Special report contributed by. Kerry-Jane Lowery, Writer, Photographer & Journalist
Zürich, February 6, 2013 -Crowd funding does not originate in the world of finance. Fans of the British rock group Marillion are considered the inspiration behind this relatively new phenomenon. In 1997 they raised $60,000 in donations through a fan-based internet campaign to fund a U.S. tour. Since then, crowd financing has been used in support of a wide variety of activities. So how does it work? “It’s a way for a large number of people to invest small amounts of money over the web to fund projects,” Steinberger, who co-founded www.c-crowd.com, the first Swiss crowd funding platform, explains.
According to crowdsourcing.org : “In the Anglo-American world, crowdfunding is already established as an alternative form of fundraising.” Gutenberg explains: “There are 20 platforms in German-speaking Europe and approximately 50 crowd funded projects, […] crowd financing is great but only for a very limited number of applications and companies.” It affords start-ups a lot of visibility and funds they would not otherwise have access to, but it very much remains a niche market. Furthermore, the idea has to be fairly simple to appeal to a large number of people and must be easy to grasp. That’s biotech out the window!
Fitting the Mould
“Companies with a B2C business model which directly deals with the client are ideally suited for this type of funding,” Steinberger explains, “since a large proportion of shareholders also become clients of the company and will spread the word within their network.” Moreover, the regulatory aspect is still quite strong for equity-based crowd funding in general.
When you raise money on a Swiss platform , it’s considered a public offer, so your company must be an AG.
Steinberger’s platform has helped to make two deals so far. “We have raised CHF660,000 of investment, which shows that it has its place,” he says. “We’re not in the same league as Kickstarter,” he explains “but raising CHF 0.5m — CHF 0.75m per company is feasible.” Platforms cannot solicit funds from abroad however, due to the different requirements from one country to another.
A Brave New World
“Starting a crowdfunding project is a lot of effort – it does not suffice to put the project on the platform,” Joerg Eisfeld-Reschke, co-author of a survey on crowd funding conducted by crowdsourcing.org, writes. This can be compounded by the worry that someone might steal your idea once it goes public. And in terms of disclosure, problems may emerge later, when the new company has to make public its numbers. “Someone could be a shareholder for just 100 bucks to find out what the competition is like,” Gutenberg remarks.
On the investors’ front there is work to do too: questions to ask and research to perform. “It is a valid form of investment if people want to engage with start-ups,” says Grünstein, whose innovative financial advisory company aims to make retail banking more customer friendly. “If the best projects are in the crowd and an investor can adequately assess the opportunities, they should go for it.”
In terms of the projects themselves, business angels and VCs alike are looking for an investment with a substantial return. Whereas, crowd funding is more about an affinity to a product or service. “It’s more of an emotional decision than a rational one,” Steinberger explains, especially given the smaller amounts of money involved. It is also a fabulous marketing tool. “It’s the best reality check you can get, feedback is immediate. A business angel can’t do that for you,” Hillary Newmayr of UBS enthused.
“If you have a good idea, try to do it with the least intervention possible,” Gutenberg explains. A crowd can be good to get the word out, while a business angel brings a lot of experience and know-how, so perhaps a mix of the two is best, argued Moser, whose closed his Series A financing round in November 2012 using investiere.ch, a hybrid platform. “We have a B2C product and believe that if we have more investors they will spread the word,” he explains. The company also wanted business angels so, in fact, two-thirds of the financing is from them, while the third from crowd funding becomes a marketing tool .
Far From the Madding Crowd
Surprisingly, the challenge of having many shareholders does not necessarily reside in the exit strategy as people might think, but in the many decisions that must be taken in between. And this is of crucial importance to a VC. “We want to stay away from companies with too many shareholders,” Gutenberg explains. “We want to shake hands with three to four shareholders, no more.”
