GCC economies must plot their way to $1 trillion in non-oil exports

Learned a lot lending an editorial hand here:

Gulf News, December 9, 2024

by Rasheed Eltayeb, Chadi Moujaes, Paul Saber, and Sohaib Dar



GCC governments are making progress in reducing their reliance on oil revenues and building an export base of high-value-added goods and services. To accelerate the shift away from oil exports to non-commoditized goods and services, GCC countries can expand their industrial base beyond petrochemicals, support high productivity sectors, and enter competitive markets.

Exports of non-oil goods have grown by a compound annual growth rate of 2% over the past ten years. The World Bank’s latest Gulf Economic Update estimates that GCC non-oil GDP growth reached 3.9% in 2023, while oil-generated revenues contracted by the same percentage.

With the correct measures, we estimate that GCC countries could accelerate this growth and increase total 2022 non-oil exports worth $202 billion to $1 trillion annually by 2030. Our $1 trillion figure comes from: past export growth, GCC countries’ revealed comparative advantage (RCA) in key export sectors (which means they sell abroad significant amounts from that sector), and extrapolating top quartile export growth manifested by global benchmarks.

To capture this prize, GCC policymakers can take three sets of actions. (Read the rest here.)

Shopping for growth: How to build an urban retail destination

Learned a lot lending an editorial hand here:

PWC Strategy&, August 2024

by Makram Debbas, Ramy Sfeir, Sukalp Tipre, and Matteo Amici




As Gulf Cooperation Council (GCC) member states pursue urban transformation and mega projects, they should seize the unrealized opportunity for growth in the retail sectors of their major cities. The region’s annual retail sales are expected to grow to US$300 billion by 2028, a 37 percent increase from 2022. With the right steps, these retail sectors can become global shopping destinations. That would allow retail to make a significant contribution to urban GDP and employment, while improving quality of life for residents and enhancing the offering to tourists.

The prospect of strong domestic retail growth, however, does not guarantee that GCC cities will become global shopping destinations. Indeed, the opposite could occur. Given the ease of foreign travel, rising GCC domestic demand could result in GCC shoppers seeking unique retail experiences outside the region. To prevent that, and to seize the growth opportunity, GCC cities should overcome two categories of challenges: supply issues, such as limited brand and assortment offerings, insufficient talent, and a lack of holistic shopping experiences; and enabling factor issues, such as fragile supply chains, underdeveloped customer and operational technologies, and cumbersome investment regulations.

Cities should create a governance entity that can articulate a compelling and differentiated retail vision and then build the required capabilities through six initiatives... read the rest here.

Reinventing the Gulf region

Learned a lot about the challenges facing GCC governments and how to address them lending an editorial hand here:

Strategy& Middle East Ideation Center, April 2021





The COVID-19 pandemic has accelerated and amplified the economic, social, and environmental challenges facing the Gulf Cooperation Council (GCC) countries. Pre-pandemic, these countries had initiated significant reforms that allowed them to respond in a more resilient, dynamic, and digital manner. Now, the GCC governments have an opportunity to elevate their economic, institutional, and societal goals and accelerate the speed and scale of regional transformation.

These aspirations will require understanding and resolving five growing tensions and their underlying trends. The tensions — economic and social asymmetry, technological disruption, the impact of aging populations, the polarization of the global order, and the changing nature of institutional trust — are wide-ranging and interconnected.

To mitigate the challenges and achieve an aspirational vision for the region’s future, GCC countries would need to adopt a holistic and integrated transformation agenda. This agenda introduces new economic growth models that put local first. It encompasses a human-centric approach to well-being that puts citizens first. Moreover, it seeks to bolster institutional agility and accountability to put innovation first. Download and read the report here.

What if every job seeker got a living-wage job?

strategy+business, August 19, 2020

by Theodore Kinni



Photograph by Katja Kircher

It’s usually eye-opening when the economic assumptions that underlie a society are questioned. In The Case for a Job Guarantee, by Pavlina R. Tcherneva, an associate professor of economics at Bard College and a research scholar at the Levy Economics Institute, that assumption is embedded in the concept known as the non-accelerating inflation rate of unemployment (NAIRU).

NAIRU assumes that when the unemployment rate gets too low, it will force companies to raise wages and then prices, causing inflation. This leads economists to try to suss out the optimal rate of unemployment, and the Federal Reserve to try to slow investment and hiring whenever the ranks of the unemployed grow too thin — cold comfort when you are in those ranks.

“The idea that involuntary unemployment is an unfortunate but unavoidable occurrence, and that there is an appropriate level of unemployment necessary for the smooth functioning of the economy, is among the great, unexamined myths of our time,” declares Tcherneva in this concise polemic. “It is also bad economics.”

