life. I want this thing to be slim, simple and button-free. It shouldn’t require any instructions at all. Also, it should look nice, in a way that invites people to touch it. I don’t care how you make it or what internals it has. That’s how the iPod, an innovative product, was born – and how the whole thing got started. What’s so unique about it? It’s small, simple, and pleasant to hold. That’s all. This is why in the financial industry we must know what clients want and respond to their needs. If we are to set ourselves the most ambitious task, then we must lead and articulate these needs. We need to say, ‘This is the right way to do it.’ However, we will only have the moral right to do this if we indeed act in that way. Otherwise we will be in the same position as a smoker who tells people about the dangers of smoking – no one is going to believe him for a second. In which sector is this transformation more obvious, and where is it happening at a faster rate: corporate or retail? I think that the speed of change in the retail sector is more obvious, although significant changes are

Thanks to the internet, social networking and technology, it’s now possible to live in a thought-up, virtual world. This is the philosophy: As long as I have a roof over my head and something to eat, then I can live in my virtual world. If that’s what you believe in, then why work and why set yourself long-term career goals? All the more so if 40% of what you learnt for five years at university is already out of date. Perhaps it’s not worth studying?

Are these ideas perceived and understood? Is it true that someone can understand what is happening as you describe it? My view is based on my experiences. At the age of 30 I wouldn’t have believed in what I am talking about now. In the position I am in now, it is easy for me to understand that the phrase ‘money can’t buy happiness’ is correct. Some will think that this is banal; others will say, ‘Well, that’s easy for you to say, you already have everything.’ That’s also true. During the time of perestroika I worked as a university lecturer. Students would tell me that things can’t get any worse, but I tried to instill in them the idea that things can always be worse. For example, do you have running water? It could stop running. Does your apartment have an electricity supply? It could be otherwise. The human mind is not capable of taking in all the changes that are happening. The traditional study, work (plus a house and a car), pension (plus comfortable old age and travel) model that the middle class has accepted as a template for life has changed. It’s impossible to finish studying or find a stable long-term job because no one knows what industries will arise in seven to ten years’ time. Comfortable old age is also not guaranteed. In other words, there is a very short planning horizon and it is extremely volatile. This is volatility crossing over into your life, and not the market. It’s not the same as the price of copper rising or falling. Rather, it’s the feeling of vulnerability and neediness. The feeling of anxiety has grown severalfold, and this in turn creates a great deal of mental discomfort. Yet this isn’t what I’m feeling. It’s what my acquaintances are experiencing, the people with whom I often socialize. They’re on the verge of depression. People only worry about 40


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that $1.5 billion tons of metal are produced, with $700 million made by China and $71 million by Russia. If I want to build a plant with an output of 2 million tons, then I’m going to need to know where demand is coming from. You can’t limit yourself to your city or region. Today you are part of a globalized world. In conclusion, it can be said that there are two tendencies in the corporate business: simplification of everything that can be simplified, and complication – the search for global links and the analysis of them when it is necessary to get a bigger picture. How does all that impact on the current performance of your investment banking business? The global economy isn’t growing. We see that the U.S. is growing, although it is far from impressive. Chinese growth rates are high, but it’s clear that a  slowdown is happening. It’s worth keeping in mind that if Chinese GDP falls by a mere percentage point, the global economy will start decelerating uncontrollably. In Europe, weak growth has only just been recorded, and on top of that it is unstable growth. Russia is practically experiencing stagnation of industrial production. If it weren’t for oil the situation would be very tough. Not surprisingly, the financial markets are in bad shape. At the same time, the capitalization of leading American banks has grown considerably because a certainty has taken hold that financial institutions will survive. If they don’t survive then there’s no point in discussing the future because it will be a different future. This isn’t the best year for investment banking, especially in Russia. Our country isn’t exactly flavor of the month with investors. The multipliers are almost at their lowest for the last 20 years. Nevertheless, Sberbank CIB is making good progress this year. We’re continuing to take an optimistic view and predict that this year’s results will be considerably healthier than last year’s. At the same time we’re continuing to build our team. Our current task is to complete the integration of Troika, which was acquired over a year ago, and create a full-fledged corporate and investment bank on its basis. It’s a very difficult and ambitious task, as the two companies have different cultures and management systems. Global experience shows that integrations turn out to be failures more often than successes. However, we understood all the risks

happening in the corporate sector too. Two opposing tendencies are at the heart of these changes. On the one hand, there is unification and simplification of standard products. Ten years ago these products could be very complicated. Now they are very simple. For example, the securities trading business is currently faced with a tough situation, as there is no margin anymore. Why pay a broker if you can trade directly via your tablet? I admit that the securities placement business could rather quickly find itself in a similar predicament. Why not hold a Eurobond placement or conduct an IPO using iPads? It’s entirely possible from a technical point of view. Of course there are regulatory restrictions, but besides that, what’s stopping someone from building up a fan club and announcing his own IPO using social networking? No bankers necessary. A current trend is that technology is used to the largest possible extent. On the other hand, the speed and complexity of the world is increasing. This is taking place against a backdrop of a frantic fragmentation of knowledge. Many people have an in-depth knowledge of something in their sphere of activity, but know nothing beyond it. Everything is developing so fast that it’s rather difficult to keep track of your own area of expertise alone. There’s also the issue of access to information. Now it is so much easier to gain access to information than it was in the past. When I ask my children when a specific event took place, they reply that there’s no point in memorizing dates because you can look it all up online. And that is true – you can find everything there – but as a result your head is empty because you aren’t actively using the information. In this situation the value of integrators rises infinitely. These are people who take knowledge from various spheres, put it together, and deliver a finished product, i.e. they turn raw data into information. Information is the foundation upon which decisions can be made. The second trend is the strengthening of everything related to in-depth research. We’re seeing serious demand for this product. Even the owner of a small business requires information about more than just his region. It is important for him to understand that the world is interdependent and that he is a part of the wider world – for example, that global GDP is $65 trillion, give or take, and that the U.S. accounts for $14–15 trillion, China for $8 trillion, and Russia for $2 trillion. Or No4, 2013–2014

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is 80:20 – 80% capital market, 20% commercial lending; in Europe it’s the other way round. Russia is closer to the European model. But money makes its way to the Russian portfolio market simply because global players can’t ignore such a market. Emerging market funds can’t bypass Russia, in the same way that funds investing in oil, gas or telecoms cannot avoid this country. This is despite the fact that Russia is not, I repeat, flavor of the month, and Russian assets are traded at a significant discount. In terms of private equity, the answer to the question of why money comes here is the same: it’s a big market and an important country. From the Browder and Magnitsky affair to the business with Pharmstandard, many recent developments on the securities market are scaring away investors instead of enticing them. Russia is currently not perceived as a very appealing place for private equity, due to a number of reasons. The risk of political instability is on the rise. I’ll elaborate on that: When you keep the exchange rate stable for a long time, the risks grow that it will become unstable. That is happening here simply because the situation has been under control for a long time. This is spooking a lot of investors. The change in the country’s economic trend is even more important. Investors would turn a blind eye to various problems if the Russian economy were to grow by 8% every year. In China, investors couldn’t care less about who is in power, Communist Party or not. Good growth could neutralize the importance of the political situation, but as this growth isn’t present, we have to review our economic prospects. And they aren’t looking very good. What about specific sectors? The infrastructure sector has enormous potential. At the moment we are studying it carefully. Around a trillion dollars needs to be invested in Russian infrastructure. Half of this should go into transport infrastructure, and the other half into different spheres. The main problems are that Russia is located in rather difficult climates, and some of the regions where infrastructure is needed are so sparsely populated that the economic feasibility of such projects is highly questionable. It’s a vicious circle: Why build infrastructure in an area where there’s nothing? But how will anything appear if you don’t build there? Someone has to take a risk and say, ‘OK, we’ll invest in this region. It doesn’t matter if our investment makes losses to begin with (or doesn’t

already at the discussion stage. It’s better to run the risk and do your utmost to achieve a positive outcome than do nothing at all. If you don’t take any risks, then it’s guaranteed that you’ll lose, yet victory is always possible if you do take risks. Right now I’m talking in a rather general way, although I can back up every statement with figures. From the start we treated Sberbank CIB as one of the key areas of activity of the international financial group that is Sberbank because our clients are growing and we are developing together with them. If today our clients are complex, international, multi-layered corporations, then we need to be the same. So far we have completed the first stage of creating CIB. Fifteen to 20% of the road has been travelled. How long will it take you to go the remaining 80%? We’re currently approving a five-year strategy. In my opinion, a minimum of three years is needed to shape a stable and capable corporate and investment banking business. We are newcomers on the market and although we have made a lot of noise, competitors and potential clients are still being surprised by what we can do. This is a normal reaction – no one should have any illusions, as we are currently playing catch-up. In the past, Sberbank was a savings bank and only dealt with retail. Then corporations appeared. Now we’re progressing to the next level and we understand that corporations make up an extremely demanding and advanced segment. It’s impossible to lead if you don’t work with that segment. However, no one has changed our one and only goal: to be a leader in everything that we do. Like any team that is setting out, we have our share of brilliant successes but sometimes not everything goes to plan. The task is to complete all deals in a stable and predictable manner so that our clients’ expectations are met and our promises are fulfilled. We’ve talked about global problems. Let’s move on to Russia. What competitive advantages does Russia enjoy as a location for private equity and portfolio investment? Russia is a key player on the global capital market, although its economic role is much more significant. We account for around 3% of global GDP but less than 1% of the capital market. However, one should understand that there are two fundamentally different models in the West. The American ratio 42


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Russia is currently not perceived as a very appealing place for private equity, due to a number of reasons. The risk of political instability is on the rise. I’ll elaborate on that: when you keep the exchange rate stable for a long time, the risks grow that it will become unstable. That is happening here simply because the situation has been under control for a long time. This is spooking a lot of investors

firsthand. On the internet you can see how, for example, Angela Merkel speaks at conferences. But when you’re sitting in the hall and listening to someone speak, it’s a completely different experience: you can literally feel the energy. Overall, forums enable you to learn from some of the most intelligent, educated and professional people. This is an area where The Russia Forum 2013 excelled. It was rich in terms of intellectual content, discussions were of a high standard, and clients showed a great deal of interest. The decision to hold the forum in April instead of February turned out to be a good move. No one assumes that unexpected breakthrough deals will be made at forums. Any deal is a semi-finished product. In accordance with Parkinson’s Law, work on a deal takes up all the time allotted to it, and so a forum is a fitting occasion to wrap up negotiations before a clear deadline. It’s a useful mission, and we were also successful in that regard.But the bar has been set; next year, as always, we will have to outdo ourselves. We’re already thinking about how to do that. Participants from countries all over the world have shown that they are very interested in The Russia Forum. This includes investors, corporations, leading economists, academics, and politicians. The goal of our event is to gather all these audiences together at one venue, hold an open dialog, and discuss the investment opportunities that Russia is opening up for the world. Judging by the number of new projects that are being realized in the non-commodities sphere – telecoms, agriculture, chemicals, machine building, and several other industries – our economy is gradually changing. It’s nice to know that we have contributed to this, not only as the country’s largest bank, but also as the organizer of productive dialog between each and every side. This dialog brings tangible results and is yet another reason for us to be proud of our work.

bring in any return at all). What’s important is that we’re trying to turn the tide.’ At the moment things are positive, the Russian President has come up with some good initiatives, and we will gladly take part in their realization as both a financing bank and as experts. It’s clear that transport corridors need to be created in Russia. It’s also clear that our country is uniquely situated between Europe and China. This potential can and should be used to our advantage but, to begin with, certain risks need to be taken, from an economic point of view. The government will have to agree to them, although we are ready to share the risks. I believe that Sberbank will be able to generate a good deal of investor interest in these future projects. Sberbank is the organizer of The Russia Forum. On the one hand, it’s quite an important discussion platform for economists, investors and businesspeople. On the other hand, it’s far from the only event of its kind, even in Moscow alone. Are you of the opinion that your forum, and forums in general, create some sort of ‘added value’? What do you expect from future meetings of The Russia Forum? I am a big fan and an advocate of forums. Be it the World Economic Forum in Davos, the St. Petersburg International Economic Forum, our forum, or any other, a forum is always a good opportunity to compare notes, exchange views, and get an overall understanding of the situation. You get to see to what extent you are lagging behind, running level or striding ahead of the rest. And, of course, forums present you with the chance to gain experience No4, 2013–2014

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Emulating the Future Charles Robertson In boosting budget spending and letting debt levels go up, Russia is increasingly at risk of becoming a new Greece, rather than a new Australia or Canada – unless real reforms are made.

$15,512 in Australia in 1965. Over the subsequent 12 to 15 years, the latter two countries lifted their per-capita figure by about 50%, to around $21,500. But while Australia and Canada may look like good role models for Russia, there is something that makes me doubtful their model will apply. The primary reason for that is Russia’s new approach to privatisation. Last year we heard that banks and infrastructure companies would be privatised, while significant stakes in natural resource companies would be sold by 2016. Investors were told that Russia intended to renew the privatisation drive that President Putin alluded to in early 2008, and that corporate governance would eventually improve as a result. Today we read that banks will remain state owned, and natural resource companies will

“We want to be an efficient natural resource country like Canada and Australia.” That was how a top executive in a state-owned enterprise (SOE) once put it when describing the strategy the Russian government wished to pursue. In fact, this is an admirable target. And it fits well with the advice of former World Bank chief economist Justin Yifu Lin who, in The Quest for Prosperity, argued that developing countries should aim to emulate countries a stage or two ahead of them. Indeed, Russia is roughly 45 to 50 years behind Australia and Canada. The Penn World Tables show that in 2010 Russia’s per-capita GDP was $15,068 – against $15,429 in Canada in 1965 and Charles Robertson is Global Chief Economist at Renaissance Capital. 44


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and Canada to Norway, South Africa and Chile, pension funds have bought government bonds (driving down domestic borrowing costs) or equities (providing cheap equity financing). While China does not have pension savings, it does not need them when domestic bank deposits are in such a high surplus. Russia’s problem is that it has neither and, unlike other commodity producers such as Kazakhstan or Nigeria, it is not making progress on addressing the issue. The good news is that the government is considering pension policy changes. The bad news is that they are aimed only at preventing the state system from going bankrupt in 2030. Thus, in fact, this will just help reduce the strain on the federal budget, which at present has to bail out the pay-as-you-go system as inflows are not matching outflows. The Ministry of Finance is hoping to boost domestic savings via tax incentives and a tax amnesty. It sees the Cyprus debacle as providing an opportunity to tempt Russian capital home. The problem I see here is that in Russia, where the income tax is as low as just 13%, it is hard to incentivise people to save more by creating ‘taxfree’ products. This problem could be helped if income tax rates were raised to 20% or more, but we have heard nothing to suggest this is likely.

not be sold before 2016. Particularly in oil and gas, the Russian state will remain dominant for years to come. Yet there is not one Canadian or Australian SOE in the 2011 Forbes Global 2000 list of the top public companies, and neither country has had the state dominant in banking and natural resources since the late 1970s, when privatisation started. This makes it hard for me to believe that Russia can emulate their success. In the meantime the role of the state is far higher in some oil-producing countries. The same Forbes list shows that Russia’s level of state ownership is similar to that of Norway and Saudi Arabia. However, their pattern is hard to emulate as well, as Russia is energy poor compared to these countries in terms of per-capita production. Deposits instead of state regulation

And what about China, which is arguably the most successful economy with a high level of SOEs? Some are misled into thinking that China (and perhaps Russia) represents an authoritarian state capitalist model that can be copied to produce sustainable strong growth. I do not believe that China’s economic success is built on the entrepreneurial brilliance of its SOE management. Rather, in my view, China’s success is due primarily to a massive pool of captive savings. Chinese deposits in the banking system are worth approximately 177% of GDP, while loans were 134% of GDP in 2012. The 43% of GDP excess (equivalent to $3.5 trillion) keeps interest rates extremely low most of the time, providing cheap funding for long-term investment. This model – also seen in Japan, Germany, Switzerland and the Czech Republic – has given companies the funds they need to invest. Russia’s savings pool is far lower, at 46% of GDP, not quite matching loans of 53% of GDP. Indeed, Russian capital often leaves the country, maintaining high interest rates within Russia but benefiting London property prices, Chelsea football club and (until recently) Cypriot banks. The shortfall of 7% of GDP, equivalent to $142 billion, means Russian corporates and banks borrow from abroad. It also means domestic interest rates are far higher than in China. Can Russia do anything to boost savings? The most obvious stance would be to compel Russians to contribute to private pensions. From Australia No4, 2013–2014

Walking the way of Greece

So, here we have a country with a low savings rate that is committed to maintaining a relatively high share of state ownership over the economy, where the political leadership (as everywhere) wants to maintain power. The solution, at least for a decade or more – as seen in so many countries of the European periphery – is to increase debt levels. Governments may choose to spend more money themselves, or they can encourage more privatesector borrowing. In Russia’s case, it looks like both options will be taken. During the boom, Russia pursued a policy of budget austerity, building up both fiscal and foreign exchange reserves, with then-Minister of Finance Alexei Kudrin arguing against ministers who wanted to spend money on infrastructure. The tack has now changed. President Putin recently announced 450 billion rubles ($14 billion) of new infrastructural spending, taken from the 86-billion-dollar National Welfare Fund, 45


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If the authorities got really ambitious, then an extra $1 trillion of debt by 2018 might only cause the debt ratio to rise to 36% of GDP, assuming the other IMF forecasts are right. With an extra trillion worth of spending over the next five years, a president fighting re-election might be able to point to new railways, airports and roads, nationwide broadband, modern electricity grids, more green power and better ports

I am not advocating or promoting this course of action. As Kudrin has made clear many times, Russia is reliant on international oil and gas prices which, when they plunge, can quickly turn a benign-looking low debt-to-GDP ratio into something much more worrying. A $1.1 trillion stock of public debt would be worth 72% of GDP if nominal GDP fell by half due to a China crash or a eurozone implosion. The budget deficit would widen dramatically, and refinancing concerns would rise. The main constraint on the scenario of much higher government spending is Putin’s evident reluctance to rely on foreign financing. Unless domestic savings explode upwards, higher public debt would require Russia to borrow from abroad and, in a nightmare scenario, perhaps require IMF support. So we are inclined to assume a modest rise in public sector debt and a larger rise in private sector debt instead. Half a trillion here (on private sector debt) and half a trillion or a trillion there (in public sector debt), and pretty soon you are talking ‘real money.’ The debt per person would have risen by $7,100, a chunk of which would have disappeared into imported cars, white goods and Kenyan roses for wives and girlfriends. GDP itself would not benefit greatly, but voters would feel more content (or at least more content than they would be without these material gains). While encouraging a debt boom to remain in power looks like the easiest option, it is obviously not the shortest way to the goals Russia declares it is pursuing. There is an alternative for the government though, which is to step up with real reforms – and happily there are signs that the authorities have not given up on pushing for them. This implies there is a chance that Russia can one day emerge as a new Canada or Australia, rather than a new Greece.

saying that eventually half the fund may be spent on infrastructure. He tasked the government with finding the right projects, but prioritised a high-speed rail link from Kazan to Moscow, a quadrupling of capacity on the Trans-Siberian railway, and ring-road work around Moscow. I am afraid this is just the beginning of a new course. First, the government will run down its savings, and then it will be tempted to increase its debt stock. If a political leader wants his party to do well in 2016, and is considering re-election in 2018, it would be wise to maximise support by spending more in 2015 and 2017 respectively. We saw this pattern in the run-up to the last parliamentary and presidential elections in 2011 and 2012. It meant a considerable spending increase on pensions and public-sector wages. Unless Russia booms again, this can only be repeated by either taxing people far more (not great for re-election), or borrowing more. The International Monetary Fund (IMF) expects Russia’s public debt stock to rise from 11% of GDP in 2012 to 13% of GDP in 2018, which, based on its GDP and ruble/dollar forecasts, means the stock of debt rising from $220 billion to $416 billion. If the authorities got really ambitious, then an extra $1 trillion of debt by 2018 might only cause the debt ratio to rise to 36% of GDP, assuming the other IMF forecasts are right. With an extra trillion worth of spending over the next five years, a president fighting re-election might be able to point to new railways, airports and roads, nationwide broadband, modern electricity grids, more green power and better ports. He might argue the investment would accelerate potential growth. Yet the debt ratio would still be half (or less) that of Brazil, India, the eurozone, the U.S. or the U.K. 46


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Developing in the Dark Vladimir Volkov Sixty percent of Africa’s population live in the dark – they simply do not have access to electricity. The remaining 40% experience power blackouts almost weekly. Yet the kilowattper-hour cost is twice as high in Africa as in other developing economies. In an interview with BRICS Business Magazine, Zola Tsotsi, Chairman of the Board of Directors at Eskom Holdings – a company that supplies electricity to nearly half of the African continent – talks about how his team is trying to overcome this serious problem.

Over the last decade or so Africa has been a big growth story in terms of GDP and electricity consumption. What is the current supply-and-demand situation on the continent? Clearly, in the meantime, the demand generally far outstrips the supply. This is simply because the resources in Africa are not available to generate enough power to satisfy the market. In many African countries it boils down to the lack of

investment in power generation and infrastructure. But also there is the issue of affordability of electric power from the consumers’ side where the consumers cannot support such an investment. It leaves the governments to take the responsibility for supplying electricity. And then again there are clear problems here as many African governments have quite limited ability to invest as they don’t have sufficient tax revenues to create 48


Developing in the Dark

this infrastructure to support the population with electricity supply. Specifically, what is the situation in urban Africa? When we come to urban environments, a lot of the African cities have experienced a decade of poor maintenance and lack of renewal of the infrastructure. So, it is becoming more difficult to provide the supply. Then of course you have got a problem of rural populations moving to urban areas seeking employment. You know, municipal authorities have not been taking time to create and improve infrastructure to make a certain quality of electricity supply more regular. Of course, the individual countries on the continent vary in the way they deal with this matter because they have different demands for power due to the size of the economy, quality of the infrastructure, investment capacity, and so on. How has South Africa been doing? When you come to South Africa what you find is that there has been a steep rise in demand for electricity over time. But, unfortunately, the government was not quite on time in taking the decision about improving facilities and infrastructure for generation to make sure we can meet future demands. Thus, of course, what happened because of the delay was that the demand began to outstrip the supply. When did it happen? The reduction of our reserve margin was neither an event nor an overnight phenomenon. It was a gradual process that peaked in the years 2007–2008. At this stage the country had decided that Eskom should proceed with the development of additional electricity infrastructure. We are currently in the middle of the construction of two big coal-fired power stations of around 4,800 megawatts (MW) each. They are located in the northern and the eastern parts of the country. Until the two power stations come on stream the country continues to operate under a very tight electricity system – requiring a fine balance of demand and supply. This has resulted in a strong focus on demand-side management. Beyond managing the demand side, Eskom is promoting a major power-saving agenda. Is that enforced by the government? Eskom has the responsibility to keep the lights on. And I am happy to say that we have fulfilled our mandate and there has not been any load-shedding No4, 2013–2014

since April 2008. Demand-side management interventions encourage customers to use electricity more efficiently, so reducing the gap between supply and demand in the short to medium term. Also known as ‘integrated demand solutions,’ these initiatives support national security of supply and minimize the negative economic implications of a power shortage on the country. During 2012–2013, Eskom achieved a total peak demand saving of 595 MW, and annualized energy savings of 2,244 GWh. The accumulated verified demand savings for the combined financial years 2004–2005 to 2012–2013 are 3,587 MW. This means that demand-side management has now ‘freed up’ about six 600 MW generators – the equivalent of a typical power station. Eskom’s demand-management initiatives are designed to achieve rapid energy-saving responses in the short term. These are supported by energyefficiency marketing initiatives that aim to promote immediate and long-term behavioral change. During 2012–2013, Eskom spent about $300 million on integrated demand-management initiatives. Eskom is a state-owned company. Is it your decision as to where to invest your money? Yes, it is, but it is recovered through our tariff structure which is determined by our energy regulator. This is called the Multi-Year Pricing Determination process. I guess one could say that we are doing the investment on behalf of the country. The returns on such investment have to be 49


ECONOMy

The proportion of total output from renewables is still very small. For example, the wind that is open now is around 1,400 MW, out of a total capacity of 4,4000 MW in South Africa. It is a small but real entry by the private sector into the electricity market. Despite being the largest producer and the major exporter of electrical power in Southern Africa, Eskom buys a reasonable amount of electricity from neighboring countries such as Zambia and Mozambique. Why? How does the regional market work? What we have in the region is a good interconnection in what we call the Southern African Development Community (SADC) that provides interconnectivity in electricity supplies across the countries. Within SADC we have developed the Southern African Power Pool (SAPP), which is a network of interconnected utilities in the Southern African region. And each utility in each country with membership in SADC and SAPP avails excess capacity to a centralized pool of power which all the countries can tap from. South Africa is the major contributor to that pool of power. So, through the SAPP networking we can export electricity to most of those countries. The SAPP is based in Zimbabwe. They do the trading on a daily basis. The costing of the power is determined by mutual agreements by all of the countries. So there is a power pool that enables this kind of interconnectivity and supplies the power to the different parts of those countries of the region. Also don’t forget we actually need as much power as we generate at home. Then why participate in such a mechanism, instead of focusing on supplying your own demand? There are political reasons why it is important for South Africa to make sure that the other countries around do not collapse. It is a political decision to support the neighboring countries by keeping the supply safe and steady. Are there similar arrangements in other parts of the African continent? Are they effective? Today the arrangement of this kind that is most effective is in Southern Africa, which is the most developed part of the African continent. In other parts of Africa there are also similar arrangements, such as COMESA, West African Power Pool, and others. But because of infrastructure limitations they are not as developed as SADC and SAPP.

Energy Giant

Eskom Holdings Limited (Eskom) is South Africa’s largest vertically integrated stateowned energy holding, with its headquarters in Johannesburg. Its power generation, transportation and distribution capacity accounts for nearly 95% of South Africa’s total, and 45% of the total across the entire continent. As of the end of the fiscal year 2012 (up to 31 March 2013), Eskom’s total installed generation capacity (based on 13 coal-fired power stations and one nuclear power station) was estimated at 41.9 gigawatts. It manages a network that spans 373,280 kilometers, and its customer base includes nearly five million retail and industrial consumers. Eskom’s revenues in 2012 reached R129 billion ($13.1 billion), while the company’s net profits totaled R5.2 billion ($529.2 million). looked at in terms of the cost of unserved energy for the South African economy. Can private investors take part in Eskom’s energy projects? Before we started to build the new capacity, all the generation that we had had been amortized already and paid for. That meant our generation costs were very low. Thus the returns you were getting out of the generation business – because we could keep our tariffs affordable – are not what you would call costreflective tariffs. Thus an investor cannot sustain investment in an Eskom facility, because it will give him probably a return of 4% to 6%, because of the fact that our tariffs are not cost-reflective. Now Eskom is building new plants. And for those facilities, in order to be able to recover the investment, we can put the tariff up. That means a  reasonable return that investors can get. So it is only now that investors are starting to talk and asking how they can come in, what the terms are, etcetera. Then what the government has done is that it has opened up the renewable energy market and has begun to set up the near cost-reflective tariffs. What investors are seeing is a new opportunity to invest in this sector and be able to get the returns that were not possible before. 50


ECONOMy

Does Eskom have the motivation – and the capacity – to expand farther north in the African continent? We would want to make sure that Southern Africa does as much supply as possible. The problem there is that we need to have a source that is sufficiently robust to be able to keep these things sustainable. So, as part of the SADC region, there is the Democratic Republic of Congo, where you have a potential of massive hydropower development. The Inga project can literally supply all the African needs outside Southern Africa, because you can get potentially a first phase of 40,000 MW – roughly equivalent of 20 nuclear power stations – to feed electricity to the rest of the African continent. But the will to create this project is really what the difficulty is. You mean the political will? Exactly – the political will and also the investment risks that are entailed in doing the investment by either the private sector or institutional investors. That is a challenging problem. But I think the SADC governments are beginning to come to grips with how they can deal with that, trying to support the project by reducing the risk profile, by creating the political stability that is required to get those projects off the ground. That is one solution to the Africa-wide problem. But of course there must be a supportive infrastructure so that the power can be delivered to all those different places. The backbone that exists in the African continent has to be strengthened substantially. There is a reasonable backbone from Central Africa to East Africa. But we have to create a solid backbone on the way up to the north of the continent. I mean up to Cairo, up to Egypt. If you can do that then you can distribute power as you go along throughout East Africa to West Africa. That will be the main thrust. But the issue with crossborder transmission is who is going to make this investment? So, these are not easy-to-solve problems. The potential is there for these things to be done. But it needs a will from the countries to make the investment for their own downstream benefit, because some of them are very poor. Take a  country like the Central African Republic, for example. I  mean, for them to invest in electricity infrastructure is going to be a huge problem. They can hardly feed their people. It is a very serious challenge that Africa is facing.

Electricity access in 2009 – Africa

Electrification rate, %

Angola Benin Botswana Burkina Faso Cameroon Congo Côte d’Ivoire Democratic Republic of the Congo Eritrea Ethiopia Gabon Ghana Kenya Lesotho Madagascar Malawi Mauritius Mozambique Namibia Nigeria Senegal South Africa Sudan Tanzania Togo Uganda Zambia Zimbabwe Other Africa Sub-Saharan Africa Algeria Egypt Libya Morocco Tunisia North Africa Africa

Population without electricity, millions

26.2 13.7 24.8 6.7 45.4 1.1 14.6 12.6 48.7 10.0 37.1 2.3 47.3 11.1 11.1 58.7 32.0 3.4 17.0 68.7 36.7 0.9 60.5 9.4 16.1 33.4 16.0 1.7 19.0 15.9 9.0 12.7 99.4 0.0 11.7 20.2 34.0 1.4 50.6 76.4 42.0 7.3 75.0 12.3 35.9 27.1 13.9 37.7 20.0 5.3 9.0 28.1 18.8 10.5 41.5 7.3 17.0 89.1 30.5 585.2 99.3 0.2 99.6 0.3 99.8 0.0 97.0 1.0 99.5 0.1 99.0 1.6 41.8 586.8

SOURCE: IEA, World Energy Outlook 2011. Countries are listed in alphabetical order.

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54


“They Said Poverty Would Always Be with Us. Well Maybe Not”

“They Said Poverty Would Always Be with Us. Well Maybe Not” The World Bank chief remains an outsider with big ambitions. Daniel Howden

Less than 12 months are left to reach the Millennium Development Goals (MDGs), ambitious anti-poverty targets set for 2015 by the UN. While the DRC, which languishes at the bottom of human development indices, represents part of the failure of those targets, the World Bank leader prefers to dwell on the positives. Global poverty, defined by the bank as living on $1.25 or less per day, was halved five years ahead of schedule. The next phase is to lift the remaining 20% of the world’s population out of extreme poverty by 2030. “The efforts to end poverty have been really significant,” says Mr Kim. “They said poverty would always be with us. Well, maybe not.” A proportion of people – he estimates three per cent – will remain below the poverty line due to natural disasters and their related aftermaths, but otherwise “extreme poverty will be gone from the earth.” It’s the kind of sweeping statement that is familiar to a world audience. His entourage wear “end poverty” badges on their suit lapels. While poverty has been halved, it is questionable how much the aid money and the MDGs contributed beyond helping to measure it. Most of those who rose out of poverty did so in places like China and Brazil on the back of economic growth. Ambition and targets have been the signature of the 58-year-old’s unusual career. During the 1980s and 1990s, as one of the founders of the Partners in Health, a community-based health organisation in Haiti, he took on the World

It is an unlikely mode for a saviour: middle-aged, suited and bespectacled, staring out from a billboard erected over the warren of slums that surround Kinshasa, the chaotic capital of the Democratic Republic of Congo (DRC). The face is that of Jim Yong Kim, the first man from outside the discipline of economics to take the helm at the World Bank, an institution many observers have accused of lacking purpose. Having just celebrated his first year in charge, the Korean-American medical expert has refocused the world’s premier development bank on ending extreme poverty. Africa’s fastestgrowing mega-city, which has no shortage of poverty, is an apt place to assess how he has set about curing the malaise at the bank and how he intends to deepen its impact. Mr Kim and his fellow Korean and United Nations Secretary-General, Ban Ki-moon, were in Congo to commit development dollars to the high-level diplomacy it is hoped can turn around one of the world’s worst-performing countries. Mr Kim announced $1 billion in support of the regional peace process, much of it to be sunk into hydropower schemes, road-building and boosting cross-border trade. These are the kind of big numbers he is interested in, in pursuit of big goals. “I want to be of use and try to have a transformational impact,” he said. He wants the major agencies to “get together and focus on a topic, ask what are the obstacles and how do we remove them.” No4, 2013–2014

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The slums of Kinshasa are a symbol of extreme poverty, which Jim Yong Kim intends to eradicate

observers resented his imposition by the United States over popular candidates from Africa and Latin America, while others worried that he was not an economist. They pointed to his presence at protests against the World Bank in 1993. Mr Kim now says that it was the lender’s “one size fits all” approach to economies that he objected to. “It was already a different World Bank when I walked in,” he says, crediting the popular James Wolfensohn, who left in 2005. But taking over the multilateral lender can be awkward. When George W. Bush appointed the conservative Paul Wolfowitz to replace Mr Wolfensohn, the bank was positively mutinous. He lasted two years amid a scandal over the promotion of his partner within the organisation. Some insiders see Mr Kim in the same mould as the dynamic Mr Wolfensohn. Others portray him as distant and only “professionally charming.” Some have been unconvinced by the voluminous discussion of change. He has appointed a ‘vice president of change’ and ‘change teams’ to propose radical alterations to the bank’s modus operandi. Targets and measuring are again to the fore, what

Health Organisation (WHO) over the treatment of drug-resistant tuberculosis which was deemed to be too expensive to work in poorer countries. The group’s success in lowering the cost of treating the disease in Haiti, and later Peru, persuaded the WHO that it could afford to change its approach. In fact, he won the argument so convincingly the WHO decided to hire him to run its HIV-Aids programme in 2003. He started targeting the treatment of three million infected patients in the developing world within the first two years. That target was missed, at least until 2007, but the drive to get there is credited with turning the tide globally on HIV-Aids. He was introduced as a “visionary” when he was unveiled as the new president of Dartmouth College, a bastion of America’s Ivy League, in 2009. His friend and co-founder at Partners in Health, Paul Farmer, told students and faculty that their new leader’s capacity to look into the future was akin to that of the Oracle in the popular science fiction film The Matrix. Yet his appointment to the World Bank last year was not universally welcomed. Many 56


“They Said Poverty Would Always Be with Us. Well Maybe Not”

© The Independent / The Interview People

He was introduced as a “visionary” when he was unveiled as the new president of Dartmouth College, a bastion of America’s Ivy League, in 2009. His friend and co-founder at Partners in Health, Paul Farmer, told students and faculty that their new leader’s capacity to look into the future was akin to that of the Oracle in the popular science fiction film The Matrix

thoughtful as possible about these expenditures and talk with governments and use private sector investment.” Since the end of the Second World War the number of international institutions has exploded and while many have noble goals they are also prone to egos, rivalries, waste and duplication. The bank president is content to play a supporting role to Mr Ban, with whom he shares a rapport. This level of co-operation between large international institutions is not the norm. None of the vast entourage who travelled with their Korean leaders could recall anything similar to their Africa trip. Squabbles broke out over everything from seating plans to numbers in the respective delegations. As a veteran of the multilateral system the best he could say about co-operation between big organisations was that “sometimes they didn’t hate each other.” On his way up, Mr Kim admits to encountering “egos at the top and egos all the way down.” It is the observation of an outsider, a viewpoint he has maintained despite his journey to the heart of the establishment.

the institution’s headman calls “knowledge work.” As well as aiming to end poverty, the bank has set itself the task of tracking the progress of the bottom 40% in every country as a means of measuring social mobility and equality. Mr Kim’s critics on the left attack him for an over-emphasis on economic growth, and accuse him of not doing enough to combat inequality. Those on the right are concerned that his ‘antigrowth’ views will come to the fore. They fret he will succumb to pressure from China to water down the bank’s Doing Business report – an annual league table that nudges reluctant nations in the direction of reform – which has embarrassed Beijing over corruption and red tape. Both clans may overestimate the influence of the bank. As Mr Kim points out, overseas development assistance (ODA) has shrunk for the last two years in a row and now stands at $125 billion. “That sounds like a lot but if you look at the infrastructure needs of India they are $1 trillion alone,” he says. “All the organisations who benefit from ODA should be humble. Let’s be as No4, 2013–2014

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Gebrselassie Intends to Lead Ethiopia with a Message: Anything is Possible David Smith The greatest runner of all time says democracy can’t come overnight as he targets a new career in politics. But he hopes he can lift the pace of progress.

