Sustainable Public Financial Management

Doug Hadden, VP Products

Christoph Schmaltz of the Dachis Group (@christoph) has described what I’ve been trying to get at with some recent blog entries. His July 28 post From traditional business to social business is essential reading for anyone to understand the business transformation enabled by social media.

My sense is that many business people view social media as another channel. They expect to see traditional metrics to justify social media cost. My view is that social is really a different business model so the old metrics won’t work.

Christoph provides effective contrasts between traditional and social businesses. (And good graphics too.) These contrasts are:

1. From transaction to interaction
2. From B2B/B2C to P2P
3. From gatekeeper to platform provider
4. From hierarchy to network

Technology and Change

Many observers believe that technology does not fundamentally change society. I’m more in the McLuhan school. For one thing, the four characteristics of the social business where virtually impossible to support in the pre-Internet age and not on a global basis until quite recently.

1. Multiple interactions between company and customers were at a high cost to both company and customers – the “your call is important to us” phenomena
2. P2P support and influence networks were difficult to organize in the era of controlled collaborative tools where security, control and compliance restricted flexibility. Also, there was little ability to create self-organized networks of like-minded people outside who were not physically in the same geography.
3. Supply and information chains required economies of scale because of the cost of information dissemination. Acting as a platform provider gained momentum through the open source movement and the development of social development tools.
4. Command and control was the most effective means of managing large organizations in the industrial age. Specialization was key. Now, social networking tools enable the network of communications within organizations and supports freer flows.

Big Deal, so you think FreeBalance is a Social Business?

I believe that FreeBalance is one of the new breed of social business as a for profit social enterprise. Don’t get me wrong, I’m not saying that we’ve got this all figured out. Here’s how we are approach the four characteristics:

1. Engaging customers and domain experts using social media. Yes, we tweet our press releases. More importantly, we interact. My analysis a few months ago is that we tweet more than the combination of the official tweets from the top 6 ERP vendors. (If you imagine the ratio of tweet per $ of revenue, you will see how FreeBalance is a bit of an outlier.) We see these activities as part of our non-virtual activities at public financial management conferences, academic presentations and transparency unconferences.
2. Extending our learning to social media. We share what we have learned. (As we are doing now.) We listen more than we talk. We also see this as an extension of our non-virtual activities as we produce case studies and articles of how countries have effectively reformed public financial management. Where the use of FreeBalance software might only be incidental to the whole story.
3. Becoming a platform is more challenging. We’ve leveraged Ning for a Customer Exchange which has had limited impact to date in getting the critical mass we’d hoped for. But, that’s the reality of social networking – it enables change as you learn good practices. We also see this as extending our non-virtual activities, particularly in the FreeBalance International Steering Committee (FISC) where our customers gather to share good practices, brainstorm about PFM trends and revise our product roadmap. We bring in experts in the PFM domain and futurists.
4. We re-organized in a matrix-network approach that results in more FreeBalance staff exposed directly to customers. We’ve sent product developers to client sites to fix problems. We use collaboration and content management tools in-house and with customers. We’ve got global development integrating product management and product development using mostly open source tools.

How do you justify the ROI of Social Media?

We don’t. Why not? Because we’re a social business. Any tool that enables us to interact better with the PFM domain is worth considering. It is almost impossible to calculate the value of the insight I’ve received from tweets and blog entries that has led to an improved product vision. I’ve engaged people who have explained the why behind the what.

Carlos Lipari, FreeBalance Washington

(editors note: like many businesses, FreeBalance leverages economic data to better understand what works in public financial management.)

Google and Facebook are outstanding examples of how companies providing “free” services can change society. Thanks to them, access to information and networking has become easier than ever.

Could we imagine what would Google be like if it had decided to attempt any expansion by billing internet users for its current services? Or how successful Facebook would be if it had chosen to ask its members for membership fees? We all know that free access was vital to the success of these two outstanding companies.

International organizations such as the IMF, OECD or the World Bank conduct research. This research is mostly focused on social, economic and development indicators and is regularly released on their official websites.

Even though they have at their disposal multi-million dollar budgets financed directly or indirectly financed by tax payers all over the world (the IMF alone expects to spend next year 985 million dollars in administrative costs), their reports are often sold, limiting access from the general population, businesses and institutions.

