Category: economy

Dealing with the demographic dividend

As populations age, training and education become more important than ever.

“In the 20th century the planet’s population doubled twice. It will not double even once in the current century,” states The Economist in a lengthy article on how the world’s aging population is going to affect economic growth.

One of the most overlooked aspects of modern day economics is the changing demographics of the developed world, the aging army of baby boomers has been effectively ignored by policy makers and voters alike and now we’re about the see the consequences.

Japan is the case study as the country is well ahead of the pack with an rapidly aging population and the indicators aren’t good.

Amlan Roy, an economist at Credit Suisse, has calculated that the shrinking working-age population dragged down Japan’s GDP growth by an average of just over 0.6 percentage points a year between 2000 and 2013, and that over the next four years that will increase to 1 percentage point a year.

Despite that drag on growth, the Japanese are still living quite well and could be showing that an economy can grow old gracefully and productively.

The key to doing that is to have a well educated, skilled and productive workforce. An efficient health system that ensures older workers stay fit enough to work doesn’t hurt either.

What The Economist illustrates in its story is that some countries are going to perform better than others as their workforces age. Those who’ve neglected their education systems and workforce skill bases are not going to do well.

One can’t help but think the ideologies that gripped the Anglo-Saxon countries in the 1980s that saw skills being discarded, investment neglected and education cut are going to have a high cost on those nations over the next twenty years.

A consumerist utopia – where does Australia go in the 21st Century?

A raft of reports and media stories highlight the threats to Australia’s continued prosperity but the nation’s business leaders aren’t listening.

Today has been a big day for Australian navel-gazing with a range of reports released on the country’s prospects on in the Twenty-First Century.

One of the reports was the Joined Up Innovation survey commissioned by Microsoft and written by PwC, I wrote a story for Business Spectator on the results.

While the Microsoft report focused on the small business sector, Startup Aus released their Crossroads report that warns Australia is falling behind the rest of the world. Smart Company’s Rose Powell has a more detailed summary of the report.

Alan Noble, head of Google’s Australian Engineering operations warns, “we still lag behind many other nations, with one of the lowest rates of startup formation in the world, and one of the lowest rates of venture capital investment.”

“If we fail to address this, we risk forfeiting over $100 billion in economic benefits from emerging tech companies, and an irreversible decline in Australia’s competitiveness.”

Looking in from the outside

Particularly notable from the two surveys is that the discussion about Australia’s tech competitiveness is the debate is being led by two local employees of US Multinationals.

For a local perspective, the Macrobusiness blog joins the day’s chorus with a long examination of the risks to Australia’s living standards by being too far down the global value chain.

In the Business Spectator piece, I compared some of PwC’s recommendations with the efforts of the UK and Singapore to rebuild their manufacturing industries.

Australia’s collective decision

For Australia, it’s probably way too late to worry about most of the manufacturing industry as in the 1980s the country made a collective – and almost unanimous – decision to shift the economy to being resources and high value added services.

The high value added services haven’t eventuated; mainly because the internet has shifted the global dynamics towards lower cost centres and partly because Australian business leaders decided it was easier to exploit their domestic market power rather than compete globally.

Mining proved to be a better bet, more by the accident of China’s turn of the century boom rather than any deliberate policy, however the industry employs less than ten percent of the workforce and the vast majority of Australians living in the South East corner of the country have little contact with the resources industry.

A consumerist utopia

For most Australians, employment and prosperity relies upon a growing population driving city GDP growth with domestic wealth supported by buoyant property prices. Australia truly is the consumerist utopia.

As a result of a booming, seemingly unstoppable, housing market and an expending resources sector, Australia’s exchange rate has soared while the nation’s productivity has slumped.

Making matters worse is that outside of mining and a few agricultural markets most of Australia’s industry is grossly expensive by global standards and suffering from chronic under-investment.

An unsustainable economic model

That model is not sustainable, it will take one shock to Australia’s housing market to see the good burghers of Brisbane, Sydney and Melbourne impoverished so the nation’s continued prosperity requires something to drive the economy beyond low interest rates and Chinese commodity purchases.

Whether Australia’s business and political leadership are capable of hearing and reacting to these reports remains to be seen, but they will have no excuse to say they weren’t warned.