Yichalal is a word made popular in Ethiopia by Haile Gebrselassie, arguably the finest distance runner ever to grace track or road. It means ‘it is possible,’ or ‘it can be done.’ Gebrselassie for president? Yichalal. That was the widespread reaction when the 40-year-old, who has conquered the worlds of sport and business, announced that in 2015 he will be running not for gold but for political office. The

only dissenting voice appeared to be that of his wife. In many ways, politics seems a natural next step for a man whose rise mirrors that of the skyscrapers in Addis Ababa, the capital of Ethiopia, where Bob Geldof is now a less likely foreign visitor than investors lured by one of the world’s fastest-growing economies. Gebrselassie, an idol to millions with that crucial political asset, a winning smile, is seen as embodying the new optimism also sweeping much of Africa. 58


Gebrselassie Intends to Lead Ethiopia with a Message: Anything is Possible

for 25, 26 years and it’s time to share my experience with others. When you do sport, you’re alone, but in business you work with others, and in both you have to win. In politics, too.” Gebrselassie already has some political experience as a member of the Elders, a group who have mediated in political crises in the country since 2005. His next target is a seat in parliament at the next election in 2015 and, such is his wild popularity, he knows expectations will be high. “They will ask me, ‘What is your plan?’ I cannot do everything they need. ‘I will try to plant the first plant, and the rest you can do yourself.’ It’s hard to explain: I don’t know the language yet.” Asked if he would like to be president one day he replied, “Who doesn’t like that?” The Ethiopian presidency is a largely ceremonial role given to an individual without party affiliation, whereas true power lies with the prime minister, currently in the iron grip of the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF). There is only one opposition MP in the 547-seat parliament. Gebrselassie is adamant that he will run as an independent candidate, saying that he agrees with the EPRDF on some points and disagrees on others. He is evasive when asked about the criticisms of authoritarianism and human rights violations: “For me it is difficult to say. I need to know what’s going on. If you come back after three years, I will answer that question.” It was only in 1991 that civil war ended with Ethiopia’s repressive communist regime being overthrown, he recalled: “Human disaster happened in this country. Millions died in the ‘red terror’ [in which hundreds of thousands died in the late 1970s]. Are you expecting Ethiopia to become a democracy like America or the U.K.? Of course everybody likes good government, but we are young. If you look back 20 years at what we had, what do we expect? My hope is in another 20 years it will be better than now.” Expressing a sentiment that echoes some of Africa’s longest-serving leaders, Gebrselassie added, “It’s better to have a government without democracy than no government. In our neighbour Somalia, they didn’t have a government for many years. Do you think they had democracy? They lost everything. You cannot bring democracy overnight. First you have to educate the people and show them how things are done.”

“We Ethiopians had many problems,” he told The Observer last week, speaking by phone while driving towards Addis Ababa. “If you come to Ethiopia now you see the difference. Things are changing very fast.” But despite projected growth of 11% next year, poverty remains widespread. “Now Ethiopia is moving in a good way but the speed is not what we need,” Gebrselassie said. “We need to move more quickly and join the middleincome countries. There is no Usain Bolt. The more you sprint, the more you break world records. If I become an MP I will push for a pick-up of speed.” Few would bet against the 8½-stone runner who has defied injuries, lifelong asthma and the passage of time. One of ten children raised at high altitude in the hills of Asala, 160 miles south of the capital, he used to run six miles to school and back every day. He won his first official race when he was eight, took part in his first marathon at 15 and, at 18, was discovered by the Dutch former distance runner Jos Hermens, who remains his coach and agent. Gebrselassie won Olympic gold medals in the 10,000 metres in Atlanta and Sydney and claimed four world titles at that distance. He switched to the marathon and was still able to smash his own world record at the age of 35. In all he set 27 world bests, although some of them were not over officially recognised distances. He became known for a distinctive running style with the right arm swinging back and forth while the left remains static – he says this developed when he was running to school carrying books. Yet all the time he was also building a business empire, riding the wave of Ethiopia’s economic renaissance to become one of its richest men, employing hundreds of people. Typically rising at 5 a.m., he owns a hotel, cinema, car showroom and a property business that has financed several of the capital’s tallest buildings. Recently he opened a coffee farm. And it will do Gebrselassie’s election prospects no harm that he is also a philanthropist. He has built two primary schools in Ethiopia and is heavily involved with the Great Ethiopian Run, which works with NGOs and the UN to raise awareness of education and health. So why politics? “Why? Good question,” he laughed. “I’ve always wanted what is useful for the country and myself and the people of Ethiopia. I’ve been in athletics No4, 2013–2014

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Analysts agree Gebrselassie’s status in Ethiopia will make him all but untouchable. Hallelujah Lulie, a researcher at the Institute for Security Studies in Addis Ababa, said, “Most ministers have a positive attitude towards him. I don’t think they’ll intimidate or arrest him. They won’t crack down as they do against other opposition parties.” Known for his single-minded determination, Gebrselassie can become an inspiration on the political stage, Lulie added: “The political sphere is deeply polarised. Haile Gebrselassie is one of the few unifying figures we have in this country. In the 1990s the only good news we had in Ethiopia was his victories all over the world. He’s a well-disciplined workaholic and he represents the ideas Ethiopians should work for. From him we learned the motto, ‘It is possible.’”

Such an approach is unlikely to win plaudits from Amnesty International, which has accused the EPRDF of stamping out dissenting voices, dismantling the independent media, obstructing human rights organisations and strangling political opposition. It says Ethiopia’s jails are packed with suspected political opponents. Claire Beston, Amnesty’s Ethiopia researcher, said, “Haile Gebrselassie would be hugely popular and it would be very difficult for the government to react against him as they have against other opposition leaders if he was outspoken and called for reforms. We hope he will. The presidency could be used to great benefit in relation to freedom of expression and the right to participate in the political process.” 60

© The Observer / The Interview People

It was only in 1991 that civil war ended with Ethiopia’s repressive communist regime being overthrown, he recalled: “Human disaster happened in this country. Millions died in the ‘red terror’ [in which hundreds of thousands died in the late 1970s]. Are you expecting Ethiopia to become a democracy like America or the UK? Of course everybody likes good government, but we are young. If you look back 20 years at what we had, what do we expect? My hope is in another 20 years it will be better than now.”


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The smart list

The

Greatest Minds

of the Developing World

BRICS Business Magazine came up with a list of living geniuses, people to whom mankind owes a debt of gratitude for their contribution. These scientists have risen to prominence in various areas of expertise, but they all meet our primary criterion: they come from the developing world. The final list includes winners of scientific awards who were born in developing countries but who may now live, work and make their discoveries anywhere in the world. The awards themselves were the second criterion. Out of hundreds of different awards, we picked those that mattered most in terms of scientific and promotional value. They are recognizable and present in the global media virtually all year round, regardless of when the awards are actually given. This list goes to show that many achievements that are usually associated with Europe or the United States in reality have entirely different roots, although they may bear fruit in those environments where conditions are most conducive. The majority of these scientists have chosen at different times to study or work away from their home countries. And it is this, perhaps obvious, but vital – and at the same time alarming – conclusion that one draws after reading of the people who proved the Witten conjecture, studied black holes, or built an artificial intelligence. BRICS Business Magazine brings into the limelight 25 of the most renowned scientists of the emerging world, the winners of the top international awards in science. The full list of laureates can be found at the end of the article. 62


The Greatest Minds of the Developing World

Ma

Cs

Yau Shing-Tung —■— Winner of the 1982 Fields Medal

Dabbala Rajagopal Reddy —■— Winner of the 1994 Turing Award (jointly with Edward Feigenbaum)

China/U.S.A.

To be convinced that Harvard professor Yau ShingTung has one of the most brilliant and reputable mathematical minds in the world, one need not study the long list of his theoretical works on differential geometry and topology. It is sufficient to know that the 64-year-old professor is the only researcher of Chinese origin to receive the two most prestigious awards in mathematics: the Fields Medal, for proving the Calabi conjecture which serves as a mathematical framework for various applications of strings theory in physics, and the 2010 Wolf Prize. But Yau’s stellar achievements in the world of science are not the only thing to have brought him worldwide renown. He is equally famous for his consistent criticism of the ‘academic corruption’ that plagues the higher education system in his home country, which he left at the age of 22. “It is a phenomenon unique to China. The problem is, those who are found to plagiarize and cheat don’t get punished. How can others be persuaded not to?” he was quoted as saying in an interview published by China Daily. He went on to insist that education has another important function: training the elite, the country’s new leaders, who will ensure China’s prosperity in the future. “If we can cultivate just 1% from among the next generation, it will be enough.” No4, 2013–2014

India/U.S.A.

The idea that robots will soon do everything for us is not a new one – it has been talked about for decades. But the research done by Indian scientist Dabbala Rajagopal Reddy – better known as Raj Reddy – actually brings it a step closer to reality. After moving to the United States, Reddy studied perceptional and motoric aspects of intellect and robotics. He taught robots to recognize speech and managed to implement independent voice control. He received the Turing Award for “pioneering the design and construction of large-scale artificial intelligence systems, demonstrating the practical importance and potential commercial impact of artificial intelligence technology.” Today the 76-year-old specialist in computingsystems theory works as a math and robotics professor at Carnegie Mellon University. But like many other immigrant scientists, Raj Reddy never forgets about his home country. He believes that education in India has a great potential that remains largely untapped. In an interview with Sramana Mitra for the One Million by One Million blog he said, “There are a lot of bright kids… first they are going to learn, then they are going to teach, and then they are going to create a knowledge base.” 63


The smart list

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Maxim Kontsevich —■— Winner of the 1998 Fields Medal

Claude Cohen-Tannoudji —■— Winner of the 1997 Nobel Prize in Physics (jointly with Steven Chu and William Daniel Phillips)

Russia/France

A graduate of Moscow State University’s Mechanics and Mathematics Department, and now a French academic with tenure at the Paris Institute for Advanced Studies, 49-year-old Maxim Kontsevich admits that he loves “different kinds of mathematics,” and working at the junctions between different sciences. “One could say that I am taking part in a dialog between physics and math, representing the latter,” he said in a 2008 interview to Rossiyskaya Gazeta. Kontsevich’s vital and decisive contributions to various areas of science are truly impressive. One of these is the superstring theory which, according to Professor Brian Green of Columbia University, Kontsevich managed to bring out of deadlock. The mathematician himself believes it to be his swan song in theoretical physics, but it has given others hope that explanations will one day be found for other phenomena such as gravitation and quarks. Another of Kontsevich’s interests is the theory of nodes, which attempts to correlate superstring theory with the theory of relativity. It is in these two areas of science that Kontsevich has accomplished what is considered to be his most important work – the proof of the Witten conjecture – for which he was awarded the Fields Medal in 1998. But that prestigious trophy is not the only one on this mathematician’s mantelpiece. It also holds an Henri Poincaré Prize, a Crafoord Prize, and a Shaw Prize.

Algeria/France

What if you could slow down a beam of atoms running along an alternating magnetic field and catch them in quantum traps? Surmounting this challenge allowed the building of high-precision atomic clocks and super-accurate global positioning systems for spacecraft, and it came about thanks to the atomic cooling method co-developed by Claude Cohen-Tannoudji, whose contribution earned him the 1997 Nobel Prize in Physics. Nuclear physics, quantum optics, laser spectro­ scopy, and resonance fluorescence are among Cohen-Tannoudji’s core professional interests. Born in Algeria, he went on to become French both in terms of nationality and scientific affiliations. However, research has never been the sole pursuit of the 80-year-old scientist, who has always dedicated just as much time and attention to popularizing and teaching science. Cohen-Tannoudji remains convinced that education and scientific research are not just a set of tools that help you to learn more about the world around you, but also a way to fight intolerance and fundamentalism. He told a 2009 gathering at Taiwan’s National Cheng Kung University that “the school of scientific approach is a school of modesty, a school of dialogue and mutual respect among people, that is, open-mindedness.” 64


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Daniel Tsui —■— Winner of the 1998 Nobel Prize in Physics (jointly with Robert Laughlin and Horst Störmer)

Amartya Sen —■— Winner of the 1998 Nobel Memorial Prize in Economic Sciences India

China/U.S.A.

Amartya Sen was witness to bloody sectarian violence and a famine that took nearly three million lives in India’s Bengal province in 1943. These events left an indelible mark in his memory, and clearly defined the professional interests of this future Nobel Prize laureate and Harvard University professor, who has dedicated his life to resolving the problem of inequality and improving the economies of developing nations. Social choice theory and numeric methods that laid the foundation for methodologies to assess the welfare of countries are probably the most important and well-known aspects of Sen’s work, whose philosophy is based on the premise that people – human values, rights and freedoms – should come first in formulating economic policies. “I advocate the kind of economic thinking that prioritizes human freedoms. I don’t just mean formal human rights, but veritable freedoms, whereby each individual person can choose what kind of life he or she wants to live and what he or she wants to achieve,” he said during an interview with the German Handelsblatt newspaper in April last year. The 80-year-old Sen insisted that politicians should always ask themselves what government can do to help people gain these freedoms. No4, 2013–2014

Even if you are born into a poor farming family in the provincial backwoods of pre-war China, you can still make it big in science – and Daniel Tsui is living proof. At the tender age of 12, Tsui left home to go to school and pursue a career in science, travelling to Hong Kong and Taiwan and ending up in the United States in 1958. Ten years later, Tsui began his brilliant career as a physics researcher at Bell Laboratories, becoming a pioneer in the study of two-dimensional electrons. Eventually, Tsui’s research interests expanded to include the electrical properties of thin films, the microstructure of semiconductors, and the physics of solid bodies, as well as quantum physics and the physical properties of electronic materials subjected to strong magnetic fields and low temperatures. It was this work that earned him the 1997 Nobel Prize in Physics “for discovering the fractional quantum Hall effect.” At 74, he is still proactively involved in scientific work, as professor and researcher at Boston University. As he wrote in an autobiography for the Nobel Prize website, “the only meaningful life is a life of learning. What better way is there to learn than through teaching!” 65


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Zhores Alferov —■— Winner of the 2000 Nobel Prize in Physics Russia

Ahmed Zewail —■— Winner of the 1999 Noble Prize in Chemistry

Apart from the way mobile phones, tablets and laptops look, people tend to pick their gadgets based on two parameters. They must be fast, to be able to send large volumes of data in a short period of time, while staying compact enough to fit in your bag or pocket, or on your desk. Such devices would never have been possible without the research done by Russian physicist Zhores Alferov. In 2000, the 70-year-old scientist shared the Nobel Prize with two foreign colleagues: Jack Kilby from the United States and Herbert Kroemer from Germany. The Nobel Committee bestowed the award “for basic work on information and communication technology.” In 1984, Alferov himself already had no doubt that he would win the Nobel Prize but he expected it to come much later. “Previous history shows that you get it either immediately after you make your discovery (in my case it would have been in the mid-1970s) or when you are a very old man. This was the case with Kapitsa,” explained the scientist during one interview. The practical application of Alferov’s work went far beyond the basic. Using his discoveries, Russia and the rest of the world were able for the first time to produce ‘heterostructural’ solar panels for space batteries. One of these was installed on the Mir space station and functioned seamlessly throughout its entire life cycle.

Egypt/U.S.A.

The third Nobel laureate in Egypt’s entire history, Ahmed Zewail is affectionately called ‘the father of femtochemistry,’ the study of chemical reactions on a timescale of femtoseconds. A femtosecond is a millionth of a billionth of a second. For a long time, this area did not enjoy a great deal of popular demand. Some of his colleagues even argued that Zewail’s experiments were theoretically impossible. However, in 1980, Zewail’s stubbornness finally paid off. For the first time, he was able to demonstrate so-called ‘coherent oscillation’ in molecules, enabling him to predict the chemical behavior of substances. This paved the way for a Nobel Prize “for his studies of the transition states of chemical reactions using femtosecond spectroscopy.” Zewail (67) believes one can have both faith and science: “The claim that in order to be a rational scientist, by definition, you must not believe in a religion is a bit naïve,” he said in a 2009 interview with The Fountain magazine. “Religion is very important for people for a variety of reasons and I don’t see a conflict between the two.” 66

© RIA Novosti

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The Greatest Minds of the Developing World

The Nobel Prize

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An international prize and medal that has been presented on an annual basis since 1901 by the Nobel Committee (Sweden) in recognition of outstanding scientific achievements and significant contributions to cultural and social advances in the fields of physics, chemistry, literature, physiology, medicine and world peace. The associated Nobel Memorial Prize in Economic Sciences has been awarded since 1969 under the sponsorship of the Royal Bank of Sweden. Each Nobel Prize includes a monetary award, which in 2013 was of eight million Swedish kronor ($1,250,000).

Yuet Wai Kan —■— Winner of the 2004 Shaw Prize in Life Science and Medicine

Winners by Country Russia 

China/U.S.A.

China 

Today Yuet Wai Kan (77) heads up the Molecular Medicine and Diagnostics Division at the University of California, San Francisco (UCSF). He does not deny that he owes many of his professional achievements, much like his profession itself, to chance. “My father said, ‘You are going to be a doctor,’ and that was it – honest! I was the youngest of 12 children, and none of my siblings were in medicine, so mine was the last chance he had,” Kan told UCSF’s Frontiers of Medicine in 2012. Another turn of events was his meeting a patient suffering from thalassemia (a genetic blood defect causing anemia) while Kan was practicing medicine in Hong Kong. The chance encounter fueled his initial interest in genetics and hematology, areas in which Kan would later make an invaluable contribution. On a different occasion, in 1975, when analyzing the DNA of adult patients suffering from so-called ‘alpha thalassemia,’ it was by pure chance that he noticed that some of them were missing hemoglobin ‘alpha chains.’ For the first time in history it was No4, 2013–2014

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proven that defective genes could cause diseases in humans. This discovery led to a completely new DNA-based method of diagnostics. Kan’s current sickle-cell anemia research and his experiments in turning normal skin and blood cells into stem cells have spelled a new breakthrough in medicine. Doctors hope they will soon be armed with a brand new tool capable both of diagnosing and treating some of the most severe diseases, including cancer and AIDS. 67


The smart list

Md Mathematics

The Frederic Esser Nemmers Prize in Mathematics is one of the most highprofile awards in mathematics in the United States. It has been awarded biennially since 1994 under the auspices of Northwestern University. The award carries a monetary value of $150,000. The Fields Medal is an international prize and medal that has been awarded since 1936 by the International Mathematical Union (IMU) every four years to two, three, or four mathematicians not over 40 years of age. The accompanying monetary award is 15,000 Canadian dollars.

Xiaodong Wang —■— Winner of the 2006 Shaw Prize in Life Science and Medicine China/U.S.A.

The mystery of apoptosis – the process of programmed cell death responsible for killing defective, damaged, mutating or infected cells that has kept researchers on their toes for the last half century – is virtually solved. The ‘cell suicide’ phenomenon was first studied in the late 1960s by various groups of scientists, including the geneticists Sydney Brenner, John Sulston and Robert Horvitz who together won the 2002 Nobel Prize in Physiology or Medicine for discovering key genes regulating the development of organs and apoptosis. However, it was only recently that this process was fully understood. A decisive breakthrough was achieved thanks to a study of cytochromes (globular proteins) by researchers at the Howard Hughes Medical Institute (HHMI) in the United States, under the leadership of Xiaodong Wang. The scientists managed to get an insight into the entire chain of transmutations inside a cell triggering the process of its annihilation. It was this work that earned Wang the Shaw Prize in 2006. “We now begin to understand how cell death is initiated, which is really the middle of the pathway,” Wang is quoted as saying on the HHMI website. “Now we plan to look at the beginning and end of

Winners by Country Russia  China  Ukraine  Vietnam  India 

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the process to determine what triggers these events and understand how the cell breaks up.” The 50-year-old, who is now a professor at the Beijing National Institute of Biological Sciences, believes that a complete insight into the apoptosis mechanism will enable scientists to create new and efficient substances to combat cancer and other severe conditions that cannot currently be treated. 68


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Srinivasa Varadhan —■— Winner of the 2007 Abel Prize

Grigory Perelman —■— Winner of the 2006 Fields Medal

India/U.S.A.

How high is the likelihood that a person born in Chennai (then Madras) under British rule would go on to become a professor of mathematics at one of the largest scientific universities in America, and a leading specialist in the theory of relativity? The brilliant example set by 73-year-old Srinivasa Varadhan shows that given a certain degree of determination, focus, and natural talent, the odds are not insurmountable. He defended his PhD dissertation exactly 50 years ago at the Indian Statistical Institute, in the presence of Andrei Kolmogorov, a Soviet mathematician widely considered to be the father of the theory of relativity. This dissertation was his ticket to the United States, where he continued his studies. Since 1966 he has taught at New York University’s Courant Institute of Mathematical Sciences. Varadhan was awarded the 2007 Abel Prize for “his fundamental contribution to the theory of relativity and in particular for inventing the theory of large deviations.” He was the first representative of a developing country to receive this award. “What the theory actually tells you is not just what the probability is, but it also tells you if an event with such a small probability occurred, how it occurred,” Varadhan said in an interview published in Notices of the American Mathematical Society following the award ceremony. “You can trace back the history of it and explain how it occurred and what else would have occurred.”

Russia

Every simply connected, closed 3-manifold is homeomorphic to the 3-sphere. If the true nature of this conjecture – formulated by the French mathematician, mechanic and philosopher Jules Henri Poincaré back in 1900 – does not seem obvious enough to you, any doubts should have been dispelled since August 2006. It was then that the Clay Mathematics Institute made the official statement that the Poincaré conjecture – one of their seven Millennium Prize Problems  – had been solved. The man behind this scientific sensation was Grigory Perelman. No matter how much recognition the Russian mathematician might have otherwise received, it was nothing compared to the sensation caused when he rejected his Millennium Prize of one million dollars from the Clay Institute, just a few years after his similar rejection of a Fields Medal. “To be absolutely brief, the main reason was the fact that I disagree with the organized community of mathematicians,” Perelman said in a letter to the Clay Institute in July 2010. “I do not like their decisions, I do not believe them to be fair. I think that the American mathematician [Richard] Hamilton made a contribution on a par with mine.” In the meantime, this brilliant mathematician continues to live as a hermit in a small flat in Saint Petersburg. How his stellar career will evolve is another question that remains entirely open. No4, 2013–2014

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Anil Jain —■— Winner of the 2007 W. Wallace McDowell Award

Alexander Razborov —■— Winner of the 2007 Gödel Prize (jointly with Steven Rudich)

India/U.S.A.

Russia

Soon criminals, terrorists, and even garden variety bad guys, will not only find it difficult to do their dirty deeds, but won’t be able to escape the watchful eye of law enforcement – even if they try to hide in large crowds. The dramatic advance of computer vision and biometric recognition technologies, capable of identifying humans by unique attributes such as facial features, fingerprints, retinas and even tattoos, certainly raises many hopes. And the importance to these of contributions made by Anil Jain, professor in the Department of Computer Science & Engineering at Michigan State University, cannot be overestimated. Today, hardware and software based around technologies developed or improved by Jain are widely used in forensic science, automated electronic voting systems, and security. It is thanks to Jain’s input that your latest iPhone can recognize your fingerprints. Today’s biometric recognition technologies are not advanced enough to ensure 100% accuracy, so errors cannot be ruled out. Therefore the 66-year-old Indian-born scientist is rather modest about his achievements. “People are putting undue pressure on biometrics; they have too much expectation but they could be disappointed,” Jain told Forbes India recently. On the other hand, that is hardly a reason for Jain to give up on work that makes the world safer and more comfortable – after all, his own biometric identification system, based on a combination of fingerprint and retina scans, allows for a margin of error of less than 1%.

Imagine that you are faced with a problem that has multiple solutions, and you need to select the one that is best based on a set of criteria. Is there a way to substitute a simple analysis of all possible options with a more efficient procedure, or algorithm, which helps you find the solution? This question lies at the heart of ‘P versus NP’ – one of the seven Millennium Prize Problems established by the Clay Mathematics Institute. “Intuition plays a role in resolving this problem – it goes to show that there is often another way to resolve problems of this sort without resorting to a tedious listing of all of the options,” Alexander Razborov said in a discussion published on polit.ru. “The question is whether it could be done in all instances.” The Russian mathematician has dedicated more than a year of his professional life to this particular subject. His work on ‘natural proof,’ co-authored with Steven Rudich from Carnegie Mellon University, was the tangible result of many years of research by the 50-year-old Razborov in this area. Their paper’s main conclusion, which earned the authors the prestigious Gödel Prize, was that the ‘P versus NP’ problem could not be solved using known methods of proof, and that new approaches needed to be developed. An approach based on the ‘algorithm optimization principle,’ rather than the tedious listing of possible solutions echoes Razborov’s philosophy as a scientist and practitioner: “The computers can only get you so far, so you have to start thinking.” 70


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As Computer Science

The Turing Award is the most prestigious prize in the computing community, and has been awarded on an annual basis since 1966 by the Association for Computing Machinery (ACM). The award carries a monetary value of $250,000.

Winners by Country

Rashid Sunyaev —■— Winner of the 2008 Crafoord Prize

India  China 

Russia/Germany

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Have you ever considered what happens when matter falls toward a celestial body such as a black hole or neutron star? One result is so-called ‘accretion discs,’ which cause strong X-ray radiation and can tell us a lot about the early history of our Universe. Disc accretion theory is perhaps the most wellknown and frequently quoted work of veritable star of the astrophysics world Rashid Sunyaev, which he co-authored with Nikolai Shakura back in the early 1970s. The theory still remains one of the cornerstones of modern space science. Similarly, another of his works – a theoretical model describing the interaction between ‘relic radiation’ photons and the hot gas found in clusters of galaxies, now known as the SunyaevZeldovich effect – is one of the key tools in modern cosmological research. Thanks to major breakthroughs in radiationdetection technologies over the last 15 years, many of Sunyaev’s theoretical predictions have been brilliantly proven in practice, and prestigious international awards have rained down. The most recent was the 2012 Benjamin Franklin Medal. No4, 2013–2014

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The 70-year-old Sunyaev now works as a fellow at the Space Research Institute of the Russian Academy of Sciences, and is also a director of the Max Plank Institute for Astrophysics in Germany. “We should do everything that we can to make sure that the young scientists have an opportunity to study and work at the international level and not complain about how bad things have become,” he said in an interview published last year by Gazeta.ru. In that interview, Sunyaev seems confident that the fastest and most efficient solution to this challenge is for Russia to become a full-fledged member of the world’s best scientific centers. Then the country could see a brand new generation of talented and bright young scientists. 71


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Shang-Hua Teng —■— Winner of the 2008 Gödel Prize (jointly with Daniel Spielman)

Charles Kao —■— Winner of the 2009 Nobel Prize in Physics

China

China/U.K./U.S.A.

He likes to read books, listen to Latin American music (especially salsa), and travel. When in the air, he keeps himself busy solving tough mathematical puzzles. Most importantly, however, he is one of the world’s most decorated computer scientists and practitioners. His name is Shang-Hua Teng. The breathtaking ascent of this 49-year-old Beijing native to the pinnacles of computer science began at the Shanghai Transport University and continued in the United States at the University of Southern California and Carnegie Mellon. America gave Teng an opportunity to build a stellar career as an academic professor and theoretical scientist, but also as a researcher with leading global technological corporations including Xerox, Intel and Microsoft. His wide horizons and insight into various areas of computer science have earned Teng universal acclaim. With his so-called ‘smoothed analysis’ of algorithms, computational game theory, combinatorial scientific computing, computational geometry and spectral graphs theory, his broad approach is light years ahead of the commonly accepted scientific practice of narrow specialization. “I like interdisciplinary research and studies that intersect both theory and applications. Although these topics appear to be diverse, the underlying principle of my research has been the same, that is, to understand the mathematical structure of these problems in order to design efficient algorithms and software,” Teng says on his website. In his current capacity as computer science professor at the Viterbi School of Engineering he intends to focus full-time on scientific research.

If, back in 1960, Charles Kao – then a young electrical engineer at the London-based Standard Telecommunication Laboratories – had not shown any interest in fiber-optic technologies, the world as we know it today would simply not exist. At that time scientists had already established that data could be transferred over long distances using fiber-optic cables. There was only one problem to resolve: to find a material that could meet the required attenuation (or ‘transmission loss’) parameters. The problem took Kao and his colleagues many years to resolve. The material in question turned out to be ordinary quartz glass, stripped of the metallic ions which it was later proved were the main reason for attenuation in the fiber. “It’s a fairly long process because we’re not spending much money. The team was very small, therefore, starting with myself and later on we added one or two or three people,” Kao said in an interview published by the IEEE History Centre in 2004. The far-reaching consequences of the discovery made by Kao and his group are well known: a revolution in information technologies that made it possible to invent and quickly disseminate such things as the internet and mobile communications. In 2009, Kao – by then an honorary professor and doctor of sciences at a number of leading universities of the world – received a Nobel Prize in recognition of his achievements. The 80-yearold physicist and engineer, who currently lives in Hong Kong, donated part of his prize money to the Alzheimer’s Foundation, aiding research into a disease with which he himself has been diagnosed. 72


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Venkatraman Ramakrishnan —■— Winner of the 2009 Nobel Prize in Chemistry

Frank Shu —■— Winner of the 2009 Shaw Prize in Astronomy

India/U.K.

China/U.S.A.

This British scientist of Indian origin knows firsthand what it is like to be rejected in life. As a student he tried unsuccessfully to be admitted to the Indian Institute of Technologies and the Christian Medical College. After completing an internship at Yale University, he applied to nearly 50 American universities – but could not find a job. However, it was these rejections that led the future Nobel laureate to the Brookhaven National Laboratory, where he spent 12 years of his life. Ramakrishnan inherited a passion for biochemistry from his parents, who worked in the same field in India. Back home he had completed his secondary education and received a bachelor’s degree in 1971. But it was in the United States that he was to discover the secrets of living cells’ ‘nonmembrane bound organelles.’ In 2009, Ramakrishnan received the Nobel Prize “for studies of the structure and function of the ribosome,” an award he shared with colleagues Tomas Steitz and Ada Yonath. According to the Royal Academy of Sciences, this trio managed to establish that “the ribosome reads the information recorded in the DNA. The ribosome produces proteins which in turn control chemical processes in all living organisms.” Ramakrishnan continues to be deeply concerned with domestic issues. “I think it is a mistake to judge science by Nobel Prizes,” he said in an interview with The Hindu in 2011. “Instead of thinking about these prizes, what the government should do is concentrate on building a broad culture of respect for basic science and knowledge.”

