THE MARKET DOESN'T HAVE ALL THE ANSWERS

One doesn't have to come to the US to come to the conclusion that while the market might be the best creator of wealth known to man, it cannot claim the same premier position in distributing it.

In fact left to its own devices the market -- the combination of actors going about their own business in search of profit (never mind what they claim), the market tends to concentrate wealth rather than distribute it. 

We talk about China today, but the original winning development model belonged to the US. In the 20th century the average family income more than tripled. The US economy has grown to the point that it's is about equal to the sum of the next three leading economies -- China, Japan and Germany, combined.

A combination of stable internal politics that anchored strong property rights and attracted immigrants from all over the world, fueled this economic miracle which, for better or worse is the US we know today.

While this is true, the US is unfortunately the most unequal society in the developed world. Countries ranked according to the Ginii coefficient, a measure for income distributions, puts the world's leading economy at number 28, behind countries like Greece, Israel and the Czech Republic.

And it's not difficult to see why this is so.

The founding fathers of America, being businessmen, were committed to private sector led growth. It was a messy process but that commitment ensured that the sanctity of private property is indisputable -- never mind that this once included slaves, their innovations in finance have left everyone else in the dust -- even if this happened literally and figuratively, during the recent global financial crisis and finally created an environment for the the greatest minds in all endeavors to flourish and make their contribution to this economic experiment.

The results are their for all to see. 

From the huge amounts of money required to sustain the political class in Washington and around the country, to the huge outlays of capital it took to build the concrete jungles of New York and any number of major urban centers around the country and to the fantastic innovations being thought up in hundreds of universities, universities of such quality as to leave any other pretenders far in their wake.

In this same free market where it is understood that everyone has a chance, but also that not every one will make it, for those that do the rewards have been abundant. However every one is not made equal and in any human endeavor only a small minority can excel, leaving the rest to their own fate is not only inhumane, but makes the whole system unsustainable.

One can safely say that the majority of Americans recognize this. Unfortunately the minority who have the resources to maneuver though the US' political system -- a system designed specifically to guard against the concentration of power, sees a more equitable distribution of wealth detrimental to their own business interests.

"The US has an advanced system of internal conflict resolution and its unlikely that it will succumb to coups or nationwide instability, we however do not have that luxury...

The rest of us may think this is America's problems and if they want to go on blundering down that road they will reap the fruits of their own folly, but the reality is that when America gets a cold the rest of us can get Ebola.

However all is not lost. A strong push from the myriad civil society organizations is beginning to make an impression. The Internet and its offspring, social media is beginning to chip away at the influence of the powerful Interest groups at the helm so change is coming. It's inevitable and the momentum is irreversible.

For the rest of us while we allow the markets to direct economic growth, we should not abrogate our responsibility to ensure the spoils are distributed equitably by beefing up our social services, infrastructure and political processes. This cannot happen by accident.

The US may have an advanced system of internal conflict resolution and its unlikely that it will succumb to coups or nationwide instability, we however do not have that luxury.

EDUCATION IS KEY ...DUH!!

The state of Massachusetts, legalized universal primary education -- well they called it compulsory school attendance, in 1852 so by now its safe to say they have universal literacy. But they went further and now have more than 100 colleges.

Harvard and the Massachusetts Institute of Technology (MIT) lead the pack as centers of education but more importantly as leading research institutions.

Understandably Massachusetts is considered a center of high education, not only in the US but globally.

The state started off as a settler colony in 1620, the state's economy has been totally transformed to the point that agriculture is not one of the major contributors to the overall economy.

"The high concentration on education means the economy is graduated up the value chain. Higher education, biotechnology, finance, health sciences and tourism now account for most of the state's $400b GDP, about twenty times the size of Uganda's economy or four times the economy of the East African Community...

As if more proof was needed while the export of goods from the state comes in at $28b state officials think export of services more than doubles that figure. They say its too difficult to track service exports so they rely on educated gueses.