As it is known, downloading data from the internet has virtually no cost to suppliers (the organizations). Even so, these international organizations chose to impose an “extra tax” on society by having reports being sold at prices that inhibit many all over the world from reading them.

Why is research, subsidized in the first place by our own taxpayers’ money, being provided virtually exclusively to a restricted number of individuals and institutions?

Should we not have these international organizations and agencies giving an example to society of how important it is to avoid information asymmetry? How can we teach economics at business schools where the assumption is accessibility to effective data, when institutions such as the IMF or the OECD are the first ones failing to comply?

Free access would not substantially increase the financial burden on these institutions. Yet this would improve global awareness, increase public discussion, and allow new ideas to be produced and innovation to take place.

(Editors note: a loss of calculable but minimal revenue in return for incalculable economic benefits as described by Tim O’Reilly’s concept of government as platform.)

Instead of a few thousand readers (that bottom line provide a marginal contribution to the overall budget of these public organizations), these institutions could benefit society by allowing their reports to be red by millions of people all over the world. After all, information is power and we, taxpayers, primary sponsors of these international organizations, should be entitled to access. And multiply the economic potential of this information.

Doug Hadden, VP Products

Scott Nelson, a Managing VP at the Gartner Group asked the question yesterday: “Is Good Customer Service Really Marketing.” This is an important point because many businesses see marketing and customer service as separate functions. My view is that the trend is moving to marketing becoming a customer service function (which might sound like tail wags dog).

Customer Service as Marketing

And there has been a lot of talk about the impact of customer service with interesting work from  Peppers and Rogers and Regis McKenna. Patricia Seybold showed how the web could improve customer service. Tracy and Wiersema showed that customer intimacy was one of three effective strategies for market leadership. So, effective customer service retains customers and provides good word of mouth. Hence, marketing, in the traditional sense.

Marketing as Customer Service

Here’s my comment on the blog entry:

In the social media era, marketing is becoming customer service, especially in customer centric organizations. Marketing is becoming less about broadcast and more about listening and interacting. It’s about engaging the domain, listening to improve products and services.

We once said that product managers represented the voice of the customer in an organization. This was not always true. Now, social media ‘marketing’ opens up another channel for the voice of the customer. It also provides a forum for crowdsourcing solutions to problems and kickstarting innovation.

In other words, as  I suggested in my post yesterday on social business, social business and customer centricity is a business model.  It’s not good enough to have good customer support to market your company. It’s critical to leverage marketing, particularly social networking, for interaction. It’s not looking for customers trashing you with tweets and trying to prevent a negative impact, it’s about learning from these mistakes to change products or processes.

Carlos Lipari, FreeBalance Washington

This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.

Upsides of an open trade economy

The more open an economy is the easier it becomes to have foreign investments bringing new technology. This might allow a country to move higher in its value chain of production but theoretically it should mostly allow countries to specialize themselves in what they do best.

Specialization is the main argument in favor of open economies and it is true that it might contribute to an increase of the local GDP but there are certain things that need to be kept constants in order for this to happen. One of these things is the terms of trade (the relative prices of goods in the international market). What reality has showed us over the last decades is that terms of trade often get negatively affected due to this world specialization process, therefore affecting countries in different ways.

There is, though, another important advantage of an open trade policy that has to do with the fact that it potentially allows developing countries to benefit from economies of scale. Korea, for instance, is competitive producing cars, like KIA, because it produces them to the entire world. The local market, alone, would not allow their auto industry to be competitive.

Finally, a trade policy that promotes free trade tends to make it easier for the local economy to access external financing. Evidence has been found that free trade can contribute to accelerate investment and by doing this, contribute for higher rates of economic growth to occur.

Downsides of an open trade economy

In order to develop themselves, countries need to have, at least, some industry. This industry, though, in its early stages, generates higher costs because it is still improving its efficiency levels by achieving higher levels of economies of experience and scale. If a country has little or no external trade barriers in those products it might become very difficult for new industries to survive. Industries might need, in their early stages, some help to gain the necessary size, consumer awareness and efficiency to survive the competition.