Seventy-year-old Frank Shu – one of the brightest stars in modern astrophysics and a professor at the University of California, Berkeley and the University of California, San Diego – would best be described as a pioneer. There are ample reasons why. In a scientific career spanning over 40 years, he was the first to blaze the trail in several astrophysics fields, and laid the foundations of a theory that explains the origins of meteorites, as well as the birth and early evolution of stars. In particular, it was Shu who managed to explain the mechanism behind the interactions between powerful magnetic fields and gravitation, which work together like a gigantic vacuum cleaner collecting tiny particles of dispersed matter – the stuff that stars and planets are made of. In the past it had been believed that this process was driven by gravitational pull only. But the theory of spiral galaxies developed by Shu gave a new insight into Saturn’s rings, whose spiral-like form is influenced by density waves. Even though he has spent most of his life and scientific career in the United States, Shu has never stopped being Chinese. He was president of Tsing Hua National University from 2002 to 2006. He has also defended his home country in America, where China is often criticized for its human rights track record. A 1998 Science article quoted him saying, “[In] the Western press … [there] is an attempt to put China in the role of bogeyman.”

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Andre Geim and Konstantin Novoselov —■— Winners of the 2010 Nobel Prize in Physics Russia/Netherlands/U.K.

If a couple of old-fashioned graphite pencils happen to be lying on your desk along with a piece of used adhesive tape, do not rush to dismiss them as trash. These humble items helped Andre Geim and Konstantin Novoselov, Russian physicists working at Manchester University, to win a Nobel Prize. At the beginning of the last decade, the ordinary adhesive tape being used to prepare graphite samples for study in a tunnel microscope caught the attention of scientists. Using it to ‘peel off’ layers of graphite, they managed to achieve something incredible: they ended up with a hydrocarbon film that was one atom thick, called graphene. “Graphene is not complicated at all,” explained Konstantin Novoselov in an interview published by Russkiy Reporter. “If you can imagine the thinnest material possible, the kind that does not get any thinner or any more elastic or robust, with the highest possible conductivity and plenty of other properties, this would be graphene. In physical terms it would be just one layer of hydrocarbon atoms. If you were to pick up hydrocarbon atoms and place them next to one another so that they would form hexagonal cells, this would be exactly our kind of graphene.” Today, billions of dollars have been invested in new graphene-based technologies and materials, and in the near future they are likely to bring a new revolution in material sciences, electronics, and mechanical engineering. But the 55-year-old Geim and 39-year-old Novoselov appear to have little interest in putting their invention on a commercial track, with their future still devoted mainly to science.

Ngô Bao Châu —■— Winner of the 2010 Fields Medal Vietnam/France

Superlatives, and variations on the adjective ‘first,’ seem to doggedly follow Ngô Bao Châu, a 41-yearold mathematician from Vietnam. The only son in a family of academics from Hanoi, and a graduate of a special mathematics class for gifted children at Hanoi University of Science, Châu was the first person from Vietnam to win two International Mathematical Olympiad medals, which paved the way for his studies in France. In 2005, as a 33-year-old professor at the University of Paris-Sud, Châu was also the youngest Vietnamese national to receive the title of professor in his home country. Most recently, his was the first group of mathematicians to prove Langlands’ ‘fundamental lemma,’ which brought him a prestigious Fields Medal in 2010 – also a first among Vietnamese mathematicians. “The most exciting moment was the time when I found the solution. I was so excited. I became almost exhausted after that,” he said in an interview with the Asia Pacific Mathematics Newsletter. Today Châu continues his scientific career in the United States at the Princeton Advanced Research Institute. But he still retains his Vietnamese nationality, and Vietnam remains one of his core interests – he remains a professor at mathematical, scientific and technological institutes in the country. 74


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Ruslan Medzhitov —■— Winner of the 2011 Shaw Prize in Life Science and Medicine (jointly with Jules Hoffmann and Bruce Beutler) Uzbekistan/Russia/U.S.A.

Ruslan Medzhitov’s transformation – from unknown Russian biochemist to star of international immunology, Yale professor, and head of his own university lab – is reminiscent of that of Cinderella. In 1992 Medzhitov – then a graduate of Tashkent University and a third-year postgraduate student at Moscow State University – got hold of a copy of Cold Spring Harbor Symposia on Quantitative Biology, dated 1989, with an article written by Charles Janeway, in which the American immunologist set out this hypothesis: that human immune cells have special receptors capable of recognizing structural components of pathogens and triggering the body’s response. Medzhitov became engrossed in the idea, and spent years trying to get access to Janeway’s laboratory at Yale, in the hope of starting to look for practical ways to prove the hypothesis. The young Russian scientist’s persistence was rewarded in 1994, when he was given a position as postdoctoral scholar in Janeway’s lab. Three years later, their joint work culminated in a triumph: a practical proof showed conclusively that humans did have the special receptors. In essence, the team had discovered a new and previously unknown type of immune system, now known as ‘innate immunity.’ Despite the sudden fame Medzhitov remains modest. “I think I was just in the right place at the right time – anyone else in the same position would probably have done exactly the same thing,” he said in an interview in Disease, Models & Mechanisms. No4, 2013–2014

Alexei Kitaev —■— Winner of the 2012 Fundamental Physics Prize Russia/U.S.A.

There was no ceremony, no reception, and no noisy party after the award, and that suited 49-year-old Russian scientist Alexei Kitaev, who lives in the United States. “It is difficult to make speeches in an official setting,” he admits. Therefore, Kitaev has no regrets whatsoever that he received the 2012 Fundamental Physics Prize, and not the Nobel. “The main difference is that this award is given in recognition of one’s work in fundamental physics, which is not necessarily proven experimentally, so scientists who achieve outstanding successes do not have to wait long.” He made the comments in an interview with Troitskiy Variant Science magazine. Kitaev received the award for his work on quantum computing, an area that incorporates physics, mathematics and computer science. In quantum computers the hardware does not process information bits (zeros and ones) but ‘cubits,’ each of which may find itself as either zero or one with a certain degree of probability. Kitaev in the past estimated that computers of this sort could become a reality by as early as 2025. However, he admits that their development has continued at a slower pace than he initially envisaged, and that it is difficult to make any predictions. 75


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Juan Martín Maldacena —■— Winner of the 2012 Fundamental Physics Prize

Jane Luu —■— Winner of the 2012 Shaw Prize in Astronomy (jointly with David Jewitt)

Argentina/U.S.A.

Vietnam/U.S.A.

At the Strings ‘98 conference, string theory specialists greeted Maldacena with the popular song Macarena, singing ‘Maldacena’ instead – such was their appreciation for the Argentine’s inventions and contributions in the field. In 1997, the 45-year-old Maldacena had proposed a relationship between string theory and quantum field theories, sometimes known as ‘Maldacena’s duality.’ Russia physicist Alexander Gorsky proposed a simple analogy to better explain Maldacena’s duality: “We know about Rutherford’s experiments that enabled us to learn the structure of the atomic nucleus. … By watching and studying the dispersion of alpha particles we could see what the nucleus is made of.” Maldacena attempted to do the same, but using strings instead of alpha particles. “The results of this dispersion can help us to learn what our fourdimensional space is made of or, more precisely, how the theory of quantum chromodynamics works,” Gorsky explained when awarding Maldacena the prestigious Pomeranchuk Prize. Today, in the world of theoretical physics, Maldacena’s work is one of the most frequently quoted. According to the scientist himself, string theory has now developed enough to be able to resolve certain space puzzles. Chief among them is black holes. “Black holes have an interesting history and they have been a source of many theoretical surprises which have led to a better understanding of the nature of space-time,” he muses in an article published on elementy.ru. Last year, Maldacena was awarded the Fundamental Physics Prize.

When you next look at a starry sky in your telescope and spot Asteroid 5430, you should know that it bears the name Luu, in honor of the Vietnamese astronomer Jane Luu. In 1975, the 12-year-old Luu found herself in the United States, where her family had fled after the communists’ victory in the civil war in her home country. She graduated from Stanford just nine years later. After spending several years working in the Netherlands at Leiden University, she returned to the United States and took up a position at the Massachusetts Institute of Technology’s Lincoln Laboratory. It was there that, after five years of persistent joint research, she and David Jewitt managed to prove the existence of the ‘Kuiper belt’ – a set of dispersed celestial bodies located at the farthest end of the Solar System. The hypothetical probability of such a cluster had first been discussed in the 1930s, immediately after the discovery of Pluto. The discovery of the first candidate Kuiper belt object, christened ‘(15760) 1992 QB1,’ was announced by Jewitt and Luu on 30 August 1992. Twenty years later this discovery brought the scientists the prestigious Shaw Prize in Astronomy. The 50-year-old Luu believes that everyone is capable of a similarly breathtaking journey to his or her own stars. In an interview for the children’s educational site Imagiverse, she said, “If you’re interested in something, you care about it enough, think a lot about it … then you’re going to have good ideas. If you have some perseverance and you stick to your ideas, you can make something of them. If you’re interested in something, you’re already halfway there.” 76


The Greatest Minds of the Developing World

The Smart List†

Name 1 Sergei Novikov 2 Grigory Margulis 3 Yau Shing-Tung 4 Vladimir Drinfeld 5 Efim Zelmanov 6 Yuri Manin 7 Dabbala Rajagopal Reddy 8 Claude Cohen-Tannoudji 9 Tilak Agerwala 10 Maxim Kontsevich 11 Amartya Sen 12 Daniel Tsui

Award Year Fields Medal 1970 Fields Medal 1978 Fields Medal 1982 Fields Medal 1990 Fields Medal 1994 Nemmers Prize in Mathematics 1994 Turing Award (jointly with Edward Feigenbaum) 1994 Nobel Prize in Physics 1997

Country Russia Russia/U.S.A. China/U.S.A. Ukraine/Russia/U.S.A. Russia/U.S.A. Ukraine/Russia India Algeria/France

(jointly with Steven Chu and William Phillips)

W. Wallace McDowell Award Fields Medal Nobel Memorial Prize in Economic Sciences Nobel Prize in Physics

1998 1998 1998 1998

India/U.S.A. Russia/France India China/U.S.A.

(jointly with Robert Laughlin and Horst Störmer)

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54

Nobel Prize in Chemistry 1999 Egypt Nobel Prize in Physics 2000 Russia Henri Poincaré Prize 2000 Taiwan/U.S.A. Turing Award 2000 China/U.S.A. Gödel Prize 2001 India W. Wallace McDowell Award 2001 India/U.S.A. Fields Medal 2002 Russia/U.S.A. Nobel Prize in Physics 2003 Russia/U.S.A. W. Wallace McDowell Award 2003 India/U.S.A. Shaw Prize in Life Science and Medicine 2004 China/U.S.A. W. Wallace McDowell Award 2005 India/U.S.A. Gödel Prize 2006 India Shaw Prize in Life Science and Medicine 2006 China/U.S.A. W. Wallace McDowell Award 2006 China/U.S.A. Shaw Prize in Mathematics 2006 China Fields Medal 2006 Russia/U.S.A. Fields Medal 2006 Russia Henri Poincaré Prize 2006 Russia Abel Prize 2007 India International Linguapax Award 2007 Malaysia W. Wallace McDowell Award 2007 India/U.S.A. Russia Gödel Prize (jointly with Steven Rudich) 2007 Crafoord Prize in Astronomy 2008 Russia/Germany 2008 China Gödel Prize (jointly with Daniel Spielman) Abel Prize 2009 Russia/France Nobel Prize in Physics 2009 China/U.K./U.S.A. Nobel Prize in Chemistry 2009 India Henri Poincaré Prize 2009 Russia/U.S.A. W. Wallace McDowell Award 2009 China/U.S.A. Shaw Prize in Astronomy 2009 China/U.S.A. Gödel Prize 2010 India Nobel Prize in Physics 2010 Russia/Netherlands/U.K. Fields Medal 2010 Russia Fields Medal 2010 Vietnam/France International Linguapax Award 2011 India Shaw Prize in Natural Science and Medicine 2011 Uzbekistan/Russia/U.S.A. International Linguapax Award 2012 Columbia/France Fundamental Physics Prize 2012 Russia Fundamental Physics Prize 2012 Russia/U.S.A. Vietnam/U.S.A. Shaw Prize in Astronomy (jointly with David Jewitt) 2012 Fundamental Physics Prize 2012 Argentina Fundamental Physics Prize 2013 Russia/U.S.A.

Ahmed Zewail Zhores Alferov Horng-Tzer Yau Andrew Yao Sanjeev Arora Pradeep Khosla Vladimir Voevodsky Alexei Abrikosov Sartaj Sahni Yuet Wai Kan Krishan Sabnani Manindra Agrawal Xiaodong Wang Benjamin Wah Wu Wenjun Andrei Okounkov Grigory Perelman Ludvig Faddeev Srinivasa Varadhan Maya Khemlani David Anil Jain Alexander Razborov Rashid Sunyaev Shang-Hua Teng Mikhail Gromov Charles Kao Venkatraman Ramakrishnan Yakov Sinai Jiawei Han Frank Shu Sanjeev Arora Andre Geim, Konstantin Novoselov Stanislav Smirnov Ngô Bao Châu Ganesh Devy Ruslan Medzhitov Jon Landaburu Illaremendi Alexei Kitaev Andrei Linde Jane Luu Juan Martín Maldacena Alexander Polyakov

The laureates are listed in chronological order by year of award.

No4, 2013–2014

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EDUCATION

Green vs. Brown Denis Konanchuk The educational landscape is shifting in front of our very eyes, and the changes are irreversible. Not all traditional academic institutions are likely to survive: they will have to either radically adapt, or die. They will be replaced by new, progressive, high-tech education projects, known in the expert community as ‘greenfield.’

competition from new online projects – Coursera, EdX, Udacity and others – that are building ‘online universities for millions’ with free access to courses offered by top professors and experts? Who will pay for the development of traditional academic institutions given the high debt burdens and budget deficits facing many countries, and corporations’ shrinking education budgets? It is not only the leaders of academic institutions who are forced to find answers to these questions. Entire regions and countries today run the risk of missing out on a growing trend and ending up on the academic periphery. This threat also holds true for the BRICS countries.

Threats and challenges

What is education going to be like in the future? To respond to this question one inevitably has to ponder the fate of existing academic institutions in light of new threats and challenges. And there is quite a bit to ponder. Today there are over 19,000 higher education institutions worldwide. Will they be able to adapt to the growing trend of internationalisation in education, and reverse the annual flight of the four million most talented students to the world’s top 500 universities? Are the leaders of existing academic institutions capable of responding to the unfolding digital revolution and the growing

Denis Konanchuk is Head of the SKOLKOVO Education Development Centre. He is co-author of The Greenfield Era in Education, a detailed analysis of education start-ups and their new technological platforms, published by the SKOLKOVO Education Development Centre.

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According to experts, this avalanche of innovation is likely to seriously change the landscape of education across the globe. A brighter future is no longer guaranteed for traditional academic institutions. There simply will not be enough resources for everyone. Education in the 21st century is confronted with an administrative challenge unprecedented in terms of both scale and complexity: the transformation of tens of thousands of educational enterprises whose activities benefit over 100 million people, and whose annual budgets are estimated to total in excess of $2.3 trillion in OECD countries alone. To stay in the education space, leaders of these institutions will have to take urgent measures to adapt to the new economic environment. This is a gargantuan challenge; after all, many of these institutions were not intended as economic entities, nor are they managed as such. However, successful transformation is more likely to begin as an exception rather than a rule. This reconstruction of the existing platform is a bit like trying to overhaul a faulty engine on a car driving at full speed. As well as a well-thought-out plan and a high degree of professionalism on the part of the management team, one also needs to be in the right place at the right time. Lacking these elements, past attempts to transform academic institutions have run into systemic inertia and centuries-old resistance to change, ultimately managing only cosmetic improvements to existing models. Without denying the importance of large-scale transformations, we believe the very logic behind the discourse on the future of education should change as well.

Over the last ten years, a new market for education initiatives has started to take shape, attracting significant financing. 2010–2012 saw a veritable boom, with investments tripling from $350 million to $1.1 billion. Compared to 2002, the total volume of investments has increased nearly tenfold

be a critical mass of such projects not only becoming popular with users, but also managing to raise significant funds from investors. An analysis of venture investments in academic start-ups shows that, over the last ten years, a new market for education initiatives has started to take shape, attracting significant financing. 2010–2012 saw a veritable boom, with investments tripling from $350 million to $1.1 billion. Compared to 2002, the total volume of investments has increased nearly tenfold (see diagram). These statistics point to a significant increase in investor appetite for academic start-ups, which supports the premise that a new educational development space is emerging. Academic greenfields are well on their way to becoming the main driver behind the education of the future. As strange as it may be, the list of the ten academic start-ups that attracted the most investment in 2012 does Venture investments in education $, millions 1200 1100 1000

A new wave

800

Given the broad range of different trends and external factors – primarily of a technological kind – there are new opportunities for the education industry. It is likely that new market niches or zones will emerge for experiments in education, developing in parallel with traditional systems. In an analogy with land development, traditional academic institutions may be described as ‘brownfields’: legacy areas of academic practice. New educational projects – start-ups created from scratch with foundations in educational technology (or ‘EdTech’) – emerge as ‘greenfields.’ However, the very existence of these greenfields still needs to be proved. The main criterion would No4, 2013–2014

600

400 200 Year

0 02 03 04 05 06 07 08 09 Source: National Venture Capital Association.

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BIGGEST EDTECH DEALS 2012

Ingredients of success

Despite the broad diversity of education projects that raised financing in 2012, they do have a number of things in common: ŦŦ They target the global market and effective demand, which the traditional education system either fails to see or is incapable of meeting as promptly and efficiently – from the inexpensive convenience of renting textbooks, to entire lifelong learning mechanisms. ŦŦ They rely on state-of-the-art technological solutions from adjacent areas (primarily computing, communications, and media technologies), which provides a new competitive edge and simplifies and enriches the education process. These solutions include online platforms, social networks, and the ability to analyse large volumes of data. ŦŦ They either enjoy a cumulative success record (two to five years among the top ten companies), or were founded by people with a name and reputation. (For example, former Harvard University president Larry Summers is on the Minerva Project’s board of trustees.) This helps mitigate the inevitable risks in launching a new product or industry. Thus, more and more people are opting to channel their energy into creating new solutions rather than fighting old academic models. Supported by investor money, and spurred on by growing media attention, these education start-ups are turning into a mass phenomenon. As opposed to traditional academic institutions, these start-ups have current educational trends on their side: massification, globalisation and digitisation. Thanks to modern technologies, academic start-ups can offer accessible, affordable, mass education for the global market, relying on private capital instead of government or corporate budgets. The threats and challenges faced by traditional players are, in practice, great opportunities and competitive advantages for new teams and projects. Today we are witnessing a new education space taking shape whose scale and potential justify the talk of a ‘new era’ – a greenfield era – which is likely not only to bring about multi-billion-dollar education businesses, but also transform the traditional education system. This new era means new and unique opportunities for teams of entrepreneurs, academic institutions, and even entire countries. The best education projects of the next fifty years are probably yet to be conceived.

Investments, $, millions

Desire2Learn 80 Open English 43 Lumos Labs 31.5 Echo360 31 2U 26 Chegg 25 Kaltura 25 Edmodo 25 The Minarva Project 25 Orbis Education 24.3 Source: GIGAOM.

not include the much-talked-about ‘massive open online courses’ (MOOCs) – Coursera, EdX, etc. The space occupied by EdTech projects is more expansive and diverse than the media has given it credit for. The MOOC phenomenon, often cited today as the poster child for breakthrough innovations in education, is merely the tip of the iceberg. For instance, a company called Desire2Learn – a  leader in attracting the attention of investors  – is developing solutions to manage the education process and build lifelong individual learning trajectories. Another company, Open English, offers online English language courses for thousands of clients around the world. Lumos Labs (also known as Lumosity) is the world leader in developing education programmes designed to improve brain performance: the company offers users a chance to unleash their intellectual potential by training memory and attention, for example. Over 45 million users have already registered on the Lumosity website, making it one of the fastestgrowing online projects in the world in terms of subscriber numbers. There are other unorthodox projects that are breaking new ground in the area of education. For example the company Chegg managed to build a successful business offering textbook rental, while the Minerva Project raised $25 million for a new type of education programme in which students study liberal arts using state-of-the-art technologies, studying in a different global metropolis every semester. 80


BRICS Education in the Global Race

BRICS Education in the Global R ace Jane Playdon Jim O’Neill, former chairman of Goldman Sachs Asset Management, coined the BRIC acronym in 2001, predicting that the BRICs would overtake the six largest western economies by 2041. But any economic growth has to be supplemented with the ability of a population to gain knowledge and qualifications. The annual QS World University Rankings assess universities worldwide; Jane Playdon looks at where the BRICS fit in.

But, according to fellow co-director Marcos Troyjo, that change has been driven by comparative advantages, and will need to be based on more competitive advantages in the future.

Last November, Christian Déséglise, codirector of Columbia University’s BRICLab and an adjunct professor of international and public affairs, spoke of the rapid growth of the BRIC nations at a conference called BRICs: The Quest for Global Growth. Déséglise said the BRICs have contributed 31% to global nominal growth since 2001, almost double their contribution of 17% in the previous decade, and, since 2008, that contribution has been 55%.

Defining competitive advantage

The World Economic Forum (WEF) defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country,” which in turn determines the level of prosperity an economy can reach. To compile its Global Competitiveness Index (GCI), the WEF looks at many components, grouped into 12 “pillars of competitiveness,” of which higher education and training is the fifth. The pillars are interconnected, with a negative performance in one area affecting the others. But

Jane Playdon is Education Writer for TopUniversities.com To see the latest QS World University Rankings in full, visit topuniversities.com/Rankings

No4, 2013–2014

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the WEF – rank within the world top ten for number of new institutions added this year. Brazil added ten, putting it in third place for number of new institutions ranked, and Russia added four, making it ninth for number of newcomers. China and South Africa both added two institutions to the rankings this year, while India’s number was unchanged from 2012. QS measures universities’ performance in four key areas: research, employability, teaching, and internationalization. These are assessed on the following indicators: academic reputation, employer reputation, faculty-to-student ratio, citations per faculty, ratio of international faculty to overall numbers, and ratio of international students to overall numbers. Academic and employer reputations are established using the results of worldwide surveys of academics and employers. This year 62,094 academics gave their opinions on the institutions producing the best research in their field, and 27,957 employers identified the universities they believe produce the best graduates. Zoya Zaitseva, Regional Director for Eastern Europe and Central Asia at QS, says that these are the indicators BRICS universities should focus on, and try to improve recognition through the number of experts familiar with their national higher education systems. At the moment, the majority of answers collected are still coming from the U.S. and Western Europe. In the latest QS World University Rankings, Russia and India each have five universities ranked within the world’s top 400; Brazil and South Africa each have three, and China has 11. China firmly leads with seven institutions in the BRICS top ten, which also has one each from Brazil, Russia and South Africa.

Number of ranked BRICS universities

2013 Brazil 22↑ Russia 18↑ China 25↑ South Africa 7↑ India 11↓

2009 7 8 13 4 12

% difference + 214 + 125 + 92 + 75 - 8.3

the weighting of each one depends on a country’s stage of economic development. Although the BRICS countries (that is, including South Africa) are grouped together in terms of being high-growth economies that could change the economic and trade landscape in the future, the WEF Global Competiveness Report 2013–2014 puts them at different stages: Brazil and Russia are in transition to the third, most-advanced, stage – an innovationdriven economy; China and South Africa are in the second stage – an efficiency-driven economy; and India is placed in the first stage – a factor-driven economy where competitiveness is based on basic requirements. In the GCI, higher education and training is weighted higher in efficiency- and innovationdriven economies, with an emphasis in innovationdriven economies on research and development, and collaboration between universities and industry. The Russian Federation scores the highest amongst the BRICS countries for higher education and training, ranking 47th out of all 148 countries for this ‘pillar.’ China comes next, ranking 70th, then Brazil in 72nd place, South Africa (89th) and India (91st). So to what extent is this connection between higher education and economic advancement reflected in the QS World University Rankings for 2013–2014? Here we take a look at the latest data, reflecting on the BRICS countries’ progress in this area.

Leaders in each sector

Chinese institutions also retain the strongest academic and employer reputation scores among the BRICS, ranking from 19th to 600th in these indicators, but with the majority of institutions declining since last year. Russian universities score reasonably well for academic and employer reputation, with rankings on these indicators ranging from 83rd to 800th, and the country’s top four institutions all showing an improvement since last year in terms of academic reputation.

BRICS performance

The QS World University Rankings now cover 800 institutions around the world, with an extra 100 added since the last edition. Brazil and Russia – countries transitioning from efficiencyto innovation-driven economies according to 82


BRICS Education in the Global Race

Brazilian universities rank from 51st to 800th for academic and employer reputation, with the majority of figures showing an improvement. Indian institutions rank from 75th to 700th for academic and employer reputation, with most weakening in this area since last year. South Africa, on the other hand, shows improvement in academic reputation amongst all its ranking institutions this year, but a decline in employer reputation, with rankings across both areas ranging from 142nd to 650th. While Russia’s ranking institutions have generally good scores for academic and employer reputation, their strongest scores are in fact for faculty-to-student ratio – the number of academic staff employed per student enrolled – with the majority ranking within the world’s top 200 on this indicator. While faculty-to-student ratio is not a definitive method of establishing teaching quality, a high score on this indicator does suggest a good degree of individual supervision, indicating a strong commitment to teaching. Russia’s high scores for this indicator come despite the fact that, according to the latest figures from the OECD, the country’s expenditure per tertiary student was $7,039 in 2010, well below the OECD average of $13,528. However, the OECD data also show that Russian expenditure on tertiary education in that year was 1.6% of GDP, on a par with the average for OECD member countries, many of which are innovationdriven economies. Three Brazilian institutions score within the top 200 for faculty-to-student ratio, but half of the ranking Brazilian institutions are outside of the top 400 in this area, with many of those numbers deteriorating since last year. India and South Africa have no institutions currently ranking in the top 400 for faculty-to-student ratio, and both countries’ scores in this indicator have deteriorated since last year. China has five in the top 200 and 11 ranking outside the top 400, again with the majority of the numbers getting worse since last year. Another area where Russia and South Africa show strength is in numbers of foreign students. Out of all the BRICS, only these two countries have rankings inside the world’s top 400 for the international students indicator. This is consistent with OECD figures that say the number of foreign students enrolled in Russian institutions increased by 90% No4, 2013–2014

Top ten BRICS universities in the QS World University Rankings

Peking University Tsinghua University Fudan University Lomonosov Moscow State University Shanghai Jiao Tong University Universidade de São Paulo University of Cape Town Zhejiang University University of Science and Technology of China Nanjing University

2013 2012 46↓ 44 48= 48 88↑ 90 120↓ 116 123↑ 125 127↑ 139 145↑ 154 165↑ 170 174↑ 186 175↓ 168

* Hong Kong and mainland China are ranked severally

between 2005 and 2011. However, only three out of 18 of Russia’s ranked universities have improved their international student ratio scores this year, with the rest all decreasing. Meanwhile none of the ranked South African institutions improved their international student ratio scores this year. Russia also has the highest percent of tertiary enrollment in the BRICS, which according to the WEF Global Competiveness Report 2013–2014 was 75.9% of the population last year, ranking it 14th in the world. This is in comparison with Brazil’s 25.6%, China’s 26.8%, India’s 17.9% and South Africa’s 15.4%. And, according to the OECD, in 2011 the percentage of Russians that had attained tertiary education was 53% – well above the OECD average of 31%. In terms of citations per faculty, a measure of research impact, all the BRICS except for India showed a general decline in this area. China’s top seven institutions did well, but the rest all deteriorated. The QS World University Rankings reveal different strengths and weaknesses in the higher education systems of the BRICS countries. Brazil, China and South Africa do well for academic reputation; Brazil and China for employer reputation; India for citations per faculty; and Russia for faculty-to-student ratio and international students. But internationalization in general is a key area in need of improvement across all these countries. 83


EDUCATION

The Power of Knowledge The business index, the environmental efficiency index, the corruption perception index – the world has long grown accustomed to using various ranking systems to assess countries. The international ranking systems for universities that have emerged over the last decade have given us the chance to look at countries from an educational perspective. Alexei Chaplygin looks at the standing of the BRICS countries in these ‘league tables’ and explains why Russia needs its own global university ranking system.

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similar standings in terms of the number of their universities included in the Shanghai ranking – with the exception of China, whose universities vie for higher positions. The success achieved by Chinese universities in this system is clear and legitimate: the ranking was initially developed by Shanghai University specifically as a tool to benchmark China’s academic institutions against the world’s leading universities. As Nikolay Kudryavtsev, rector of the Moscow Institute of Physics and Technology (MIPT), aptly noted in an interview with Izvestia, “Initially any ranking system has underlying political considerations. … It is just like playing a football match on your home field.” Although Russia is the only BRICS country with a university in the ARWU top 100 (the Lomonosov Moscow State University – MSU), only two Russian universities make it into the top 500. And that is why, amongst the BRICS, Russia is ahead of only India. In the last three years, only one university from India was included in the top 500, but there were 42 from China, six from Brazil, and three from South Africa.

In today’s world there are three indisputable leaders in the global university ranking industry: the Academic Ranking of World Universities (ARWU), also known as the ‘Shanghai ranking’; Quacquarelli Symonds (QS); and the Times Higher Education (THE) World University Rankings. In 2014 these will be joined by another, developed by the E.U., called U-Multirank. There are also territorial ranking systems that focus on groups of countries, and rankings based on specific subject areas. We can compare the clout and relevance of top-level national education systems in the BRICS countries by looking at the presence and standing of their universities in global rankings. The Shanghai rankings

ARWU prioritises universities’ success in stateof-the-art research. The BRICS countries enjoy Alexei Chaplygin is Education Ranking Director at Interfax.

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The Power of Knowledge

BRICS universities in the Times Higher Education rankings

The QS rankings

In the QS rankings, China enjoys the highest standing of all BRICS countries. The best of its universities, Peking and Tsinghua, have held positions in the top 50 for several years. Brazil has shown a positive dynamic, with the country’s best university – São Paulo – managing to climb from 207th position in 2009 to 127th in 2013. South Africa also boasts some significant successes. Russian institutions have shown some improvement in their QS rankings as well. Despite the fact that the country’s leading university (MSU) keeps dropping, year after year – reaching only 120th position in 2013 – other Russian universities have managed to climb the rankings. Saint Petersburg State University’s positions in 2011, 2012 and 2013 were 251st, 253rd and 240th respectively. In those years the Bauman Moscow State Technical University (MSTU) ranked 379th, 352nd and 334th, and Novosibirsk State University 400th, 371st and 252nd. It should be noted that in 2013 four Russian universities were included in the QS rankings for the first time.

Universities’ best

Top 100 Top 200 Top 300 Top 400

2 2 2 2 1 2

Russia 2011 276–300 — — 1 2 2012 201–225 — — 2 2 2013 226–250 — — 1 1 India 2011 301–350 — — — 1 2012 226–250 — — 2 3 2013 226–250 — 1 1 5 China 2011 49 2 3 6 10 46 2 2 6 9 2012 2013 45 2 2 6 10

The Times Higher Education rankings

In the rankings maintained by Times Higher Education magazine, it is still universities in China that lead the BRICS. The highest-ranking BRICS institution, Peking University, climbed one position to 45th place in 2013. While not a single university from the other BRICS countries has ever made it into the top 100, China has two universities in this group: Peking and Tsinghua. The country has also maintained a stable number of universities in the top 400: ten in 2011, nine in 2012, and ten again in 2013.

South Africa 2011 103 — 1 3 3 2012 113 — 1 3 4 2013 126 — 1 2 3 Source: Times Higher Education World University Rankings 2013-2014.

The ranking is based on a set of criteria that Russia’s leading universities recommended to the Ministry of Education and Science in the autumn of 2012. These criteria were categorised into three groups – educational activities, scientific research, and international activities – and then expanded to collect the most accurate data from all target countries. As part of Russia’s policy of furthering cooperation with the other BRICS nations in the area of education and science, this project will boost the relevance, depth and objectivity of any subsequent comparative analysis of the quality and efficiency of their universities.

Russia’s rankings

President Putin recently took the initiative to establish a Russian global university ranking system, with IIG Interfax winning the bid to develop it. This November, Interfax will join forces with QS to publish its international rankings of BRICS universities. Interfax set a very ambitious goal: to create a ranking system that would not only be in line with the ‘Berlin principles’ – which establish quality and good practice in international academic rankings – but also be recognised and accepted around the world. No4, 2013–2014

positions

Brazil 2011 178 — 1 2012 158 — 1 2013 226–250 — —

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From Russia with a Degree Russians are well accustomed to having ‘two capitals’ – Moscow and Saint Petersburg. By the same token, Lomonosov Moscow State University (MSU) and Saint Petersburg State University (SPbU) enjoy a special status in the country. These friends and rivals embody Russia’s higher education system, with all of its pluses and minuses. BRICS Business Magazine asked the rectors of both universities the same questions – about international rankings, their institution’s place in the world, and where they are heading.

Victor Sadovnichy Rector of Lomonosov Moscow State Univercity, Academician of the Russian Academy of Sciences Rankings

International university rankings attract more and more attention every year. Regrettably, many people tend to put too much stock in them, often overestimating their importance. First of all, one should bear in mind that most well-known international ranking systems have been specifically designed for the Anglo-Saxon education model, which is different from our own. It is equally significant that there are very few representatives of our country among the experts who rank universities around the world. One could say that Moscow State University occupies a respectable place in international rankings, being the only Russian academic institution to be included in an overall top 100 – an objective that Russia’s other leading universities currently have in their sights. Nevertheless, all experts  – including those from abroad  – are perfectly aware of the

fact that the regularly published agency rankings are not always in line with informal rankings, in which the Russian education system in general, and Moscow University in particular, enjoy the high standing that they deserve.

Human Sciences, and working with biotechnologies and nanotechnologies and so forth. All of these activities, in priority areas of science and technology, are managed by professors and fellows at the MSU. Science

Development

Professors always play a decisive role in the development of any universi­ ty. But today faculty have to be able to meet specific requirements. Thus many professors at MSU are famous scientists with a high citation index. They head up scientific schools and train world-class specia­lists. The uni­ versity now has its own ‘2020 Deve­ lopment Program.’ Based on this we are conducting space research, launching university satellites, increasing the power of our supercompu­ ter, conducting comprehensive interdisciplinary research at our Institute for 86

The university creates an enabling environment for the development of science both in terms of its fundamental aspects and its practical application. An important factor in scientific development is its multidisciplinary nature. In recent years more and more breakthrough research has been conducted at the junction of various sciences. In this respect a classical university, which by definition deals with both natural and humanitarian sciences, is the perfect place not only to successfully develop sciences, but also to find innovative ways to apply them.


