SOPHISTICATED FINANCE

Diaspora Management

I have spent the last two days in Jamaica, including some time at a convention devoted to the 4-5 million Jamaicans that live outside the country. Currently Jamaica has a local population of 2.3 million. The Jamaican Government call this overseas population the Diaspora. The Government went to Israel to study how that country manages their diaspora or overseas population of religious followers. There are even academics who have developed a set of five best practices for diaspora management. They are all so obvious that I will not repeat them.

As near as I can tell, diaspora management is designed to guilt the overseas population into investing in the homeland as a means to foster economic development. Economic development theory has baffled me for years, despite quite a bit of study of the subject. As this previous post on economic development makes clear, the subject is overly complicated and therefore much of the theory appears to have limited applicability.

Diaspora management appears to me to be another part of economic development theory that is overly complicated. If you want to attract foreign investment, regardless of the source, you need to satisfy four conditions:

1. Free movement of capital across borders
2. A legal system that protects investor rights at the level of developed countries
3. An economic performance that has sufficient stability and growth to attract investors 
4. Market rates of return for the perceived level of risk that are attractive compared to alternative investments (in other countries)

Jamaica is making progress on the necessary conditions outlined above. Personally I think diaspora management is a distraction that will have limited effect on economic development. Increased efforts to build an economy that attracts more foreign investors would be my strategy for Jamaica.

Areas that look particularly attractive to me for investment in Jamaica are agriculture and alternative energy, which are also key industries in the government twenty year plan (in addition to tourism and logistics). Interestingly, Jamaica is trying to build an enormous transhipping facility to take advantage of the expanded Panama Canal in 2014. Project is in the early stages but foreign investors are showing interest. Miami beware!!

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Carao Ventures--Central America VC

I met Adrian Garcia several years ago when he worked at MesoAmerica, perhaps the first venture capital firm in Central America. I would also point out that Adrian is a graduate of the MIT Sloan School, so we have some other shared interests.

Recently Adrian and a partner, Allan Boruchowitz, founded Carao Ventures, a venture capital firm that specializes in early stage tech companies targeting the Latin American market. What differentiates Carao from most VCs is their approach, which I quote below:

"Carao Ventures has an early stage startup program where one of our partners takes an active role in the startup through the next stage of company development, participating in relevant roles such as strategy, finance, marketing and others."

Carao is headquartered in San Jose, Costa Rica. 

Pipeline Brickell--Miami Accelerator Meets Shared Workspace

Jerry Haar, the Director of the Pino Entrepreneurship Center at FIU (where I am on the Board), introduced me to Todd Oretsky, the Founder of Pipeline Brickell. Pipeline Brickell is a somewhat unique concept which combines shared space with mentorship and access to capital for startups and early stage companies. What makes the concept different is that mature high tech companies, such as Google, and services providers, such as IP attornies, also use the space. Looking for an expert on an issue, the answer may be just down the hall. 

Pipeline Brickell has as well thought out office space as I have seen anywhere...in the world and beautifully done. Definitely designed for collaboration and creativity. Perhaps not surprising given that Oretsky came from the world class law firm of Skadden Arps. Oretsky plans to expand Pipeline to cities in Latin America and to link networking opportunities across multiple cities.

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Previous posts on Latin America.

FIU's AVCC announces presenting companies

The Next Silicon Valley

My friend Mariana (@Yaquesita) is one of the best sources of excellent articles and blog posts I don't find myself. She covers a wide range of subjects, including education, gadgets, tech, entrepreneurship and all things Mexico to name a few subjects. She is well worth a follow on Twitter. Today she sent me a post “Can our country be the next Silicon Valley?” from Tech Crunch.

The article lists six factors to duplicate Silicon Valley, which are:

1. Market
2. Capital
3. People
4. Culture
5. Infrastructure
6. Regulations

I think this list misses the point. To foster great entrepreneurship requires three factors:

1. Available capital to finance early stage companies
2. Great universities, such as Stanford and Cal Tech
3. A culture of business people (this is a difficult point to explain at the risk of being discriminatory, but certain groups have thousand year cultures of doing business)

You also need a regulatory environment sufficiently permissive to allow individual empowerment. Not a full fledged democracy, but a certain permissiveness that allows business formation.