Its obvious. 

If we want to have long term sustainable development we need to invest more and attract more investment into the education sector. UPE and USE are a good start but beyond higher education a more determined push into research and development is critical.

MIT, which is on the cutting edge of technological development, gets more than half a billion dollars in research .grants annually from the government. The university earns more than $100m a year from the more than 500 patents and technologies they license.

It is in the text books, improve the quality of your human resource -- through education or increasing capital utilization in your work processes, and you raise incomes and the general economy.

But even more interestingly it can be argued that there need not be any major attempts to direct this human resource to one particular direction or another. Beyond creating an enabling environment for it to grow and thrive, the US shows that it will find its own level and work for the betterment of the general society.

An enabling environment will have at its center an ability of this improved labour force's ability to be gainfully employed otherwise it will take it services elsewhere.

As it is now the US is recovering from the global crisis, creating new jobs at a prodigious rate. But observers note that the jobs that were lost during the crisis are not the ones being replaced. The jobs being created are either at the very low end of the scale or the most specialized ones -- they say there is no problem finding jobs for PhD holders.

But even at the lower end they are needing less and less hands to do the same amount of work as before....

At one restaurant in La Guardia airport-New York two waiters serve hundreds of clients a shift. Back breaking work, but made easier by the fact that the waiters don't have to take orders. Patrons order straight from their seats using tablets, pay for the meal using their cards and the first time they meet the waiter is when they get served. This innovation alone cuts fixed costs significantly according to the shift manager.

While it will be harder to get a job the US worker will be more productive coming out of the crisis than when he went in, but bare minimum what ever you do you better be able to use a computer.

Strangely while raising the society's output, increased use of technology could be increasing wealth inequalities in the US. It will be interesting to see how they handle it in coming years.

The fear of course is that left to capital's hands, labour will get the short end of the stick. Left to labour they would love to sue for more pay and fewer hours, which would do nothing for business.

It's a dilemma they need to resolve sooner than later.

TWO DEVELOPMENT MODELS, DIFFERENT OUTCOMES?

Last week Singapore's founding leader Lee Kuan Yew passed away.

In the same week across the world, Brazilian private equity firm 3G made a $49b bid or twice the GDP of Uganda, for foods giant Kraft Foods Group. About the bid later.

Yew's place in history was long been cemented with his stewardship of a small city nation that went from third world to first in one generation. The journey is well documented in his book "The Singapore story" arguably a template for how under developed country's should go about their own development processes.

Of course, the context of the time meant Yew could do somethings it would probably be hard to do now, among them his crackdown on communist parties, which would now be read as harassment of the opposition, but he grappled with security threats, abject poverty, disease and ignorance like all his contemporaries.

What probably gave the whole project a chance was the vision he and his contemporaries had to see Singapore attain per capita GDP equivalent to that in the UK. They then went about reverse engineering the results and voila, half a century later Singapore is the envy of the third world and has been accepted at the high table of the first world.

It wouldn't be a big deal had the dozens of third world countries especially on our continent made a similar leap -- especially since Singapore was worse off than, say Uganda, when Yew started his mission in 1965.

"There really are no excuses for why Singapore is where it is and where we are now....

People argue that Singapore is strategically located in key shipping channel, but that was the case even before Yew came along. People argue that Singapore did not have to grapple with security threats and instability as we did, but they had to live with the real threat of being swallowed up by Malaysia from whom they had broken away at independence. Diplomatic finesse coupled with political pragmatism averted that event but committed a lot of resources which would otherwise be used to push development. People even argue that the Cold War and the decision to align with the free market made the difference, but a study of the development of Singapore shows they used what they could from both sides of the ideological divide to achieve what they did.

Yew was not a saint -- no politician is, but his leadership in helping raise the standard of living of his people cannot be taken away from him. However his example means there is no excuse for leaders anywhere in the world not to lift their populations out of poverty.

Which brings us back to the multi-billion dollar bid for Kraft foods.