From Russia with a Degree

Nikolay Kropachev Rector of Saint Petersburg State University, Professor of criminal law Situation

The modern university, being the leading ‘expert center,’ is the bedrock of the global education system. It is at universities that new knowledge is forged and honed. And it is there that new ways to convey this knowledge are discovered. This new knowledge shapes graduate and postgraduate education, which in turn affects the entire system. The Russian education system learned a tough lesson in the 20th century, when science was divorced from higher education – the system was separated into academic institutes and universities. Today the situation is changing but it is still far from being ideal. It is hardly breaking news that success today is defined by an ability to change one’s activities using in-depth knowledge of a subject. This foundation is shaped by academia at the university level. Rankings

International recognition is important for any university, since it is directly related to the institution’s ability to hire highly qualified staff. In today’s globalized world it is only international recognition that gives universities a chance to No4, 2013–2014

appoint truly leading global specialists and, by extension, to attract the most advanced and motivated students. International recognition reflects reputation, so is equally important in raising resources to develop university programs. International rankings are also important in helping to identify areas that the institution’s administration should focus on. Formally speaking, one can look at the criteria underlying the leading rankings. It is the assessment of these parameters against a specific university that may provide the answer to the question, ‘What to do?’ But each university is free to use its own set of tools. At SPbU we have a clear picture as to what sort of measures are needed in our specific environment. We continue to work on those areas, and are already seeing some tangible results: We were one of only two Russian universities included in all three core international university rankings. We have also shown positive dynamics, being the first Russian academic institution to be included in the Financial Times Masters in Management ranking. However, one 87

should bear in mind that, while any discovery takes only seconds, the preparations take years of hard work. The same principle applies to international recognition and one’s reputation as a whole. Faculty

There is no doubt that professors play a pivotal role in shaping an institution’s international reputation. Their effectiveness and quality of work lie at the core of any modern university. Close professional contact, co-ope­ ration and networking are the attributes of success – in both objective and subjective assessments; hence the requirement that professors must be leading specialists in their respective fields, open to co-operation and committed to their scientific work. Science

In my view, scientific research and the birth of new knowledge are the key characteristics of a university. On that premise, scientific research determines everything, including international recognition and the university’s professional reputation. The full texts of both interviews are available at bricsmagazine.com


EDUCATION

The New Gunpowder To survive in Africa during the ‘post-extraction era’ one needs to place greater emphasis on education, says Dr. Ndubuisi Ekekwe. And that is precisely why he is currently building a technological institute in Nigeria, slated to become Africa’s answer to MIT.

making it knowledge driven, the sustainability of the new-found optimism cannot be guaranteed. With underperforming universities, with only three in the global top 400, it has more questions than answers – since new technologies are disrupting commodities in the international arena. As United States shale gas production continues to increase, and more people buy electric vehicles, the currently dwindling crude oil revenue in nations like Nigeria could be permanent. For a sustainable, stable, hopeful and prosperous Africa, planning for a post-mineral era is very important. Education provides the opportunity to do that as it will help restructure the economy to be competitive in key industrial sectors in the coming years. Unfortunately, in quality and quantity, tertiary education in Africa has structural challenges which must be fixed. Despite secondaryschool enrollment increasing by 48% from 2000 to 2008, access to university education remains limited.

Africa is undergoing a tremendous transformation, with an expanding middle class supported by the world’s continuous quests for minerals, hydrocarbons and commodities. Its economic roadmap and developmental trajectory are driven by the pockets of structural, macroeconomic, political and microelectronics reforms which are evident in most economies. Yet the continent’s future and growth models remain solidly tied to commodities and therefore open to associated global trade shocks and cyclical welfare impacts. Without decoupling itself from these present growth drivers by redesigning its economy and Dr. Ndubuisi Ekekwe is President of the First Atlantic University.

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Every year about ten million individuals take tertiary education entrance exams in Africa. Unfortunately, due to limited space, less than 1.5 million applicants are accepted. The continent currently has fewer than five million students in its tertiary four-year institutions, despite having three times the population of the U.S., which has 21 million students. With access such a problem, Africa’s working-age population interested in furthering their education – estimated at 50 million people – cannot do so. Education drives technology – the gunpowder of the 21st century. A nation that cannot create new ideas and intellectual property will never lead. For Adam Smith, it was the wealth of nations; in our time, it is the technology of nations – because technology is wealth. Sometimes, when international tech companies go public, the value created exceeds the GDP of whole African countries. This tech innovation paradigm is the roadmap of the future, as knowledge becomes a key element ahead of the traditional factors of production. It implies that Africa could accelerate development if it invests in innovations with the potential for such IPOs, rather than by leasing more oil wells. As a graduate student at Johns Hopkins University, I saw how a university could improve its community and nation. Over the years, I have visited more than 82 African universities, organizing workshops and observing their problems. I have seen the challenges of poor academic curricula, unprepared faculty, inadequate infrastructure and poor governance. With no reform in place, and after all considerations, I felt the best way to fix the problems would be to start a new university. First Atlantic University, to be located in Nigeria, is a 21st century African university with an in-campus technology park. Our expectation is that its graduates will position Africa competitively through entrepreneurial innovation, technical excellence, and world-class management capabilities. They will measure up on three metrics  – Entrepreneurship, Citizenship and Employability  – while seeding a ‘new economic layer’ in Africa. Inside this university and technopark we plan to seed capabilities in information and communications technology, energy efficiency, health, mineral processing and agriculture, which will lead to start-ups that will become the global champions of the decades to come. No4, 2013–2014

For a sustainable, stable, hopeful and prosperous Africa, planning for a postmineral era is very important. Education provides the opportunity to do that as it will help restructure the economy to be competitive in key industrial sectors in the coming years

First Atlantic will provide university-level educational opportunities in a hybrid of physical and satellite campuses with online components. It will give Africa’s middle class the ability to pursue their full-time careers and still acquire higher learning. We will be the first pan-African university to use online and video technologies to expand university access. The African education space is evolving, with stakeholders evaluating the roadmaps of online resources and massive open online courses (MOOCs). MOOCs have a role in Africa, but cannot replace a physical campus – just as having Disney videos has not stopped parents from sending their kids to pre-schools. Even with Wikipedia and great textbooks, students have always needed tutors. Africa’s path to a knowledge economy will not be driven by assumptions that watching a video with no lab to practice in will produce better engineers or nurses. It is certainly wrong to think that even the most esteemed researchers can scale their MOOC lectures to take into consideration the specific contexts and individual readiness of their students. MOOCs deliver information, not education. That is why we are establishing a physical campus, and will adopt emerging tools where necessary. Higher education is playing a crucial role in the modern world due to the changing economy, as knowledge continues to supplant physical capital as the source of present and future wealth. As a source of ideas and innovation, higher education is the main bastion of the continued economic viability of any continent. We have set this strategic goal of a university to concentrate African intellectual capital into stimulating the development of breakthrough ideas. It provides a huge investment opportunity as the middle class expands, with more people seeking to attend college. We are now looking for the international investors who will take this opportunity to help seed the future of Africa. 89


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Searching for the Meaning From Day One the Moscow School of Management SKOLKOVO billed itself as something out of the ordinary in business education. In this interview, the school’s new dean Andrei Sharonov explains what it is all about, and who studies what at this academic institution. He also speaks about Moscow’s strategic goals, having recently left a position in the city administration.

The school’s strategy is to admit successful people – those who could already be called leaders – and make them even more successful. Why is the school so confident that it can offer added value for those who have already made it? Who are your students and alumni in that case? One should take it literally. We really do admit people who have already achieved something in business, who’ve made enough money to pay their tuition and can afford to study, who are mature enough to scale up their business, discover new dimensions and search for the meaning of life and new ways to operate. We believe we can provide added value for them. Judging from the feedback we have received from our alumni over the seven years since the school was established, it has been a success in most cases. By and large we are talking about transforming their thinking in a particular way. I am currently taking part in developing the final module of a new program, called ‘Practicum,’ for business proprietors and managers from medium-sized businesses. I talked to them in person, read their final CVs and questionnaires. After four months of training at the

In the eyes of the world the reputation and operations of any school depend in many ways on who founded it. Can any long-term business or education project rely on its stars, and to what extent do those stars feel comfortable fulfilling their many duties at SKOLKOVO? It is their choice. The founders did not just donate their money to the school and stop taking an interest in the ways it went on to develop. From day one they defined, and continue to define, the school’s profile. The founders take part in granting access to MBA students, they act as their mentors. They also decide on the school’s strategic development, and read lectures. This is truly important because the benchmark is very sensitive and they help to maintain a certain level. Despite the need to stimulate demand and to increase the school’s revenues and income, one cannot lower the bar with respect to students and teachers. One of the main arguments compelling me to take up the job at SKOLKOVO business school was the proactive involvement of its founders – their substantial support and considerable input into the educational process. 90


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school many of them were pondering the stage they were at, and rethinking their occupation. And that applies not only to business, but to how they position themselves in general – their values, and how those values play into what they are working on. This is what Practicum is all about – a successful experience specifically in terms of finding the meaning of things. Something similar could be said about any of the other programs offered at the school. Do you think that Russia and the world are faced with a deficit of leaders? Do they need the elite or do they need executives at all levels rather than just top executives? I think it is the former. You know, it is just like Vysotsky said: “Few of us are truly rambunctious enough, hence the lack of leaders.” We need people who are able to generate super ideas, who also believe in those ideas, and who are prepared to spend a considerable part of their resources – time, money, and energy – to see them through. This is what the SKOLKOVO mission is all about. A number of the school’s founders came up with one stipulation from the very outset: they thought that the school should only deal with entrepreneurs who generate ideas and projects, and who could risk their own money to see them through. Other founders realized that the school should offer education not just to entrepreneurs but also to hired managers and civil servants. After all, even if you work as a manager, you still need to possess the entrepreneurial spirit to be able to implement changes inside your company. Do you have enough students in the first category? No we do not. In general, entrepreneurs and people who possess the entrepreneurial spirit are few and far between – even in those countries where such traditions have not been eradicated or burned at the stake for a long time. No matter where you look, there is a lack of businesspeople who are prepared to build things, to undertake risky projects – plus not every one of them is known to us. Unfortunately, most of them never succeed. We either never hear about them or, when we do, we hear about them as losers. However, if we are talking about business, the main principle that applies here is that failure teaches success. It is always important to talk to people who have experienced failure but stayed in their business, stayed on the market. Those who worked with failed projects are not considered losers. On the contrary: These people are capable of

teaching us many more lessons than those who have always had luck on their side. There is a perception that business schools do not always know what kind of people businesses really need. Allegedly, there are two options: either to train entrepreneurs or managers with a nice set of universal skills, or to train reformers capable of radically modernizing a run-down company. What do you think of this assessment? There is no single approach to business school typology that can be considered the gospel truth. As a rule, business schools develop in broader frameworks and do not tend to narrow down their horizons to focus on purely professional categories. Obviously, there are people who are clearly project managers by nature: when the project is over their spirits are down. At the other end of the spectrum there are those who deal with irregular processes, operate well under external pressure, and are able to cope with many new emotions. Therefore this question is not only predicated on one’s conscious choice of school, but also on the student’s personality and readiness to engage in a  certain type of activity. In principle, both personality types are equally important; both should possess managerial competencies and be able to think, assess the situation, and select the right staff. If we take SKOLKOVO, we tend to operate on the premise that our students are agents of change. Any change requires a great deal of training, the ability to deal with the unexpected, to adapt and strike a balance. We teach our students to generate and implement changes. A key point for us is that one should be able to generate ideas and not just see them through. There are people who are capable 91


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could be used for that merger? One of the options mentioned was an American-style university. One should bear in mind that an Americanstyle university is based on a single legal entity, but our point of departure is different. Today SKOLKOVO, the New Economic School and Skoltech are different legal entities. Therefore, we can only talk about a certain convergence-based model. It would not be a physical merger but rather a co-existence with common goals. The benefit of this model is that no one would be acquiring anyone. That is very important because, for a long time, any rapprochement was impeded by fears that someone could ‘swallow up’ someone else. There is an additional benefit. The curricula of these schools do not overlap at all: the NES trains economists and mathematicians, SKOLKOVO trains managers, and Skoltech trains engineers and physicists. All three schools complement one another nicely. You continue to consult for the government of Moscow on a freelance basis. What are the city’s strategic goals now? What sort of specialization does the capital want to have to be able to compete successfully with other global cities? In principle these goals have been made public. Moscow wants to become a global metropolis specializing in state-of-the-art technologies and innovation, with a comfortable living environment. The city still hopes to improve its ranking among international financial centers. This is the objective and it is not only rooted in political fantasies. Objectively speaking, Moscow has been a fixture in these rankings for a long time and remains a regional financial center. The question is how the city is going to develop from now on, and what kind of resources will be needed to achieve these goals. Are these objectives of Moscow’s in any way integrated into the Russian national government’s agenda? If Moscow fails in its quest, will Russia stand to lose? Of course. If we look at the key sources of progress, it is not countries – not even regions – but specific cities. After all, people tend to pick specific cities where they want to live and create, not so much the country or the region. Moscow is considered perhaps the most competitive metropolis in Russia. That is why it strives to compete with Beijing, Shanghai and Mumbai – and possibly with London, Berlin or New York – but not so much with Kazan or Kaluga.

of dealing with changes and implementing them, but who would never do it on their own initiative, of their own volition. Accepting change is always risky; it always means that you have to give up stability. It takes courage and resolve. There are two philosophies that the whole world revolves around one way or another: ‘If it isn’t broken, don’t fix it’ and ‘The perfect is the enemy of the good.’ I think the second philosophy is a driving engine. What do the students themselves strive for? What do they internalize better – pure knowledge, skills, a way of thinking, or business ethics? Our students are very different. Some prefer pure knowledge and skills – after all, many people come to business without a basic education in economics or finance. Having gone through various programs they say, ‘This is what we really needed; we always wanted to learn that.’ But there is another point: all of them respond well to proactive forms of teaching. We practice a so-called ‘project-based’ approach, which means that students are either tasked by ‘proprietors’ to accomplish something, or generate ideas on their own and try to see them through in the course of their training. This is the element the students find most entertaining. Do you keep track of your international alumni in any special way? Yes, and we now have quite a few international alumni. Some are pursuing careers in Russia or in international companies that focus on the C.I.S. and emerging markets. We try to help them in that respect. International students come to the SKOLKOVO business school on purpose; they do it not just to improve their managerial competencies but also to gain a better knowledge of Russia. A program designed for this group in particular, called ‘BRICS Prospects,’ will be launched in December. There are many international students at our school, but one should bear in mind that not all of them come from outside of the former Soviet Union. Generally, for every 100 students from Russia, there are 19 students from other countries. It is also worth noting that 95% of our faculty are international professors. Many people still expect to hear about a possible merger between SKOLKOVO, The New Economic School, and Skolkovo Institute of Science and Technology (Skoltech). What model 92


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The Clash of Academic Civilizations Evgeniy Pakhomov India has the third-largest Muslim population in the world, just behind Indonesia and Pakistan. Today nearly 165 million Indians practice Islam – representing more than 10% of the world’s entire Muslim population. Two educational centers that emerged within this gigantic community could easily be included in a list of the most influential academic institutions because of the footprints they have made in world history.

The debate is still raging over which university was the first in the world. According to one school of thought, the first was founded in Fes, Morocco, in 859 AD, while others argue that the universities of Constantinople or Zaragoza predate it. Whatever the truth, from their very inception, universities played host to clashes of opinions and philosophies. It is hardly a surprise, then, that they went on to provide the backdrop for a clash of civilizations. It is commonly understood that the Taliban movement was born in the last two decades of the 20th century. But the story really started in India – under British rule – long before the movement emerged in Afghanistan, just as the moderate branch of Islam traces its roots to South Asia. For both movements, academic institutions served as a springboard.

Following the uprising

By the early 19th century, when the British Empire gained de facto control over India, the country was still ruled by the predominantly Muslim Mughal dynasty. In the early stages, the interests of Britain were represented by the East India Company, whose practices brought about the Indian Rebellion (or Sipoy Mutiny) of 1857–1859. The uprising was triggered by a religious issue. Sipoy units (mercenaries in the service of the British Crown) were issued with new rifles and ammunition. Back then, munitions came wrapped in oiled paper; to open them, the mercenaries had to bite into the paper. But rumors started to circulate that the paper was impregnated with pig fat. Before long, Hindus had joined a Muslim rebellion demanding that the British leave the country. 94


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said. Most importantly, the Deoband university preached equality: all students were equal and studied under the same conditions regardless of their background and financial standing. “We need to strive to achieve the same goals as the Rebellion through peaceful means, ”Nanotvi was quoted as saying. The Darul Uloom quickly gained popularity and influence, teaching modern subjects including natural science. At the same time, the university’s leaders were fully prepared to do away with the English language, European culture, and any ‘corrupting’ Western influence – including clothes and music. Gradually, Deoband became a centre of radical traditionalist education. This traditionalism served to quickly isolate and radicalize the Deoband school. Though there were Hindu teachers and students at the Darul Uloom, especially in the early days, its Muslim supporters never managed to organize any joint action with their Hindu counterparts. For instance, we know that in the early 1870s Nanotvi met with Dayanand Saraswati, another fighter for Indian independence, who was a devout Hindu. Instead of discussing possible joint actions, they spent several hours arguing the merits of their respective religions. Another academic institution that came into existence at approximately the same time proved to be an equally influential force among the Muslims of South Asia. This was the Aligarh College located in the city of Aligarh, south-east of Delhi. Another prominent Islamic scholar of the time, Sir Syed Ahmed Khan, became its founder and first leader. Sir Syed was born into a noble Mughal family, yet he encouraged his students to “begin to learn from the British.” His supporters believed that there were positive aspects to the British conquest, such as access to state-of-the-art technologies, science, and the modern world itself. The group gave credit to Britain for brokering peace between local fiefdoms, building roads, developing trade, and putting a stop to blood feuds. The work of Sir Syed and his followers culminated in the establishment of the Aligarh College – today Aligarh Muslim University – in 1864. Sir Syed truly challenged the supporters of Deobandism, who followed their religious scriptures strictly. He believed that both sharia law and Islamic dogma had to be interpreted in the light of the historical environment, and must not

Naturally, the root causes of the rebellion lay elsewhere. The Mughal elites still held a grudge. Their power had been taken away from them, and the colonial regime ruled the country with an iron fist. But the British understood that many of the country’s problems were colored by religion and that in such an environment any upset could be incendiary. After the rebellion was quelled, Indian society – including the country’s Muslim community – was faced with a question: What to do next? It was then that two academic institutions first appeared in India which went on to shape the attitudes of the Indian Muslim community toward the British Crown for centuries to come. The Darul Uloom (or ‘house of knowledge,’ often dubbed ‘the Islamic university’) located in the city of Deoband near Delhi still remains the more famous of the two. It was founded in 1867 by two prominent Islamic scholars of the time, Muhammad Qasim Nanotvi and Rashid Ahmad Gangohi. Nanotvi was an educated man, who had graduated from a madrasa and then a college in Delhi founded by the British governor General Bentinck. He had excellent command of English and was familiar with the latest Western scientific and technological discoveries of his time. Nevertheless, he became the chief ideologist behind a movement to reject all things Western. During the Sipoy rebellion, Nanotvi had become what would now be called a warlord, but was captured and sentenced to a lifetime of penal servitude in the Andaman Islands. However, his influential relatives managed to have this punishment commuted to a prison sentence, subsequently leading to his amnesty. Once released from prison, together with Gangohi, he founded the Darul Uloom in Deoband with the objective of fighting against the British education system and Western cultural propaganda. The leaders of the new university believed that the Rebellion was a lost cause; India did not have any education centers of its own that could explain the achievements of its home-grown culture. The English, the West, or the ‘crusaders’ (as the British colonial troops came to be known among their opponents) could only be fought with the kind of education that “does not dull one’s patriotism,” they No4, 2013–2014

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The circumstances in which the independent India and Pakistan were born left a mark on the subsequent relations between these two nations. The entire region was engulfed in a wave of religious nationalism. Never has this phenomenon manifested itself to the same extent as it did in South Asia. Even India’s early fighters for independence used to say that the country had ‘two main nations’ – the Hindus and the Muslims. Today, the Aligarh Muslim University offers more than 300 courses dealing with both traditional Muslim subjects and modern sciences. Over 30,000 students from India and the rest of the world take classes there. Students are admitted regardless of caste, religion, or gender. According to the University, it is ranked 8th out of India’s top 20 research universities. The Deoband Muslim University, on the other hand, is no longer a mere academic institution. Today the very word Deoband has come to signify an entire religious school of thought. Over 15,000 madrasas (Islamic schools) in India, Pakistan and Afghanistan are affiliated with it. There are nearly 3.5 thousand students attending classes at the Deoband – and many more would like to be in their shoes. They study sharia law and ethics, the Quran, the hadiths, Muslim jurisprudence ( fiqh), and a number of scientific disciplines. In recent years, however, Deoband has been the center of attention not just as an academic institution. The Taliban movement (whose name derives from Arabic, and means ‘students’) originated in Deobandi madrasas in Pakistan, in particular among Afghan refugees who absorbed Islamist ideas about confronting ‘infidels.’ The Taliban ideology came as a logical conclusion to the philosophy taught at Deoband. It essentially declared everything that humankind had invented during recent centuries to be ‘unholy.’ The only things that could be considered ‘pure’ were those that existed during the ‘Golden Age of Islam’– the time of the prophet Mohammed and the first Caliphs. Hence the Taliban desire to ban television and modern music, to force all women to wear burkas, to punish men whose beards were not long enough, and so forth. The Taliban’s strict religious discipline also led to the destruction of the giant Buddha statues in the Afghan province of Bamyan, something no previous Islamic regime had dared do.

run contrary to modernity. At that time this was an exceedingly bold statement. The Aligarh College aimed to enlighten the Muslims of India and to familiarize them with advanced ideas and modern knowledge. A new, modern generation of South Asia’s Muslim elite was raised in this school. Some contemporaries subsequently mocked the students of Aligarh in their memoirs, referring to them as young men from good Muslim families who tried to be both Muslim and English at the same time. The mockery was completely misplaced. The Aligarh environment produced many famous politicians and fighters for independence, including: the first prime minister of Pakistan, Liaquat Ali Khan (killed by an Islamic fanatic in 1951); the second prime minister of Pakistan, Khawaja Nazimuddin; Pakistan’s Presidents Mohammad Ayub Khan and Fazal Elahi Chaudhry; India’s President Zakir Hussain; prime minister of Bangladesh Muhammad Mansur Ali; and even the first president of the Maldives, Mohamed Ameen Didi. The post-independence era

In 1947 India gained independence from Britain, and was divided into two countries – Pakistan and India – based on religion. When the announcement came that the country was to be broken up, British India was engulfed in a disastrous wave of pogroms: Violence erupted against Hindu populations in Muslim-controlled areas, and Hindus responded in kind against Muslims. Mahatma Gandhi called these events “the greatest madness in the history of Indian civilization.” Radical groups hunted down those who practiced ‘the wrong faith.’ Clashes escalated into real battles, especially when waves of refugees collided, and millions of people fled to the farthest ends of the continent. The governments of the two fledgling nations lost control of the situation. Entire neighborhoods lay in ruins, the streets covered with torn and burnt bodies. According to official estimates (which some researchers believe to be conservative) more than one and a half million Indians lost their lives. Countless others ended up wounded or raped, or lost their homes and property. Some estimates put the total number of refugees and victims of the 1947 conflict at more than 15 million. No other country in history had ever witnessed such a tragic and bloody disintegration. 96


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The Deoband Muslim University

reigns supreme there will be no poor, because the rich will share their wealth “in accordance with their faith”; there will be no wars, as “all men would be brothers.” They spoke of corruption and lawlessness back home, and thought that only the “real Islam” could make a difference. The idea that ‘all men are created equal under God’ was preached at Deoband when it was founded, and the dream of a just state continues to attract new followers. It appears at times that a number of radical Islamists in the region simply picked up the banner of ‘equality’ and ‘a brighter future for all men’ that the communists had left behind, and continued the fight. Looking at the assistance that the West has extended to the region, and to Pakistan in particular, one cannot help but notice that it has come mainly in the form of military aid, and support for a number of economic programs. However, countries that want to have a positive effect in Pakistan would do well to support the country’s education system more proactively, especially its universities, by developing contacts and exchanges between students. It is often these kinds of institutions that produce the ideologies that the rest of the world ultimately has to come to grips with.

The so-called ‘war on terror’ in the region resulted in a backlash. The Taliban did not just appear from nowhere: their beliefs are rooted in tradition; they have their own ideology and rich history; their own heroes and social mythology. The movement, originally born in response to a Western invasion, switched into a higher gear and re-invented itself when the region’s Muslim community was confronted with the West once again. The Taliban’s radicalism raised concerns among the religious scholars at Deoband. In 2008 an ‘AntiTerrorist Conference’ was held at the Darul Uloom Deoband, which condemned all forms of terrorism and declared that “Islam prohibits the killing of innocent people.” However, the Taliban are not about to give up their struggle. Back in the late 1990s I managed to visit a Deobandi madrasa near Peshawar, called Haqqania, where many leaders of the Afghan Taliban movement had studied in the past. There I met a group of young boys from Central Asia, mostly from Tajikistan. (Later, in the 2000s, Pakistan’s military leader Musharraf banned foreigners from attending the local radical madrasas.) They explained to me, a visiting journalist from Moscow, that when the “real Islam” No4, 2013–2014

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In the Urban Net Saskia Sassen From London to São Paulo, from Chicago to Johannesburg, from Zurich to Mumbai – the whole world is entangled in a complex network of inter-industry ties connecting global cities. To be truly transnational, a business has to be present in a multitude of different cities both large and small that are often far from perfect. This serves as yet more practical evidence of the fact that the world is growing increasingly multipolar.

Saskia Sassen is Robert S. Lynd Professor of Sociology, Co-Chair of the Committee on Global Thought at Columbia University. She is also the author of Cities in a World Economy, Territory, Authority, Rights: From Medieval to Global Assemblages and A Sociology of Globalization.

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today, and it is this that matters in our global future. Understanding these features is the way to understand our global urban future.

There is a strong tendency to think of cities as competing with each other. This in turn leads to concerns with what might be the ‘top five cities’ now and in the near future. Let me make the argument that this approach moves us away from understanding the key features of our emerging global urban economy. The future is not about five or ten cities topping the rankings. The future is more complex, and it is already emerging now. We are moving toward a multipolar world, one where cities are key spaces and nodes. In such a multipolar world, the notion of a top five or top ten is far less significant than the expansion of the network of global cities which now incorporates about a hundred urban centers. There is far less competition among these cities than is generally asserted or believed. In my own research I find that it is the specialized differences of cities that matter

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Strategically important

For much of the 20th century, cities were above all centers for administration, small-scale manufacturing, and commerce. Cities were mostly the space for rather routinized activities. The strategic spaces where the major innovations were happening were the government (in the making of social contracts, such as the welfare state) and mass-manufacturing, including mass-construction of suburban regions and national transport infrastructure. As recently as the 1970s, many of our great cities were in physical decay and losing people, firms, key roles in the national economy, and share of national wealth. New York was officially bankrupt, and so was Tokyo; London was informally bankrupt. Mumbai, Shanghai, Dubai, and many others were decayed and/or underdeveloped. As we moved into the last decade of the 20th and into the first of the 21st century, a rapidly growing number of cities had re-emerged as strategic places for a wide range of activities and dynamics. Critical, and partly underlying all the other dimensions, has been the new economic role of cities in national economies and in an increasingly globalized world. The most common and easiest answers as to why cities became strategic in a global corporate economy are the ongoing need for face-to-face communications and the need for creative classes and inputs. Both are part of the answer. But in my reading, these are surface conditions and cannot fully explain the new phase. The rise of cities as strategic economic spaces is the consequence of a deeper structural transformation evident in all developed economies. It affects cities at multiple levels, from provincial to global. At the heart of this deep structural trend is the fact that today even the most material economic sectors (mines, factories, transport systems, hospitals) are buying more insurance, accounting, legal, financial, consulting, software programming and other similar services. These so-called intermediate services tend to be produced in cities, no matter the non-urban location of the mine or the steel plant that is being serviced. Thus even an economy centered in manufacturing 99


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The key feature of the current era is a vast number of highly particular global circuits that crisscross the world, some specialized and some not, which connect specific groups of cities. … If we were to track the global circuits of gold as a financial instrument, it is London, New York, Chicago and Zurich that dominate. But the wholesale trade in the metal brings São Paulo, Johannesburg and Sydney onto the map, and the trade in the commodity, much of it aimed at retail, adds Mumbai and Dubai

or mining will feed the urban corporate services economy. Firms operating in more routinized and sub-national markets increasingly buy these service inputs from more local or regional cities, which explains why we also see the growth of a professional class and their associated built environment in cities that are not global. The difference for global cities is that they are able to handle the more complex needs of firms and exchanges operating globally. The outcomes of this structural condition become wired into urban space. The growth of a high-income professional class and high-profit corporate service firms becomes legible in urban space through the growing demand for state-of-the-art office buildings and all the key components of the residential sphere and consumption. The growing demand for these leads to often massive and visible displacements of the more modest-income households and modestprofit-making firms, no matter how healthy these may be from the perspective of the economy and market demand. In this process, urban space itself is one of the actors producing the outcome. This partly explains why architecture, urban design and urban planning have each played such critical roles.

A global city model

Beginning in the 1980s we saw the partial rebuilding of cities as platforms for a rapidly growing range of globalized activities and flows, from economic to cultural and political. This explains why global cities become an object of investment, beyond being a place for investing in, and why the number and types of cities that became such objects expanded rapidly as globalization expanded from the 1990s onwards. When I first developed the global city model in the 1980s, my starting points were the global networks of affiliates of firms, global financial exchanges, global trade routes, and global commodity chains. The emergent scholarship on globalization examining these global operations emphasized geographic dispersal, decentralization and deterritorialization. This was indeed all happening. But I was interested in the territorial moment of all these increasingly electronic and globally dispersed operations. At that time my idea was to focus on New York and Los Angeles. They seemed to be major territorial nodes. But sticking to my own methodology – starting with the global operations 100


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Even a highly imperfect global city is better for a global firm or exchange than no such city. And this then explains why the many and very diverse global cities around the world do not just compete with each other, but also collectively form a globally networked platform for the operations of firms and markets

as an infrastructure for globalization, and for increasingly urbanized global networks. Different circuits contain different groups of countries and cities. For instance, Mumbai is today part of a global circuit for real-estate development that includes investors from cities as diverse as London and Bogotá. Coffee is mostly produced in Brazil, Kenya and Indonesia. But the main trading place for futures on coffee is Wall Street, even though New York does not grow a single bean. The specialized circuits in gold, coffee, oil and other commodities each involve particular places, which will vary depending on whether it is a production circuit, a trading circuit, or a financial circuit. If we were to track the global circuits of gold as a financial instrument, it is London, New York, Chicago and Zurich that dominate. But the wholesale trade in the metal brings São Paulo, Johannesburg and Sydney onto the map, and the trade in the commodity, much of it aimed at retail, adds Mumbai and Dubai. New York and London are the biggest financial centers in the world. But they do not dominate all markets. Chicago is the leading financial center for the trading of futures, and in the 1990s Frankfurt became the leading trader for – of all things – British gilts. These cities are all financial leaders in the global economy, but they lead in different sectors and are different types of financial centers. Not only global economic forces feed this proliferation of circuits. Migration, cultural work and civil society, which struggles to preserve human rights, the environment and social justice, also feed their formation and development. Thus NGOs fighting for the protection of the rainforest function in circuits that include: Brazil and Indonesia, as homes of the major rainforests; the global media centers of New York and London; and the places where the key forestry companies selling and buying wood are headquartered, notably Oslo, London and Tokyo.

of firms and exchanges, and tracking the sites where they hit the ground – forced me to recognize that in the 1980s it was New York, London and Tokyo that stood out, with Los Angeles way, way down the list. Applying this methodology today leads to a vastly expanded global geography of sites. There is more of everything: export processing zones, offshore banking centers, massive warehouses that are one stop on global trade routes, and many more global cities. Chain geography

There is no such entity as ‘the’ global economy. There are global formations, such as electronic financial markets and firms that operate globally. But the key feature of the current era is a vast number of highly particular global circuits that crisscross the world, some specialized and some not, which connect specific groups of cities. While many of these global circuits have long existed, what began to change in the 1980s was their proliferation and their increasingly complex organizational and financial framings. These emergent intercity geographies began to function No4, 2013–2014

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This process is easier to understand if we consider consumer sectors rather than organizational or managerial ones. Even such a routinized operation as McDonald’s adjusts its products to the national cultures in which it operates, whether that is France, Japan or South Africa. When it comes to managerial and organizational aspects, matters become more complicated. The global city contains the needed resources and talents to bridge between global actors and national specifics. Even a highly imperfect global city is better for a global firm or exchange than no such city. And this then explains why the many and very diverse global cities around the world do not just compete with each other, but also collectively form a globally networked platform for the operations of firms and markets. The network of global cities has expanded as more and more firms go global and enter a growing range of foreign national economies. The management and servicing of much of the global economic system takes place in this growing network of global

There are particular music circuits that connect specific areas of India with London, New York, Chicago and Johannesburg, and even more particular music circuits that connect parts of China with Los Angeles. Adopting the perspective of one of these cities reveals the diversity and specificity of its location on some or many of these circuits. These emergent intercity geographies begin to function as an infrastructure for multiple forms of globalization. The critical nodes in these intercity geographies are not simply the cities, but more specifically the particular, often highly specialized, capabilities of each city. Further, a critical trend is that, ultimately, being a global firm or market means entering the specificities and particularities of national economies. This explains why global actors need more and more global cities as they expand their operations across the world. Handling these national specificities and particularities is a far more complex process than simply imposing global standards. 102


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cities and city-regions. And while this role involves only certain components of urban economies, it has contributed to a repositioning of cities both nationally and globally. This repositioning of cities and the move away from intercity competition is further strengthened by the emerging fact that cities are at the forefront of a range of global governance challenges. Because of this, many cities have had to develop capabilities to handle these challenges long before national states signed international treaties or passed national laws. The air quality emergency in cities such as Tokyo and Los Angeles back in the 1980s is one instance: these cities could not wait until an agreement such as Kyoto might appear, nor could they wait until national governments passed mandatory laws for car fuel efficiency and emissions. With or without a treaty or law, they had to address air quality urgently. And they did. Cities have even shown a willingness to go against national law when the urgency of confronting particular conditions demands it. Finally, the urgency of such global challenges in cities takes on a further practical character with the urbanization of war. The new military asymmetries arising out of conventional armies confronting networked insurgencies tend to produce an increasingly urban geography of war. In this context, the expanding presence of cities in global networks and the expanding number of intercity networks take on added meanings, because cities are not about war; they are about commerce and the civic. The more cities are involved in global transactions, the more they will be a voice against war and international military action.