The actual nature of the relationship between unemployment and inflation is an unsolved mystery, according to Tcherneva. Moreover, the Fed has no “reliable” theory of inflation — even though the Fed began to claim, starting in 2014, that the U.S. economy was at full employment. (Never mind the 3 to 4 million people who were unemployed and seeking work.)

The assumption that there is an optimal level of unemployment comes with harsh ramifications. Unemployed people are less healthy and suffer higher rates of suicide and mortality. Their lifetime earnings shrink, and they often must be supported by social welfare programs as they try to find to work. Chronic unemployment causes communities to decline and collapse. In macroeconomic terms, unemployment depresses GDP growth — Tcherneva cites an analysis by Australian economist Bill Mitchell, who calculated a decline of nearly US$10 billion in output per day caused by unemployment during the Great Recession in the U.S. (versus output if the “full” employment rate at 2.8 percent per annum average GDP growth of 2003–07 had held).

“What if we changed all that,” asks Tcherneva, “and made it a social and economic objective that no job seeker would be left without (at a minimum) decent living-wage work?” The solution she strongly advocates is a job guarantee: a commitment by the government to provide everyone who wants to work with a job. If a job is not available in the private sector, it will be provided in the public sector...read the rest here

Inside Mexico's Anemic Economy

LinkedIn, February 9, 2020

by Theodore Kinni



They say ignorance is bliss and it certainly used to feel that way whenever I ate a tortilla chip laden with guacamole. But now, because journalist Nathaniel Parish Flannery chose avocados, along with coffee and mezcal, as the principal entry points for his boots-on-the-ground exploration of the Mexican economy, Searching for Modern Mexico, I know a little too much about the main ingredient of guacamole to enjoy it’s creamy, green goodness as much as I once did.

Most of the avocados Americans consume come from Michoacán, a state located west of Mexico City that stretches to the Pacific Ocean. In 1995, the year after the North American Free Trade Agreement (NAFTA) was signed, Michoacán exported 45,600 tons of avocados. In 2015, it exported nearly 775,000 tons valued at $1.5 billion. But if this sounds like a free-trade success story, it’s not so much.

The wealth generated by avocados not only enriched Michoacán’s farmers, explains Flannery, but it also attracted criminals, many of them former members of drug cartels. These gangs of gunmen demanded 30-40 percent of the earnings of avocado producers as “protection money.” The gangs tortured and killed anyone who refused to pay, dumping the mutilated bodies in public squares as a warning.

The police and armed forces of Mexico’s local, state, and federal governments were unable to stop the killing, so the avocado growers of Michoacán formed and funded their own gangs, vigilantes called the autodefensa. A running battle ensued that continues today. Caravans of gunmen armed with automatic weapons speed through avocado country fighting for control. Gangs have splintered and reformed until it is impossible to tell the good guys from the bad guys. Cities and towns have been transformed into armed camps, with private armies manning turrets and barricades.

“The government doesn’t rule here, but it’s under control,” a grower in the city of Tancítaro tells Flannery. “You can relax.” Meanwhile, in the U.S., we are mashing avocados into guacamole as little as 30 hours after they were picked in Michoacán. Read the rest here.

All the healthcare you can afford

strategy+business, July 31, 2019

by Theodore Kinni


Illustration by adventtr

In 2014, a syllabus and sample lecture for a course entitled Introductory Korean Drama (pdf) surfaced at Princeton University. Written by the eminent healthcare economist Uwe Reinhardt, it began, “After the near‐collapse of the world’s financial system has shown that we economists really do not know how the world works, I am much too embarrassed to teach economics anymore, which I have done for many years. I will teach Modern Korean Drama instead.” It appears that some economics professors aren’t nearly as dismal as their science.

Reinhardt never taught the class, which he said began as an impromptu lecture at a dinner with a group of Korean and Taiwanese health insurance professionals. But his tongue-in-cheek analysis of Korean TV dramas offers a glimpse of his ability to get to the nub of a matter. So does Priced Out, Reinhardt’s final book, published earlier this year, two years after his death in 2017.

In the book, Reinhardt gets to the crux of the ongoing debate over the American healthcare system — in which solutions abound but relief is nowhere in sight — with just one question: “As a matter of national policy, and to the extent that a nation’s health system can make it possible, should the child of a poor American family have the same chance of avoiding preventable illness or of being cured from a given illness as does the child of a rich American family?”

This is the ethical issue hidden behind all the talk of free markets and government control, the political rhetoric about socialism and states’ rights, and the calculations of how much the people of the United States can or can’t afford to pay for healthcare. Clearly, it’s an uncomfortable one. When Reinhardt first posed the question more than 20 years ago, he was dismissed as a “socialist propagandist” for his temerity.