This bid audacious in its execution is more noteworthy, in my mind, in what it says about the US development experiment.

Unlike Singapore, which had a somewhat centralized planning system, the US has developed over the last two centuries not by design but organically, the people going about making it happen by responding to the circumstances as they arose.

Given what the US has achieved it comes as a surprise that they do not have a planning ministry, neither have they dabbled in five-, ten- or even 100-year development plans along the way.

So how did they pull this off, without everyone pulling in different directions and making the whole experiment collapse on itself in a mess of civil war, competing political egos and general chaos?

Political gridlock is not unusual in Washington and people who work with the system are often frustrated at how long things take to get done, however when things are agreed they often stay that way or don't divert much from the mean, because wide agreement has been attained, assuring business a level of predictability that can not be enjoyed in many places around the world.

Maybe the US development process is the best case of Adam Smith's invisible hand, that individuals working in their self interest advance the well being of the society in general.

"The one thing that is clear in both development models, is the identification of a vision to aim at. On one hand championed by determined individuals while on the other driven by societal consensus...

The danger with the former is that once the individuals move aside can the momentum be sustained? While the US biggest contradiction is that their development process, which suggest widespread agreement, has the highest wealth inequalities in the developed world, meaning more and more people are being left behind.

The suggestion is that big business and other powerful interests have gamed the system to ensure the rich get richer and the poor get poorer, a possible cause for future implosion. Who knows ?

LESSONS FROM THE FORBES LIST’S CELEBRATION OF WEALTH

Last week the Forbes list was released.

The list is an unabashed celebration of wealth accumulation, listing the richest individuals in the world. The list accounted for 1,826 dollar billionaires with an aggregate networth of $7.1 trillion or about twice the total economic output of Africa, population 800 million.

Africa was well represented with Nigerian industrialist Aliko Dangote on top of the heap with other Nigerians, Egyptians and South Africans accounting for most of the continent's Forbes listers.

I suspect that for the members of the Forbes list it does not change very much, if anything at all, in the quality of their lives. But as journalistic project, now in its 29^th year, it is a winner. People like lists. They simplify information and what best way to provide context than by presenting from best to worst?

"What is interesting is to go down the list and notice that while the richest man in the world Bill Gates and few other billionaires have made their money in the ICT sector, the old economy industries of manufacturing, finance, real estate and even agriculture dominate...

Among other things this means that to make outlandish fortunes one still has to build capital over years, decades even generations before you can even be on the list.

Also interesting is that more than half the people on the list were from the USA and Europe, while resource rich Africa only accounted for 106 or less than a tenth of the total list occupants.

This points to the fact that it is not the abundance of natural resources that produces the wealth of nations. The individual entrepreneurs are key but more importantly is the economic and legal framework they operate in.

The US is a single $17trillion dollar market, Europe is not very far behind with an economy of about $14 trillion. On the whole the number of billionaires depends on the size of the economy they are playing with.

The love of money is the source of all evil and it interesting to see how when interviewed most of the billionaires are not in it for the money. Even at their most extravagant they cannot consume their accumulated dollars.

Two things come out. That the bigger they get the more people they employ and the more people they serve. Secondly, that the growth of their companies is a real survival mechanism. There is no such thing as staying in the same place you are either growing or shrinking.

"The poor convince themselves that such accumulation of wealth is evidence of the supersized greed of the superegos that own it.  This thinking probably helps them sleep better at night...

Interestingly billionaires Bill Gates and Warren Buffett have between themselves pledged to give away all their wealth to charity by the time they die. Buffett last year gave away $2.5b. Ironically however his net worth as an individual during the same period grew by $14.5b.

Of course the argument is that the rich are getting richer and the poor, poorer, a situation that is unsustainable and bound to cause instability in the future. They are right and they are wrong.

Inequality is inevitable. What is not, is the growing chasm between either side of the wealth divide.