What is the profile of the crowd? “The investor profile is very varied, from CEOs to students, business angels, etc.” Steinberger says. Which begs the question: do these many funders appreciate that they might lose their investment should the venture fail? This is stated on the platforms’ websites (along with a good legal disclaimer!) but perhaps not made sufficiently clear according to Gutenberg and Härtsch. “The reality is that 85 to 90% of companies need more money than they think so they need more rounds,” Gutenberg explains. But do these funders understand the concept of dilution? Most of the companies will go bankrupt, investors will lose out and they will complain – this from 2011’s business angel of the year! Given that the majority of investors risk between CHF500 and CHF5,000. Does that make it more palatable?
INSEAD Alumni Association of Switzerland Event Zurich
ZURICH October 7, 2013 – What do GE, Dangote, DHL, Orascom, and Tullow Oil have in common? In the past year they are just a few of the larger corporations announcing multi-billion dollar cross-border investments targeting the healthy long-term prospects of Sub-Saharan Africa. Growth rates of upwards of 5%, several full percentage points higher than most of the world’s other major economic regions, have triggered an inflow of investment dollars. But these opportunities are not just reserved for billion dollar investments, as about 100 attendees of September 19th’s Africa Mid-Market Investment Seminar learned. There is clearly opportunity in providing finance to address mid-market business in multiple sectors and countries.
The event, hosted by the INSEAD Alumni Association of Switzerland, provided a rare opportunity to hear six experienced and successful African investment professionals describe their experiences and discuss the key factors that determine success or failure for investors in the rapidly growing Sub-Saharan market. “The Heinekens and the Diageos of this world will invest as little as a quarter of a million dollars for bottling plants in the Democratic Republic of Congo (DRC) and have it pay itself back in eighteen months. It is just an amazing return, and illustrates one reason why our bank is focused on Africa,” said Chris Clarkson, Head Corporate & Investment Banking, Standard Bank Africa in Johannesburg, in a keynote speech.
Clarkson’s descriptions of Standard Bank’s growing business in Africa reflected why African opportunities have become more attractive to businesses of all kinds as they seek to enter and develop new markets. But the key topic of the evening that Clarkson and his fellow panelists, all of whom currently work in Africa, addressed was the practical aspects of where and how to invest in Africa.
Two panels, moderated by Michael Southam (pictured left), a partner at Rockcliffe Partners, a Swiss boutique M&A firm specializing in African opportunities, focused on the practical aspects of investing in Africa and addressed some of the myths surrounding the subject such as the size of investments required to succeed on the continent. They described an investment landscape that is compelling despite the broad perception of risks and dangers generated by stories that often make headlines about investing in the frontier markets of Sub-Saharan Africa. “You don’t have to exaggerate because it is Africa. The risks are known, understood and can be addressed. If you take a country by country approach, there is reliable information and competitive intelligence available to make informed investment decisions,” said Christophe Asselineau, Partner, Shearman & Sterling in Paris.
Fellow panelist, Jean-Michel Lavoizard, founder of Aris Intelligence in Abidjan, Ivory Coast, agrees: “I absolutely concur. It is necessary to have a country by country approach. Even countries that border each other can be very different from each other. However it is possible to get the necessary information with respect to the law, and I agree that you don’t have to go overboard because it is Africa.”
The panelists (above L to R: Anat Bar-Gera, Christophe Asselineau, Chris Clarkson, Jean-Michel Lavoizard, Amber Mahood, Joe Delvaux ), who were selected by Rockcliffe Partners from its extensive network of specialists and drawn from different sectors and professions, made the point that taking stock of each country’s social and political environment is essential, but equally important is travelling to the country to meet partners, government officials, and local business leaders. “You cannot just do desk research from a distance. Political risk is a real issue and you have to be comfortable with it. You need to get on the ground, meet and understand the people,” said Joe Delvaux, Head African & Middle East Investment, Quantum Global Investment Management (Zürich, Switzerland). The knowledge gained on the ground cannot be replaced by a simple review of financial reports or market analyses. The wealth of knowledge to be gathered in situ is unique, as Delvaux made clear when he said, “How to run a business during hyperinflation is not something you pick up in business school.”
An evaluation of all dimensions of the local landscape is crucial, agreed Jean-Michel Lavoizard of Aris Intelligence. “I emphasize the importance of having local Information, the right information,” said Lavoizard, who pointed out that in some jurisdictions basic records, such as commercial registers, cannot be relied upon, nor can data from local chambers of commerce. There are gaps in African governments’ centralized information, and so his firm uses other methods for deep due diligence work.