Another potential downside of low trade barriers has to do with the fact that in some cases, as countries open their economies and specialize domestic productions, terms of trade in the international markets (relative prices of goods in the World market) change. A country like Brazil could produce a sharp change in the price of coffee if it chooses to further specialize itself in this commodity or to reduce its local production. This happened back in the 80s, when Brazil reduced its coffee production and world prices suffered a sharp increase (The World Bank Economic Review 1990).. Specialization might not ensure higher income if increases in production result in sharp decreases in the value of what is being produced.

In addition to what was said, there are also security reasons that can justify some protectionism. A developed or developing country might not wish to become extremely dependent of the foreign market in some productions.  In the EU, Japan or the US, local authorities highly protect with tariffs and/or subsidies the production of a set of agriculture products because they do not wish, in the event of a war or some other extreme event happening, to be totally depended from the external markets. This political decision has an economic cost but it also reduces the risk that those countries have of not being able to access some essential goods. It’s a difficult trade-off that generates always a great deal of controversy, with the EU, for instance, being constantly accused of depressing the development of developing countries as a result of its Common Agriculture Policy.

Finally, one should stress that protectionism is used by rich countries not only as a way of reducing dependence in foreign productions but, often, as a way of depressing the prices of those type of goods in the international markets. By doing this, the cost of certain tariffs applied to imports can be indirectly transferred to developing countries, allowing developed countries to increase their wellbeing and autarky simultaneously.

Carlos Lipari, FreeBalance Washington

This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.

When analyzing this topic from the developing nation’s perspective, emigration can be a way of boosting development as it can become a way of limiting a country’s ability to grow and develop itself.

Downsides of emigration on developing nations

Emigration reduces the stock of human capital and therefore, when it occurs and everything else is kept constant, the GDP potential of a nation is reduced.

This reduction in the stock of human capital can be considered the main downside of emigration but the extent to what this downside is costly will depend fundamentally on two main issues: the quality of the human capital loss and the amount of human capital unemployed and underemployed in the developing country (especially the amount of human capital unemployed or underemployed with similar skills).

The quality of human capital loss is of great concern also for two main reasons. One has to do with the substitution costs, more precisely the investment that society will have to incur in order to substitute this human capital (costs of raising a child, education, training and more). The second reason has to do with the potential value that this human capital, also referred to as labor, could produce in the developing country, with this value increasing in line with the level of instruction and training.

When analyzing the potential loss of income in a developing nation due to a reduction of its most educated labor force, one should have in mind that research has been conducted concluding that a simple increase in one year on the average level of education in one country can increase its yearly rate of growth by 0.44%, achieving a social rate of return of 7% (Robert J. Barro in is paper of Human Capital and Growth, American Economic Review, page 14, of May 2001), therefore, losing skilled workers can potentially have a significant negative impact on developing nations but there are other variables that might change the final outcome. Another recent research points out to the existence of an optimal brain drain, stating that some brain drain might actually be beneficial to developing nations (Lowell, B. Lindsay, 2002). The authors of this study argue that emigration of skilled labor can stimulate domestic education, actually increasing the overall amount of skilled labor in developing nations due to an increase in enrolments. Such an increase in enrolments is spurred by the chance that people perceive of emigrating and might offset the direct losses of skilled labor.

In addition to this, emigration of skilled labor is also expected to provide higher remittances and increased productivity when emigrants return home. It is also expected to expand the country’s international network, making use of its diasporas, and to provide technology transfers.

This leads the authors, Lowell and Lindsay, as well as many economists to believe that, in fact, there is an optimal brain drain level and to recognize that this optimal level does not depend exclusively on the amount of potential brain waste in developing countries (skilled labor that is unemployed or underemployed).

Upsides of emigration on developing countries

Besides providing remittances, technology transfers, expanding a country’s network via diasporas and boosting productivity as migrants return, emigration can reduce poverty.

According to (Richard H. Adams & John Page, December 2003), an “increase of 10% in the share of international migrants in a country’s population will lead to a 1.9% decline in the share of people living in poverty (1 dollar/person/day)”. This was found to be mostly due to remittances.