1 Tokyo 2 New York 3 London 4 Osaka 5 Paris 6 Beijing 7 Moscow 8 Seoul 9 Rhein-Ruhr 10 Chicago 11 Hong Kong SAR 12 Taipei 13 Los Angeles 14 Zurich 15 Sydney 16 Stockholm 17 Houston 18 Nagoya 19 Randstad 20 Singapore 21 Dallas 22 Washington. DC 23 Toronto 24 Munich 25 Melbourne

A picture of the multipolar world

Average revenue per large company, $, billions

Total revenue, $, billions

Number of large companies

Top cities ranked by number of large companies

613 5,231 8.5 217 1,965 9 193 1,924 10 174 1,028 5.9 168 2,785 16.6 116 2,503 21.6 115 709 6.2 114 1,150 10.1 107 1,220 11.4 105 695 6.6 96 468 4.9 90 472 5.2 82 422 5.1 79 770 9.8 75 466 6.2 74 360 4.9 74 661 8.9 70 481 6.9 67 1,516 22.6 64 343 5.4 63 804 12.8 62 655 10.6 61 436 7.2 61 581 9.5 58 289 5

Source: MGI CompanyScope; McKinsey Global Institute analysis.

While there is competition between cities, there is far less of it than is usually assumed. A global firm does not want one global city, but many. However, given the level of specialization of globalized firms, the preferred cities will vary according to the firm. Firms thrive on the specialized differences of cities, and it is these that give cities their particular advantage in the global economy. The other side of this dynamic is that for a firm to go global it has to put down feet in multiple cities that function as entry points into national economies. This bridging capacity is critical: the multiple circuits connecting major and minor global cities are the live infrastructure of the

global economy. This indicates that cities do not simply compete with each other. A global firm does not want just one global city, even if it is the best in the world. Different groups of cities will be desirable, even if they have some serious negatives. This helps explain why there is no one ‘perfect’ global city. Today’s global phase does not function through one imperial global capital that has it all. In this growing number of global cities – and their differences – we see the larger story of a shift to a multipolar world. 104


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How Smart is Your ‘Smart City’ and Why Should You Care? Bill Hutchison Dozens of urban development projects, from Malaysia to Siberia, claim to be technologically advanced, comfortable and ‘sophisticated,’ with a cognitive-cultural economy to boot. They all need to sort out what they really are – and whether or not their plans are obsolete.

Not all ‘smart city’ investments are very smart. Today we have billions of dollars being invested in transforming our cities, towns and rural districts into ‘smart cities,’ ‘intelligent communities,’ ‘living cities,’ ‘sustainable cities’ and ‘green cities.’ Even the names are confusing. What’s happening? Why all the fuss and investment? And are the strategies the same in the BRICS nations as they are in developed countries? What about small emerging markets? Can everyone participate and benefit in this new technology-driven urban transformation? First, what’s happening, and why should you care? Technology transformation and new product innovations have created the rapid growth of smartphones and tablets with more power than the mainframe computers that filled large rooms 50 years ago. But this is just the tip of an iceberg

of thousands of new applications that have turned our cars into computers-on-wheels, and disrupted thousands of other products and systems. The camera market is just one example: digital cameras put Polaroid and Kodak out of business. The room-sized computer now fits on the head of a pin, but who cares? The question is, what are the applications and how can we benefit from them? It was not until the early 1990s, 20 years ago, that the concept of ‘smart’ or ‘intelligent’ communities was first introduced into the public mind, with the appearance of Singapore’s Intelligent Island, Silicon Valley’s Smart Valley, and Smart Toronto. But like all disruptive innovations, this technology-driven wave of urban transformation has taken time to gestate before coming out in full force to make obsolete those cities and towns that 106


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no overarching strategic approach or framework within which the investment in technology was supporting strategic goals. Automation was really viewed as a cost reduction and productivity improvement for a specific application. There is nothing wrong with that approach, but it misses the extra value that is available when you tie automation to an overall strategic framework. In the late 1980s the concept of ‘strategic alignment’ was introduced by two MIT professors. They used the term to describe the alignment between an organization’s investment in technology and its strategic goals and directions. Strategic alignment seems like an obvious requirement in business and government systems today, but it was mainly ignored for the first 30 years of business automation and it is being ignored today in many smart city initiatives. So it sometimes seems as if we are starting over in this relatively new area of applying technology to urban life and systems, as we create the ‘Live, Learn, Work and Play’ environment for tomorrow’s citizens. But an evolution is occurring in the maturing of smart city systems, from the automation of a few specific applications like traffic lights and security features, to systems that do include strategic alignment. To help reduce the confusion of terms it is useful to think in terms of Smart City 1.0 and 2.0 – and now the early stages of Smart City 3.0. Smart City 1.0 is like those old business and government systems where individual applications were automated without reference to the overall strategy of the organization. Smart City 2.0 has early forms of strategic alignment. Smart City 3.0 includes sophisticated strategic alignment and early forms of intelligence in the applications and communications infrastructure. Naturally there are no hard boundaries, but in general these terms are useful when discussing the differences between applications in various countries and regions of the world, and the difference between a smart city and an intelligent community. The phrase ‘intelligent community’ was defined in the late 1990s by the New York-based Intelligent Community Forum (ICF). An intelligent community consists of broadband, knowledge workforce, innovation, digital inclusion, advocacy. For 14 years the ICF has held an annual compe-tition for the Intelligent Community of

are not innovating to transform themselves and keep ahead of the wave. Comparisons are drawn with cities and towns in Britain and Europe which prospered when canals were important forms of transportation. They lost their economic power when the railway ran in another direction or when, in the U.S., the new interstate highways bypassed prosperous towns, which then declined. When engaging in urban transformation or new community development, the high-level goals for a community can generally be categorized as economic, social or environmental. Naturally these are not independent of each other, but all activities and goals usually fit into one or two of those three categories. Transforming towards a new future state requires many things, but innovation is certainly a common theme. The three categories are a useful reference point when discussing the terms ‘smart,’ ‘intelligent,’ ‘living,’ ‘green’ and ‘sustainable.’ Some people use ‘sustainable’ and ‘green’ in the same breath, to mean that communities with more effective green policies will be more sustainable; sometimes the terms are used interchangeably. The ‘living cities’ movement has its roots in the work of Jane Jacobs and other social pioneers who, in essence, were focused on urban designs that created great places and neighborhoods. They are characterized by plenty of parks, the elimination of high-speed expressways that cut through cities and neighborhoods, great facilities for cycling, and a general focus on the citizens’ socializing and comfort. ‘Smart’ cities have many degrees of smartness. Some people claim they have a smart city when they have automated their traffic lights and installed cameras for increased security. It is interesting that many of today’s smart city automations are following the same dynamic that government and businesses followed 40 to 50 years ago. There was Bill Hutchison is Executive Director of EY’s Center for Smart City Innovation, Chairman of i-CANADA Alliance.

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investment begins. Smart City 2.0 and definitely 3.0 approach this standard. So where are we with these urban transformation initiatives in various parts of the world? Really effective and open collaboration between citizens and their governments is generally more prevalent in Western democracies and developed countries. The more autocratic the national and municipal leadership, the less there is community collaboration, and the more the government decides what is required. That difference usually leads to an automation approach characteristic of Smart City 1.0: automation of specific functions, but very little strategic alignment. This is not intended as a comment on the pros and cons of various forms of government; it is merely a statement of fact, as many other factors determine the most appropriate form of government and governance. As in the case of early business automation, each application or project can still be valuable in terms of cost reduction and/or productivity improvement. In civic terms it may be improved traffic flow with a positive impact on gas emissions and overall efficiency, or improved security in terms of cameras, lighting and sensors. But it is in the Western democracies where we are generally seeing the evolution of Smart City 3.0 and intelligent communities. They are the ones gaining the extra leverage from their investment by connecting it to an overall strategic framework that also includes the power of citizen participation in establishing priorities. Cities, towns and rural areas around the world have great stories to tell about their efforts to transform themselves. The internet is spreading throughout Africa, and broadband is expanding and increasing in speed everywhere. On 21 October this year the ICF announced its Smart 21 shortlist for the 2014 Intelligent Community of the Year award. They include one community in each of Kenya, Greece, Brazil and New Zealand, as well as six in Canada, four each in the U.S. and Australia, and three in Taiwan. Chinese, Japanese and Korean cities have won the award in previous years, but India and Russia have not yet made the list. Having said that, there is an impressive wave of new smart city activity in both countries, and cities in places like Kazakhstan will quickly move up the ranks as a result of their present initiatives.

Smart21 Communities for 2014 by ICF Community

Country Population

Arlington County, Virginia

USA

Coffs Harbour, New South Wales

Australia

Columbus, Ohio

USA

809,800

Heraklion, Crete

Greece

150,000

Hsinchu City

Taiwan

427,000

Kingston, Ontario

Canada

159,500

Mitchell, South Dakota

USA

210,300 70,900

15,000

Montreal Metropolitan Area, Canada 3,957,700 Quebec Nairobi County

Kenya

4,000,000

New Taipei City

Taiwan

3,949,800

Parkland County, Alberta

Canada

30,500

Prospect, South Australia

Australia

20,000

Quebec City, Quebec

Canada

Rio de Janeiro

Brazil

728,900 6,323,000

Sunshine Coast, Queensland Australia 322,600 Taoyuan County

Taiwan

2,038,000

Toronto, Ontario

Canada

2,791,000

Walla Walla Washington

USA

31,900

Wanganui

New Zealand

43,000

Whittlesea, Victoria

Australia

176,500

Winnipeg Canada 778,400

the Year, based on the mentiond elements. Each year they add an area of focus, like innovation or collaboration. They receive a few hundred applications each summer, narrow them down to 21 semifinalists – the ‘Smart 21’ – and then again down to seven finalists in January. The winner is announced at a gala in New York in June. Singapore, Stockholm, Eindhoven and Taipei are among the past winners of the award. The main differences between an intelligent community and other designations are the existence of an overall strategic framework, collaboration between all community players in creating that strategy and agreeing goals, and the use of technology in achieving those goals. For example, if it is agreed that the community wants interactive healthcare services in the home, through communication with a nurse or doctor via camera, then the technology, regulations and processes are implemented to provide the servi­­ce. Technology is not the end goal: it is the enabler, in all cases. All applications and services fit within an overall strategic community framework that is created before the automation 108


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URBANISM

Role Model Vasily Baburov Brazil’s Curitiba is a model of the ‘smart city’ not just for developing, but also for developed, countries. Most of the key challenges that a modern metropolis faces – including environmental, transportation, social and economic problems – were successfully tackled in this city as early as fifty years ago.

guarantee decent living conditions for at least several generations of residents. As opposed to well-to-do communities in Europe, North America and Australia with their centuries-old traditions of self-government, cities in other regions of the world have to function in a much more constrained environment not just because of their shoestring budgets, but also due to their underdeveloped social and administrative institutions. That is precisely why there are so few

Every city with even a modicum of self-respect strives to achieve two fundamental goals. The first is to create a comfortable living environment. It is predicated on tough competition for investment and talent. The second goal is to ensure sustainable development, which requires an integrated model (incorporating economic, social, transportation, energy and environmental aspects) that can Vasily Baburov is urbanist and architecture critic. 110


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cities of this sort in the developing world. However, their number is growing thanks to the modernisation processes that are currently underway in countries in Latin America and Southeast Asia. Brazil’s Curitiba offers one of the most well-known examples – it managed to create a development model emulated by many cities around the world. Curitiba found a way to resolve a  broad range of problems (transportation, economic, social, environmental, etc.) and maintain a high standard of living for most residents.

On the Monday morning, when supporters of the ‘automobile party’ brought their lorries to break down the roadblocks, they were stopped in their tracks by a group of several hundred children drawing pictures on the pavement. The drivers were forced to beat a retreat. Since that time children draw pictures on the pavement every weekend in what has become a tradition, even though the rights of pedestrians have long been safe

economic, social and environmental needs. This model, coupled with the urban development plan, produced five pivotal elements referred to as ‘structural corridors,’ along which the city’s further growth was to be concentrated, turning it into a predictable and manageable metropolis while gradually building up its transport infrastructure. Thus, Curitiba was to acquire a skeleton to be used for the targeted planning of ‘centralised functions’ (e.g. business, commercial and cultural). The new regulations governing land tenure and development aligned the concentration of population with the transport capabilities and the number of storeys in residential housing facilities. Maximum density in newly constructed facilities was only permitted within and along the structural corridors; they would become accessible on foot from express bus stops. The city’s remaining territory, located farther away from these main arteries, was to be allocated for medium- and lowrise buildings. Instead of launching into risky and financially ruinous ‘big projects,’ the city’s administration prioritised a range of concurrent, well-coordinated, and original small-scale initiatives that offered greater savings and relied on local resources and market mechanisms. This approach came to be known as ‘urban acupuncture.’ Transport and land tenure, hydrology and landscaping, education and healthcare, waste management and the eradication of unemployment and crime – all were treated as interlinked elements forming part of an integrated project objective. The successes achieved by Curitiba’s administration over a relatively short period of time can be explained by several key factors. The professionalism of the city’s executives played a huge role. Acting quickly and efficiently they managed to streamline the work performed by

A revolution in urban planning

Between 1940 and 1980 the city experienced a period of explosive demographic growth caused by the forced industrialisation sweeping through the country, as well as the transformation of its agricultural sector. The huge upsurge in population created a multitude of problems, spurred on by the rapid growth of the vehicle-to-population ratio. With the U.S. experience in mind, the municipality started working on a general plan designed to fast-track the development of private automotive transport and high-speed motorways. However, by the mid-1960s the expediency of this strategy was being called into question. The decision taken by the authorities to build a motorway cutting through the city’s historic centre ran into organised resistance from intellectuals and students. The city’s elite went through a paradigm shift, and a group of young architects and civil engineers managed to convince government officials to give up the original plan and adopt an alternative development programme conceived by them. The group was headed up by a  27-yearold urban planning engineer named Jaime Lerner. Together they created an independent urban planning research institute (the Instituto de Pesquisa e Planejamento Urbano de Curitiba – IPPUC), mandated to develop key principles underlying the city’s development strategy, and its general plan. Soon after, following a cabinet reshuffle organised by the military junta that was running the country at the time, Lerner himself was appointed the mayor of Curitiba. The new strategic plan adopted in 1965 was based on one key idea – to integrate three systems: the street and road network; public transport; and land tenure and development. Their development was to be interlinked depending on the city’s No4, 2013–2014

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various entities involved in the process of urban development. Moreover, the city’s elite (both the entrepreneurs and the government) managed to reach an important consensus both with respect to the overall 1965 General Plan and selected municipal programmes. Thus, despite a fledgling civil society, the most educated groups in the population were given an opportunity (albeit not entirely equal) to have a role in the city’s governance.

Green light for pedestrians

Starting in the 1970s, each successive city administration – regardless of political affiliation – was mainly concerned with environmental policy. Even during junta rule, when Brazil tried its best to attract investment into industrial production, turning a blind eye to any hazardous side effects, the construction of new plants in Curitiba was subject to strict environmental safeguards. Back in the late 1960s the city had virtually no green areas, bodies of water, or well-developed public spaces. Statistically, each resident could enjoy as little as 0.5 square metres of vegetation. Therefore, the city administration focused predominantly on areas located in the risk zone (mostly in floodplains and lowlands) that required immediate attention. In parallel they had to fight against illegal squatter developments on flood-meadows, and often resorted to tough measures. Squatters were evicted from the flood-lands. Linear parks were built along the banks of the rivers, which not only served to expand the territory of the ‘lungs’ of the city but also helped to regulate the streams collecting excess water during the rainy season, preventing soil erosion. Concurrently with the landscaping improvements the authorities approved a new set of development regulations whereby any newly constructed residential facilities were to occupy no more than 50% of the plot of land on which they were built. Gardening was incentivised through tax benefits for owners of parks and gardens. This proactive and rational environmental policy yielded some tangible benefits: by the early 21st century Curitiba boasted over nine thousand hectares of vegetation (one fifth of the city’s territory). Over a period of 20 years, 30 parks have been built from scratch and 1.5 million trees have been planted, while the proportion of landscaped areas on a per capita basis has increased nearly a hundredfold. Along with the parks, improvements have been made in the city’s streets and squares. Curiously, this process began with what nearly became a crime story. During one weekend in the winter of 1972, a section of 15th of November Street was converted into a pedestrian zone. This operation had been prepared in full secrecy and took literally 72 hours. Even though the mayor’s office had wanted to bring the local residents on board to help improve the city, all preliminary work had to be done quietly and within particularly tight

Fighting traffic jams

Lerner’s first steps as mayor were to reform the transportation system and improve the state of the environment. One of the key principles enshrined in the 1965 General Plan was the priority given to pedestrians over motor vehicles, which at that time was seen as a revolutionary step not just in Brazil but in Western Europe as well. This principle provided for a radical improvement in the public transportation system while simultaneously restricting the rights of car owners despite the high vehicle-to-population ratio. (Today the ratio stands at 600 vehicles per 1,000 residents.) Buses, which could rely on the existing road infrastructure, were selected as the primary means of transport. The cost of one kilometre of dedicated bus lane proved to be 50 times cheaper than that of an underground rail system, while its capacity approximated that of a modern tram, thanks to custom-made models with a longer body. This bus lane backbone was used to gradually develop a range of routes of various calibres, from express to local buses. The operator of Curitiba’s public transport network (Rede Integrada de Transporte – RIT) is a public company that contracts private companies – the owners of the bus fleets which actually carry the passengers. The municipal authorities coordinate their activities and finance the construction and operation of infrastructure. In addition to a significant improvement in the quality of transport services, this approach offered great environmental benefits. The well-organised network of roads and public transport required 30% less fuel compared to other cities. Curitiba’s experience of building dedicated bus lanes has long become textbook material, replicated in different areas of the world – from Ottawa to Mexico and from Bogota to Bangalore. 112


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a tradition, even though the rights of pedestrians have long been safe. The newly created pedestrian zone served as an impetus, pushing the city’s government to put into order the entire historic centre, thus helping it escape the fate of other large cities in Brazil that ended up defaced by development fever in the 1960s and 1970s. Even though in terms of its artistic value Curitiba’s old town may lag behind such pearls of colonial baroque as Olinda or Ouro Preto, its immaculate state is exemplary. In parallel with the landscaping efforts and other improvements, the city managed to stumble upon an ‘outside-the-box’ solution to its waste management problem. The mayor’s office found a way to convince city residents to recycle rubbish by both raising their awareness (starting in kindergarten) and providing a financial stimulus. The municipal authorities offered the city’s lowincome residents a chance to exchange their waste for food and essential commodities. They used a similar approach to clean up bodies of water and public spaces. Thanks to a closed-loop cycle, the administration managed to cut its costs by more than half.

The well-organised network of roads and public transport REQUIRED 30% less fuel compared to other cities. Curitiba’s experience of building dedicated bus lanes has long become textbook material, replicated in different areas of the world – from Ottawa to Mexico and from Bogota to Bangalore

deadlines amidst some serious concerns over potential violent resistance from street vendors and the gangsters who offered them protection. The latter decided to try to win the street back by force, but the municipal authorities dealt a preventive blow. On the Monday morning, when supporters of the ‘Automobile Party’ brought their lorries to break down the roadblocks, they were stopped in their tracks by a group of several hundred children drawing pictures on the pavement. The drivers were forced to beat a retreat and the municipality celebrated its first victory – one that also brought some added benefits: The new pedestrian street provided an enabling environment for commerce. Since that time children draw pictures on the pavement every weekend in what has become No4, 2013–2014

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A city that’s socially responsible

The development of a settlement cannot be called sustainable if its economic and environmental achievements are marred by deeply rooted social problems. Where the rights of particular groups of citizens are infringed upon, or there is economic or cultural stratification, or the society suffers from other ills, one can hardly claim that such a community is particularly ‘sustainable.’ Much has been achieved in Curitiba in this respect. The government’s social policy was designed to create an enabling living environment and ensure that all residents could at least enjoy equal opportunities if not equal benefits. Naturally, universal well-being is an unrealistic proposition; however, in the face of the monstrous polarisation plaguing Latin America, Curitiba leaves the impression of a well-to-do city with a population that would hardly qualify as poor. To achieve tangible results the city’s government agencies and social services had to be radically optimised. One innovative approach came in the

By the early 21st century, green areas accounted for one fifth of Curitiba’s territory. Over a period of 20 years, 30 parks have been built from scratch and 1.5 million trees have been planted, while the proportion of landscaped areas on a per capita basis has increased nearly a hundredfold

form of so-called ‘Streets of Citizenship’ (Ruas da Cidadania). These are integrated service centres for citizens, which serve as a one-stop shop for resolving most bureaucratic issues: filing various types of paperwork, paying taxes, registering with the office of unemployment, and much more. In addition to municipal services, such centres include a supermarket for low-income residents where goods are sold at cost, as well as sports facilities and playgrounds for children. To eradicate illiteracy the city organized new schools and provided so-called ‘mobile classes,’ held in out-of-commission buses moving from place to place. New specialised professional development 114


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Curitiba: facts and figures

Curitiba’s transport consumes 30% less fuel compared to other cities. The pedestrian zone in Curitiba’s city centre is one of the largest in the world. 99% of Curitiba’s residents are happy with the quality of life in the city. 70% of São Paulo residents would like to live in Curitiba.

centres called ‘vacancy roads’ were set up to reduce unemployment. Despite the formal ban on child labour, street children were hired to perform easy work, acquiring new skills in the process. These measures helped to significantly reduce the crime rate and transform Curitiba into the safest metropolis in the country. The city’s administration opted to encourage squatter developments to resolve the housing problem with all construction supervised by professionals. The municipality would purchase large plots of land, put together a plan of the area, lay down the required communications and sell parcels of land to those in need, in so doing offering them a chance to build their own housing and pay for it in instalments. Apart from preparing the land, the city provided additional support by extending in-kind loans, in the form of construction materials and standardised construction designs, as well as offering free specialist advice.

Curitiba’s Bus Rapid Transit system operates as quickly and efficiently as a light metro but costs the city ten times less.

environmental resources lie beyond the city limit. These include wooded areas and springs, the survival of which are now threatened by urban sprawl. These problems have not been resolved yet due to a lack of coordination between the various municipalities forming part of the agglomeration. Creating a ‘supramunicipal’ (sub-regional) authority capable of pursuing a streamlined policy in developing the metropolis would be a step in the right direction. However, this idea was strongly rejected by the local elites who fear that their spheres of influence would be re-partitioned. At the same time, the growing ability of local residents to self-organise and develop greater insights into complex issues may well accelerate cooperation between different municipalities and in so doing bring this Brazilian city closer to developing a new and infinitely more complex model of governance.

Challenges in the new century

Curitiba’s ‘dirty’ industrial facilities, however, are still dispersed throughout the city, and continue to pose a serious problem. Even though the authorities did manage to group a large portion of the city’s production facilities in a large industrial park, the Cidade Industrial de Curitiba, many plants had been built in adjacent municipalities where environmental protection regulations were not as strict. In addition, the metropolis’ main No4, 2013–2014

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A Beauty That Could Not Save the World Alexander Alexeev Oscar Niemeyer was one of the founders of the Brazilian modernist school of architecture. He also helped to design a new capital city, Brasília. Built on a desert plateau, the city became a perfect example of the modernist dream brought to life. It is both an architectural triumph of the 20th century and its greatest urban development failure.

promised that the city would be built before his presidential term ended; having won the election he immediately went on to implement his programme. His vision was to turn Brasília into a symbol of the country’s modernisation efforts, providing impetus for the development of its central region and becoming an example of a new kind of city, based on humanitarian values, which would be free of injustice, poverty and the infamous Brazilian slums called ‘favelas.’ In other words it was to become the opposite of the old Rio, shaped during the colonial era. Oscar Niemeyer met Kubitschek in the early 1940s, long before he started working on the new capital project. At the time, the future president held the office of prefect in Belo Horizonte. He hired the architect to build an entertainment complex in an affluent city suburb, which included a casino, a dance hall and a yacht club. This project came as a turning point in Niemeyer’s career.

The 20th century heralded an era of architectural utopias. Architects had always had the ambition not just to develop open spaces but also to create a social order. It is thanks to their talent and knowledge that the power of monarchs, the wealth of merchants, and the grandeur of deities found their visual, quotidian, manifestations. But against the backdrop of the last century’s large-scale social re-development experiments, architects suddenly realised that their hour to bring happiness to the whole of mankind was finally upon them. This realisation gave birth to modernism. A clean slate

The idea to build Brazil’s new capital closer to the centre of the country was first voiced in the 1820s. However, it was only Juscelino Kubitschek – president of Brazil from 1956 to 1961 – who had the resolve to see it through. During his election campaign he 116


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Palace, the Palace of Development, etc. Perhaps the city’s most famous landmark is the Palace of the National Congress, located on Three Powers Plaza. Two rectangular towers deliberately placed closely together to accentuate the empty spaces around them, a gigantic horizontal terrace resting on a low-rise building adorned by two parabolic structures – a dome and a cup; all of these elements contribute to a balanced architectural design. These simple laconic forms, the perfect proportion, and the snow-white sunlit surfaces contrasting with a blue sky and reddish soil, seem out of this world, bordering on the surrealistic. The city’s residential buildings, however, were based on a standardised design. The multi-storey apartment blocks assembled together from prefabricated elements were the only realistic solution considering the tight construction deadlines. Moreover, this approach was fully in line with the legacy of Le Corbusier, who considered the modern home to be a ‘machine for living in.’ Yet a separate area of standalone villas was developed on the shores of the artificial Lake Paranoá.

In 1956, Kubitschek requested his services again, inviting him to develop the master plan for the new capital. But Niemeyer turned down this offer, insisting on competitive bidding. Twenty-eight different projects were presented, with the successful bid coming from Niemeyer’s friend and mentor Lúcio Costa. Niemeyer, however, took on the design of government and public buildings himself. From blueprint to reality

Viewed from the air, Brasília resembles an aeroplane or a bird, even though Costa claimed that he meant it to be reminiscent of a giant butterfly. Its head is a huge triangle: Three Powers Plaza. Its body is flanked on both sides by government buildings, ministries, a cathedral, a stadium and the city’s business, commercial and entertainment areas. Its spread wings are home to a maze of identical squareshaped residential quarters. Kubitschek was an efficient president and surprisingly enough he kept his promise: Brasília was built in just three years by 60,000 construction workers. They used 100,000 tons of iron and a million cubic metres of concrete. Construction materials were flown in by plane, as roads were yet to be built. In the summer of 1958, a group of architects had arrived in a capital city still under construction. “One could not say that the conditions we found ourselves working in were satisfactory,” Niemeyer wrote later. “We had no electricity, no hot water and the food we ate during the entire period of construction left much to be desired. Torrential rains turned roads into mud, which was a great inconvenience for us as we were accustomed to asphalt roads. And yet, surprising as it may be, we were full of enthusiasm, resolve and fighting spirit.” Kubitschek spared no expense in the construction and fully relied on the judgement of the architects. This helped him to avoid serious difficulties with the implementation of the initial vision. Naturally not everything went smoothly, but the main reason for difficulties was the furious pace at which the work was carried out. Finally, on 21 April 1960, Brasília officially took over from Rio de Janeiro as the nation’s capital. The monumental buildings designed by Niemeyer adorn the sides of an esplanade that is as wide as an open field. These buildings look more like palaces – and that is precisely how they came to be known: the Palace of the Dawn, the Highland No4, 2013–2014

Victory or defeat?

Costa and Niemeyer continued to work on Brasília’s development for several more years; however, after a new government came to power, their enthusiasm began to dwindle. Many original ideas had to be given up and their work turned into a series of conflicts with certain officials and even entire government agencies. When a military dictatorship came to power in Brazil in the mid-1960s, Niemeyer was faced with a career crisis in his home country. He never managed to work in the United States; at the height of the Cold War the architect was denied a visa because of his communist views. He moved to Europe and continued to work in France and Algeria. He would return to Brazil from time to time to implement specific projects, but never saw eye to eye with the new administration. It was only in the 1980s, when a new democratic government came to power, that he finally returned home for good. “The architect’s main objective is to dream,” wrote Niemeyer. Why is it that his own dream never came true? Why couldn’t this radiant city inspired by humanitarian ideals offer a comfortable life for everyone? Why did this splendid utopia never manage to come to life? 117


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Jan Gehl, a popular urban planner, has even come up with two special terms – ‘Brasília Syndrome’ and ‘Helicopter Urbanism’ – to describe cities based on a plan which looks good from a bird’s eye view, but which does not work on the ground. Gehl also picked a strong word to describe the architects who practise this approach to city planning: he refers to them as ‘birdshit architects.’ The suggestion is that they draw up their plans looking down from high above and, like birds, tend to drop the results of their work on the heads of unsuspecting citizens

Despite all the efforts taken by various architects to make this project more humane and commensurate with the capacities of a normal human being, Brasília is not a very pedestrianfriendly city. Ironically, both the communistminded planners and their capitalist counterparts placed greater emphasis on cars. Brasília never had favelas, but soon after it was built a slum satellite city, called Taguatinga, sprang up nearby. Niemeyer and Costa may have envisaged that the capital’s labourers and construction workers would live in the very houses they built, but their dreams were never destined to come true. The high property prices in the capital proved too prohibitive, and Brasília soon turned into a city for the rich. A splendid architectural idea alone proved to be incapable of eradicating poverty and injustice. Utopian urban projects developed by modernists ended up a failure because they never made room for the full extent of life’s complexities. Fortunately, these talented architects did not commit themselves exclusively to building ‘a brighter future’; they also created unique, expressive, and fluid structures. “For me beauty always comes first,” said Oscar Niemeyer. So he did succeed in one thing beyond any doubt: He invented Brasília’s unique image. And many admired his architecture. In 1987 UNESCO declared Brasília a World Heritage Site, and the British architect Norman Foster has called it “hauntingly beautiful” and “absolutely magical”, “They make life richer for everybody who uses them.”

This capital, built in the desert from scratch, also doubles as a wonderful metaphor for profound changes in a society: ‘We start a new life on Monday! … Granted, this new life is only likely to last until Wednesday evening, or Friday at the latest.’ The same rule applies to cities: they only look perfect on paper. Jan Gehl, a popular urban planner, has even come up with two special terms – ‘Brasília Syndrome’ and ‘Helicopter Urbanism’ – to describe cities based on a plan which looks good from a bird’s eye view, but which does not work on the ground. Gehl also picked a strong word to describe the architects who practise this approach to city planning: he refers to them as ‘birdshit architects.’ The suggestion is that they draw up their plans looking down from high above and, like birds, tend to drop the results of their work on the heads of unsuspecting citizens. The truth is that cities built by modernists do look better from a distance. Large-scale structures separated by open spaces appear particularly stunning when viewed from a car speeding down a freeway. Brasília never managed to become a city in the full sense of the word. According to Ricky Burdett, an urban planner from the U.K., it lacks complexity. Here you will not be able to find the mixture of residential, commercial and business functions characteristic of real cities. Brasília is divided into clear-cut zones and its street life is underdeveloped. 118


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Le Corbusier’s Disciple

© Illustration by August Kunnapu

Oscar Ribeiro de Almeida Niemeyer Soares Filho was born in 1907 in Rio de Janeiro into a well-known and wealthy Brazilian family. His father owned a printing shop and his grandfather was a Supreme Court justice. He inherited his surname Niemeyer from his German ancestors, who had moved from Germany to Portugal in the 18th century. Oscar studied at a prestigious school and went on to pursue his passion at the National School of Fine Arts, where he soon caught the attention of the school’s dean, Lúcio Costa, a devout follower of such European modernist architects as Walter Gropius, Mies van der Rohe and, naturally, Le Corbusier. While still at the school, Niemeyer started working in the dean’s studio. Soon he completed his studies and joined the group of architects who went on to design the Ministry of Education and Healthcare building in Rio de

No4, 2013–2014

Janeiro. The group was headed up by Costa, while Le Corbusier himself – who had already become a cult figure – was brought in as a consultant. In many ways the project was based on Le Corbusier’s ideas: a monolithic reinforced concrete skeleton, free-floor layout, a simple cuboid shape with dull edges, and elongated glass facades. Yet the building had certain features characteristic of the new Brazilian architectural school of thought that soon became synonymous with the name of Niemeyer. Asymmetry, curved forms, the use of different colours and texture in sheeting materials, sculpture, and monumental paintings – all of these features were further developed 119

in Niemeyer’s later projects and became his trademark. At the same time, they were the typical traits of Brazilian modernism, characterised by sensitivity rather than functionality. Niemeyer’s work on Brazil’s pavilion at the World Expo in New York in 1939 brought the young architect new commissions from the United States. He was also successful back home: In the 1940s and early 1950s he completed nearly 30 projects of various scale, from private mansions to large campuses. However, it was his work on the capital city of Brasília that brought him international recognition. Niemeyer died on 5 December 2012, just a few days before his 105th birthday. He continued to work until a very old age. His latest creations included the Museum of Contemporary Art and the People’s Theatre in Niterói in Rio de Janeiro State, an administrative campus in the state of Minas Gerais, the Cultural Complex in Brasília, and his own museum in Curitiba in Paraná State.


urbanism

Seven Pieces of Good News Positive social shifts can occur, and the quality of city life improve, thanks to changes in systems of governance, improved and more efficient infrastructure, and properly developed public spaces. Moscow Urban Forum has prepared a brochure entitled 33 Projects that Changed Cities. BRICS Business Magazine has selected seven of those stories which convey the beauty of efficient solutions and teach us that tangible results can be achieved even in the face of scarce resources.

budget in 1989. Despite the high level of education and life expectancy – by Brazil’s standards – the gap between rich and poor was relatively wide, while one third of the city’s one million residents lived in slums. In an attempt to resolve this problem, the city’s administration invited local residents to take part in managing the budget, or rather the part dedicated to city development, construction, and so on. The system that was proposed back then still works today: Every year different forms of consultation take place – from large-scale district assemblies to taskforce formats. Each district proposes projects that it can benefit from, as well as overall municipal programs. Based on these recommendations the Porto Alegre administration approves its final budget. The civil servants are then entitled to initiate their own discussion and revisit specific ideas, but they cannot turn down these proposals. All in all, about 40,000 city residents are involved in the process. During the first years, the city managed to resolve a variety of key problems: Virtually no districts were left without a water supply, the quality of social housing improved, and education and healthcare budgets have gone up. Since then the participatory budgeting system has been implemented in 140  other Brazilian cities, and other countries are looking into it as well: This September a pilot project was launched in New York City.