“And so,” he laments, “permanently reluctant ever to debate openly the distributive social ethic that should guide our healthcare system, with many Americans thoroughly confused on the issue, we shall muddle through health reform, as we always have in the past, and as we always shall for decades to come.” 

But muddle through we must, because of two long-term trends: the seemingly inexorable growth in healthcare spending and the increasing inequality in the distribution of income and wealth. These trends, Reinhardt argues, “already are pricing more and more American families in the lower part of the nation’s income distribution out of health insurance and healthcare as families in the upper half of the distribution know it.” In other words: No, currently, the child of a poor American family does not have the same healthcare prospects as the child of a rich American family. Read the rest here.

Is Capitalism Killing America?

Insights by Stanford Business, September 18, 2017

by Theodore Kinni


On August 2, 2017, the Dow Jones Industrial Average hit a record-breaking 22,000 — its fourth 1,000-point advance in less than a year. That same day, I read the first sentence in Peter Georgescu's new book, Capitalists Arise! End Economic Inequality, Grow the Middle Class, Heal the Nation (Berrett-Koehler, 2017): “For the past four decades, capitalism has been slowly committing suicide.”

How does Georgescu, the chairman emeritus of Young & Rubicam (Y&R) and a 1963 graduate of Stanford Graduate School of Business, reconcile the Dow’s ascent with his gloomy assertion?

“The stock market has nothing to do with the economy per se,” he says. “It has everything to do with only one thing: how much profit companies can squeeze out of the current crop of flowers in the garden. Pardon the metaphor. But that’s what corporations do — they squeeze out profits.”

In the latter half of the 1990s, Georgescu shepherded Y&R through a global expansion and an IPO. He has served on the boards of eight public companies, including Levi Strauss, Toys “R” Us, and International Flavors & Fragrances. He also is the author of two previous books, The Constant Choice: An Everyday Journey from Evil Toward Good (Greenleaf, 2013) and The Source of Success (Jossey-Bass, 2005). An Advertising Hall of Fame inductee, the 78-year-old adman is still pitching corporate leaders. Now, however, he is trying to convince them to fundamentally rethink how — and for whom — they run their companies. Read the rest here.

Cracking the Code of Economic Development

strategy+business, May 24, 2017

by Theodore Kinni

Jobs are the burning issue of the day. But while politicians are busy erecting physical, economic, and rhetorical walls to corral and preserve jobs, a larger and more fundamental question looms. As advances in artificial intelligence and machine learning permeate every industry, will there be any jobs left to protect?

Philip E. Auerswald, associate professor at George Mason University’s Schar School of Policy and Government, calls this question “The Great Man–Machine Debate.” In his engaging and wide-ranging book, The Code Economy: A Forty-Thousand-Year History, he seeks to answer it by reframing how we think about economic dynamics and progress. “The microeconomics you learned in college was generally limited to the ‘what’ of production: what goes in and what comes out,” Auerswald writes. “This book is about the ‘how’: how inputs are combined to yield outputs.”

Auerswald has a more expansive definition of the word code than the typical computer scientist. For him, code encapsulates the how of production — that is, the technology and the instruction sets that guide production. The processes Paleolithic peoples used to create stone tools, the punch cards that Joseph Marie Jacquard used to direct looms in France in the early 1800s, Henry Ford’s assembly lines, and the blockchains first described by the person (or persons) named Satoshi Nakamoto in 2008: All these are, in Auerswald’s view, examples of code. Read the rest here.

2017 Chemicals Trends

Learned a lot lending an editorial hand here:

PwC Strategy&, January, 2017

By Vijay Sarathy, Marcus Morawietz, Jayant Gotpagar, and Jeremy Bebiak

Chemicals companies face a formidable challenge: delivering profitable growth in a hypercompetitive, low-growth world.

The structural headwinds in the chemicals industry are blowing like a gale out of the global economy. In a funk since peaking in 2007, global economies have been unable to reach the 35-year GDP growth average of 3.5 percent in six of the past eight years. And the two years of “high” growth were more of a bounce back from the sharp downturn of 2009 than precursors of a sustained turnaround.

Within this problematic macroeconomic environment, made worse for many multinationals by the strong dollar, demand for chemicals has fallen. Overall industry sales growth increased an anemic 2.1 percent in 2016 as the sector faced declining industrial production and broad inventory rightsizing by many of its customers. Chemicals companies that sell petroleum-based products often fell short of these industry averages because lower oil prices led to sharp top-line declines, sometimes in the range of 30 to 40 percent. Only naphtha-based producers benefited from oil price weakness, because it translated into materials cost reductions of about 60 percent for some companies, which greatly improved profit margins. Read the rest here.