San Francisco’s stuggle with property prices

The current protests against tech workers in San Francisco are part of a wider economic problem

“You’re not wanted here” is the message from San Francisco residents protesting against tech workers and tycoon moving into the city.

Over the last year the protests against the ‘Google Buses’ that ferry tech company workers from San Francisco to Silicon Valley has steadily ratched up with protests against high profile individuals, people vomiting on the buses and Google Glass wearers getting their devices smashed.

Around the world, from London and Berlin to Auckland and Hong Kong, cities are worrying about the diversity of their cities as the global asset bubble inflates property prices beyond the reach of ordinary citizens.

In many respects San Francisco is probably unique in its relationship to Silicon Valley and its restricted geography, but it’s hard not to think if the current technology stock falls on the US stock markets became a Tech Wreck style bust then the city’s problems might solve themselves.

The challenge for all major cities around the world is to manage the current boom in property prices that threaten to drive out lower paid workers essential to vibrant economies – although ultimately anything that can’t be sustained won’t be sustained and it’s hard to see how housing can run too far ahead of wages before a reversal happens.

In the meantime though we can expect to see many cities struggle with the same issues that face San Francisco.

Burying capitalism with the Internet of Things

Burying capitalism with the Internet of Things

A strange piece by author Jeremy Rivkin in The Guardian argues the internet of things will facilitate an economic shift from markets to collaborative commons which threatens capitalism as marginal costs fall to zero.

Rivkin argues that the rise of the ‘prosumer’, who contributes content and adds economic value for free, is undermining the basic tenants of capitalism.

A telling blow to capitalism in Rivkin’s eyes is the abundant data generated by the Internet of Things;

Siemens, IBM, Cisco and General Electric are among the firms erecting an internet-of-things infrastructure, connecting the world in a global neural network.

There are now 11 billion sensors connecting devices to the internet of things. By 2030, 100 trillion sensors will be attached to natural resources, production lines, warehouses, transportation networks, the electricity grid and recycling flows, and be implanted in homes, offices, stores, and vehicles – continually sending big data to the communications, energy and logistics internets.

Anyone will be able to access the internet of things and use big data and analytics to develop predictive algorithms that can speed efficiency, dramatically increase productivity and lower the marginal cost of producing and distributing physical things, including energy, products and services, to near zero, just as we now do with information goods.

That Rivkin mentions large corporations like Cisco, Siemens, IBM and General Electric illustrates the flaw in his idea — these companies are profiting from the Internet of Things and the data it’s generating.

Rather than being killed, capitalism is evolving to the new marketplaces.

Nowhere is this truer than in the sharing economy where the new lords of the digital manor are  profiting from the work and free content generated by unpaid ‘prosumers’.

How long the free business models can survive is open to question, in many respects the age of the digital sharecropper is a transition phase that isn’t sustainable and it’s more likely we’re seeing a move to an economy where information is far more abundant than it was previously.

Such a change is not unprecedented, far more basic human needs are food and energy. In Western economies, we have been living in a time of unimagined abundance of both for the last century.

In subsistence economies, food and the energy to grow or hunt it is scarce and its why living standards are low and life expectancies are short. Agricultural society start to solve the food scarcity problem and industrial societies automate farming and increase living standards through abundant energy.

During the pre-industrial era, the basic unit of energy was the horse – hence the term horsepower – and it was rare to have more than four horses driving a coach or piece of machinery.

Today, we have locomotive engines that provide 6,000 horsepower, a basic farm tractor delivers around 100 HP  and a typical family car around 200. We live in an age of abundant energy and our living standards reflect it.

We’re moving into an era of abundant information that will change our societies in a similar way to the age of abundant power has changed economies over the past 300 years.

Open source, the sharing economy and the internet of things will all change aspects of our economies and society but people will still be making a living one way or another so they can buy a meal and pay their rent.

The age of abundant information means massive change to the way we work, but it no more means the end of capitalism than the steam engine did.

Using data laws to create an economic advantage

Will the EU data laws give European business a competitive advantage?

Yesterday I posted piece on Business Spectator about Australia’s new privacy regulations, little did I know that the European Union Parliament was about to release its own.