Porto Alegre

Since 1989, residents of this city have decided for themselves how to spend some of the money in their budget – and now New York City is taking a lesson from them

Challenge:

adequate distribution of budget funds Solution:

participation of residents in the budgeting process Timeline:

the system was introduced in 1989

The city of Porto Alegre in the south of Brazil gained worldwide recognition as a trailblazer in what is known as ‘participatory budgeting.’ Local residents were first invited to take part in managing the city’s 120


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Medellín

Carhuaz

Beautiful libraries can transform even a city of criminals – if they become a part of a new idea

This small Peruvian city completely revamped its wastemanagement system, saving the local river in the process

Challenge:

Challenge:

a new development vector for a depressed city

waste collection and recycling

Solution:

Solution:

a complex program of change

to develop the system and train local residents

Timeline:

Timeline:

the mayor came up with the new program in 2004

the project continued from 2004 to 2007

This small city on the banks of the Río Santa in Peru was confronted with a waste management problem. The local rubbish collectors would dump nearly 60% of all waste in the river, and only 35% of the city’s residents paid for waste removal and disposal. Peru’s environmental foundation Ciudad Saludable received support and financial aid from international organizations, and proposed to the municipal authorities a solution. The program included several different initiatives: awareness raising, work with teachers and schoolchildren, the establishment of a training center, and changes in the operations of municipal services dealing with waste collection and disposal. Over three years they explained to local residents the difference between organic and non-organic waste, and taught them to recycle. Today 90% of local residents recycle their waste, and 85% pay for waste disposal – which refutes the popular myth that poor people do not concern themselves with environmental issues. Compost centers have been set up, along with relatively environmentally friendly landfills for non-organic waste. By extension there were also changes in the rules governing waste collection and disposal, and a special training center opened its doors as well.

With its population of three million, Medellín is Columbia’s second biggest city. At one time it was considered the most dangerous city on the planet. In the early 1990s, in Pablo Escobar’s drug capital, there were 300 murders for every 100,000 residents. Sergio Fajardo, who became the city’s mayor in early 2004, was elected by local residents who had almost given up hope of seeing any changes. Instead of established politicians, they voted for an architect’s son – a mathematician and journalist by trade – and his group of supporters, which happened to include quite a few architects as well. Fajardo and his team proposed a comprehensive program to modernize the city. The revenues from the city’s main taxpayer – a state-owned company called Empresas Públicas de Medellín – were diverted to reform the education system and repair the city’s schools. They also went to develop squares, parks and public transport, and construct buildings that have since become the city’s new landmarks – with a special focus on libraries. Today one can hardly call Medellín an exemplary city, but much has been achieved. News from Medellín is no longer dominated by crime stories. The murder rate dropped to 29 per 100,000 residents in 2006. Subsequently, tourist numbers went up from 95,000 in 2006 to 151,000 in 2011. No4, 2013–2014

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Ahmedabad

Guangzhou

Ahmedabad’s bus rapid transit (BRT) system has been recognized as the best in India

One of the largest BRT systems in the world is now operational in Guangzhou, China

Challenge:

Challenge:

transport for a large agglomeration

transport for China’s third-largest city

Solution:

Solution:

a bus rapid transit system

a bus rapid transit system

Timeline:

Timeline:

system development began in 2005

the system was launched in 2010

Many new cities have followed the example of Brazil’s Curitiba and introduced a BRT system. In 2009 one was implemented in Ahmedabad in India – a city with a population of six million. By 2035 the Ahmedabad agglomeration is likely to be home to 11 million people, and occupy an area of 1000 square kilometers. By that time the system needs to be fully operational. The project began in 2005 with research focusing on the local residents’ transport needs, as well as the social, economic and technical aspects of implementing a BRT system in the city. A detailed plan was then prepared, which included the routes, the number of buses, and the relevant infrastructure. This plan also took into consideration the errors and successes of the developers of Delhi’s BRT, which had gone through hundreds of adjustments to the original project. Several dozen routes were identified, with technical routes introduced for municipal services providing BRT maintenance. The particular needs of pedestrians, cyclists and rickshaw drivers were taken into account during construction. Tata has designed special buses to be used on the streets of Ahmedabad, costing 50% less than similar vehicles produced by Volvo and Mercedes-Benz. Five lines are currently operational, servicing 75 stops.

The Guangzhou bus rapid transit system became operational in 2010. So far, the system consists of three lines, but these are used by one million people every day, making Guangzhou’s BRT system the second-largest in the world in terms of capacity, just after Bogotá’s TransMilenio. But the records do not stop there: Guangzhou has the world’s longest stops – up to 260 meters – and the shortest intervals between buses – as little as ten seconds. Three stops offer connections to the local metro system, and a bicycle service has been developed in parallel, with bike parking areas and bicycle rental stations located next to bus stops. The buses are managed by seven companies controlled by a special agency, with another agency responsible for system planning and development. Special 18-meter-long buses service the Guangzhou lines, with dedicated lanes provided mainly along the center of motorways, separated from other lanes by both road markings and small curbs.

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Iquique

State of Tocantins

Two houses for the price of one (and a very small price at that): a solution created by Chilean architects

A large-scale housing-construction program takes into account the region’s cultural variations

Challenge:

16,000 families without modern housing Challenge:

Solution:

slums

a program to build affordable housing

Solution:

Timeline:

affordable and adaptable housing

the program was launched in 2000

Timeline:

In the year 2000, the government of Tocantins state in Brazil launched a large-scale program to provide housing to 16,000 families unable to afford a house or a flat on their own. To implement it, the government had to develop a financing system that could raise the required $62 million in investments. But the biggest problem was that the state had never dealt with a project of such complexity before. Even though basic housing parameters (cost of each unit, construction norms) were standardized, each of the 116 prefectures had previously run into its own individual problems related to the availability of construction materials, the qualifications of construction workers, and the customs of local communities. Training centers for engineers, construction personnel and social workers were established within the framework of the program, along with special mechanisms to communicate with local communities, involving them in the construction process, showing them the benefits of housing, and explaining the importance of keeping it in good order. Employees of the program still visit families living in the newly built homes. The sheer scale of the project spurred on other positive changes: new jobs have been created, new schools and hospitals have been built, and an enabling environment has been created for local businesses to develop.

the first community was built in 2003

Researchers and architects from the Elemental architectural practice, headed up by Alejandro Aravena, were commissioned by the Chilean government to design housing for a hundred low-income families. Their budget was $7500 per housing unit, including infrastructure and construction costs. It was obvious to the architects that the usual solution to this problem – to simply build very cheap housing – would ultimately re-create the very slums from which the families were to be relocated in the first place: growing families add new rooms to their already cramped houses using any available materials, and can then no longer connect these to the requisite infrastructure. Elemental developed a different approach, based on a unit with one part ready to house new residents immediately, and another part to be developed by them on their own. The units have all vital amenities, including electricity, running water, and a sewage system. Units are grouped into modules to form small blocks with courtyards, where neighborhood communities can form, helping maintain order both in the houses and in public spaces. Since 2003 the model invented by Elemental has been replicated both in Chile and abroad.

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The Celestial Empire Goes Urban Li Tie China is engaging in a new urbanization spree intended to turn hundreds of millions of former peasants into city dwellers, creating a huge source of long-term economic growth based on domestic consumption.

The new urbanization

After taking office in March, Li Keqiang, China’s new prime minister, clearly indicated that urbanization was among his top priorities. The effort is completely in line with the government’s modernization plan, which will move around 250 million people from rural regions to towns. The ultimate goal is to fully integrate 70% of the Chinese population, or roughly 900 million men and women, into city living by 2025. The primary motivation for the new urbanization push has been to lift the living standards of millions

Li Tie is Director-General of the China Center for Urban Development. This article is based on a speech given at the ‘Summer Davos’ (the Annual Meeting of the New Champions) 2013 in Dalian, China, organized by the World Economic Forum (WEF).

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of ex-farmers, providing them with access to the job opportunities, housing, infrastructure and services that modern cities can offer, as well as to give a new boost to the Chinese economy by changing its structure, with growth based on domestic demand for products rather than on exports. The wisdom here is quite clear. Firstly, there will be a basic need for accommodation, both owned and rented, for the hundreds of millions of former peasants arriving in towns. This will lead to sustainable demand for construction materials, labor and expertise. Secondly, the relocation will set up a longlasting consumption trend due to the integration needs of the new city dwellers, as well as producing many spin-off effects in terms of household and industrial products, home decoration, healthcare, health insurance and other service industries, and education. That said, from the investment and the consumption side there are enormous market opportunities in China that would benefit both domestic and foreign businesses. Last year, in the discussions that we had in Brussels, many people noted that the sheer size of a market of 700–900 million urban residents means quite a different consumption pattern, which will actually spur lots of domestic and international enterprises to come with their money and expertise to our country. As Prime Minister Li Keqiang mentioned, when the enormous Chinese market combines with Western technology, what you have is not a threat of resource competition, but a pool of greater promise that brings broad avenues both for foreign exports and for rapid Chinese development. Indeed we already see a great interest from international investors in the tapping of those opportunities. To give an example, lots of businesspeople are keen to promote the concept of ‘smart cities,’ and wonder how they can get involved in that process in China. The government’s new urbanization plan also calls for clean materials and green energy in new Chinese towns in the future, which provides a huge opportunity for international technology companies to step in.

The government’s new urbanization plan also calls for clean materials and green energy in new Chinese towns in the future, which provides a huge opportunity for international technology companies to step in

for the new urbanization. We also need to allow the market to play its role. I believe future reforms will unleash another investment force, allowing private capital and enterprise to contribute to paying off the costs. But they will be paying it according to the market situation. As to the concerns that this kind of massive investment into new urban areas may inflate bubbles in China’s real estate market, I believe they are probably exaggerated. Yes, it is an undeniable fact that prices, especially in Tier-1 and Tier-2 cities, have been rising too fast. But I have to note the overconcentration of primary resources that we have had, and that we are now starting to see an even bigger gap in resource allocation. Then we can look at Hong Kong or Singapore for why they also have high real estate prices. The answer is probably because there are large numbers of highincome people who can afford it. So in these terms China is completely within a global trend. And finally it is worth noting that urbanization is not necessarily pushing up real estate prices. The current reality is that migrant workers are likely to start by renting an apartment instead of buying one right away; we noticed this around Shanghai. Even in Guangzhou and Beijing over 30% of the rural population’s new urban dollars go to renting around the city centers. Importantly, this will contribute to solving certain problems in China’s real estate industry, because there are a lot of vacant new city apartments that can now be rented out. Summing everything up, I have to admit that in terms of the new urbanization we are facing multiple challenges down the road. Right now we are going through a major adjustment to the organization process. We have to strike a balance between the services and infrastructure provided in urban and in rural areas. We have also noticed that a lot of local governments are very reluctant to push or promote the urbanization process. But I believe that the central government is very clear on this issue: the future urbanization policy will be promoted, and the process is irreversible.

Bubbles under control

The channeling of smart foreign money into China, along with aggressive state investment, is a part of the answer to the question of who will foot the bill No4, 2013–2014

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Slum, Willing and Able Valeriya Khamr aeva The slums of Mumbai have become one of this Indian city’s landmarks. But while filmmakers are telling stories about people trying to get out of them, some researchers claim they are economically vibrant, and do not require heavy-handed reform.

Echanove, members of the urban research collective URBZ, reject the label, saying the term ‘slum’ has a negative impact on the development of the city as a whole. Local residents, they point out, often construct buildings in such territories on their own, meaning the development of the neighborhood dovetails with local needs.

Anthropologist Rahul Srivastava and urban developer Matias Echanove have always been interested in working directly with architects to propose the most expedient urban design projects and to work together to invent new tools to improve them. In an exclusive interview for this magazine, they explained: “We are interested in studying objects moving in the ethnography of local construction, and we try to use architecture as a language that describes the city and its development stages in the evolution process rather than traditional and static.” Dharavi is a Mumbai district widely known for the low-rise buildings covering its entire territory, which many identify as a slum. But Srivastava and

‘There is no slum here!’

Until the middle of the last century Mumbai was in the throes of socialist building projects; then, until the 1990s, it was the only free market in the country. Despite this, the face of the city was shaped by the general trends common to all metropolises, regardless of their economic orientation. In the 128


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the original typology of buildings, around which people began to build their own, and could not define where was the municipal part and where a suspended one. We talked with the residents of the municipal house, and they told us about the ‘self-development communities agreement’ they reached with the government.” People had demonstrated their willingness to take matters into their own hands – and this was a powerful redevelopment trend in Mumbai. “Slums are often perceived as a raw material, a big amount of it, which is ready for conversion. The construction of high-rise buildings begins  – which is typical for an abstract modern city. But residents are struggling with it, and develop an area in a different way, with their own tools, using their own vision and ideas about the way they want to live,” says Echanove. Living conditions are improved by building new structures on top of existing ones, or redeveloping buildings, without permits from regulatory bodies or the administration. These districts no longer qualify as slums because there is a certain logic to their development which makes them convenient locations for people to live in.

1950s and 60s, local residents preferred highrises. Now, however, the majority (approximately 60%) live instead in the so-called slums, which Srivastava and Echanove refer to as “buildings on the ground.” If you walk through the city districts today you can easily turn a corner and find yourself in a residential low-rise neighborhood. The old and the new alternate and co-exist here, and the urban developers believe this helps the city to transform itself. These ‘buildings on the ground’ take up less than 15% of all land earmarked for construction in the city, but they are occupied by more than half the city’s population. It is hardly surprising therefore that, in these neighborhoods, two- or three-story buildings are chockablock: the population density is incredibly high. Districts like Dharavi are often described as dirty, backward or even atavistic. But local residents do not consider themselves to be ‘bottom-dwellers.’ “We were searching for slums and everywhere faced the same. In every neighborhood, residents said, ‘There is no slum here!’ They don’t think their house is situated in a slum,” the URBZ researchers say. The residents of one district insisted that they were the descendants of Portuguese fishermen who had settled there long before the English came. In a different neighborhood, locals claimed they lived in houses built by the state that had been slightly improved, and hence did not qualify as ‘squatter’ developments. In a third neighborhood, the residents confirmed they had indeed lived in slums in the past, but were later relocated to their current district. Only in the fourth neighborhood did inhabitants openly admit that they lived in a slum. “But when we close the door,” they said, “the slums remain on the outside and what is inside is our home.” Dharavi is a symbolic area for Mumbai. It illustrates not only the city’s ability to respond to the needs of its residents, but also the readiness of locals to solve problems on their own. Looking at the way of life in Dharavi, Srivastava and Echanove came to understand why it is that its citizens believe that they live in a normal environment. “We found ourselves in an old independent municipality,” they told me. “There were barracks for the workers there, which were built by the government and were given up on lease. We met with representatives of the municipality, examined №4, 2013–2014

A home for work

The people of Dharavi have made the so-called ‘tool-house’ a norm. This type of building combines a living space with a workspace. The first (ground) floor may house a small store and bedrooms; the second floor may be occupied by a workshop and living quarters. If you add a third floor to this structure, the total area may reach 70 square meters. Around ten people can live and work in each of these homes. Srivastava and Echanove say that there are no free spaces in Dharavi; every square meter is used for something. In contrast, in the rest of Mumbai there are nearly 500,000 unoccupied apartments. In reality, neighborhoods that are commonly thought of as poor or struggling are very productive economically. In every tool-house there is a retail store, a workshop, a dormitory or a restaurant. Families tailor clothes, make shoes, bags, or jewelry: these are the most common forms of employment in the slums. In 2010, $500–650 million worth of goods made in Dharavi were shipped for export. According to the researchers, the local residents’ main problem is that they do not have any free time. 129


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Districts like Dharavi are often described as dirty, backward or even atavistic. But local residents do not consider themselves to be ‘bottom-dwellers.’ “We were searching for slums and everywhere faced the same. In every NEIGHBORHOOD, residents said, ‘There is no slum here!’ They don’t think their house is situated in a slum,” the URBZ researchers say

housing problem in the slums by building highrises, thinking that residents will find them better. But Srivastava and Echanove beg to differ, claiming that the unique identity of such districts needs to be preserved: “Slums reproduce a discourse that represents existing space as something alive, developing and transforming by residents using minimal interference from outside.” The URBZ team has even found similarities in the development of Dharavi with that of Japan’s capital. “Until 1990 houses in Tokyo were built locally, using local teams and developers,” says Echanove. “It is an interesting example of what can happen if you choose local construction. After the war, Tokyo was absolutely destroyed, but the city recovered very quickly. High-rise buildings were built and are now spontaneously occurring areas that are slowly getting better. Stimulation of economic development led to the creation of new districts.” Even if skyscrapers were to be built to replace the low-rises, the Mumbai population would still not comfortably fit into them. URBZ insists this means more emphasis should be placed on the way of life local citizens consciously choose and find comfortable: renewal, rather than designing housing from scratch.

The building of tool-houses is an economically efficient activity. Construction processes are well organized; you can clearly trace the interactions between residents, contractors and clients. Each house is custom built according to the owner’s specifications by a team of contracted construction workers. No written contracts exist between workers and owner; nobody prepares any drawings or plans. Yet every house is built to a specific design, with all details agreed verbally, while the construction is undertaken by experienced specialists. According to URBZ, the Dharavi construction industry’s annual turnover is estimated at $20–30 million. They also estimate that about 10% of this is paid to various officials to turn a blind eye to the changes in the neighborhood. The myth that slums are simply a place where the poor sleep on the floor is just that – a myth. The residents of Dharavi must pretend they are poor, because any construction in the slums is against the law. To avoid unnecessary suspicions the locals disguise their houses, covering robust brick-andmortar walls with cardboard, and making new houses look older to fool officials. The researchers claim that on the inside they are on a par with middle-class houses. The Indian authorities, following the example of many other countries, are trying to solve the 130


Slum, Willing and Able

Three criteria for an ideal city According to consulting firm McKinsey & Company, by 2030 60% of the world’s population will be living in cities. While this could spell great economic opportunities, how should cities best respond? A recent McKinsey report, How to Make a City Great, confirms the old truth that there is no universal recipe for all, but it does lay out three recommendations mayors would do well to take heed of. Balanced well, these three priorities could help create a comfortable living environment in even the toughest metropolis.

1.

2.

Impressive economic indicators are important, but they do not automatically make a city comfortable to live in. More often than not, economic growth causes environmental damage which can ultimately cost quite a bit to fix. According to McKinsey, smart growth means finding better opportunities for economic development – taking into account the needs of the populace and the environment – and is based on the premise that city residents like the path they have chosen. The report says cities should invest in the kinds of infrastructure that reduce industrial emissions and waste, and in high-density housing. It also suggests that conscientious city planners should focus on harmonizing growth with adjacent regions; as a metropolis expands, co-operation with neighboring municipalities and regional services becomes more and more important.

According to McKinsey, “Great cities secure all revenues due, explore investment partnerships, embrace technology, make organizational changes that eliminate overlapping roles, and manage expenses.” The report also encourages the wise use of privatepublic partnerships to raise the quality of infrastructure and services.

“Achieve smart growth”

№4, 2013–2014

“Do more with less”

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3.

“Win support FOR changes”

McKinsey recognizes that badly managed changes can sometimes elicit resistance from citizens and businesses. They recommend that city leaders “build a high-performing team of civil servants, create a working environment where all employees are accountable for their actions, and take every opportunity to forge a stakeholder consensus.”


practice

How to Beat China in China Phil Leung, Weiwen Han and R aymond Tsang Only about a quarter of Fortune 200 companies will rely solely on organic growth in China. As companies gain experience in M&A and joint ventures, they are finding the best approaches – and quickly adapting.

China is as challenging to global companies as it is important. Even when the economy cools down, it is creating opportunities for scale that are unmatched anywhere else. Already it is the number one market in a host of industries, including automobiles, home appliances, and mobile phones. It is also emerging as a leading profitable growth engine for multinational companies (MNCs). In a recent American Chamber of Commerce in China survey, 68% of MNCs are reaping margins in China that are comparable with or higher than worldwide margins. But as Groupe SEB, Carlsberg, and countless other companies have learned, winning by going it alone is not easy. The competition has never been tougher, as a new generation of domestic companies – local champions – is quickly setting the standard for low-cost ‘good-enough’ products. MNCs need to measure up or they will fall behind. And with so much competitive pressure, they need to do it fast. Chinese players are showing how easy it is to outpace MNCs. In consumer goods, local company Hosa overcame Italy’s Arena to become the number one seller of swimwear by targeting the mass market. In healthcare, domestic ultrasound manufacturer Mindray became the number one player by using technology that was reliable but less advanced, and

French appliance manufacturer Groupe SEB and Danish brewer Carlsberg sell in vastly different industries, but they both had similar experiences trying to get ahead in the treasure chest that is China. In 2002, Groupe SEB was inching forward – growing by, at most, 0.2% a year – and it was the 32nd-ranked company in its segment in China. Carlsberg was also at the bottom of the pack, a small player with less than 1% market share, with no clear path to a sustainable position. Then both companies got serious. In 2006, Groupe SEB started buying shares in China’s leading appliance manufacturer, Supor, a move that steadily and dramatically increased its market share. The company leapfrogged to 5th place by 2010. For its part, Carlsberg started acquiring or partnering with Chinese local breweries. The brewer has watched inorganic volume grow at a compound rate of 43%, and achieved organic growth of 31% from 2002 to 2011 when, according to Euromonitor, it became China’s 10th-ranked brewer, with a focus on Western China, where it is the market leader. Phil Leung, Weiwen Han and Raymond Tsang are partners in Bain & Company’s Shanghai office and members of its Mergers & Acquisitions practice. 132


How to Beat China in China

often focus their efforts on non-top-tier cities, where much of the growth is taking place. Of the ten toothpaste brands with the most penetration in Tier-2 cities, seven are local. A local company may have a 5,000-member onthe-ground sales force in high-growth Tier-2 to Tier-5 cities, something that would take years for an MNC to replicate. Buying a Chinese company gives an MNC access to key channels and large accounts – increasingly critical for success in China. In addition, Chinese companies often have a low-cost distribution network, which is particularly important for goodenough or mid-market products, where distribution has a higher share of the total costs. And when it comes to filling portfolio gaps, MNCs can use a domestic player’s strong local brand to address a broader customer base – adding different price segments or adjacent product segments. U.S.based medical device maker Medtronic has used M&A in large part to expand into new segments in China, beginning in 2008 when it set up a joint venture with Shandong Weigao Group, a major medical equipment company in China, to develop and market Medtronic’s vertebral and joint products. In 2012, Medtronic announced the acquisition of local Chinese orthopedics company Kanghui for more than $700 million. As MNCs look for the best deals to help them gain these and other capabilities that can enable them to grow fast, they are finding out what works and what doesn’t. A well-devised system for joint ventures or acquisitions can be the single biggest contributor to a company’s growth in China and a key enabler of building a leading market position; a less-diligent approach can derail expansion. From our experience with clients in a range of industries in China, we have determined some approaches that boost the odds of inorganic growth success.

by offering 30% to 40% lower prices than similar models from MNCs. Mergers and acquisitions (M&As) and joint ventures ( JVs) have always been options for success in China, and in restricted industries like banking or insurance, there is still no alternative. In those cases, deals not only allow a company to operate in China but may also give the MNC access to important government contracts. But the pace of deals has dramatically intensified outside of restricted industries. Every week seems to bring with it announcements of new joint ventures or merger deals. Only around 25% of Fortune 200 companies are relying on organic growth in China. Increasingly, the deals are becoming transformative for the companies involved, providing upstream activities, research and development (R&D), intellectual property (IP) contributions, core capabilities sharing, and other means of advancing in China. In addition to the original intention of gaining regulatory access, MNCs are turning to inorganic growth to lower costs for both domestic production and exports, fill portfolio gaps, and strengthen their go-to-market capabilities – all areas in which domestic players typically have the edge. Costs: feel the difference

Let us start with cost levels. It is no secret that local players benefit from less stringent specifications, cheaper raw materials,lower labor costs and lower back-office overhead costs. The difference in production costs in China is sometimes staggering. In both swimwear and carpets, for example, analysis shows that one local company’s unit costs for local production are 40% less than that of a leading MNC competitor’s production in China. In medical devices and cell phones, comparisons between a local player and an MNC show that costs are 20% less for the domestic company. It is virtually impossible to replicate a Chinese company’s cost structure. That is one of the major reasons why Japan’s Hitachi Ltd. has entered no fewer than 36 joint ventures, M&As or partnerships in China to piggyback off the low-cost manufacturing of partners like Haier and Shanghai Electric. And consider Chinese companies’ go-tomarket approaches. Unlike their multinational counterparts, domestic players typically have extensive built-in distribution networks, and they No4, 2013–2014

Why this deal?

In China as elsewhere, one of the keys to a deal’s success is to start out by knowing exactly what you hope to gain. Begin with a growth strategy that clarifies how M&A will enable growth, and then develop a prioritized target list – keeping in mind that in China deals may arise opportunistically. A ‘deal thesis’ spells out the reasons for a deal – generally no more than five or six key arguments for why a transaction makes compelling business sense. According to a Bain & Company survey of nearly 133


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1

Formats for inorganic deals should be evaluated based on potential value and need for control M&A Instant access to Hsu Fu Chi Chinese-style snacks

Potential engagement value ŦŦ Breadth of capability required

Network in Tier-2/Tier-3 cities

Nestlé ↓ Hsu Fu Chi

CRE + SABMiller ↓ CRB

ŦŦ Depth of collaboration ŦŦ Scope of cooperation ŦŦ Length of partnership Postal Savings Bank of China + GTZ

Gain supporting role in rural retail bank expansion

Alliance

250 global executives, an acquirer’s management team had developed a clear investment thesis early on in 90% of successful deals. A deal thesis articulates on one page the business fit, strategic importance, acceptable valuation range, key risks, and potential integration issues. Achieving profitable growth in China is increasingly difficult. When MNCs can’t reach their strategic goals organically, they turn to joint ventures and M&A. In China, few companies have been as systematic in the use of a deal thesis as China Resources Snow Breweries (CRB), the SABMiller and China Resources Enterprise joint venture. Since joining forces in 1994 (SABMiller owns 49%, China Resour­ ces controls 51%), the joint venture has completed dozens of regional brewery acquisitions in China, integrating brands and operations. Dra­wing on more than 115 years of brewing experience and more than 200 brands across 75 countries, SABMiller brought its significant brewing expertise and low-cost experience to the table, as well as its ability to quickly integrate and consolidate new acquisitions to create scale. China Resources brought its local market knowledge and key relationships. When the joint venture looks for acquisitions, it evaluates whether – and how – SABMiller’s and China Resources’ strengths can be used to make the deal a success. SABMiller offers M&A capability, a systematic approach to managing post-merger integration complexity, and experts who maintain stringent quality control via lab tests

Need for control ŦŦ Value new entity will create ŦŦ Likelihood of success if wholly owned ŦŦ Possibility of losing core assets ŦŦ Willingness to take full investment risk

and factory visits. China Resources contributes a local network that serves as a source for promising deals, and strong government relationships that ease approval processes. Consider how the joint venture built Snow beer into a single national brand. Acquired brewers’ production capacity was converted to Snow beer, which is now produced across 22 provinces. Snow is the best-selling beer in ten provinces and cities. The joint venture enhances local brewing operations with new equipment, imports CRB’s best practice management systems, and centralizes functions to achieve benefits of scale. For example, 90% of procurement costs are centralized. Using its proven M&A approach – which always starts with a deal thesis – China Resources Snow has outgrown the competition to become the clear market leader, with a 21% share of China’s beer market. It is now the world’s number one beer brand by volume. How to get there

Once a company understands why it’s doing a deal, the next big decision involves whether to embark on a joint venture or acquire majority ownership 134


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2

Engagement-control framework definitions

Potential engagement value

Need for control

Breadth of capability required

ŦŦ The more capabilities required to be invested for the success of the partnership, the higher the engagement needed

Value new entity will create

ŦŦ The revenue, assets (e.g. IP), etc., that the new entity is expected to create ŦŦ Higher control is needed to realize higher expected value creation

Depth of collaboration

ŦŦ Across the entire value chain, or focusing on only part of it? ŦŦ Deeper collaboration requires more engagement

Likelihood of success if MNC is wholly owned

ŦŦ The higher the likelihood an MNC could succeed independently, the less it needs to rely on a Chinese partner, and the more it can demand control in the partnership.

Scope of cooperation

ŦŦ For one project only, or for multiple projects? ŦŦ Bigger scope of cooperation requires more engagement

Possibility of losing core assets

ŦŦ Higher control is needed if there isa high likelihood of losing core assets, e.g. IP and know-how

Length of partnership

ŦŦ For one-off short-term cooperation, or an enduring long-term relationship? ŦŦ Longer-term partnerships require higher engagement

Willingness to take full investment risk

ŦŦ A higher risk-taking preference for large investments requires higher control; being more riskadverse leads to lower control

the willingness to take the full investment risk. The higher the value and need for control, the more likely M&A is the best option. Whenthe engagement value and need for control are relatively low, it is wise to consider JVs. Whichever path a company takes, its odds of winning improve greatly by taking a rigorous, replicable approach to succeed and mitigate risks.

through an M&A. Both have been successful paths to growth for companies in China. Bain & Company has developed a framework for helping companies decide which of the two options is most appropriate, based on two factors: the potential value the deal can bring, and the MNC’s need for control (see 1 and 2). Companies ask and answer a series of questions designed to help them clearly understand the potential engagement value and level of control required. For example, determining the potential value means looking into the breadth of the capability required, depth of collaboration, scope of cooperation and length of the partnership. Assessing the need for control requires determining the value the new entity will create, the chances of success if the MNC advances on its own, the possibility of losing core assets such as IP – a serious consideration for foreign companies operating in China – and

Venturing jointly

In dozens of sectors, ranging from healthcare to finance, government restrictions make JVs the only feasible option – and some have been highly profitable. But when many MNCs in unrestricted industries consider venturing with Chinese players, they often stop cold when they spell out the potential challenges. The list is long: misaligned agendas between the global and local players; poor governance or organizational control among 136


practice

1 Five Steps to Success How to build relations for a Chinese joint venture (following the example of one European company)

Create a differentiated setup for different strategic product types. For commoditized products, the joint venture operates along the entire value chain under its IP license. But for high-end products, the joint venture acts as an original equipment manufacturer,with the company maintaining strict control over R&D, sales, and after-sales service.

2

Provide partner-desired assets and capabilities. For example, the European company provides technology transfer to the JV on commoditized products, enabling the JV to compete in good-enough, high-volume market segments.

approach to build a solid foundation for the joint venture (see Five Steps to Success).

the players; contract noncompliance; technology infringement; and the risk that the partner may become an eventual competitor in the same market. That is why the approach needs to be tailored to China’s unique opportunities and risks. Joint ventures require careful screening of potential candidates to address the tricky issues early as part of contract negotiations and joint business planning, and agreement on key business drivers and ongoing management and monitoring. That was the approach taken by a European manufacturer of heavy industrial equipment. The company knew it had to win in China – it was essential to winning globally – but faced strong competition from Chinese players with good-enough products. It decided to set up a joint venture to improve its cost competitiveness and local reach. To protect itself against the loss of IP, it focused most of its efforts on products with low IP sensitivity. The company maintained its portfolio of high-end products, but used the joint venture to help it control costs to the point that it could achieve its desired margins. One of the reasons players have resisted joint ventures in the past has been the fear that such deals take a long time to close – and that results are slow to be achieved. In our experience, when done right, joint ventures deliver successful outcomes relatively quickly. The European heavy industrial equipment company set up its JV with a Chinese company less than a year after signing a letter of intent. Key to the success of any deal is to clearly understand what each party brings to the table, and to ensure the joint venture will accommodate the unique needs of each party. The European company used a five-step

Turning to M&A

The challenges for companies pursuing M&A in China are well known. One of the biggest obstacles is that it is a market in which good target companies are hard to find. About 75% of deal activities are sourced from proprietary networks or brokers, and the success rate for closing deals is low – less than half the rate of closing in the United States. Due diligence poses thorny problems due to the lack of transparency and established accounting and financial reporting processes, and it is also a lengthy process. Valuations are high, and post-acquisition improvements are hard to achieve, as cultural differences create integration challenges and the top management drain hurts target value and employee morale. Meanwhile, approaches that work in other regions – to simply adopt the acquirer’s best practices and expertise, for example, – often don’t work in China. Again, companies that succeed begin with a clear strategy and investment thesis. They also have an integration thesis and process that is designed to capture the key elements of the deal thesis while simultaneously managing the risks. They know what they are looking for and how it will fit with their strategy. They know how they plan to integrate it, if at all. They carry out systematic screening. Only then are they positioned to make a disciplined investment decision. Consider the case of a multinational spirits company that saw M&A as its only chance to gain 138


How to Beat China in China

3

Pressure-test assumptions and look for potential operational hurdles that could affect the JV’s success. The European company and Chinese partner collaboratively considered everything from land site value to the capacity to support joint venture sales targets.