“You, as investors, need to have sufficient clarity on who you are dealing with and who your partners are. The correct information can anticipate, as well as mitigate risk and lay the ground work for problem solving in cases of fraud, for example,” said Lavoizard, who added that the mid-market was in his view less risky than large cap deals. “I don’t want to deter or discourage business investment with these examples,” said the experienced African intelligence expert, “On the contrary, I believe, as most of us here do… it is more risky to not invest in Africa than it is to invest in Africa.”
Some Do’s and Don’ts
Having covered where and what to look for in African investments, the discussion turned to the more practical aspects of how to invest.
Don’t cut corners on the regulatory and legal aspects of investing, was a key piece of advice offered to the audience. Contractual issues may occur, said several of the panelists. “Do the commercial and legal due diligence and get legal advice. It doesn’t have to be expensive legal advice. There are good local lawyers. Get the contracts in place, bearing in mind that arbitration will typically not bring back assets, but money and rights may be returned”, said Christophe Asselineau of Shearman & Sterling who has been working in Africa for more than a decade. “There may be the need for contract renegotiations, even within a month, following the signature of an agreement due to regional conflicts or political changes. With that in mind, it is essential to have the initial contracts done properly. You are starting from a more solid base if or when renegotiations are required”, said Asselineau.
Panelist Anat Bar-Gera’s experience as an entrepreneur and Chairperson of YooMee Africa, a Cameroon- based Internet services provider, confirmed Asselineau’s comments. “In Côte d’Ivoire we obtained our original license in the correct manner and thanks to that were able to go back when the war was over and get our contract back into place and the business up and running.”
Clearly, attempting to conclude business deals by relying on legal or regulatory shortcuts is not a sound alternative. “I know of a few big deals done like that, multibillion dollar deals done on the back of an envelope. Those were proved to be very expensive mistakes,” said Asselineau who did not reveal the name of the companies involved.
Don’t pay for corruption. “If you pay once, you will have to continue to pay forever. You must stick to your principles and it is not, in fact, very difficult. We tell corrupt officials that our institutional backers required us to commit to not commit corruption,” said Bar-Gera. This stance has served to give her company an effective means to avoid being asked for improper fees or indulge other forms of commercial misconduct.
The Opportunity: Addressing the Mid-Market Financing Gap
Because it is significantly under-serviced financially, the African mid-market is offering returns that are difficult to find in other markets. According to Clarkson the region is underserved because traditionally equity investors have sought the security of large cap companies, such as Heineken, Nestlé or Unilever. Senior debt too is also typically reserved for companies from outside of Africa or sovereign bonds. “Investment is largely reserved for deals that can get a rating. You get a rating and there is somebody (international banks and commercial banks) who will take it to the international markets,” he said, giving the examples of Mozambique and Tanzania, which both recently raised international capital at “astounding” rates.
The opportunity for investors willing to approach African mid-market companies is significant. Mezzanine financing is particularly attractive according to Clarkson and Southam. “If the PE players are covering the whole continent, there is a clear opportunity for mezzanine financing or structured debt which is a bit more risky but also more rewarding to the investor than senior debt,” said Clarkson. The international banks are not interested in addressing the mid-market opportunity due to the relatively high costs of small deals.
On the sell side, debt has also become more attractive to entrepreneurs. “African entrepreneurs are increasingly drawn to a debt solution as it offers an attractive alternative to giving away their equity”, said Delvaux of Quantum Global. He went on to explain that entrepreneurs clearly understand the long-term value of the business they are building. Delvaux added, “Do they really want to give away control of the company just to raise a few million dollars?”
While some investors in the mid-market tend to be opportunistic, relying on their networks of contacts to identity “low hanging fruit”, Clarkson said that there are clear growth nodes and asset classes to focus on. Presently the most rewarding asset classes are oil and gas opportunities, mineral resources, infrastructure development such as power generation and transport networks, projects linked to the region’s rapid urbanization (FMCG and real estate), and agriculture; “I would be amiss not to mention agriculture,” said Clarkson, explaining that “There were earlier stop and start forays by international players which had problems, but now local countries themselves have shown some resolve, have come through and are now producing.”