Another interesting aspect of emigration found by Richard Adams and Page is evidence that who emigrates comes mostly from families above the poverty line. In addition to this, they find that extremely poor countries tend to have less emigration than countries with middle levels of poverty (they describe this as a U–shaped curve emigration. Poverty increases emigration only to the point where people can still afford to finance their way out of the developing country).

Finally, assuming that emigration consists fundamentally of unskilled labor, one can expect net gains from emigration to be particularly high in countries with high unemployment rates and considerably lower in countries with a very low unemployment rate. This is so because emigration in low unemployment countries has larger opportunity costs, producing more inflation, pushing up salary levels and being responsible for scarcity of labor in the economy. Emigration of countries with high unemployment, though, mostly benefit from reductions on the social and economic burden of unemployment while at the same time benefiting from higher remittances.

Impact of Remittances

According to Peter Gammeltoft, in his 2002 paper on “Remittances and Other Financial Flows to Developing Countries”, migrants remittances some up around US $ 100 billion dollars, with about 60% of this amount going to developing nations. The author found that remittances had become a larger source of income for developing countries than official development assistance (ODA), as this last type of assistance only represented a yearly average of less than 50 billion dollars during the same period. The author highlighted the fact that ODA had been falling over time while remittances increasing.

In countries such as Philippines, remittances represented, back in 2009, 11% of its GDP (The Economist, Feb 9 2010) and in for African countries, remittances are estimated to represent on a country-by-country average 5% of GDP, the equivalent to 27% of their exports (International Found for Agricultural Development).

Can “Social” be Justified in Business?

Doug Hadden, VP Products

Many business leaders question the value of social networking. So the consultants and analysts are at it again with return on investment spreadsheets, warnings, damn lies and statistics.

And, many corporate social networking initiatives are meager at best. That’s because these firms see social media as another broadcast channel: press releases and opinion and listen to see if anyone is hurting your brand.

Social is a Business Model

Social is not a channel. It’s a fundamental way of doing business. Social businesses have many of the following characteristics:

1. Customer-intimate with customer-centric processes: there is significant overlap among “departments” to support customer requirements. Marketing departments engage customers and domain experts. Product management is integrated. As are support and sales. This is not an operationally efficient model, but it is customer effective.
2. Social enterprises: for profit or not for profit companies focused on specific social needs like clean water, green technology or governance. Social enterprises recognize that traditional business models need to change. Business models and methods adapt to suit the social need.
3. Networked: organizations that participate in domain events, academic studies and discussions with like-minded individuals are social. These organizations learn and adapt. Networked organizations are more able to migrate to the virtual networked world.
4. Learning organizations: many larger organizations have a culture of expertise. Leaders believe that they are ahead of the curve, thought leaders, little to learn from the crowds. Social organizations are always learning and sharing what they’ve learned.
5. Sustainability: social businesses want customers to be continue buying products and services. These organizations understand their environmental impact and the total customer costs. Social businesses drive down long-term customer costs.
6. Transparent: holding knowledge is no longer power. Sharing knowledge is power. Social organizations are forthright and accountable. Transparency is the new currency of trust.

Our experience at FreeBalance

FreeBalance is a for-profit social enterprise (FOPSE) focused on governance and public financial management. We leverage a number of social networking tools. We’ve discovered many interesting phenomena:

1. Making a direct connection between a social media posting to a sale is almost impossible. We find that social media adds to the company credibility and supports our social networking activities outside the digital world.
2. Valuable product and process ideas have been generated through social media interaction with experts in the governance domain.
3. More effective use of corporate social responsibility initiatives have occurred thanks to learning good practices from practitioners.

Carlos Lipari, FreeBalance Washington

This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.

In the previous section, we discussed about how important investment is for the economic growth of a nation and, therefore, for its development. It is of upmost importance, though, to understand that in order to have a sustainable economic growth, countries need to produce savings. In developing countries this issue gains greater importance because low incomes make it particularly difficult to save, which can easily produce vicious cycles of poverty.

Evidence has been found that in pretty much all economies there is a strong correlation between internal savings and investment (Marianne Baxter and Mario J. Crucini 1993).  In normal circumstances, investors tend to be more risk averse to investing abroad than then they are when it comes to investing in their own country and borrowing from foreign countries is usually a limited option. Therefore, even in a context of very open economy, one can expect to find a strong correlation between gross savings and Investment, with most of the savings being invested in the domestic economy.