4

Agree on the important details. Both companies invested significant time reaching agreement on many details that would be critical to the JV’s success. This spanned everything from the appointment of the chairman, board of directors, CEO and leadership team, to pricing issues, to the valuation of in-kind contributions.

5 Build an implementation plan and lay out critical steps for the joint venture setup and full operation. A steering committee is charged with making organization design and other key decisions, while the program management office is responsible for implementing those decisions and facilitating the transition to the joint venture structure. Among the most important factors to get right are dispute resolution and exit mechanisms, in case the joint venture veers off course.

a deal will be killed. Lastly, they use an incentive system to drive the right deals – not just any deal. This approach is the reason Dutch chemicals and life sciences group Royal DSM is now on a winning path in China. The company relies on a team with deal and frontline experience. Separate teams are responsible for medium to large M&A deals like the 2005 acquisition of Roche (Shanghai) Vitamins; early-stage and expansion deals like the 2008 equity investment in Tianjin Green Bio-Science; and IPbased transactions such as licensing agreements. Teams repeatedly execute M&A deals, carefully following an institutionalized process as they fulfill well-defined responsibilities. For example, in larger deals, the China business development team is responsible for identifying synergies and integration costs and risks, while the China strategy and acquisition team arranges deal structuring and finance. Institutionalizing its M&A capability has allowed Royal DSM to make acquisitions the driving force behind its growth strategy in China. Before embarking on its acquisition strategy, China represented only 4% of the company’s total revenues. By 2010, China had grown to contribute 10% of its global total, according to data from Capital IQ. The company’s first big stepwas realizing it couldn’t capture Chinese potential on its own. Now that it has perfected the M&A process, the opportunities ahead for Royal DSM are as vast as China itself.

scale in China, where there was relatively little demand for its high-end and premium brands. The company thoroughly screened adjacent sectors to assess and prioritize opportunities, looking at companies in different price segments, psychographic segments and demographic segments, among others. With 1,400 companies in selected sectors, it first screened candidates by size, only evaluating the top 50 players in selected segments. The company then screened for regional market position and price segments (it looked at high-growth segments where they could potentially shift to premium offerings). Finally, it considered availability, narrowing its list further to include only companies with no equity investment from other strategic investors. After making field visits, it then short-listed companies based on business fit, willingness, and business attractiveness. Finding the right acquisition candidate is one thing, but the process of planning and executing integrationcan make or break a deal. Companies need to designan explicit, pragmatic, integration blueprint, and targetsto unlock value. In our experience, companies that get M&A right benefit from an institutional M&A capability: they build a dedicated core M&A team with the right transactional experience. They involve product line staff early on and make them accountable for longterm results. They set clear M&A policy and target assessment criteria, and they know when to walk away from a deal, determining the price at which No4, 2013–2014

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Admit It. You Love Cheap Clothes and You Don’t Care About Child Slave Labour Gethin Chamberlain Despite a series of revelations for The Observer about the brutal conditions in garment factories, companies, Western consumers and India are still complicit in turning a blind eye.

little fingers to put them together. There is much outrage, WKC professes its horror that it has been let down by its supply chain and promises to make everything better. And then nothing happens. WKC keeps making shiny, pretty things and people keep buying them. Because they love them. Because they are cheap. And because they have let themselves be bewitched. I revealed how poverty wages in India’s tea industry fuel a slave trade in teenage girls whose parents cannot afford to keep them. Tea drinkers

Until three years ago I did not believe in magic. But that was before I began investigating how Western brands perform a conjuring routine that makes the great Indian rope trick pale in comparison. Now I’m beginning to believe someone has cast a spell over the world’s consumers. This is how it works. Well Known Company makes shiny, pretty things in India or China. The Observer reports that the people making the shiny, pretty things are being paid buttons and, what’s more, have been using children’s nimble 140


© The Observer / The Interview People

Admit It. You Love Cheap Clothes And You Don’t Care about Child Slave Labour

were naturally upset. So the ethical bodies that certified Assam tea estates paying a basic 12p ($0.19) an hour were wheeled out to give the impression everything would be made right. For many consumers, that is enough. They want to feel that they are being ethical. But they don’t want to pay more. They are prepared to believe in the brands they love. Companies know this. They know that if they make the right noises about behaving ethically, their customers will turn a blind eye. So they come down hard on suppliers highlighted by the media. They sign up to the certification schemes – the Ethical Trading Initiative, Fairtrade, the Rainforest Alliance and others. Look, they say, we are good guys now. We audit our factories. We have rules, codes of conduct, mission statements. We are ethical. But they are not. What they have done is purchase an ethical fig leaf. In the last few years, companies have got smarter. It is rare now to find children in the top level of the supply chain, because the brands know this is PR suicide. But the wages still stink, the hours are still brutal, and the children are still there, stitching away in the backstreets of the slums. Drive east out of Delhi for an hour or so into the industrial wasteland of Ghaziabad and take a stroll down some of the back lanes. You might want to watch your step, to avoid falling into the stinking open drains. Take a look through some of the doorways. See the children stitching the fine embroidery and beading? Now take a stroll through your favourite mall and have a look at the shelves. Recognise some of that handiwork? You should. Suppliers now subcontract work out from the main factory, maybe more than once. The work is done out of sight, the pieces sent back to the main factory to be finished and labelled. And when the auditors come round the factory, they can say that there were no children and all was well. Because audits are part of the act. Often it is as simple as two sets of books, one for the brand, one for themselves. The brand’s books say everyone works eight hours a day with a lunch break. The real books show the profits from 16-hour days and no days off all month. Need fire extinguishers to tick the safety box? Hire them in for the day. The lift is a deathtrap? Stick a sign on it to say it is out of use and the inspector will pass it by. The dark arts thrive in the No4, 2013–2014

In the last few years, companies have got smarter. It is rare now to find children in the top level of the supply chain, because the brands know this is PR suicide. But the wages still stink, the hours are still brutal, and the children are still there, stitching away in the backstreets of the slums

inspection business. We, the consumers, let them do this because we want the shiny, pretty thing. And we grumble that times are tight, we can’t be expected to pay more and, anyway, those places are very cheap to live in. This is the other part of the magic trick, the Western perception of the supplier countries, born of ignorance and embarrassment. India, more than most, knows how to play on this. Governments and celebrities fall over themselves to laud India for its progress. India is on the up, India is booming, India is very spiritual, India is vibrant. Sure, the workers are poor, but they are probably happy. No, they are not. India has made the brands look rank amateurs in the field of public relations. Yes, we know it is protectionist, yes, we know working conditions are often diabolical, but we are in thrall to a country that seems impossibly exotic. Colonial guilt helps. The British in particular feel awkward about India. We stole their country and plundered their riches. We don’t feel able to criticise. But we should. China still gets caught out, but wages have risen and working conditions have improved. India seems content to rely on no one challenging it. India’s powerful planning commission claimed that poverty was at a record low of 21.9% of the population. It did so on the basis that people could live on 26 rupees (29p – $0.47) a day in rural areas (33 rupees in urban areas). Many inside India baulk at this. Few outside the country did so. But times are tough, consumers say. This is the most pernicious of the ideas the brands have encouraged. Here’s some maths from an Observer investigation last year in Bangalore. We can calculate that women on the absolute legal minimum wage, making jeans for a WKC, get 11p ($0.18) per item. Now wave your own wand and grant them the living monthly wage – the £136 ($218) the Asia Floor Wage Alliance calculates is needed to support a family in India today (and bear in mind that the women are often the sole earners). It is going to cost 141


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India’s powerful planning commission claimed that poverty was at a record low of 21.9% of the population. It did so on the basis that people could live on 26 rupees (29p – $0.47) a day in rural areas (33 rupees in urban areas). Many inside India baulk at this. Few outside the country did so

wearing something stitched by kids kept locked in backstreet godowns, never seeing the light of day, never getting a penny. I want to feel clean. And I want the big brands and the supermarkets to help me feel clean. I want people to say to them, “You deceived us. You told us you were ethical. We want you to change. We want you to police your supply chain as if you care. Name your suppliers. Open them to independent inspection. We want to trust you again, we really do, because we love your products. Know what? We don’t mind paying a few pennies more if you promise to chip in too.” And here’s the best part: I think they would sell more. I think consumers would be happier and workers would be happier. And if I can spend less time trawling through fetid backstreets looking for the truth, I’ll be happier.

a fortune, right? No. It will cost 15p ($0.24) more on the labour cost of each pair of jeans. The very fact that wages are so low makes the cost of fixing the problem low, too. Someone has to absorb the hit, be it the brand, supplier, middleman, retailer or consumer. But why make this a bad thing? Why be scared of it? Here is the shopper, agonising over ethical or cheap. What if they can do both? What if they can pluck two pairs of jeans off the rail and hold them up. One costs £20 ($32). One costs £20.15. It has a big label on it, which says, “I’m proud to pay 15p more for these jeans. I believe everyone has the right to a decent standard of living. My jeans were made by a happy worker who was paid the fair rate for the job.” Go further. Stitch it on to the jeans themselves. I want those jeans. I want to know I’m not 142


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Gethin Chamberlain’s Three Years of Revelations The Observer revealed this summer how tea pickers in Assam are paid a basic 12p ($0.19) an hour to supply all the major tea brands. Certification groups, including Fairtrade and the Ethical Trading Initiative, which had allowed the brands to claim ethical status, immediately welcomed the investigation and called for industrywide action to tackle poverty pay.

August 2010 We revealed how factories supplying some of the biggest names on the British high street were making workers put in up to 16-hour days. Marks & Spencer, Gap and Next all launched inquiries and pledged to end excessive overtime.

March 2012 Working with War on Want, we revealed how Bangladeshi workers producing sportswear for Olympic sponsors Adidas, Nike and Puma were beaten, verbally abused, underpaid and overworked. The companies promised action.

No4, 2013–2014

November 2010 We revealed how Monsoon, the fashion chain that pioneered ethical shopping, used suppliers in India who employed child labour and paid workers below the minimum wage. Its global ethical trading manager urged the Indian government to tackle the issue. The company insisted it had a “long-lasting and passionate commitment to ethical trade.”

August 2012 The Observer, working with Indian anti-trafficking group Bachpan Bachao Andolan, revealed how boys as young as seven were sold to slave traders for work in the sweatshops of Delhi. Soon after the investigation, India’s government introduced new laws against child labour.

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April 2011 We revealed how workers in China making iPhones and iPads for Apple suffered from illegal working hours and were made to write confession letters for minor misdemeanours. Foxconn, the Apple supplier, said it was trying to improve working conditions.

November 2012 We revealed claims that women in India who failed to hit impossible targets while making clothes for British high street names were berated, called “dogs and donkeys,” and told to “go and die.”


finance

Alternative Brazil Eugenia Slouchak Investments made by high-net-worth Brazilian individuals into hedge funds are double the average in the rest of the world. Almost one quarter of every large Brazilian investor’s portfolio is accounted for by alternative investments. The reason behind this is the transparency of this industry and strong government regulation.

its strategy may include transactions with direct investment funds and other classes of assets banned under Rule 409/04 of the CVM (Comissão de Valores Mobiliário), the Securities and Exchange Commission of Brazil. Today there are 76 hedge funds and seven funds of funds in Brazil. They manage nearly $126 billion. Over a period of seven years (2004–2011), hedge funds showed 1003% growth denominated in Brazilian Reals (approximately 1020% in U.S. dollars). For the sake of comparison, fixed income funds showed only 22.26% growth over the same period, while the funds that invest in shares grew by 177%. Hedge funds represent the fastest-growing industry in Brazil’s securities market. This phenomenon is driven by two main factors: lower interest rates, and a great number of independent investment management companies not linked to any Brazilian or foreign banks. The overnight rate (SELIC – Brazil’s Special Clearance and Escrow System), which was in excess of 40% in 1999, went down to 12% in 2007 and dropped to a mere 8.5% by August 2013. Even though interest rates in Brazil are among the highest in the world, this significant yet stable drop had a serious impact on the state of the country’s economy. One of the consequences was a decrease in the profits of fixed income funds that invested a majority of

As a matter of law, hedge funds in their traditional sense are banned in Brazil. The use of investment tools with the high level of liquidity and diversification that are required by hedge funds to achieve their objectives is strictly regulated in Brazil. Funds (except for private capital funds, accounts receivable, and real estate transactions) are only allowed to acquire assets registered with over-the-counter (OTC) trading systems or stock exchanges, and may not acquire shares from private funds or those that are not quoted on the market. Therefore it is the so-called multimercado (multimarket) funds that come closest to a hedge fund in Brazil. These structures are allowed to invest in more than one class of asset, and the level of diversification available to them is higher compared to other types of funds. However, not even multimercados can invest in unlisted assets, funds, real estate or derivatives that are not registered with the stock exchange or OTC markets. Yet there is some sort of exception: if a multimarket fund operates with qualified investors only, Eugenia Slouchak is Managing Partner at Europe Finance.

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their assets in sovereign bonds. Brazilian investors realised that the new market conditions spelled more risk for them if they wanted to retain the same level of income; this ushered in a legitimate increase in investments in hedge funds.

Brazil’s securities market is one of the safest and most transparent in the world. It is virtually impossible to hide anything from the regulatory bodies and investors Regulation and reporting

In many other countries, governments treat hedge funds with thinly veiled contempt at best; Brazil’s government is certainly much friendlier. Hedge funds in Brazil are viewed as a source of investment in the private sector. One of the reasons behind this attitude probably lies in the fact that alternative investment funds are allowed to take banking loans for a limited time only and subject to huge interest rates, which prevents them from accumulating liabilities that would be many times greater than their assets. Hedge funds tend to use more risky instruments compared to other types of funds; however, in Brazil, the industry’s safety level is much higher than in other countries. The country’s securities market is one of the safest and most transparent in the world. It is virtually impossible to hide anything from the regulatory bodies and investors. All funds operating in the Brazilian market are obliged to submit information to the CVM on the net value of their assets on a daily basis, along with monthly reports on the state and composition of their portfolios. This information is published on the CVM’s website and is available to the public. The CVM also maintains strict requirements with respect to the level of liquidity, susceptibility to various risks, and adjustments and recalculations of various assets and their net value. Investment managers disclose their positions every month, which makes this market far more transparent. This indicator is several times greater than in the United States, where such information on positions is submitted to the Securities and Exchange Commission every six months. Further, in Brazil all oversight, regulatory and administrative functions are performed by different organisations. This form of regulation protects the industry and at the same time makes its life more difficult. Given such a degree of transparency, everyone knows what is going on in their competitors’ back yards, although the market’s close-knit nature and its small size also play a role. Investment managers simply do not have that much leeway, so they all do pretty much the same thing.

Strategies

Brazil’s industry cannot boast a multitude of different investment strategies: 12 hedge funds use multiple strategies, 15 gravitate towards micro investments, and one opts for targeted investments in the market for fixed-income instruments. The remaining investment managers tend to lean towards hedged positions in shares. This all leaves very little room for investment manoeuvring in Brazil. For instance, there are 5,700 publicly traded companies in the United States, whereas Brazil boasts only 467. Ten positions account for 50% of the entire market value of Bovespa (the São Paulo stock exchange). Therefore, over time, the following overall approach has been developed. Managing companies generate their portfolios based on the so-called ‘Brazilian package’ principle, with most of their assets invested in fixed-income sovereign securities. They then open their positions in foreign exchange, bonds and Brazilian shares. This strategy spells low liquidity, yet it brings good profits thanks to high interest rates. This situation was brought about by the fact that, historically, levels of volatility and inflation on the Brazilian market have always remained very high, and Brazilian investors do not agree with having their money blocked for long periods of time. Therefore many funds have to provide their clients with daily liquidity, which does not enable them to use more flexible strategies and resort to non-liquid positions. External investors, attracted by impressive growth and income levels, battle for an opportunity to invest with Brazilian hedge funds, often agreeing to have their money blocked for two to three years. However, the market in Brazil still remains relatively close-knit. Size literally does matter here: the largest funds in the country are afraid that if they continue to increase their assets, ultimately their operations may distort the markets. That is why pension funds and endowments – not to mention private investors – are often rejected by the large hedge funds. No4, 2013–2014

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Welcome to Piauí Wilson Nunes Martins Brazil’s sustainable macroeconomic indicators and continued consumer boom are an excellent incentive for foreign investments. To expedite this process however, the government will have to tackle a number of significant challenges, including defeating bureaucracy and implementing tax reform.

our commitments and maintain stability. All of the above go to show that today macroeconomic risks for investors in Brazil remain exceedingly low. It is also worth noting that throughout this entire period investments remained the key driver that spurred on Brazil’s economic development. The unprecedented growth that the country saw in the early 2000s enabled it to build the sixth largest GDP in the world. However, more importantly, the ensuing economic boom helped millions of Brazilians to cross the poverty line, transforming them into financially sound consumers. It is certainly no coincidence that the rate of unemployment in Brazil remains at 5.4% – an historically low level against the backdrop of the global economic recession. In the meantime, the country continues to go through a period of consumer boom. Yet it is also common knowledge that the rate of economic growth has significantly slowed down of late. Last year our economy showed a mere 0.9% growth, reaching R$4.4 trillion (US$2.2 trillion). Parenthetically, one of the main factors contributing to the slowdown was a drop in direct investments: the share of these investments in the capital assets of Brazilian companies has gone down to 18.1% of the GDP, the lowest level since 2007. The explanation lies on the surface: in the context of a protracted economic recession, investors do not seem to be too keen to invest in new projects; they prefer to move their funds to ‘safe’ countries. The United States, which managed to shake off the effects of recession faster than other countries, would be the most obvious case in point. Needless to say, Brazil faces its own

Over the past several years the desire to win the hearts and minds of investors has virtually become the key imperative that underlies the policies of national governments across the globe. This hardly comes as a surprise, especially considering the fact that incentivising investments today is, bar none, the most effective way to accelerate economic growth and improve the quality of economic infrastructures. In other words, it is the quickest way for most developing countries (and all other countries for that matter) to achieve an end state that hardly requires lengthy explanations. In this sense Brazil is certainly no exception. Over the last decade the government has spared no efforts in reforming the economy and enhancing the investment climate, and now they have much to show for their hard work. I would even venture to say that, in terms of macroeconomic indicators, Brazil is currently in peak form, to use a sports analogy. We have stabilised our currency and put inflation under control: throughout the entire last year we managed to maintain it at 5.8%. Our foreign debt is relatively low – less than 55% of our GDP – and we have sufficient financial reserves both to sustain Wilson Nunes Martins is the Governor of the state of Piauí, Brazil.

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Welcome to Piauí

In terms of macroeconomic indicators, Brazil is currently in peak form, to use a sports analogy. We have stabilised our currency and put inflation under control: throughout the entire last year we managed to maintain it at 5.8%. Our foreign debt is relatively low – less than 55% of our GDP – and we have sufficient financial reserves both to sustain our commitments and maintain stability

specific challenges, which currently prevent the country from pitching itself to investors in a more favourable light. The first aspect I would like to focus on is the notorious Brazilian bureaucracy. Sluggish and topheavy, it plays a significant role in blocking the influx of investments into the country. Attempts to enhance the efficiency of the Brazilian bureaucratic machine have been made on a regular basis, and Brazil’s President Dilma Rousseff has taken a proactive stance, vowing to combat all forms of red tape. Some of the measures include temporary laws and steps to improve the flexibility of certain processes and procedures. However, this is clearly not enough for a long-term solution to the problem on a systemic level. Another equally significant obstacle comes in the form of tax legislation, which remains imperfect and cumbersome. Today’s Brazil is in dire need of tax reform. However, unfortunately, the National Congress (the country’s parliament) has put this issue on a slow track. The federal government does not consider this reform as one of its top priorities either. So far, instead of issuing explicit directives to legislators, the cabinet seems to give preference to temporary measures and provisional legislative acts, hoping to find a way out of this stalemate. This is why the process is being yanked forward at an extremely slow pace. Finally, significant regional investment imba­ lances continue to pose another challenge for our country. For many years, investment resources  – primarily in the industrial sector of the economy – have been concentrated in or channelled towards the South and Southeast regions (the so-called Rio de Janeiro-São Paulo axis), which continues to create undesirable regional distortions in the country’s economic development. The solution to the problem lies increasingly in the hands of regional authorities. They should make No4, 2013–2014

it their priority to improve the investment climate in their respective territories. Our track record in the state of Piauí shows that this approach can yield excellent results. We continue to pursue a proactive policy to incentivise investors through various tax benefits. For instance, investors who create at least 500 jobs are exempt from local taxes for a period of ten years. Furthermore, foreign investors may be eligible to obtain preferential loans to develop projects in the state if they opt to set up a joint venture with one of the local companies. In any event, I have no doubt whatsoever that Brazil will be able to successfully tackle all of the challenges that still prevent the country from realising its investment potential to the fullest. Perhaps this would help to dispel a number of negative stereotypes attributed to our country, many of which are not true even today. In the real world however, Brazil remains absolutely stable at the macro level, while the Brazilian people are more than willing and able to adopt a constructive approach; their appetite for change and development is incredible. All of the above mean that investors who choose to come to our country will not regret the move. Brazilian states’ share of national GDP (%)

1. São Paolo 33.5 2. Rio de Janeiro 10.9 8.9 3. Minas Gerais 4. Rio Grande do Sul 6.7 5. Paraná 5.9 ... 21. Piauí 0.6 Source: IBGE. Data for the уear 2012.

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Siberian Rules Tomsk Oblast seems to have found a way to successfully combine its raw-materials-based economy with innovative projects, says the region’s governor Sergey Zhvachkin. He invited foreign investors to engage in dialogue.

of integrating into our programme all the exciting projects offered by our travel agencies, to help them promote their services. Without a doubt this will make our region more recognisable and attractive. However, I will be honest with you. We are only beginning to develop an efficient formula to enable us to work better with investors. In the meantime our interaction with the business community is still managed ‘manually.’ And yet the region is running a number of interesting investment projects. Recently we held negotiations with representatives of the Hilton hotel network to build a medium-priced hotel in the region’s centre. This year McDonald’s will open two restaurants. We have joined forces with Gazprom to launch an ambitious programme to supply gas to 40 communities in the region. Rosatom (Russia’s state nuclear energy corporation) is already running two important investment projects in the region valued at 100 billion rubles – we battled for these projects in competition with the Beloyarsk Nuclear Power Station in Sverdlovsk Oblast and Mayak Production Association in Chelyabinsk Oblast. SIBUR built a facility from scratch and has already launched production of BOPP film – a state-of-theart packaging material used across the board in the food industry. That is why I believe Tomsk Oblast is highly attractive for investors and representatives of a broad range of different businesses.

On investments

I talk a lot with foreigners and I can say with satisfaction that, fortunately, the association of Siberia – and the Tomsk region in particular – with bears, vodka and balalaikas is becoming a thing of the past. Today we are known as a region boasting a  powerful oil and gas complex: companies with Indian, Swedish, Irish, Hungarian, and Czech capital extract natural resources from the Tomsk soil. Foreigners are also well aware of our higher education institutions. The recent celebration of Tomsk State University’s 135th anniversary stands as proof: a great number of presidents of leading European universities took part in the anniversary session of the Academic Council. Obviously, over the last 50 years, one of our largest nuclear industrial facilities – the Siberian Chemical Combine – has also attracted a lot of attention in the West. But many foreigners have no idea about our hospitality and our beautiful attractions. Sometimes they come here on a business trip and leave the region in awe. For instance, this was recently the case with Michèle Bellon, president of ERDF – a French energy company that leases distribution networks in the Tomsk region. Today we have launched a special programme to stimulate domestic and foreign tourism. The programme will include historical tourism – next year Tomsk will be celebrating its 410th anniversary; environmental tourism – over 60% of the region’s territory is forest, with half the population living in the boreal Taiga forest or rural areas; and educational tourism. We are currently in the throes

On the new economy

The universities of Tomsk are both the region’s pride and its brand, ranking among the world’s leading educational establishments. Innovations are also one of the region’s development priorities. Even though demand for innovative products is driven for the most part by businesses, the government is pursuing an aggressive policy to stimulate it. For instance, the region’s universities and industrial enterprises are taking an active part in the government-run programme implementing complex investment projects to create high-tech production facilities.

Sergey Zhvachkin is Governor of Tomsk Oblast, Russia.

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A special economic zone has been set up in the Tomsk region with more than 60 registered residents, six universities – two of which have National Research Facility status and are included in the Education and Science Ministry’s Top 15 list – and a network of business incubators. We won the Education and Science Ministry’s tender to build industrial parks. These will offer a realistic platform for developing the high-tech production facilities that the residents of our special economic zone need so badly.

The federal government supports this cooperation between universities and businesses, meeting half of the costs of opening new technological facilities. Since the launch of the programme we have already implemented 15 such projects. Having said that, I would like to point out that our region’s budget is also used to shape greater demand for innovative products. We decided that at least five per cent of the funds earmarked for government procurement would be diverted into acquiring new technologies. Experts – and Anatoly Chubais in particular – say that Tomsk Oblast is one of the trailblazers in this area. Innovations that originated in our region are already sought after on the market. One of our first innovative companies, EleSy, developed an automation system that is used to operate the Eastern Siberia–Pacific Ocean oil pipeline. Akvelit – a company based in Tomsk’s technology development special economic zone – produces a nano-gauze called VitaVallis; this product significantly reduces the healing time for various wounds, burns, oncological sores and other lesions. The LED systems manufactured by a local company called Fiztekh-Energo are used to illuminate the Olympic rings at Sochi airport. Scientists from Tomsk developed a glyoxal technology and are now in commercial production – it is the only glyoxal production facility in Russia. The project was headed up Alexey Knyazev, a scientist from Tomsk State University. In 2009 he won the President’s Prize for Young Scientists, and in 2012 he was appointed my deputy in charge of innovations policy and the scientific and industrial complex. In recent years the fuel and energy complex has accounted for approximately one quarter of our consolidated budget. If we add the tax revenues that we receive from pipeline production facilities the figure would go up to nearly 30%. Every year the share of the fuel and energy complex in regional finances is falling by a fraction of a per cent. I believe this is a positive sign. The fact that this industry continues to operate in a stable manner enables the government to meet its social obligations and at the same time develop the innovations sector which we bank on heavily. Today the share of this ‘new economy’ in the region’s gross product is estimated at eight per cent. This is 2.5 times higher than the country’s average; however, we are planning to reach 25%. And we are able to do it. No4, 2013–2014

On big business

Several subsidiaries of large oil companies are operating in Tomsk Oblast. In expanding their oil production and making significant investments in the development of new fields, they help to address social problems in the territories where they maintain their presence. I am most happy with the way this sector operates. The government has legislated maximum levels for associated gas flaring, and there are environmental considerations to be taken into account. But common sense should ultimately prevail; after all, associated gas is a raw material that can bring profit. In my relations with the business community I do not have any favourites: all companies are equally important for the region and we demand that all of them meet their obligations equally. I think that entrepreneurs and CEOs are happy with this policy. I  always maintain an honest dialogue. Recently, I  was shown a memo stating that several oil companies that had been operating on the market for six to eight years were forecasting losses. As a  result the region stood to receive 6 billion rubles less in revenues. I convened a meeting and told them, “I am not a rookie in your business. I will personally audit your books.” Following that meeting, 20% of the companies that had been ‘planning to sustain losses’ showed a profit. We continue to work with the remaining companies, trying to understand the reasons behind their production losses. I have no intention of merely shooting from the hip. The business community expects us to come up with clear-cut rules of the game. We are establishing these rules, and have given the green light to many projects. In return we demand compliance with the rules; we expect entrepreneurs to remember their commitments. 149


summary

概览 评判自己国家和整个世界的现状有很多指标,但是为了看清未来,就需要深入分 析发展的基础来源,而教育则属于这些来源之一。不考虑到教育因素,就无从谈起 随时间而变的人的资本的质量。这也同样适用于教育水平的讨论。在本世纪,人们 必须掌握不同于上个世纪的能力和技巧,而现代教育体系应该满足这些需求。与此 同时社会应该有对受教育的人们的需求和时刻准备着吸收他们,金砖国家商业杂志 编委会主席这样写道。教育 -- 本期杂志主要内容之一,本期的几篇文章正是围绕这 一主题展开。 发展中世界的优秀人才 优秀的科学家 -- 是衡量民族智慧潜力的公认的可靠指标之一。金砖国家商业杂志 拟了一个发展中国家天才的名单。这名单中的每个人都在某一方面对人类作出了贡 献。 出身 -- 是拟定这个名单时的一个标准之一。第二就是名单中的所有人都获得过具 有影响力的国际性的科学奖项(他们的成就不仅有关科学本身,而且还具有普及意 义)。 这个名单很好的说明了,人们习惯把很多科技成就与欧美科学家联想到一起,然 而事实上却不是这样。 大学排行榜 如果看一下很多世界优秀大学排行榜,很容易感觉到发展中国家的高等教育体系 没有任何竞争力。然而这样的结论只是部分合理。假如不按照发达国家的标准来衡 量这些大学,那么情况就会变得更加客观。金砖国家商业杂志联手国际知名的从事 教育领域研究的英国公司QS (Quacquarelli Symonds)提出了自己的发展中国家大 学排行榜版本。通过这个排行榜可以了解到在发展中经济国家的大学教育方面的一 些问题。 城市建设 几年前人类迈入了一个重要门槛:从今以后超过一半的地球人成为城市居民。这 在人类发展史上是第一次。城市化进程还在继续 -- 使得新问题产生,同时也造就了 很多新机遇。 如何像中国一样,为了给那些想成为经济发展带动力主角的新生代市民把城市空 间最大程度的变得舒适?巴西库里蒂巴的成功是否可以复制?为什么未来理想城市 应该是智慧的?本期金砖国家商业杂志中有关城市建设的文章回答了上述问题。 专家 新一期金砖国家商业杂志汇集了最好的理论和实践相结合的专栏作家。这其中就 有德国前外长和副总理约什卡•费舍尔谈论叙利亚危机问题,墨西哥前外长豪尔赫•卡 斯塔涅达聊席卷拉丁美洲的人民浪潮发生的原因,今年诺贝尔经济学奖得主罗伯特• 席勒揭开市场泡沫的真相,高级研究所社会科学教授戴尼•罗德里克讲述发展中国家 早期非工业化的风险等等。

BRICS Business Magazine thanks chief-correspondent of China Radio International in Moscow Sheng Jingjing for the translation. 150


summary

Sumário Há muitos indicadores que nos permitem avaliar a situação atual em nosso próprio país e no mundo em geral, mas para colocá-la em perspectiva é necessário analisar mais profundamente as fontes fundamentais de desenvolvimento, uma das quais é a educação. Sem considerar esse fato não faz sentido falar do capital humano, cuja qualidade varia com o tempo. O mesmo pode-se dizer também do nível de educação. No século 21 são outras habilidades e capacidades que são mais procuradas, em comparação com o passado, de modo que os sistemas de educação modernos devem satisfazer esses novos requisitos. Ao mesmo tempo a sociedade que irá precisar de pessoas educadas tem que estar pronta para absorvê-las, opina o presidente do Conselho Editorial da BRICS Business Magazine. Pois, o leitor vai encontrar toda uma serie de materiais dedicados à educação, um dos temas centrais desta edição. O berço de gênios para a humanidade O número de cientistas e acadêmicos eminentes é um dos indicadores formais para avaliar efetivamente o potencial intelectual de uma nação. A BRICS Business Magazine fez uma lista de gênios vivos do mundo em vias de desenvolvimento que contribuíram de uma ou de outra forma ao progresso da humanidade. A origem foi um dos critérios da seleção dos gênios para a lista. Outro pré-requisito para ser listado foi o de possuir prêmios científicos internacionais mais prestigiosos (entre centenas deles foram selecionados aqueles que são necessariamente importantes não só cientificamente, mas também do ponto de vista de promoção e popularização da ciência). O resultado é que podemos ver claramente que muitas das realizações tecnológicas e êxitos científicos habitualmente associados com a Europa ou os Estados Unidos são, de fato, oriundos de outras regiões do mundo. Cujas universidades são melhores? Os sistemas de notação mais conhecidos que se aplicam para avaliar a qualidade de ensino superior em todo o mundo colocam as universidades dos países emergentes muito atrás das dos países mais desenvolvidos. Porem, tal impressão corresponde à realidade só em parte. Em todo o, a imagem torna-se mais objetiva se avaliar essas universidades usando critérios mais objetivos. A nossa revista apresenta a sua própria versão do ranking das universidades em países emergentes elaborada em cooperação com um dos centros de pesquisa na área da educação mais reconhecidos no mundo, o QS Quacquarelli Symonds da Grã Bretanha. Esta publicação abre uma série de artigos sobre os problemas do ensino universitário nas economias emergentes. O fenômeno do urbanismo Recentemente a humanidade atravessou uma linha muito importante: a partir de agora, pela primeira vez na história da humanidade, mais do que a metade da população mundial vive em cidades. O processo da urbanização continua criando tanto novos problemas como novas oportunidades. Como fazer com que os espaços urbanos sejam mais atrativos, confortáveis e “vivíeis” para uma classe crescente de novos cidadãos urbanos que tem todas as razões para considerarem-se um novo motor do desenvolvimento econômico, como na China, por exemplo? É possível emular e multiplicar o sucesso da cidade brasileira de Curitiba? Porque é que a cidade ideal do futuro tem que ser “inteligente”? O leitor pode encontrar as respostas a estas e outras perguntas na secção da BRICS Business Magazine sobre o tema “urbanismo”. Vamos ler o que nos dizem os especialistas Nesta edição da BRICS Business Magazine o leitor vai encontrar os melhores colunistas que são peritos não só nos assuntos de teoria, mas também na prática. Entre eles o leitor reconhecerá o ex- ministro das Relações Exteriores e vice-chanceler alemão Joschka Fischer compartilhando as suas visões acerca dos vários cenários para a Síria; o ex-ministro de negócios estrangeiros do México Jorge Castañeda falando sobre as causas da agitação social nos países da América Latina; o recente vencedor do Prêmio Nobel da Economia Robert Shiller revelando a essência das bolhas especulativas; Professor de Ciências Sociais no Instituto de Estudos Superiores Dani Rodrik descrevendo os riscos que traz uma desindustrialização precoce para os países emergentes, e ainda muitos outros.