This growing inequality is actually an indictment on governments. Either through poor policies that do not allow businesses to create wealth, jobs and taxes or by failing to spread the tax of the surpluses businesses make for the benefit of the rest in terms of security, social services and infrastructure.

"Despite our poor mentalities we need more wealthy people in our midst, businesses create wealth not governments. So the more wealthy people you have the better chance your society has of uplifting the general population, especially if government is doing its job well...

Which comes around to how government should aid businessmen. Giving them handouts does not work.

Last week the Economist had an article “Brazil’s business Belindia”, wondering why Brazil while it has a handful of world class companies it has hundreds more mediocre to bad businesses.

As it turns out the winners such as aeronautical company, Embraer or JBS a meat processor (they slaughter 100,000 cows a day) are private companies benefitting from investments in education and progressive policies that allow them to compete on the world stage. State owned oil company PetroBras on the other hand has been brought to its by mismanagement and scandal that have come to light with the fall of global world prices.

So we have to stop looking at the Forbes list as a vanity project, but as a tool, for both individuals and governments, that can point us in the right direction in our efforts to raising te living standards of our people.

SHILLING COLLAPSE IS OUR FAULT NOT THE DOLLAR’S

Last week the US dollar burst through historical highs against the shilling raising inflationary fears and more stress for local businessmen.

The dollar traded above sh3,000 on Tuesday and held there by the time of publication. This is the highest the dollar has been against the shilling.

There was very little we could do about it.

During the financial crisis in 2008 the US decided that to jump start the economy they would risk the threat of inflation and pump more and more dollars into the economy. They called it Quantitative Easing.

This and other interventions got the economy back on its feet and last year the US Federal Reserve – the central bank, announced it would start mopping up the excess dollars as the economy was on a steady growth path. The effect of this announcement and subsequent actions have strengthened the dollar.

However the other major economies – Europe and Japan, held back on their own Quantitative Easing programs hoping their economies would just recover organically. They did not. So at the end of last year Japan kicked off its own program and Europe started in March.

So while the dollar is strengthening the other major currencies are weakening against it.

Locally, the drought has affected coffee exports, which have been down almost a fifth in the first months of the season, which begun in September, compared to the same period last year. In addition, while donor funding has returned the taps have not been fully opened. While our supply of dollars is not as healthy as it was a year or two ago, our demand for imported goods and fuel continues to grow unabated.

The usual suspects -- the importers, are jumping up and down calling for government and the central bank to do something about the galloping dollar.

"The best the Bank of Uganda can do – and they know it, is to moderate the movement of the shilling either upward or downward, so there are no dramatic jumps in the value of the shilling either way. To try and hold the shilling to certain rate would be a fool’s errand....

To hold the shilling to say sh2000 to the dollar would require that the central bank flood the market with dollars, which they would have bought using shillings. The artificial supply – supported by no production, would only last for a while before either the central bank gives up or runs out of reserves to sustain the defence of the shilling. At that point the shilling would suffer a spectacular collapse, possibly shoot past sh3,000 and who knows even touch sh4000 before the forces of supply and demand return it to a more sustainable level.

In 2011 the Swiss National Bank (SNB) declared it would hold the Franc from appreciating against the Euro, whose economy was in throes of depression following the global financial crisis.

At the end of last year, four years and $400b later, the Swiss gave up their defence and the Franc gained 30 percent in one day against the Euro. Imagine if the Uganda shilling jumped from sh3,000 to sh3,900 in one day against the dollar? Mayhem!

Central bank interventions are often the equivalent of treating a deep wound with a plaster. One would only be treating the symptom and not the real cause.

There are no short cuts.

To shield ourselves from the vagaries of the market two things must happen.

One, we have to produce more. And we are not talking about incremental improvements in production, but exponential leaps.

Secondly, with increased production agro-processing will become a more viable proposition. We need to process these products in order to have better control of the market prices. When the world price of coffee drops, like it did in the late 1990s from $4.00 to $0.40 a kilo, we did not see a corresponding drop in the price of instant coffee, if anything it has continued to rise ever since.