The EU regulations look interesting and certainly seem on  first look to be far more comprehensive than Australia’s effort that I describe as a toothless, box ticking exercise.

A notable aspect of the EU’s announcement of the new rules is its claim that the updated regulations are expected to generate €2.3 billion in economic benefits each year.

Whether the EU’s rules prove to be an economic cost – as Australia’s effort will almost certainly turn out to be – or a competitive advantage remains to be seen, however the European Parliament is certainly making a case for data security and privacy protection as being an important selling point in a highly competitive digital world.

The competitive advantages between countries and continents in the 21st Century will be vary different to those that determined the economic winners of the previous two centuries.

Saving retirement

The costs of the baby boomer population bubble are becoming apparent

Retirement age is vexed problem in the developed world; while life expectancy has increased over the last Century, the age where one becomes eligible for the pension has barely changed.

Harvard University professor Martin Feldstein illustrates this in a post on Project Syndicate, Saving Retirement, where he has a number of suggestions of moving the pension age to ease the pressures on public finances.

Obviously, retirees deserve advance notice before benefits are reduced. That is why it is important for the US – and for many countries around the world – to act now to make the changes needed to stabilize future pension finances.
Those pressures are going to become more real in the decade as the baby boomers join the ranks of the retired, the cry “I’ve paid my taxes, where’s my benefits?” is going to get louder.
Unfortunately for them, the kitty’s going to turn out to be bare – there simply aren’t enough Generation X and Y workers in the developed economies to pay for millions of boomers collecting pensions for the next thirty years.
Governments around the world have ignored this obvious, and predictable, problem for fifty years and now it’s time to address it. Unfortunately few leaders have the courage to tell their electorates the truth of the challenge ahead.

Revisiting the Lipstick effect

How real is the lipstick effect? The Irish experience says it’s complex.

During the recession much was made about the ‘lipstick effect’ – the idea some businesses and products would survive because they’re little luxuries that cash strapped consumers will spend on while scrimping and saving in other areas.

Some of those areas are ladies’ cosmetics (lipstick), chocolate, movies and coffee shops. All of them offering small pleasures for a few dollars.

It’s a theory I’ve always been sceptical of and an episode of the BBC’s World Of Business where Peter Day travels to Cork to see how Ireland’s second city is recovering from the great recession illustrates the reality is a lot more complex than the theory suggests.

“We really struggled to keep alive,” Claire Nash of Nash 19 restaurant says in her interview with Day on her business experience during the recession.

“My turnover just absolutely took a spiralling tumble and it wasn’t that the customer weren’t coming in – those that had lost their jobs weren’t coming in – but those that hadn’t lost their jobs were really hurting and they were very careful with their spend.

“So they started using us as a treat, which was a model I never wanted to enter into but we weathered the storm.”

It can be argued that Claire survived because of the lipstick effect – she kept enough customers to survive – but it was tough and had she taken out the loans offered to her during the boom it’s unlikely her restaurant would have survived.

The key point though is the lipstick effect turned out to be a very different, and much less lucrative business, for Claire and other businesses in Cork.

So assuming a business will remained unscathed because of the assumption the lipstick effect is a big risk, if that’s the plan then Sequoia Capital’s infamous Powerpoint of Doom comes to mind.

While the presentation was aimed at tech companies and investors, it’s a good overview of how the Global Financial Crisis happened and Slide 49 – Survival of the Quickest – is probably the best lesson for any business: Act fast to adapt.

The lipstick theory is a nice way to justify unsustainable business models, particularly those that rely on consumer spending, in the face of a recession but the assumption spending will remain the same as customers will seek little luxuries is deeply flawed.

A business that doesn’t respond quickly to changed circumstances and reduced spending is one that might not survive a downturn.

Peter Day’s Cork story is a good listen on how Ireland and Cork have weathered the global financial crisis, the main question from the piece is how much have the Irish and the rest of the world learned from the mistakes of the boom years at the start of the 21st Century.

InfoSec’s looming labor shortage

A looming shortage of IT security experts is one example of new jobs being created.

For the last few days I’ve been reading Cisco’s 2014 annual security report and trying to decide exactly which parts are suitable for this site, Networked Globe and the various other outlets I write for.