BRICS Business Magazine thanks Victor Bereznoi for the translation into Portuguese. No4, 2013–2014

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anti glossy brics Glossy paper is a symbol of well-being, often synonymous with success, celebration, and ease of living. Although it plays with contrasts and raises expectations, it can attract attention to things that may otherwise be overlooked. The emerging markets are richer in contrasts than most other countries on the planet – something that this magazine’s economic commentary can only let us read about. That is why the closing pages of BRICS Business Magazine are dedicated to a book and photo project aimed at changing our perspectives on two gigantic cities – each considered to be the locomotive of their respective countries – and letting us really see beyond the gloss. Welcome to outskirts of São-Paolo and the ‘other world’ of Hong-Kong.


Justin McGuirk

DRIVING THE PERIPHERY OF SÃO PAULO

Justin McGuirk is Director of Strelka

Illustrations by

Edge City.

Press, winner of the Venice Architectural

Os Gêmeos

Driving the

Biennale’s Golden Lion Award

Periphery

and columnist for The Guardian.

of São Paulo. Justin McGuirk. StrelkaPress, 2012


A reporter from The Guardian got into a car with his friend, a photographer, and drove counter clockwise around the non-tourist suburbs of Brazil’s largest city. The trip culminated in a book, fragments of which are published in BRICS Business Magazine. Having visited São Paolo’s suburbs, Justin McGuirk had a chance to act both as an anthropologist and urban developer. His story will help to fill various lacunae that one is inevitably confronted with when trying to understand one of the largest metropolises of the world from inside its business quarters.

São Paulo, the largest city in South America, is an arsenal of statistics for the shock-and-awe urbanist. You might read that São Paulo is a megacity of 19 million people, and that it has grown 8,000% since 1900. Does that help us understand the city? Does it reveal some essential 154

characteristic? In a limited sense, yes, but it also reinforces what we already know. Speed has always been this city’s raison d’être. In Tristes Tropiques, Claude Lévi-Strauss wrote of his time there in 1935: “The town is developing so fast that it is impossible to obtain a map of it.” In the middle of the


Edge city. Driving the Periphery of São Paulo

20th century, when the city was the engine of the “Brazilian Miracle”, a popular slogan proclaimed “São Paulo must not stop” – it was “the unstoppable city”. Today, despite the staggering statistics, São Paulo is slowing down. The population is not growing anywhere near as fast as it used to, but all of that growth is happening in one zone: the periphery. São Paulo’s sprawling fringes reveal a city that is still very much in the making, still somehow raw. It is a place where the sacrifices that people make for access to the city are written into the landscape, into the fabric of their homes. Cities that grow this fast grow in an unconsolidated way, and so while the periphery is full of pathos it is also full of potential. This is the record of a drive around the periphery of São Paulo. In London Orbital, Iain Sinclair spent months walking the M25, the city’s ring road, in an attempt to understand and embrace the sprawl. I have no such inclinations, and not just because the distances involved are even more perverse. São Paulo is not a city for walking, it’s a city of cars – six million of them. In that spirit, this is emphatically a drive, and as such it is an unapologetically blurred snapshot of a city taken from a moving vehicle, with occasional stops here and there to stretch our legs. But while I doff my cap to Sinclair, in one respect he had it easier: São Paulo has no M25. There are plans for a ring road, the Rodoanel Mario Covas, a 170km-long four-lane motorway. Indeed, one section of it opened in 2002, but the project stalled. Instead we’ll be patching together our own orbital, a spaghetti of roads named Ayrton Senna and Presidente Dutra, Nordestino and Imigrantes — some of these names contain clues as to how this city grew so corpulent. Our route will take us anti-clockwise around the city, which offers the irresistible conceit that this is a journey backwards in time. In telling the story of social and informal housing in São Paulo, we will start with the conditions that face its most recent arrivals, and work No4, 2013–2014

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back through other forms of housing that previous decades have offered. As we work backwards through those iterations, a fairly clear picture will emerge of the different strategies the government has taken to house São Paulo’s ever-growing population – and I include favelas in that “strategy”. Our trajectory will cut roughly from the present day back to a  paragon of modernist social housing, and, even further, to a first world warera workers village, all the way back to one of the missionary settlements that first purported to bring civilisation – or at least the word of God – to this part of Brazil in the 16th century. But this is not just a survey of housing, it is a portrait of a city that is best understood by its edge condition. The official centre of the city is Praça da Sé, the old cathedral square. Like Trafalgar Square in London, it is the point from which all distances to the city are measured, point zero. Yet Sé has none of the potency of a symbolic central square, nor any of the usual bustle. Like nearby Praça da Republica, another once grand plaza, it is symptomatic of the decline of São Paulo’s historic centre. Meanwhile, a few blocks north, the Centro district is now the preserve of pimps and prostitutes, and neighbouring Santa Ifigenia has been renamed Cracolandia: Crack Land – an open market for crack dealers and addicts, and a no-go zone after dark. This triangle has been notoriously resistant to gentrification, but that resistance is buckling. With the municipality’s blessing, developers are demolishing entire blocks to realise their vision of Nova Luz, an upper middle-class quarter with a cultural centre designed by Herzog & de Meuron. As ever, speculation and land values take precedence over the current residents. The unlikely occupation of this central zone by the poor is coming to an end, and they will inevitably be decanted to the periphery. Elsewhere in the centre, tourist guides will draw your attention to Oscar Niemeyer’s meandering Edificio Copan,


The unlikely occupation of thE central zone by the poor is coming to an end, and they will inevitably be decanted to the periphery

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one of the largest residential buildings in the world. And a fine building it is too. But more telling than this landmark is a newer typology, the vertical slums that have blighted the centre in recent years. The São Vito tower was from the same era as the Copan but, far from representing the glamour of Brazilian modernism, it was recoded as a beacon of inner-city destitution. Its 27 storeys were occupied by squatters and its façade was a parchment of graffiti and broken windows until it was demolished in the summer of 2010. There are an estimated 40,000 abandoned buildings in São Paulo, and yet 2 million people live in favelas in the periphery. The municipal housing company Cohab is starting to buy some of these properties to turn them into housing, but so far none of the half-hearted attempts to revitalise the city centre has worked. The city has no real tradition of looking after its heritage. São Paulo has happily let once-vital areas go to seed as long as there is a new financial district being thrust upwards somewhere else. The “centre” has been shifting across the Monopoly board in a steady southwesterly direction – first to Avenida Paulista, then to Avenida Brigadeiro Faria Lima and, more recently, to Berrini. But the historic centre is in limbo, awaiting its gentrifying shock therapy. And the periphery? In the case of São Paulo the word periphery is almost a misnomer, as there is more periphery than anything else. There are no clear boundaries or perimeters. The periphery is a condition – it is the condition in which the majority of paulistanos live. This has always been the product of tacit politics and economic exploitation. The first wave of the poor to settle in the periphery was actually not made up of rural migrants but was displaced from the city itself by the São Paulo equivalent of Haussmannisation. In the 1910s, the centre was redesigned with broad boulevards and gardens, which of course meant demolishing the crowded tenement quarters of the innercity poor, who were forced to the outer edge. Then in the 1940s, the city boundary shifted more No4, 2013–2014

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dramatically. Rural landowners around São Paulo started subdividing their estates and selling plots cheaply – and illegally – to the poor. They gambled that once communities started to accumulate, the government would be compelled to provide basic services and transport routes. Faced with a  housing crisis that it was failing to address, the government – the first of the military dictatorships – turned a blind eye to this unregulated expansion. And of course the gamble paid off, because when those services arrived, the value of what remained of the landowners’ estates increased dramatically. There is a history, then, of the peripheral poor being used as pawns in a game of property speculation. In subsequent decades there was less of the economic exploitation but the same degree of political blinkering. The expansion of the periphery took on a different scale in the 1970s with a wave of migration from the north-east leading to an explosion of favelas. Again it was a case of laissez-faire politics, with another military dictatorship deciding that the periphery was not in the municipality’s jurisdiction, but that the outlaw favelas would be tolerated so long as they looked after their own interests (which meant that the government didn’t have to).


The São Paulo of popular imagination is conjured by photographs of a dense field of skyscrapers and tales of its helicopterborne elite on the one hand, and by a creeping fringe of favelas on the other. But it would be overly simplistic to see the city’s composition in terms of a wealthy core surrounded by a ring of poverty. While new migrants tend to concentrate around the periphery, they are not alone. It is a  place of extreme social contrasts. São Paulo followed a familiar course in the 1980s and 90s, with wealthy citizens fleeing the inner city for the suburban isolation of new gated communities. Alphaville – the sprawling enclave of manor houses and swimming pools on the city’s north-west edge – is the most notorious of these. We shall drive past it later, but such places are not the focus of this journey. Not only is there little to distinguish Alphaville from the suburbs of Phoenix, there is scant inspiration to be found in the capacity of e rich to look after themselves. By contrast, the tenacity of the poor in carving out a life in this brutal city is constant source of amazement. 2. SELF-HELP: SÃO MATEUS

We’ve been following a lorry with “So Jesus Salva” inscribed across the wheel guards: Only Jesus can save you. Cutting through a forest, we soon find ourselves in São

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Mateus. This is a diverse streetscape that feels only half formed. We slow to a crawl as there’s a pack of wild dogs in the road and one of them is determined to mount another whether we like it or not. There are some social-housing blocks, a few roads’ worth of self-built housing and a small favela just off the road, next to a stream. As we get out and start pulling out cameras, a man approaches us shouting something. He’s saying he wants to make a formal complaint about the conditions there. The government is absent, he says. Before we know it, he’s leading us down a muddy path towards his shack. Inside, the man leaves us in the hands of his wife, a woman in her late 20s perhaps, with young skin but an old face, and a scarf over her hair. She doesn’t work but looks after the house and their two kids. And no doubt she is wondering why there are suddenly three strangers standing in her kitchen but is too shy not to go along with the situation. It’s not the first time people will accept us into their homes – their openness is in marked contrast to the closedness of so much of the São Paulo fabric. She explains that they bought the land – or, rather, the space – off their neighbour for 2,000 reais ($1,000). That purchase will not have legal standing of course, because it wasn’t technically their neighbour’s either. Ten days ago, she continues, during a heavy rain, the stream broke its banks and the floor of their house was submerged in sewage-tainted water. There is no sign of that drama now. The place is spotless, and surprisingly well appointed considering the precariousness of the structure itself, which looks like it could blow away. They have a  fridge, a TV and a cheap plastic washing machine. The blender has a crocheted cover on it. The houses here are all assembled from cardboard, sheets of plastic laminate and corrugated iron. This is just a seedling favela, a fresh settlement by new arrivals. It’s an illegal occupation of the land, and a  tentative claim to it. These houses will


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While the favela may last four or five years, be the most notorious and at that point, if they form of housing that the haven’t been moved away, the residents will formalise The Clã da Parede Podre poor will build for themselves, there are more their claim with bricks blog mocks workinginstitutional forms. In and mortar. This cluster fact, we came across this has only been here two class paulistanos favela by chance. The real years. There’s no running reason for visiting São water and the electricity who post pictures of Mateus was to see another is siphoned off a nearby down the pylon. Under foot, sewage themselves in aspirational settlement road. Here, residents were pipes poke out directly poses — in the swimming granted permission from over the stream. Favelas the government to build are most often founded pool or with a flashy themselves real houses, next to rivers or creaks for car — only betrayed by the following a standardised precisely this reason. Some design handed out by the of the pipes happen to be nestling in wild mint, as if stained walls behind them department f housing. This programme is known as to mitigate the aroma. mutirão, a Portuguese word Nascent favelas such as taken from the indigenous this one are rarer than they Guarani rm for working together towards used to be. With so many large, entrenched a common goal. favelas across the city, it is much easier to The mutirão housing programme was join the edge of an established community launched in 1987 as a cost-effective way than it is to strike out on new territory as of tackling the housing deficit. Local these people have done. These settlements community organisations could claim tend to grow fastest when there is grants for building materials, and then a building boom in full swing. A migrant pool their labour to build the houses from the north-east will come and get themselves. It didn’t come with legal tenure a labouring job, then his cousin will come of the land but it was a productive way of down and move in, before meeting a girl resourcing community self-organisation. In and building an extension for themselves. São Mateus, more than 500 families built It’s the natural order of things. their own homes this way. Arranged in neat terraces along straight, orderly streets, these two-storey houses appear to self-consciously shun the disorder of the favela. But they are not without their idiosyncrasies. It soon becomes apparent that the original houses lie somewhere behind newer extensions that thrust the frontage right up to the pavement. In most cases these extensions consist of forecourts for parking with an extra room and balcony above. The owners of these houses may be poor, but in one respect they emulate their wealthier paulistano counterparts. Almost every house meets the street with a large, floor-toceiling gate. The decorative panache behind each gate varies – some go in for pink paint 160


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and faux-marble tiles while others opt for bare brick and concrete – but the gate is universal. On the street we meet a middle-aged woman, Francesca, locking up her gate. She recalls trying to move here 20 years ago almost as if it were a battle. “It was a  struggle. We attended all the meetings and seminars, all of those things, until the day came when we occupied the land. We arrived one night, and the day after we achieved the victory, thanks to God.” It took her and her husband five or six years to build the house and make it habitable. They would come on the weekends, as they worked during the week, and lay bricks. For a long time they had no doors or windows. There was no sewerage, so they dug a  latrine in the garden. The roads weren’t asphalted. Besides the permission to build and a small grant for materials, there was no other government support. Gradually, basic services such as water and electricity were provided, but still they have no legal documents for the house. We ask how much the houses here are worth now. Francesca thinks about 25,000 reais ($12,000). “But I won’t sell my house. I fought for it, and it was such a struggle. I will never sell it.” Introduced in the 1980s, the mutirão housing scheme was a short-lived phenomenon. It had only been running a few years when the incoming government of President Collor scrapped it in 1990. While local community housing initiatives still exist, the government-sponsored version arguably never really worked anyway. It was overly bureaucratic, requiring participants to work on the building a certain number of hours a week to qualify, and as we saw with Francesca, it was a huge drain on families – one that did not even result in legal ownership. It was much easier and cheaper, in the end, to have a local mason build you a small house in a favela. Having briefly romanticised the idea of self-building, the government quickly resumed its laissezfaire ways. The streetscape here in São Mateus is eerily empty. There are no shops, no sign of No4, 2013–2014

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daytime activity. Just the intense morning light and a silence that leaves us wondering how secure we feel outside of the car. Francesca’s street sits in a disjointed, patchwork landscape. This still has the tangible feel of an area that was once countryside before succumbing to a series of randomly sited developments that now exist in an awkward relationship with each other. What is interesting about it is that within a few hundred metres you have three utterly different approaches to the housing problem: the favela, the mutirão and social housing blocks. You would expect the social housing to be the best of these options, but that is far from obvious from where we are standing. Behind walls topped with razor wire, it certainly appears to be more secure, but then these hulking blocks also have the air of prisons. They are raised up on piloti, that device beloved of tropical modernism, but in every other respect their design and construction is crude in the extreme. Their sad effect is no doubt partly a consequence of their colour, the concrete shame-facedly showing through the sallow, mildewed pastels. Though they will have been built in the early 1990s, they look much older. It’s the climate that does it. Lévi-Strauss noted the rotting effect of this heat and humidity. He dwells on it in Tristes Tropiques, concluding that towns in the New World “pass from freshness to decay without ever being simply old”.


It’s not uncommon to find grand old houses standing empty near favelas, like colonial fortresses abandoned in the face of superior numbers

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Rotting concrete is the backdrop to so many lives, as one blogger has observed. The Clã da Parede Podre, or “rotten wall clan”, blog mocks working-class paulistanos who post pictures of themselves in aspirational poses – in the swimming pool or with a flashy car – only betrayed by the stained walls behind them. It’s a nasty piece of social snobbery. Anyway, it makes you realise what a coat of paint can do. One of the social-housing developments here is much newer, which is obvious not just from the slightly more complex design (with corner balconies) but the freshness of its colour. The building is almost exactly the hue of the red earth around it, as if it was formed from the very clay on which it sits. The redness of the earth here is a constant surprise to my European eyes, and while one is hardly ever aware of it in the city centre, it is abundantly exposed on the rawer edges where the city is still being formed. This redness is in some ways the very essence of Brazil. The country was named after the trees that the Portuguese called brasa, or mbers”, for the reddish glow of its wood. It was the dye extracted from that wood, and thus one might say edness itself, that made Brazil such a lucrative colony in the 16th century. But São Mateus is not the best place to consider social housing. We are heading north, to Zezinho Magalhães and a  paradigmatic setpiece from the 1960s. Designed by João Vilanova Artigas and Paulo Mendes da Rocha – Brazil’s most revered architect after Oscar Niemeyer – it is a relic from a time when social housing was still an idealistic project. Compared with the cheerless examples we’ve just seen, I’m curious to discover whether it retains any of its utopian optimism. Exiting São Mateus along one of its high streets, you can’t help but notice the conspicuous number of love motels. Charging by the hour, they’re particularly common in poor areas such as this, where apartments have too many occupants for even the hope of any privacy. One of the motels is offering an Executive Lunch


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promotion – the room comes with a plate of feijoada, Brazil’s signature black bean stew. That’s what you call maximising your 40-minute lunch break. Turning on to Avenida Itaquera, we set into a steady cruise. Not for the first time today we pass an old mansion house that is perversely out of context. Did it once sit amid a fazenda, or coffee plantation, the likes of which first produced São Paulo’s wealth in the 19th century? Even 30 years ago it would have stood in open countryside, but the city has swallowed it. It’s not uncommon to find grand old houses standing empty near favelas, like colonial fortresses abandoned in the face of superior numbers. Though I’ve heard of some who keep them for occasional parties at which they and their friends revel in nostalgia for more idyllic times. We pass a neon sign that appears to be attached to a bingo hall: Jesus Cristo é o Senhor. Jesus Christ is the Lord. This is the local outpost of the Universal Church

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of the Kingdom of God, the evangelical empire of its billionaire founder, Bishop Edir Macedo. There are 4,500 such churches across Brazil, with millions of followers around the world (and 20 branches in the UK). Made in the mould of an American televangelist, the private-jet-flying Macedo has built a global empire on donations from the poor. A lorry cuts in front of us with “Jesus is the fountain of life” splashed across its wheel guards. And then, suddenly, we’re crawling along in traffic. It’s still mid morning, but this isn’t a commuter jam. In the outskirts of São Paulo, rush hour happens much earlier than in the centre, between 6am and 7am. That’s simply because from here, with the traffic, you need to allow about two hours to get to work in the centre. It’s no wonder the road is lined with car dealerships and mechanic workshops. Next to us an old VW camper van is spewing plumes of exhaust, forcing us to


tie but his logo is worthy wind up the windows. We Ironically, given their of gangster hip-hop album just need to get past the next cover. traffic light, because we’ve often reactionary discovered that we’ve gone too far east. A short detour politics, in the late 1960s 3. MODERNISM: and we’re heading along ZEZINHO MAGALHÃES and 70s the military Avenida Nordestina, back towards Guarulhos airport. Gunning on to the regimes of not just Brazil Nordestina, or the northAyrton Senna highway, eastern, is a reference to the but Argentina, were still appropriately, we finally main source of São Paulo’s clock 100kph – only we’re immigrant population. Even willing to pump huge sums going in the wrong direction. Lula was once a  penniless The city is to our right, and it of money into housing migrant from the northshould be on our left for the east, a fact that has no doubt entire circuit, which means projects by the most contributed to his immense we’re heading south instead respected architects popularity with Brazil’s of north. We pull off at the sub-proletariat. Passing next exit and 10 minutes later a  billboard advertising the local electoral we’re back on track and passing Guarulhos campaigns of two politicians, what is most international airport. By the roadside are noteworthy is how their names have been dozens of bare, rusting billboards, and though turned into logos. One of them is contained this form of advertising was banned in São in a gold ieroglyphic-style cartouche with a Paulo in 2006, it isn’t out here in Guarulhos. starburst glint. The man’s wearing a suit and Correction: one or two billboards are taken. 164


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There’s a Mercedes ad. There’s an Audi. Cars, of course – luxury cars. Luxury is so incongruous on its own like this, it needs the plenitude of other advertising to feel at home. Pulling into the complex of Zezinho Magalhães, its vast scale is not obvious at first, but there are three sectors and a total of 72 housing blocks. And that’s only half of what was planned. Commissioned by the military dictatorship in 1967, it was originally designed to cover 130 hectares and house 50,000 people. Zezinho was to be an exemplar of how to provide social housing on a mass scale. Vilanova Artigas, its lead architect, used it as an experiment in prefabricated construction in the hope of achieving an industrial efficiency. Mendes da Rocha, Artigas’ assistant on the project, recalls that, “The goal … was to reach a level of excellence that would demonstrate that quality of housing need not correspond to the economic standards of a given social class but to the technical knowledge of the historical moment, offering rational, honest and accessible construction to everyone.” This kind of idealistic rhetoric, still prevalent in the 1960s, has hardly been heard since. The idea that somehow technology would be a great social leveller never quite transpired. But the main reason why governments and architects alike drifted away from such noble stances on social housing was the expense. Ironically, given their often reactionary politics, in the late 1960s and 70s the military regimes of not just Brazil but Argentina, were still willing to pump huge sums of money into housing projects by the most respected architects. At this stage, high modernism still had political backing, even if it was from dictatorships to whom the architects themselves were antithetical. But as it became clearer that such exemplar projects were failing to keep pace with population growth and were thus ineffectual at reducing the housing deficit, the political will sapped. It would be fair to say that from the late 1970s onwards, what was an idealistic and centralised strategy became a pragmatic and piecemeal one No4, 2013–2014

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resulting in the kind of forlorn housing blocks we saw in São Mateus. Just outside Zezinho is a lively street market that looks like a promising place to make a pit stop. We have a standing breakfast of pastels, deep-fried meat pastries, and cups of freshly pressed cane juice, before setting off into the complex on foot. The place is remarkably well kept, with tended gardens and fresh coats of mustard paint. Perhaps some of that attention stems from the fact that this is such an obvious period piece, straight out of the CIAM (Congrès


internationaux d’architecture moderne) textbook – it was orthodox even for its time. The blocks are arranged in strict ranks, long and low. Each one is a mere three storeys, but raised up on piloti to create an open ground level for parking. While Latin American modernists adored these piloti, so often they produced gloomy, menacing undercrofts. Here, because the buildings are narrow and not too high, and because of the green landscaping, the place is still bright and comfortable. By Brazilian working-class standards it feels rather affluent, and I have the weird sense of being in an American condominium. Climbing up a random stairwell, we find ourselves on an access deck that feels rather like someone’s veranda. A number of the apartment doors have been personalised with crazy paving or tiles imitating stone or brick. It seems almost any store-bought surface is preferable to concrete. While these embellishments may jar with our purist sensibilities, such home improvements are a  healthy expression of a commitment to a place. Standing outside his front door in baggy jeans and a white vest is Sergio, smoking a cigarette like a man in a Levi’s advert. In his late 50s now, he moved here 25 years ago when he was still working at the local Ford factory. It’s extremely safe, he says, a  good place to bring up kids. About 60% of the 166

original tenants still live here, but there’s also been a certain amount of gentrification. When the middle classes aspire to live in housing built for the poor, it is at least a sign that it has been well designed. On the other hand, you wouldn’t strictly call Zezinho social housing any more, with rents at 700 reais ($350) a month  – the Brazilian minimum wage is 545 reais a month. The market price of one of these apartments is R$130,000 ($65,000). Sergio shows us around his apartment. The ceilings are on the low side but because of the narrow blocks, the apartments all have a dual aspect and healthy cross ventilation. The real boon of Artigas’ design, however, is that there are no structural walls within the apartments, just gypsum partitions so that residents can reconfigure the interior as they like. Sergio raps his knuckles against a  new, hollow wall. He expanded the kitchen because when they have guests that’s where everyone hangs out. He starts going into energetic detail, not at all fazed by having three strangers in his home but, rather, proudly discussing room dimensions and the way that locals here look out for each other. It’s hard to imagine people satisfying our curiosity so readily in a wealthy neighbourhood. In fact, I  can’t see a group of Brazilian architects or anthropologists sweet-talking their way into a council flat in London and getting this kind of cooperation. Somehow in Brazil, the fact that we even show an interest is flattering. I don’t know whether the standard of this block is maintained across the whole of the Zezinho complex, but the quality of life here and the degree of communal pride certainly seem to validate Artigas’ design in particular and the idea of centralised housing in general. I would rather live here than anywhere we’ve seen so far. The mutirão houses are much bigger than these flats, and they have the personal investment and satisfaction that comes with building your own house – but imagine, even after such a struggle, not having the security of legal ownership.


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himself remains a belieIn any event, the totaver. He is a socialist – the litarian approach ofcentralised social housing is not The favelas are no longer late Artigas, it should be just outmoded politically an embarrassment to be said, was a communist – and so one would expect but urbanistically. The him to uphold the urban provision of housing is no cut out of the city like ideal of collective living, longer even the central a cancer and replaced but he goes even further. issue. The urban discourse He still adheres to dogmahas shifted its attention by neat ranks of pilotitic modernist principles, from the object to the both in aesthetics and network, if you will. The raised blocks industrialised construcfavelas are no longer an tion methods  – indeed, embarrassment to be cut his design for the Olympic village for out of the city like a cancer and replaced the 2016 Rio games is in the same mould by neat ranks of piloti-raised blocks. as Zezinho. He even thinks that indiviThey are a given, and the question is dual houses are unjustifiable. Hypocritihow to incorporate them. Infrastructure cally, he did design himself a  eautiful and connectivity are the new means of house, which he no longer lives in. Roberto enfranchising communities. once asked him about it and the 80-yearZezinho-style grands projets may have old replied, hat was the biggest mistake of been consigned to history, but they still my career.” have their advocates. Mendes da Rocha No4, 2013–2014

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Claustrophobia Photo: Benny Lam / SoCO / R ex Features / Fotodom.ru

3.7 square meters of living space: homes in Hong Kong can be that small. Early this year the local Society for Community Organization (SoCO) published a series of photos featuring the poor, the lonely and the unemployed of one of Asia’s richest cities. The project’s primary objective was to raise awareness in the international community of Hong Kong’s housing problem and the fate of the hundreds of thousands of people not living in decent conditions.


Hong Kong is the hottest real estate market on the planet. According to Knight Frank, early in the second quarter of 2013 local housing prices were up nearly 28% on the previous year – compared to a world marker rate of 2%.


Hong Kong is a world leader in terms of the size of its public housing sector. According to the Hong Kong Housing Authority, in 2011 nearly 3.4 million people – 47.7% of the city’s population – rented flats from the government.


The rate of return in Hong Kong’s housing rental sector is very low; depending on the property class, it fluctuates between 2.2% and 3.6%. In the period 2001 to 2011, average residential property prices increased by 131%, whereas the average rent went up only 40%.


The global economic slowdown and the eurozone crisis proved a serious blow for Hong Kong. According to the IMF, in 2012 China’s special administrative district’s GDP showed a mere 1.25% growth, compared to 5% and 7.1% in 2011 and 2010 respectively.


One fifth of Hong Kong’s residents are poor. According to the Hong Kong Poverty Situation Report for 2012, 1.3 million people – 19.6% of the city’s population – were living below the poverty line last year.


Nearly 190,000 new jobs were created in Hong Kong between 2009 and 2012, leading to a record employment figure of 3.66 million, while unemployment fell to 3.3% – its lowest figure since 1997.


Median monthly household income in Hong Kong in 2012 went up by 4.2% to reach $20,000. The income of the poorest 10% fell 2% to $2,000.


A Map of Inequality

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

Belarus 21.90 Ukraine 22.04 Germany 22.07 Bulgaria 22.17 Sweden 22.18 Serbia 22.20 Slovakia 22.41 Finland 22.57 Austria 23.05 Afghanistan 23.21 Norway 23.38 Romania 23.50 Kazakhstan 23.75 Luxembourg 23.77 Montenegro 24.12 Tajikistan 24.31 Slovenia 24.64 Canada 24.79 Iraq 25.24 Armenia 25.40 Hungary 25.44 Ethiopia 25.63 Mali 25.83 Switzerland 25.91 Moldova 25.97 Greece 26.04 Pakistan 26.05 Nepal 26.52 Egypt 26.58 Spain 26.61 Sudan 26.72 Italy 26.80 Bangladesh 27.03 East Timor 27.03

>10% >15% >20% 35. Poland 27.05 36. Togo 27.06 37. Ireland 27.23 38. Bosnia and Herzegovina 27.25 39. Azerbaijan 27.37 40. Croatia 27.48 41. Kyrgyzstan 27.79 42. Estonia 27.97 43. The Maldives 28.03 44. Burundi 28.04 45. Belgium 28.06 46. Latvia 28.10 47. Guinea-Bissau 28.13 48. West Bank and Gaza 28.18 49. Vietnam 28.21 50. India 28.26 51. Mongolia 28.38 52. Indonesia 28.51 53. Niger 28.51 54. Jordan 28.70 55. Israel 28.80 56. Syria 28.93 57. Albania 28.99 58. Lithuania 29.10 59. Turkey 29.35 60. Bhutan 29.36 61. Uzbekistan 29.47 62. Tanzania 29.61 63. Iran 29.63 64. The United States 29.85 65. Liberia 30.10 66. Senegal 30.14 67. Laos 30.33 68. Guinea 30.34

69. Cameroon 30.36 70. Chad 30.79 71. Yemen 30.82 72. Djibouti 30.91 73. Benin 31.24 74. Georgia 31.31 75. Cambodia 31.36 76. Thailand 31.45 77. Nicaragua 31.51 78. Mauritania 31.62 79. Russia 31.68 80. Côte d’Ivoire 31.75 81. Malawi 31.85 82. China 31.97 83. Burkina Faso 32.16 84. Argentina 32.30 85. Macedonia 32.40 86. Tunisia 32.45 87. Ghana 32.75 88. Sri Lanka 32.94 89. Gabon 32.95 90. Venezuela 33.17 91. Morocco 33.22 92. Sierra Leone 33.57 93. The Philippines 33.62 94. Uruguay 34.36 95. Malaysia 34.65 96. Madagascar 34.68 97. D.R. Congo 34.69 98. Fiji 34.87 99. Jamaica 35.90 100. Qatar 35.90 101. Uganda 36.10 102. Peru 36.11

176

>25% >30% >35%

>40% >45% >50%

103. The Dominican Republic 36.41 104. Mozambique 36.73 105. The Gambia 36.94 106. El Salvador 37.00 107. The Republic of the Congo 37.05 108. Kenya 37.99 109. Nigeria 38.23 110. Ecuador 38.32 111. Mexico 38.68 112. Lesotho 39.40 113. Costa Rica 39.50 114. Panama 40.08 115. Swaziland 40.12 40.64 116. Cape Verde 117. Paraguay 41.11 118. Honduras 42.40 119. Chile 42.77 120. Brazil 42.93 121. Zambia 43.14 122. Rwanda 43.22 123. Bolivia 43.28 124. São Tomé and Príncipe 43.61 125. Colombia 44.43 126. Angola 44.74 127. Guatemala 44.92 128. Central African Republic 46.13 129. Fed. Sts. of Micronesia 47.12 130. Haiti 47.67 131. South Africa 51.69 132. Namibia 54.75 133. The Comoros 55.19 134. The Seychelles 60.16

Income share held by top 10% of the population, %†

For countries not shown in the table due to lack of data, provisional values have been used on the map. Source: Global Finance.

The uneven distribution of income is considered a veritable bane for developed and developing countries alike. On this indicator Afghanistan and Norway, or Sudan and Greece, are quite similar. This criterion alone is obviously not sufficient to assess the overall state of an economy. However, it can provide an indirect insight into how happy middle- and lower-income classes are with their quality of life; what sort of access they have to good education or prestigious jobs; and whether their governments’ social policies are bearing fruit.


The new face of a new world He is young. He thinks he is small and insignificant. But he is not. He is growing bigger and stronger, everyday. Soon he will be a leader at the forefront on economic policy, business and politics. His decisions will change lives, industries, communities, Africa and the world. And he will not be alone. He will have an entire continent with him. A continent with the resources, minerals, political stability, human potential, technology and backing of BRICS – the 5 fastest growing economies in the world. And with all this to help grow this young man and his ambitious generation, we think maybe it’s time you change the way you see Africa. Because Africa and its people, are the future.

South Africa. Your African growth story starts here.

BRICS Business Magazine English Edition No.4  

http://bricsmagazine.com/