"The way our economy is structured, based on huge donor inflows and exportation of raw materials, we can expect that we will every so often suffer these fluctuations against international currencies. The antidote of course is to reduce donor dependency and add value to our exports...

Restructuring the economy is a long term project that will involve reforming the land tenure system, the resuscitation of the cooperative movement, the reskilling of our manpower and the rejigging of the financial system.

Of course in the short term it is much less painful to seat on our hands just allow things to take their own course. It really is too hard and potentially politically expensive to do what needs to be done, but we put off the necessary to our own detriment.

LACK OF STRATEGIC CLARITY HURTING THE OPPOSITION

Politics is a lot about perceptions – creating them and defending or dispelling them. So too is marketing. Politicians can learn a lot from marketting to sell their message.

Marketting should make selling easier. Through the creation of awareness, enhancing the customer experience with the product or service, ensuring the associations are positive all in the hope of creating customer loyalty.

How one goes about doing the above will depend on the product or company’s position in the market.

In the classical book Marketing Warfare by Al Ries & Jack Trout they identify four positions in the marketing environment – the leader, the challenger, the flanker and the guerrilla. So the trick is to know your place in this hierarchy, important because it would make no sense to use the leader’s marketting tactics when you occupy the guerrilla position.

Basically if you own the leadership position in an industry in addition to innovating you have to watch the challenger, replicating or executing better any new initiatives they may come up with. If you are a challenger you should be looking to turn the leader’s strengths into weakness as part of a strategy to unseat them from the top. If you are the flanker you should only contest for space in the areas where the leader and challenger are uninterested.  The guerrilla is a variation of the same theme, identifying a niche market and exploiting and even dominating it.

Of course these positions are not static, changing as the competition goes along, depending on the ambitions and execution of their respective strategies by the players.

"Also given the different strategies the players employ in the market, their respective calibration of what constitutes victory will, out of necessity, differ...

It would be instructional to learn from the history of the NRM.

In the wilderness of Luwero they fought as guerrillas. Understanding their limitations in terms of human and material capacity they were keen not to engage the UNLA in any frontal battles. Hitting and running, not offering a stationary target. Building their capacity painstakingly slowly while losing as little of their hard earned capacity as possible. Victory at it’s bare minimum was that you were still alive the next day.

They graduated to flankers taking over uncontested territory in western Uganda. Victory here was that they could protect these marginal areas from government attacks.  They eventually challenged for the prize by turning the UNLA’s strength, their heavy armaments and fixed positions into weakness, attacking on many fronts, using speedy and lithe mobile units to which UNLA was slow to react.

When in power and as the leader, beyond casting their net every which way they can in formulating policy, they have not been averse to adopting opposition proposals as their own and even spreading dissension in the “enemy” camp on the odd occasion.

Going by this segmentation it is futile to bunch the opposition together. That being said the individual parties have not been clear to the public what their unique selling proposition is and even worse they are not clear about their positioning in the grand scheme of things.

That is a problem.

"You will be doomed to failure if your party should be pandering to a niche audience and yet you are posturing like a mass party. Or for lack of resources a party, which should be looking for uncontested ground is challenging for the political leadership of the country...

Of course, it is one thing what parties tell the electorate and a totally different thing what they are truly capable of.

This is an important discussion because ten years after the return to multiparty democracy it is safe to say, the opposition parties have not made progress, in fact they have already ceded ground.

It’s this lack of strategic clarity that is dooming them to worse than the perennial bridesmaids of Ugandan politics.

FIFTY YEARS OF WARREN BUFFETT

Last week investor billionaire Warren Buffett put out his annual letter to the shareholders of Berkshire Hathaway, the US conglomerate he controls.

Reportedly the most anxiously awaited company annual letter in the world, it was noteworthy this year because this is the fiftieth year that Buffet has led the company. And his shareholders are not complaining.