In many countries the biggest challenge is the lack of great universities (Latin America). In an equally large number of countries there is no long standing culture involved in business (perhaps much of Africa). Everywhere access to early stage capital is an issue, even in Europe.

If we reduce the scope of the analysis to regions like Silicon Valley or cities, the possible centers of entrepreneurship are reduced further. For example, in Asia there may be only 5-6 cities that have a great university devoted to technology, but 4-5 of these lack multiple sources of organized capital for early stage companies.

Re-creating Silicon Valley is not impossible, but I would start by attracting a great technology oriented university to the area. Two would be better as Silicon Valley shows with Stanford and Cal Tech. Also, note that Boston has both MIT and Harvard.

My last article on this theme is here.

Smart Cities--Smart People?

The "smart city" project is designed to introduce better, more environmentally friendly technology into larger urban areas to improve the overall quality of life. Much of the early work was done in Europe but now the movement is spreading to lesser developed areas including Latin America. This story from Co.EXIST, "Filling South America With Smart Cities", highlights a project in Santiago, Chile.

I think the "smart city" project is a great idea particulalrly given the dramatic growth in urban population. Free ubiquitous Internet access, solar powered everything and better mass transportation all sound attractive. I have only one question? Where are the smart people who will inhabit the the smart city? Without equal emphasis on improving education for the poor and disenfranchised, smart cities will only further exacerbate the class discrimination so prevalent in Latin America and other parts of the world.

Previous thoughts on urbanization are here, here, here, and here.

Image credit: faculty.fairfield.edu

Update on Latin America Economic Performance

The Center for Hemispheric Policy at the University of Miami has released a new research paper, "Latin America in the Age of Globalization: A Follower or a Force of its Own?” Key findings from the paper include:

- Average annual growth in GDP in LATAM trailed the world average in the period 1998 to 2008 but surpassed world averages in the period 2009-2011 on the back of strong commodity prices.
- The ratio of exports to GDP is growing faster in Latin America than in any other part of the world in part due to new trading partners in China and India.
- in 2011 foreign direct investment amounted to US$ 150 billion, a 31% increase over 2010.
- Latin America continues to have the highest Gini coefficient, which measures the concentration of wealth, with a coefficient of 50%; 30.4% of Latin America's population is poor or indigent.
- Total factor productivity has shown little improvement in the last 40 years in Latin America, while countries such as Korea, Malaysia and Thailand have demonstrated marked improvement in productivity.

The paper concludes:
"If Latin America does not change its policies substantially, the prospects for the region to remain a relevant partner in an increasingly integrated world would be poor. Latin America may grow by the current rate on a per-capita basis, possibly in the order of 2 1⁄2 percent a year, but the world will be growing faster. Latin America’s income may stay at a constant ratio to advanced countries, with Mexico and Brazil possibly posting growth rates close to that of the United States, but this performance means that Latin America may slowly loose global relevance, especially in comparison to East and South Asia."

Wednesday I will be speaking at a conference in Lima on ICT. My themes will be education and social inclusion in the digital era. A timely speech given this research report.

Full report is at: https://www6.miami.edu/hemispheric-policy/Task_Force_Papers/Loser-GlobalizationTaskForce.pdf

Education and Social Inclusion

The quote below by Richard Wolin in the May 21, 2012 issue of The Nation explains the relationship between education and social inclusion.

"For the first time, men and women of diverse social backgrounds were afforded the opportunity to cultivate the knowledge and self-understanding necessary to surmount the oppressive constraints of class, race and gender."

The reference is to the GI Bill that paid for WWII veterans to attend college in the U.S.

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The Economist Wrong About OLPC in Peru

In a recent article The Economist magazine reviewed the results of an Inter-American Development Bank report on the OLPC project in Peru. While known for its insightful writing, in this case The Economist missed the point. While correctly pointing out that math and language skills showed no noticeable improvement after the children started using their XO laptop, The Economist missed the most important point. In Peru children showed a marked improvement in cognitive skills.