One of concerns Cisco raises in their study is the labor problem facing the information security (InfoSec) community with a shortage of a million workers this year.

Even when budgets are generous, CISOs (Chief Information Security Officers) struggle to hire people with up-to-date security skills. It’s estimated that by 2014, the industry will still be short more than a million security professionals across the globe. Also in short supply are security professionals with data science skills—understanding and analyzing security data can help improve alignment with business objectives.

“There are essential a million jobs across the globe that can be filled but we don’t have trained people to fill them,” Cisco’s Chief Security Officer John Stewart told a media conference yesterday. “We’ve got a dearth of talent and skills.”

As governments tighten up laws on liability for data breaches and privacy lapses a lot of businesses will be fighting to find people with the right skills to fix their problems or help them manage various technology and security risks.

So if you have a teenager moping around the house wondering what to do for a job, or you’re looking for a career change, becoming an IT security expert might be the answer.

Just as we see many jobs disappear in the face of technological change, we see new ones appear. This is a good example.

Digital vagrancy

The term digital vagrant might be appropriate for the businesses and people left behind in a connected world.

One of the joys of writing on and analysing trends IT industry trends is the never ending source of buzzwords and phrases that vendors invent.

Today is a good day with a release from security software vendor AVG coining the term ‘Digital Vagrant’.

Underlying the idea of digital vagrancy is an abandoned underclass who, overwhelmed by technology, are ignored and neglected in a connected society. As the AVG media release describes;

Users who are left behind to wander around in an online world that largely ignores them are nothing more than the digital equivalent of vagrants – people who are left to cope in a world that has become too overwhelming.

‘Digital Vagrant’ joins other wonderful ‘digital’ labels; digital immigrant, digital native and digital sharecropper come to mind.

It’s tempting to think that digital vagrancy is what eventually happens to poor exploited digital sharecroppers – those who’ve donated their free labour to help the likes of Mia Freedman, Chris Anderson and Ariana Huffington to build their media empires.

Should that be the case, there’s going to be many digital vagrants.

On more serious note, AVG does have a point in that both individuals and businesses that scorn technology risk being left behind in society that’s becoming increasingly connected.

Society and business are going through a change similar to that of a century ago where the motor car, trucks and tractors radically changed industries and the economy.

Those farmers and businesspeople who stuck with horse drawn equipment slowly became irrelevant and went broke.

A similar process is happening now as a new wave of technology is changing business and society.

The question for all of us is do we want to be left behind in a connected society?

Beggar image courtesy of apujol through sxc.hu

Peak employment and the political challenge

The current angst about employment in an age of automation is a political, not technological, problem

This week’s edition of The Economist asks about the Future of Employment and where the jobs are in a society where work is increasingly done by machines.

For the Economist the conclusion is that the future of employment is ‘complex’ and observes economists and politicians haven’t given enough thought to the effects of the changing workplace and the dislocation of many workers.

Much of the Economist’s story is based around the ideas of professors at MIT Erik Brynjolfsson and Andrew McAfee in their upcoming book “The Second Machine Age”.

The race with the machines

Professor Brynjolfsson gives his view at TED 2013 in the key to growth? Race with the machines, a presentation countered by Robert Gordon in the ‘death of innovation, the end of growth’ and followed by an excellent debate between the two.

Brynjolfsson cites the dilemma of bookkeepers being displaced by software applications such as Intuit Turbotax as an example of where service sector staff are being displaced.

“How can a skilled worker compete with a $39 piece of software?” Brynjolfsson asks.

“She can’t. Today millions of Americans do have cheaper, faster, more accurate tax preparations and the founders of Intuit have done very well for themselves. But 17% of tax preparers no longer have jobs.

“That is a microcosm of what’s happening not just in software and services, but in media and music, in finance, manufacturing, in retailing and trade. In short, in every industry.”

The great decoupling

Brynjolfsson’s key point is that workers’ wages have been decoupled from productivity and that the workforce isn’t sharing the rewards of improved practices and increased wealth.

That is certainly true over the last forty years, however that may not be a technological effect, but the business consequences of liberalising the financial sector which has seen massive pay increases to the banking industry and managerial classes that has been way out of kilter with the rest of the workforce.