In the following graph, we can see how investment, gross savings and current account deficits have changed in the US over the last decades. Savings are presented as gross savings.

Note:  By gross savings, the International Monetary Fund (IMF) refers to the overall savings of an economy before subtracting depreciations. Investment, for the same reason, could be referred to as gross investment.

The Case of the United States

(Source: IMF)

The US is a nice example of how investment and savings tend to move in line. One should not expect perfect correlation in an open market because external financing is available but a strong correlation still holds.

As we can see in the graph above, savings have declined severely in the US over the last 30 years, from almost 20% of the GDP in the beginning of the 80s to little more than 10% in recent years. This decrease translated into lower investment rates despite larger current account deficits used to finance some of its national investment.

Some Lessons Learned

Borrowing money from abroad has its costs, with interests paid on foreign loans reducing the amount of cash available to benefit from future investment opportunities but, as mentioned before, access to external financing has also its restrictions and running deficits for a long period of time has its risks. As external debt increases, foreign lenders might start demanding higher risk premiums for the money they borrow and when this happens, often, this interest rate increase occurs too quickly for an economy to properly adjust itself without falling into a recession. Also, these risks tend to be higher among poor and underdeveloped economies, as they tend to be weaker to resist speculation movements against their currency and economy, Due to this, developing countries should be careful enough to have a high level of savings and avoid running large external deficits for a long period of time.

The Case of China

(Source: IMF)

If the US runs large external deficits and low savings, China does the extreme opposite. In fact, when it comes to savings, China is a unique case within large economies. China saves most of its GDP. In 1982, savings were representing slightly more than one third of its GDP, an impressive figure itself, but since then they were increased to 54%. Also in China, savings and investment move in line.

In net terms, about 90% of Chinese gross savings are invested in the Chinese market. Investment itself represents almost half of the country’s GDP.  Only a relatively small fraction of this volume of gross savings is actually been invested abroad but the size of this economy and its huge savings rate have contributed, indirectly, to generate large trade deficits in developed countries and the US is particular. In fact, this has led many economists to recommend China to increase private consumption and explains why so much pressure has been done to force China to increase the value of its currency and, by doing this, saving less and buying more American products.

The Case of Portugal

(Source: IMF)

In Portugal, gross savings have dropped massively from 28.4 % of the GDP in 1990 to 8.9% in 2010. This has led investment to fall considerably and the country to finance its investments via higher current account deficits. Current account deficits increased indebting the country beyond reasonable levels. One fundamental reason why this country could allow itself to maintain high external deficits for such a long period of time had to do with the fact that it had joined the euro currency, therefore facing lower exchange rate, inflation and interest rate risks. Following the recent financial crises, investors have become more averse to credit risk and this together with recent developments in the EU involving the Greek and Irish sovereign debt crises is forcing Portugal to take action to rapidly reduce its budgetary and external deficits, while also increasing gross savings.

Note: In brief, the most recent bailout to Portugal can be pointed out as a consequence of the combination of high levels of public and external deficits and debt, together with low investment and gross savings rates and marginal economic growth, leaving this country, for too long, vulnerable to speculators.

The Case of South Korea

(Source: IMF)

Also in South Korea, Investment and Savings tend to move in the same direction and the ability to finance investment, and therefore growth, with foreign capital is very limited. Prior to 1997, the existing currency indexation against the dollar resulted in greater volatility of the current account balance. This volatility translated into a lower correlation between changes in gross savings and investment rates but, following the 1997 Asian crises, the currency has started to float, producing more balanced current accounts and a greater correlation between investment and gross savings.

Doug Hadden, VP Products

World Bank President Robert Zoelick summed it up in the Washington Post: “Afghanistan is a poor country that can ill afford an economic reversal.” He further pointed out: “aid should go through the Afghan government.” As we have pointed out in the past, the Afghan Reconstruction Trust Fund (ARTF) combined with the Afghanistan Financial Management Information System (AFMIS) has improved financial transparency and reduced the opportunity for corruption thanks to auditable government financial transactions. But, as Mr. Zoelick points out, only 15% of aid is funnelled through this system that leverages the FreeBalance Accountability Suite.