Cognitive skills are important as evidenced by their inclusion in the international PISA tests, which are the bench mark for measuring educational effectiveness worldwide. PISA describes cognitive skills in their 2003 Evaluation Framework as follows:

"Problem solving is an individual's capacity to use cognitive processes to confront and resolve real, cross-disciplinary situations where the solution path is not immediately obvious and where the literacy domains or curricular areas that might be applicable are not within a single domain of mathematics, science or reading." 

Cognitive skills are the higher order skills required to properly process information, evaluate the information in terms of critical thinking and draw original, creative conclusions. While math and language skills may have been of paramount importance in the industrial age, many commentators have identified cognitive skills as critical for success in the digital age of the 21st century.

The 21st century will be a period of individual empowerment with much less reliance on corporate infrastructures and other traditional institutions. The successful individuals will be masters of creating original content, packaging it in multiple forms and marketing it globally. While traditional industries such as agriculture and manufacturing will still make a significant contribution to the world economy, the new opportunities from the digital age will make an increasing economic contribution. However, this contribution is much more likely to come at the individual level rather than through institutions.

Perhaps The Economist needs to update its business model for the 21st century. Then, perhaps The Economist will realize the really meaningful results from the increase in the cognitive skills of the children in Peru. As OLPC is always quick to point out, the children do not need to learn computing but rather learn through the computer. The children of Peru in their environment of limited resources and undertrained teachers have learned the most important skills--cognitive skills. Now we just need for The Economist to recognize it. 

 

Brazil Auto Industry-Troubling Signals

Image via Wikipedia

Brazil is now the sixth largest economy in the world. Brazil is enjoying an economic boom, in part due to the reasons discussed in this presentation. The prosperity is flowing down to the middle class. AP reports that Brazilian tourists spent $5.9 billion in the U.S. in 2010. Many would say that the Brazilians, bolstered by a strong currency, saved the retail industry in Miami the last 2-3 years.

Despite the wide reaching economic prosperity in Brazil, there is one area that concerns me. Imports to Brazil have always been tightly controlled in order to protect local industries. This strategy may have been effective when Brazil was a struggling third world country, but today Brazil is emerging as an economic powerhouse with international political aspirations. 

Latin Business News reports that Brazil has requested that Mexico reduce auto exports to Brazil by 33% or $1.4 billion this year. If Brazil is going to aspire to a position of international leadership, it should be fostering more trade in LATAM. Such an approach to trade would increase its political clout.

If Brazil were to expand its political influence, especially in LATAM, such an approach would force the U.S. to pay more attention to LATAM. More attention from the U.S. would theoretically foster greater economic development in LATAM and benefit Brazilian exports.

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Coffee Substituted for Coca Production

Time reports that Bolivian coca growers are switching to coffee, helped in part by a US AID program. As pointed out in the article, for poor farmers it is simply an economic decision. Coffee is a more valuable crop than coca when coffee prices exceed about $3 per pound. Coffee prices have been rising steadily since 2003, as shown in the chart below. 

Source: Wolfram Alpha

U.S. Latin America Cancer Plot

Venezuelan President Hugo Chavez is speculating that the U.S. has developed the technology to cause cancer in leftist leaders in Latin America, according to this article from the BBC. The most recent head of state to suffer from cancer is President Cristina Kirchner of Argentina, who underwent emergency surgery recently for thyroid cancer. Chavez went through chemotherapy for an undisclosed cancer earlier this year.

While Chavez is renown for his baseless speculations, a negative view by the U.S. government of leftist governments in LATAM is widely believed in the southern hemisphere. Given the strategic importance of LATAM to the U.S. as a market for exports and as a source of natural resources, perhaps it is time for the U.S. to give a priority to better relations with the countries of LATAM regardless of where they lie on the political spectrum.

The election successes of leftist governments across Latin America is a trend that will not be reversed for a long time. As long as Gini coefficients remain high, oligarchies control the economies and indigenous peoples are discriminated against, populous, leftist governments will continue to have electoral success.

This story was inspired by a story in Latin Business Chronicle, which provides an excellent daily English language summary of LATAM events. Unfortunately, I cannot find a link to the email subscription I receive.