It may well be the current golden era of high executive salaries is a transition effect of an evolving economy, albeit one where our grandchildren will puzzle over an era where a failed executive can receive a $100 million payout on being fired.

As The Economist points out technological change itself tends to create new jobs that make up for those displaced in old industries, this is a view supported by GE’s Chief Economist Marco Annunziata.

The main problem that Brynjolfsson identifies is the medium term issue of dislocated workers finding themselves out of work with superseded skills and, as The Economist point out, it’s clear the developed world’s political leaders haven’t though through the consequences of that transition.

In almost every sense, the current crisis of confidence about employment prospects is more a political and social problem rather than technological.

Helping displaced workers is going to be the greatest challenge for today’s generation of business and political leaders, the real question is are they up to that task?

Regional pains – what happens to communities when industries close?

Upstate New York and rural Australia may give us some clues to how regions will evolve in the 21st Century

Yesterday’s post on Chobani Yoghurt rescuing a town in Upper New York state raises some questions about what happens when a major industry leaves.

For South Edemston, the question went unanswered as Hamdi Ulukaya and Chobani saved the day, but other towns haven’t been so lucky.

Australia’s Goulburn Valley, about a hundred miles north east of Melbourne, may be about to find out as the main local fruit cannery will close down unless the state and Federal governments each contribute $25 million to an investment plan.

Closing the region’s major cannery will have dire consequences for the local economy as the industry has been a major customer for the local fruit industry. Without the cannery, many of those peach, pear and apple growers have nowhere to sell their produce.

Already farmers are bulldozing their trees and grubbing up the roots as the market works against them.

So what happens to the Goulburn Valley if the canning industry leaves? Do the orchards get turned over to goats?

There is a precedent in Australia for this, in Tasmania the ‘Apple Isle’ has seen its orchard industry steadily decline from the days of peak production in 1964.

A touching story in The Griffith Review by Moya Fyfe, the daughter a former Tasmanian apple farmer, describes when her father’s orchards were ripped up.

So in the winter of 1974, his life’s work, and that of his father, was bulldozed into windrows of gnarled stumps and roots. Acre after acre of once productive apple trees, captured in a photograph hanging on my parents’ dining room wall as picture-book hills awash with blossoms above North West Bay, were twisted and torn from the ground and left in undignified heaps to rot.

Moya’s father was given an exit package – a cash payment to find something else to do – by the state government. Something that many agricultural communities around the world have become familiar with.

The problem for Tasmanians was that there wasn’t really much else to do. At the time Moya’s farm was ripped up there was a belief the state would become an industrial powerhouse on the back of cheap hydroelectricity, but that never happened.

Tasmania’s economy continues to struggle and Moya’s article was part of a Griffith Review edition focusing on the state’s struggles.

The most pubilicised essay was a scathing analysis of the state’s culture by Professor Johnathan West, who identified the real problem for Tasmania as being a dependency mindset.

These numbers suggest that as little as a quarter to a third of Tasmanian households derive their livelihood from the genuine private sector. Of them perhaps a third gain their income from wholesale and retail trade and associated logistics, another third from residential and commercial construction and maintenance. The clients of both these groups depend largely on public-sector incomes, leaving only about 10 per cent of all households making a living from the traded private sector.

Interestingly both Johnathan West and Moya Fyfe are employed by the University of Tasmania, which probably proves the Professor’s point.

Overall Tasmania relies upon Federal government funds to survive, receiving over $1.50 in payments for ever dollar remitted in taxes; in that it joins half of Australia’s states and territories in being economically dependent on the Federal taxpayer.

That’s not a good sign for the Goulburn Valley or for the state of Victoria which increasingly is appearing to be to Australia what Spain was to the European Union circa 2007 or Miami to the US in 1927. When the Melbourne property market pops, the region could be in deep trouble.

For much of regional Australia – like disadvantaged parts of the European Union or the United States – communities have become dependent on transfers from the central government, the sustainability of that is being tested now.

It may well be that South Edmenson’s experience with Chobani illustrates the most sustainable way governments can support these regions, attracting entrepreneurs and new industries into communities that are being left behind is far better than leaving them on welfare.

Image courtesy of elcapitain through Flickr