Meanwhile, billions of dollars of aid funds, much of from the hard-to-track and hard-to-audit 85% of the aid that does not go through AFMIS leaves the country.

Mr. Zoelick points out that “development does not work without local ownership.” It also doesn’t work when there are no disincentives for corruption.

Automated Financial Management

Government Resource Planning (GRP) systems do not eliminate corruption. GRP makes corruption more difficult. It can eliminate cash so that all transactions are tracked, and can be audited. It enforces rules such as the segregation of duties and spending approval mechanisms. It can highlight transactions that could be fraudulent as early as the commitment stage.

Yet many question “government systems”. Especially in a media environment where there is a strong Afghanistan corruption narrative. As Richard Allen pointed out, direct budgetary support is considered “courageous.” The fact that providing such support reduces corruption contradicts the media narrative. In fact, one report some time ago about corruption at Kabulbank suggested that ARTF would be next to go.  Good story, wrong facts. Fact: multiple donors disbursing cash across multiple recipients, many of whom have sub-contractors is a practice that enables corruption.

But, as Marshall McLuhan pointed out, bad news is there to sell good news: advertising.

Facts and Good News

• The Government of Afghanistan produces timely financial statements that meet international standards
• AFMIS manages over 99% of the government funds. Over 90% of revenue collected is cleared within 24 hours.
• All line ministries and all mustafiots (regions) are operating AFMIS. This includes those regions that remain in the news as combat zones.
• The roll out of AFMIS to the mustafiots was accomplished by Ministry of Finance personnel after building internal capacity.
• The 2008 Public Expenditure and Financial Accountability (PEFA) assessment found Afghanistan to have a more effective government financial system than peer countries.
• A 2011 study found that Afghanistan has made significant progress compared to other post conflict countries. (As we pointed out at the time, only Kosovo and Sierra Leone also had made significant progress – also FreeBalance GRP customers.)

Aid Transparency Required

As we’ve pointed out, the key to improving governance and aid effectiveness in developing countries is through aid transparency. Transparency across the aid chain will enable the improvement of controls and improve auditing.

Doug Hadden, VP Products

[on the centenary of Marshall McLuhan's birth]

Is social media changing society? Business? Government? Malcolm Gladwell’s New Yorker article, why the revolution will not be tweeted, has spurned an echo chamber. An acoustic meme, battling with social media noise. It’s hard to separate, in McLuhan terms, the figure (what’s important now) from the ground.

Media Effects

Marshall McLuhan studied the effects of media. He saw how a new medium, like the printing press, inevitably led to the nation state. He described how a new medium uses the previous medium as content, such as television using radio programs at first – until, the medium becomes the message. The medium changes which has effects in society. A new medium changes the previous medium.

Social Media Effects

Some important effects that we are seeing in the transition from old media to new media:

1. Traditional media changed new media/social media: reality television, telephone hacking (News of the World) , opinionated cable news adjusts to compete against the always-on internet. It’s an industrial response to a knowledge economy problem.
2. Social media disintermediation of organizational structures built from industrialization: political parties, unions and NGOs as seen with the Arab Spring where groups self-organized. Traditional organizations are insufficiently agile in the digital age.
3. Use of traditional media power becomes ineffective: fighting back against social media (Arab Spring, NewsCorp) information through controlled media makes buffoons out of leaders
4. Acceleration of transparency and accountability: social media thrives on transparency with emphasis on open government, Facebook, and corporate governance. Information once held tight by organizations is exposed via social media. Media monopolies and state media is losing the information battle.
5. Change of role of traditional media: industrial media items such as the book have changed roles and are being deployed in digital means. The new medium uses the old medium as content.
6. Category confusion: traditional categories become confusing as new medium enters the transitional phase like “radio with pictures” “horseless carriage”. Today, it’s “social media journalism” where many claim superiority of traditional journalism over social media authors.

The effects of the printing press, telegraph, radio and television did not occur overnight. Much of the criticism suggesting that social media is not affecting change comes from not seeing the trend.

Stages

Social media is in the early stage of transforming society. This transformation is gradual.