 

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Startup Fund Abandons Chile

Arnon Kohavi, an Israeli venture capitlist, tried to start a venture fund in Chile according to this story in TNW. After six months he pulled out. His reasons, as reported in TNW, are below:

"I took off because it will take longer for Chile to reach the tipping point. Good will from the government and a few people isn’t enough to re-create what places like Silicon Valley, Israel and Finland have.

The heart of the problem is Chile’s dramatic generation gap, between young entrepreneurs and the old generation. The Chilean society is less dynamic than Asia or the US; a handful of monopolistic families control the country, and won’t move.

Worse, these families don’t care about anything (the young, the poor…) besides their money. They don’t have to: the country’s natural resources (copper, etc.) are a disadvantage here, because it means the rich don’t need to work hard. The Asian model is better, because it focuses on exporting manufactured goods.

Chilean family offices may still give money to Endeavor, but for them it’s not about entrepreneurship – it’s just a way to brush their ego, and they only do it because it is all conducted in Spanish.

I know people were disappointed when I left, and the Chilean government would have supported my fund, but I also wanted a commitment from the elite, and it didn’t happen. Yet, I’d be happy to come back and do business when the country is ready."

I suspect the same result would have happened in ten other countries in LATAM. Organized and supported entrepreneurship struggles in most of LATAM with the exception of Brazil. I am working with a group to organize a high tech entrepreneurship center in Colombia that is supported by the private sector, municipal and state government and local universities. With such widespread support maybe we will do better.

Venezuela Mortgages its Oil to China for $30 billion

The LA Times reports today that Venezuela has arranged a new loan for $4 billion from China, secured by future deliveries of oil. Loans of this type with China now total $30 billion. A few observations:

1. With future oil revenues already spent, Venezuela post-Chavez will have few resources to rebuild the country and the economy. 
2. Natural resources will increasingly become the point of friction between the U.S. and China as China increases its sourcing in the western hemisphere
3. The U.S. needs a much more active policy of engagement with LATAM in order to shore up natural resource supply from the locally popular, left leaning governments in Brazil, Peru, etc.

Decentralizing Education Good Strategy for Peru

Much speculation surrounds the new administration of President Humala in Peru. One of the early decisions by Humala was to decentralize the management of education to the regional level in Peru. This approach is in sharp contrast to the former President, Alan Garcia, who used a federal or centralized approach to education.

The regional approach in Peru is very similar to Brazil where states have managed education since the abolition of slavery in the late 19th century. This is also the approach used by the world renown education system in Finland where cities exercise most of the power.

One of the advantages of a regional approach is that it better enables the matching of the curriculum to the local culture and language. Peru has about 60 indigenous languages and ethnic groups.

This working paper from Harvard Business School may support President Humala's decision through an analysis of the better performance in education by Brazil compared with China, India and Russia.

I think smaller countries, such as Uruguay, can be very successful with a centralized management of education. Larger countries, particularly those with rugged, remote regions such as Peru, may be better off with a decentralized approach that gives more authority and resources to regional, state or city governments.

A Great Example of Sustainability from Mexico

I spend a lot of time in Mexico. I have probably made ten trips there in the last two years. One of the things that always impresses me is the initiatives at the state level to correct social problems. Certain private sector companies also make significant contributions to social problems.

Friday I moderated a panel at the Latin American Business and Finance Conference in Miami. One of the panelist on the corporate social responsibility roundtable was an executive from Grupo Bimbo. Bimbo, headquartered in Mexico, is one of the largest consumer products companies in Latin America and well known for their breads, cookies and confections. Bimbo is completing a wind farm in the state of Oaxaca (wa-ja-ka) that will produce sufficient electricity to power all of the Bimbo plants (20+) in Mexico.

Maybe a reader can correct me, but I cannot think of a U.S. multinational that could claim that they use renewable energy to power all their plants in the U.S..

Mexico Benefits from U.S. Remittance Surge

A little news from Mexico this morning.