This trend has not escaped the attention of multinationals in Europe and the BRIC countries. “You are now seeing London based sugar companies investing in mills in Mali and Tanzania,” said Clarkson.
Other panelists confirmed this trend towards mid-market projects. Amber Mahood, Director of Fund Development, Fusion Investment Management in London, commented: “We’ve moved into real estate investment, green energy, and infrastructure investing from a base in small and medium sized consumer goods and industrial businesses.” According to Mahood, real estate and mortgages are attractive due to growing urbanization and the emergence of the middle class and high income earners. “Our investment activity has a goal to provide the capital to take local business owners to the next level,” said Mahood, whose company has historically invested locally in East Africa and now employs a team of forty in the region. Mahood added that the region was selected by her UK-based parent company due to the potential for cross-border trading, potential for a single currency and cultural, legal, and language affinities.
Other areas favored by panelists were telecommunication and mobile services but the panelists warned that investing in Africa is not like winning the lottery. “Don’t come to Africa with a me-too business idea. You have to bring a competitive edge and cannot just copy/paste what has worked elsewhere,” said Anat Bar-Gera of YooMee Africa.
Bar-Gera rejects rolling out identical services to those that are on offer in Europe or North America because many African countries are in fact leapfrogging technologies, and are already ahead of Europe. Clarkson agreed that leapfrogging technology is evident in several nations. “Nigeria and Kenya, for example, have moved directly to mobile, skipped satellite and [legacy] underground cabling,” said Clarkson.
Other countries have bypassed traditional banking and gone straight to mobile banking. Clarkson said that Kenya’s ecommerce and mobile payments and mobile money transfer boom is an example. “Kenya has something called airtime money,” said Clarkson. “The system has revolutionized banking.” It was originally created to enable microfinance-loan repayments to be made by phone. Because it dramatically reduced the costs associated with handling cash, and users repaid the loans on time and in full, it enabled lower interest rates and it has spread into many other banking segments for the same reasons.
A networking cocktail followed the panel discussions. The consensus on the evening’s event, as expressed by a senior banker at one of the largest Swiss-based banks “ …was that it proved again that Africa is simply one of the strategic themes of our times for investors, financiers, entrepreneurs, corporations, NGOs and last but not least politicians”.–ENDS
Read the 4-page Africa Event Special Report (pdf)
Text & Pictures by Kerry-Jane Lowery, Writer, Photographer & Journalist
“For those of you in a hurry, the executive summary of tonight’s talk is: The 20th century is over.” With these opening words from Avivah Wittenberg-Cox, the woman behind Women Who Mean Business, the audience settles down to find out just what she means by this.
Monday evening 6pm sharp, and the Salon de Brunswick at the Beau-Rivage in Geneva comes to life as INSEAD alumni and guest business schools gather for the first talk of the year.
As the room fills up and resounds to the hum of voices greeting friends and colleagues, it is obvious that this topic of Why and How Women Mean Business is a hot one.
Pepsico, the event’s sponsor, is out in force this evening keen to hear Avivah speak and partake in the lively conversation which follows over drinks and eventually dinner. Forty INSEADers mingle with a large number of people from other networks including the Harvard Business School, IMD, Kellogg’s, LBS, etc. representing a host of sectors such as finance, industry, academia, government and coaching.
Leila Ojjeh’s, President IAA Geneva, highlights how alumni associations can play a key role in helping women develop their career and nurture their network after business school in her introduction to a packed room of over one hundred participants. Avivah then takes to the floor and reveals the ‘whys’ and ‘hows’ by beginning to compare pyramids to pomegranates. The old hierarchical and structured system has given way to today’s more decentralised, globalised, agile and levelled approach to companies and business with a very consumer-centric focus, which is very much in line with women’s leadership style and approach. In fact, this shift is very much driven and influenced by the increasingly important and central role women are playing in the workforce and the market place, yet despite this, the majority of leadership teams remain 90% male.