In the half a century that he has been in charge the company’s share price has grown from about $20 to $219,500 a share on Thursday. This represents a 19.4% compounded annual growth. So if in 1965 you had the good sense to invest $1000 with Berkshire you interest would now be worth $7m (sh20b).

No one comes close to this level of investment acumen and consistency.

Buying his first share at 11, Buffet, now 84, graduated to buying whole business to create the current company that has a few dozen companies under its roof, but whose main business is insurance, energy and logistics.

Buffett’s annual letters are a popular read – a compilation of them is one of the best selling Business books. The thing that made this annual letter unique is his and co-chairman Charlie Munger’s  attempt to peek into what the future holds for the $220b colossus.

For the full annual letter check, http://berkshirehathaway.com/letters/2014ltr.pdf#page=33&zoom=auto,0,742 but below are excerpts from letter that are a must read for all managers with ambitions beyond 4WDs, little brown girls and extended holidays abroad.

On buying businesses ….

“Forget what you know about buying fair businesses at wonderful

prices; instead, buy wonderful businesses at fair prices.”

On Capitalism …..

“One of the heralded virtues of capitalism is that it efficiently allocates funds. The argument is that markets will direct investment to promising businesses and deny it to those destined to wither. That is true: With all its excesses, market-driven allocation of capital is usually far superior to any alternative”

On why Berkshire is a different kind of conglomerate ….

“Sometimes pundits propose that Berkshire spin-off certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than as separate entities. One reason is our ability to move funds between businesses or into new ventures instantly and without tax. In addition, certain costs duplicate themselves, in full or part, if operations are separated. Here’s the most obvious example: Berkshire incurs nominal

costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors would soar. So, too, would regulatory and administration expenditures.”

On the attitude you should adopt around the market ….

“Periodically, financial markets will become divorced from reality – you can count on that. More Jimmy Lings ( past manger of a conglomerate that went burst) will appear. They will look and sound authoritative. The press will hang on their every word. Bankers will

fight for their business. What they are saying will recently have “worked.” Their early followers will be feeling very clever. Our suggestion: Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is --- zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices”

On maintaining long term viability ….

“Financial staying power requires a company to maintain three strengths under

all circumstances: (1) a large and reliable stream of earnings; (2) massive liquid assets and (3)

no significant near-term cash requirements. Ignoring that last necessity is what usually leads companies to experience unexpected problems: Too often, CEOs of profitable companies feel they will always be able to refund maturing obligations, however large these are. In 2008-2009, many managements learned how perilous that mindset can be.”

“At a healthy business, cash is sometimes thought of as something to be minimized – as an

unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent”

“At Berkshire, our “breathing” went uninterrupted. Indeed, in a three-week period spanning late September and early October, we supplied $15.6 billion of fresh money to American businesses. We could do that because we always maintain at least $20 billion – and usually far more – in cash equivalents.”

On the next 50 years …

“Choosing the right CEO is all-important and is a subject that commands much time at Berkshire board meetings. Managing Berkshire is primarily a job of capital allocation, coupled with the selection and retention of outstanding managers to captain our operating subsidiaries. These duties require Berkshire’s CEO to be a rational, calm and decisive individual who has a broad understanding of business and good insights into human behaviour. It’s important as well that he knows his limits.”

“A Berkshire CEO must be “all in” for the company, not for himself. He can’t help but earn money far in excess of any possible need for it. But it’s important that neither ego nor avarice motivate him to reach for pay matching his most lavishly-compensated peers, even if his achievements far exceed theirs. A CEO’s behaviour has a huge impact on managers down the line: If it’s clear to them that shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of thinking”

“My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency. When these corporate cancers metastasize, even the strongest of companies can falter.”

“All told, Berkshire is ideally positioned for life after Charlie and I leave the scene. We have the right people in place – the right directors, managers and prospective successors to those managers. Our culture, furthermore, is embedded throughout their ranks. Our system is also regenerative.”