Remittances from Mexican workers in the U.S. reached a five year high in September and totaled $2.08 billion, accorrding to a story from Mexico in Bloomberg. While a cheaper peso accounts for some of the increase, Mexican workers in the U.S. are also moving into better paying jobs in the service sector. The move to service sector jobs is due in part to a decline in traditional jobs in fields such as construction.

If Mexicans are moving into the service sector in the U.S., perhaps we should consider more outsourcing to Mexico.

Latin American Business and Finance Conference--Miami

Image via Wikipedia

November 4th I will be moderating a panel on corporate social responsibility in Latin America at a new conference in Miami. Sponsored by the Colombia University Business School (my alma mater) alumni in South Florida, the Latin American Business and Finance Conference brings together thought leaders from across North and South America to discuss a wide range of themes in business, finance and economic development. Conference details are here. 

Miami should expand its role in the thought leadership of LATAM. UM and FIU have several organizations that contribute to a better understanding of a wide range of topics in LATAM (but more conferences raise the profile of Miami even further). Two organizations that are particularly noteworthy are the  Center for Hemispheric Policy at the University of Miami, which hosts high quality monthly events, and the Institute for Public Management & Community Service at FIU which focuses on the issues of the cities and states in LATAM and also hosts a great annual conference now in its 12th year.

Another upcoming conference is the 2011 Americas Venture Capital Conference, November 16-17, sponsored by FIU and the Pino Center for Entrepreneurship (where I am on the Board). This conference focuses on bringing together LATAM entrepreneurs and funding sources. Now in its second year, details for this premier event are here.

Take advantage of these events to expand your knowledge of Latin America. Please share this post on FB, Twitter, etc. so that more people realize that a great deal of though leadership on LATAM comes from right here in Miami.

Mexico--It's Not Brazil

Recently I wrote a very popular post on Brazil--ABDI Presentation on the Future of Brazil--that discussed a government presentation on the competitiveness of Brazil. A friend sent me some similar statistics on Mexico. 

Based on statistics from the International Monetary Fund:

• Mexico is the 14th largest economy in the world and the 2nd largest in Latin America
• Mexico is the 11th most populous country with 107.6 million inhabitants
• Mexico had per capita income of US$ 8,096 in 2009

The Secretaria de Desarollo Social, a minister level position responsible for social development in Mexico, provides the following statistics:

• 54% of Mexicans live in poverty
• 24% earn less than US$ 2 per day
• The poor are highly concentrated in the indigenous populations and the states where they live

The middle class in Brazil is roughly the same percentage as the poor in Mexico. Herein lies the problem for Mexico, for its people and its economic competitiveness. A large middle class is required to truly build a modern country.

Some additional statistics on poverty and social issues in Mexico are here. (Spanish)

Image credit: Wikipedia

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USEM Mexico UNIAPAC

This week I spoke in Mexico City in Spanish about One Laptop per Child to USEM (Spanish link; English link). USEM is an organization of business owners that use Christian principles for social good and has 26 chapters throughout Mexico. The members support a wide range of social projects related to children, family, education, entrepreneurship and the environment. It is especially enjoyable to speak to like minded people and I would like to thank USEM for the opportunity to speak to their members.

The members of USEM recognize that to achieve social change there are three requirements:

1. the will to make a meaningful change
2. the capital to carry out the program
3. the scale to make a significant difference

Implicit in my three requirements for social change is a recognition by USEM that the private sector cannot wait for the government to address all the social issues.

USEM is the Mexico branch of Uniapac, a worldwide organization of business owners in 25 countries devoted to social change through Christian principles.

 

XVI Inter-American Conference of Mayors and Local Authorities--FIU

Today I am speaking in Spanish at an FIU conference for 500 Mayors from across Latin America. A summary of my comments follows:

1. Typically the most effective government in Latin America is at the state and city level. At this level there is greater effectiveness in decisions and greater accountability. This is particularly true in Mexico and Argentina. Uruguay would be a notable exception in terms of the quality of the federal government.
2. State and city governments need to focus on the three basics--health, housing and education--in order to have any real impact
3. OLPC is the solution to the education issue and there are many different ways to fund a project
4. Education is a key issue across Latin America with voters, especially the poorer voters
5. To advance politically Mayors should focus on education

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