“Today women represent most of the talent pool and much of the market, Avivah explains, […] but the subject of women and gender has long been framed as an interesting but somewhat minor issue in the business world.” This is all about to change according to her, since at this moment in time we are witnessing a massive global and historical shift with women representing 60% of university graduates in many countries, setting up most of the new companies in the US, filling three quarters of the jobs created in Europe since 2000, making 80% of consumer purchasing decisions in the US, and the list goes on.
As CEO of the leading gender consultancy, 20-first, and author of two best sellers, Why Women Mean Business and How Women Mean Business, Wittenberg-Cox has the facts and figures as well as the road maps and solutions which leave no doubt in anyone’s mind that women mean business. Bigger, better, faster, more. Today’s reality is that women are good for business.
“Recent studies complement and reinforce a wealth of evidence that gender balance is good for economic growth and wellbeing, as well as for the business bottom line”, she tells a room that is not gender balanced, only a quarter of the audience is men, representing companies such as Pictet, Julius Baer, Dupont, Caterpillar, WWF, and Korn & Ferry.
“Gender is a business issue, not a “women’s issue”
Avivah includes women and the issue of gender in the 4 Ws that are changing the lives of countries, companies and couples all over the world, the 3 others being the Web, the Weather and the World in terms of economic and geopolitical reshuffling. One of the main questions she poses is: “What’s the matter with our organizations if we can’t recruit, retain, and promote the majority of the educated talent in the world today?” Note that she doesn’t talk about fixing women but: “… adapting organizational cultures and management styles to new talent and market realities.”
In order to design – and be accountable for – more gender balanced businesses men must be included in the conversation, especially men in senior management. They must buy in to the necessity and benefit of this and become gender-‘bilingual’ in the process, along with everyone else. “There is a growing acceptance that women and men can be equal and different, and that what adds value is the optimisation of these differences, not their suppression,” she explains.
Isn’t equality part of the answer, you might ask? Apparently not. In fact this strive for equality has side tracked the promising careers of countless women. Just think of the number of companies that evaluate and groom young talent for leadership and power, whose programmes kick off for managers in their early 30s… “This is exactly the moment in life when high-achieving, ambitious professional women tend to get married and have children,” says Avivah. This 30-35 window is a very effective way of eliminating women from the leadership pool and is one of those systematic blindspots that no one sees.
“A related issue is the strong belief in many organisations that they are healthy meritocracies. If people are good, most leaders believe, they will naturally rise to the top,” she adds. The fact that the number of women vs. men begins to fall as soon as you look at the gender balance up the management ladder is not taken into account. However, women are put into question. And the same could be said of power and ambition. “Companies promote “hungry,” ambitious people,” she explains, but women are less likely to push for power. “Does that mean they are not fit for it?” Surely this obsolete blueprint ought to be updated.
Phil Myers, Pepsico Head of Communication, EMEA, wraps up the talk by explaining that half way through Pepsico’s collaboration with Avivah, he had a ‘eureka moment’, when he understood that gender balance was fundamental to their business. He goes on to add that the company has to be better at communicating the business case since it is about empowering everyone and not just one group: “This is not about promoting women, but having a workforce for the 21st century.”
Getting men to lead the change
Question time brings further food for thought. How do you prepare ambitious 20 year old women for their thirties when their priorities often shift to having a family and their career takes second place? According to one study, women’s expectations in terms of career dropped by 30% when they hit 30, whereas before they had been identical to men’s. What can be done about this since it comes as a big shock to many women? And the issue does not only involve family life and children, but changing values and perceptions vis-à-vis work and careers too.
The issue of language around leave also emerges, with companies favouring ‘parental leave’ to ‘maternity leave’ to take the focus away from women and value the father’s role in childcare. Will this really have an impact? A further concern around the fact that 60% of graduates are female sparks a debate, since the educational system has over-feminised and men are falling back. “Who are our daughters going to marry if this goes on?” Avivah ponders.