1. Observers see the new medium as a variation of a previous medium and see that this change has limited or no impact because of lack of uptake (automobiles) or uptake by influential groups (Facebook)
2. General view that the new medium is vulgar (from Socrates view of writing – will eliminate memory to You are Not a Gadget by Jaron Lanier)
3. Use of the previous medium as content leads some to think that the new medium has no use, no content. It’s natural for European television news to report on newspaper headlines and it’s natural to tweet links to on-line newspapers.
4. When there is an effect (Arab Spring), experts deny that it had much of an effect.
5. The nature of the medium comes into effect, changing the visceral connections between humans and the medium.

All media, according to McLuhan, are extensions of Man. Digital media is becoming an extension of the nervous system. So, you are not a gadget, but gadgets are extending you.

Carlos Lipari, FreeBalance Washington

This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.

(Source: IMF)

When analyzing the World investment and economic growth trends, we find something very peculiar. Growth has apparently registered a slight increase over the last 30 years while investment levels seem to have experienced an opposite trend.  As we know, in order to increase growth with lower levels of investment, a country has to increase significantly the productivity of its investment which is usually done by improving technology. At the world level, though, another explanation could be given for achieving potentially higher economic growth rates, while at the same time investing a lower percentage of the world GDP.

I would like to analyze one extremely important fact that has been changing over the last 30 years and that might provide us with a good explanation to why we can have World Investment and Growth trends moving slightly in opposite directions.

Investment: Developed vs. Developing Countries

(Source: IMF, results reflect current/nominal values of Investment)

Over the last 20 years, a major shift in the origin of the World investment has occurred. Developed economies used to produce in their economies about 80% of the World investment (measured in current prices), against approximately 20% of the Emerging and Developing Economies. Today these two set of countries are investing about the same amount of money.

Therefore, over the last 20 years, developed nations moved from a position where they were investing four times as much as the rest of the world towards a position where they currently invest approximately the same amount.

Savings: Developed vs. Developing Countries

One might ask if this increase has been done via saving transfers from developed to developing nations but the reality shows us that, in general, the increase in investment in Emerging and Developing economies has been financed with savings generated among these set of countries. In fact, most of the world gross savings are already been produced in Emerging and Developing nations.

(Source: raw growth data IMF)

This big shift in the World investment distribution might help us understand why we have experienced a shift in the world economic growth from the so called “first world” towards the “third world” but also why we might be experiencing an increase trend of the world economic growth while investment, in percentage of the GDP, appears to have diminished slightly.

Growth: Developed vs. Developing Countries

For this assumption to hold, though, one should expect a higher ratio of growth/capital in developing nations to exist.  Is this actually the case?

(Source: raw growth data IMF)

Analyzing historical data from the IMF allows as to see that by 2007, before the last world crises began, emerging and developing countries were already responsible for about 2/3 of all the World real economic growth (twice as much as the growth generated by the so called Developed world) and they were doing so with just 34.6% of the World volume of investment.

This finding is relevant because it indicates that the Emerging and Developing countries, right before our most recent world economic crises, were being able to grow much faster than developed economies for the each dollar they invested in their economy. This becomes even more relevant when we acknowledge that they are already producing most of the world savings.

With such high saving, developing nations could afford to maintain high investment growth rates during the latest economic crises. In fact, recent stimulus packages to promote growth in China and other developing economies, looking forward to sustain growth while World exports were plummeting during the 2008/2009 crises, might help to explain part of the most recent jump in the World investment quota that less developed experienced. Also, this increase might contribute to a lower gap between the productivity of investment in Developed nations and the rest of the world. In fact, some evidence can be found that this might be happening since 2008 even though Emerging and Developing nations continue to register on average roughly twice as much real economic growth as the one registered by developed economies per each nominal dollar of gross investment.

Shift from “Developed Countries”

In conclusion, the shift in the origin of investment towards Emerging and Developing countries over the last 20 years seems to have allowed the World economy to grow slightly faster even though its investment rate did not followed the same trend. Different reasons could be pointed out for this to happen but any future analysis should always include the impact of profound changes in the global distribution of investment and economic growth. One thing is clear, with or without an increase in its overall economic growth rate the world is living an historical process of rapid reduction the gap between developed nations and the rest of the world. This gap reduction process was intensified over the last 10 years and it seems very likely to continue for many years to come.