As for the question of talent mobility, one of the answers involves new mothers taking up positions in countries where day care is inexpensive, and gaining international experience in the process, returning later in their career to HQ with valuable knowledge of other markets, etc. This has to be a constructive answer surely?
The debate spills over into the drinks that follow. “The fact that it makes good business sense makes gender balance all the more compelling,” explains Jennifer Bernstein, Strategic Planning Senior Director, West Europe Region, Pepsico. “It was a very inspiring talk, says Taran Bains, Independent Wealth Manager. I’ve done a lot about boards and no one focuses on gender balance and we need to be focusing on this.”
Andrea Bastreghi, INSEAD alum, sums up the talk from the male perspective: “As a man I found it interesting and refreshing, since the attitude was very engaging, friendly, intelligent and non-confrontational. I was positively surprised because there were quite a few men there.” Andrew Hunziker, ex-Swiss IAA President, expresses his surprise at the lack of men: “It was such a great talk but it’s a shame there was an imbalance between men and women in the audience since it’s a stimulating topic and I agree with the view that this is the future.” And since all the participants leave with copies of Avivah’s two bestsellers, thanks to Pepsico’s generous sponsorship, the future will spread fast.
A small dinner for INSEAD Alumni and special guests follows. Richard Bissonnet, President IAA Switzerland, makes a short speech thanking Avivah for her inspiring talk, and Leila and Rumyana Dorlas, Vice President IAA Geneva, for organising the event. Albert Van Daalen, Harvard Business School Class of ’53, reveals to his dinner companions that he wrote a paper entitled: The Changing Role of Women in Business, 57 years ago. And the icing on the cake is that he wrote it with Professor Doriot, the founder of INSEAD! Avivah Wittenberg-Cox, INSEAD MBA ’84, is definitely following in a great tradition.
What Drives High Growth Rates, Miracle Economies, and Disasters
The Swiss INSEAD Alumni Association invited Ilian Mihov to speak to alumni and special guests in Zurich in May. We are pleased to publish here an exclusive report about his presentation and the evening’s activity. Professor Mihov is in high demand for his research on emerging markets. He is also now the new Dean of INSEAD, a role that he undertakes with a vision is to keep INSEAD on the vanguard by developing “responsible, thoughtful global leaders who will transform companies, communities and nations throughout the world.”
ZURICH Friday, 03 May 2013- This month the Yuan climbed to its strongest level against the US dollar since 1994. India’s Rupee climbed to a two-month high as inflation there eased, and Brazil’s Real is slightly up since the beginning of the year. Do these gains mean that the so-called emerging markets are about to wrest economic power from the US and Western European countries? No, the timeline has not changed, according to Ilian Mihov, INSEAD Professor of Economics, and Interim Dean. The past fifteen years of consistent economic growth in emerging market countries has been unprecedented, particularly in China and Singapore. “But the world’s economic power is currently distributed in favour of the US and European countries, which combined, currently represent close to 50% of global GDP. Change is underway in the long term. In 1980 the richer countries represented 60% of output, but by 2015 it will still be 47%,” said Mihov speaking at a Swiss INSEAD Alumni Association event in Zurich in early May organized by Alexander Wyss, a partner at Baker & McKenzie and President of the Zurich chapter.
Redistribution is however inevitable based on current growth rates (See Distribution of World Output graphic). “By the year 2050 the US might represent only 10% of output based on GDP,” said Mihov who said that he has not changed his outlook significantly since 2011.
“There have been slight fluctuations of growth rates in the past couple of years, but the trends remain strong and they determine the long-run evolution of the global economy. The reduction of China’s growth rate was largely expected. When you have one bulldozer, adding another one increases capital and possibly output by 100%, but adding a third only increases capacity by 50%,” quipped Mihov on the side-lines of the alumni event.
Countries like China, Malaysia, and India are growing. Growth is driven by imitating and replicating, a model followed in the sixties and seventies by Japan and now by Korea and other emerging economies. “These drivers are replicating and imitating, and they will be the drivers for some time to come. The key ingredient for this growth is investment and mobilization of the workforce,” said Mihov.
“Rapid growth of 8 to 10% is possible during the catch up phase, but the growth slows once a country converges on the so-called technological frontier established by the US and followed by other countries, such as Japan, Germany, and other G7 countries,” said Mihov, explaining that it makes no sense to invest in innovation at this stage of development.
The Bulgarian-born economist discussed the concept of the technological frontier. (See the red line in the graphic entitled US GDP : at the technological frontier). “Wealthy countries are already at the frontier and cannot grow faster than the rate of the frontier (about 1.85% per annum). “Poorer countries can and will often grow very quickly until they reach the frontier, after which they grow at the same speed as the rich countries,” posited Mihov. He argues that long term growth at the frontier has been surprisingly stable as seen in the US, despite oil shocks, recessions, depressions, and world wars.
He warns of extrapolating growth rates of emerging economies indefinitely, which can happen if one is not aware of the convergence and frontier concept. He pointed out that several renowned economists once predicted back in the seventies that Japan’s economy, which had a high growth rate due to imitation and replication, would overtake and outpower that of the US. Instead it converged on the more modest 1.85% growth rate along with the advanced economies. “It is the same story for Korea,” he said.
Mihov’s work removes the mystery and gives credible reasons why some countries get rich and others remain poor or become “disasters”, rather than “miracles”. Miracle growth rates are not really miracles nor random. They are the result of a high rate of investment, at least 25% of GDP, plus productivity improvements. In Latin America, Brazil and Chile have had periods of good growth, but also some disappointing periods. For example, Brazil recorded an average growth rate in income per capita of only 0.4% between 1980 and 2005, while during the same period Chile managed to grow rapidly and to become now the richest economy in the region. It is worth noting Argentina was at one time a strong and thriving economic power. It was outpunching Italy, but it has stalled in the last 50 years and today it is still a middle income country.
Mihov said that his studies show that economies become “disasters” or get stalled not because they lack machinery, nor because workers and skills are in short supply, nor because they lack natural resources. It is because some countries cannot or will not improve institutions, reduce corruption, and enact reforms. As an aside, Mihov pointed out that resource-rich countries do not grow as quickly as one would expect. A wealth of natural resources can in fact be a liability. The reason is corruption. He also showed that investment in human capital only without a strong institutional foundation and capital investment program is not a particularly effective way to foster growth. Improved education can accompany negative growth. Why? Brain drain.
Today China and other fast growing economies still score very low on income per capita against the US, Europe and Japan. “It will take quite some time for emerging markets to grow annual income per person from a few thousand dollars to the current level of the US and Europe, which is about $50,000 annual income per capita,” said Mihov. Before reaching parity, each of the poorer countries have to cross what he calls the “great wall”, the point where income per capita is around fourteen thousand dollars. At that point, a country has to navigate carefully; one essential is to make sure the country has good institutions. Political mismanagement can prevent growth from increasing to reach convergence on the technology frontier, according to Mihov. His discovery of the “great wall” was a result of an extensive study co-relating a large number of economic and governance indicators for about 100 countries over an extended timeline.
One of the countries that has exhibited the most miraculous growth over a 35 year period was a surprise: tiny Botswana, a land locked African nation. Mihov said that it had been growing for decades from a very low basis faster than Korea, Japan, and Hong Kong. He says its success was due to a decision to form quality institutions after the British left the country to its independence. After an hour of listening to Mihov’s studies and observing his extensive models it became clear that institutions matter, good governance, including property rights, ease of doing business for entrepreneurs, rule of law, independent central banks, and the ability to reform are all combined to highly influence the potential rate of growth in emerging economies. (Image Source: Ilian Mihov)
On the sidelines
Discussion was lively following the presentation at the historical and elegant Zunfthaus zur Waag near Paradeplatz in Zurich as attendees enjoyed an Apero Riche with wine and soft drinks. Mihov is clearly a well-respected INSEAD lecturer. One alumnus told this reporter that she’d exempted his course when doing her MBA, a mistake she was keen to amend by attending the event. “I am fascinated by him because I’d heard how so much about him and how he challenges students. They are the top, smart, and well-educated, and yet he managed to challenge them to think more deeply,” she said.