Private-sector participation in the GCC: Building foundations for success

Learned a lot lending an editorial hand here:

PwC Strategy&, Jan. 30, 2017

by Hilal Halaoui, Salim Ghazaly, Karim Aly, Joe Youssef Malek, and Rawia Abdel Samad

The governments of the Gulf Cooperation Council (GCC) states have decided to change their economic development model. The state-led approach which relied upon natural resources successfully raised incomes from developing to developed country levels in a little over a generation. However, that model is no longer appropriate as it is undermined by oil dependence, a lack of workforce diversity and skills, a growing need for public services, and insufficient innovation.

One effective response is private-sector participation (PSP). GCC states are already using PSP, but have wielded it tactically and ad hoc. As a result, they have not tapped its full potential. Instead, a comprehensive strategic program of public–private partnerships (PPPs) and privatization initiatives that covers all major sectors of the economy is needed to define a country’s PSP plan. If GCC states can successfully develop, launch, and execute such a PSP program, they can transform their economies. The GCC states could avoid US$164 billion in capital expenditures by 2021 and generate $114 billion in revenues from sales of utility and airport assets alone, and up to $287 billion from sales of shares in publicly listed companies.

Furthermore, GCC states could narrow the innovation gap with other countries, enhance the delivery of and access to government services, and improve their infrastructure. To capture these benefits, GCC governments will need a rigorous and comprehensive approach to PSP and a clearly articulated, long-term implementation plan that encompasses all economic sectors. Such an approach rests on three foundational elements: A governing policy for PSP that is either a standalone policy or part of a broader national policy; a legal framework that encompasses the new laws or modifications to existing laws necessary to facilitate PSP activities; and an institutional setup that clearly defines and allocates authority over PSP to existing government entities or establishes new entities to govern it. Download the white paper here.

Fit for Service government: The opportunity in the GCC’s fiscal challenge

Learned a lot lending an editorial hand on this white paper

PWC Strategy&, July 5, 2016

The Gulf Cooperation Council (GCC) countries are in a fiscal crunch. Even if the GCC member states can grow non-oil revenues by 10 percent annually over the rest of this decade and the average price per barrel of oil returns to US$50, their budgets will still need to be reduced by approximately $100 billion (7 percent of GCC GDP) on an annual basis to achieve fiscal balance.

All GCC governments have announced spending cuts, but conventional strategies, such as across-the-board or narrowly focused cuts, could do irreparable harm to their economic and social development. Instead, they need a more effective approach — one that enables them to cut costs and grow stronger simultaneously. This approach, which Strategy& developed for the private sector and customized for government, is called Fit for Service.

Fit for Service achieves substantial and sustainable reductions in spending, while bolstering investment in the government services and initiatives that are essential to the long-term security and well-being of governments’ constituents. It involves four actions: articulating strategy; transforming the existing cost structure of government services; building the necessary capabilities; and reorganizing the government’s operating model for high performance. There are two enablers of these actions. The first is digital, which drives the digital transformation of government. The second is the development of the talent needed within government and the national economy at large along with the creation of a change-friendly culture that can support and nurture stakeholders as they undertake transformational initiatives.

Fit for Service initiatives are difficult but worth the effort because the leaders of the GCC member states cannot simply cut costs by conventional means if they are to transform the cost base of their governments and create a more sustainable fiscal future. Download the full paper here.

Judith Rodin’s Required Reading

by Theodore Kinni

strategy+business, April 27, 2016

 In August 2005, a few months after Judith Rodin was named the first female president of the Rockefeller Foundation, Hurricane Katrina slammed into the U.S. Gulf Coast. In the days, months, and years that followed, the critical importance of resilience — the ability to prepare for systemic disruptions, survive them, and transform them into opportunities for growth — became evident.

Since then, Rodin, an academic by training and a nonprofit leader by profession, has adopted the concept of resilience as a core focus of the Rockefeller Foundation. She is deploying the philanthropic organization’s US$4.2 billion in assets to promote and develop the resilience of cities, organizations, and communities. A prolific writer with 15 books to her credit, Rodin also wrote a book on the topic to help spread the word, The Resilience Dividend: Being Strong in a World Where Things Go Wrong (PublicAffairs, 2014).

Prior to joining the Rockefeller Foundation, Rodin was president of the University of Pennsylvania. The first woman to head an Ivy League school, she led the university for a decade — a period in which research funding doubled and the endowment tripled. Before that, Rodin served as provost and a named professor at Yale, where she conducted pioneering research in behavioral medicine and health psychology.

Since disruption is an issue that applies to business as much as society at large, I asked Rodin to share the books that have most influenced her thinking on the subject, ones that she thinks business leaders should read to understand and nurture the resilience of their organizations. She responded with the following three titles.

The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, by Yossi Sheffi (MIT Press, 2005). “Professor Sheffi highlights the fact that the businesses that do best after an unforeseeable disaster are the ones that make the right decisions before a crisis ever strikes. He explores how companies can build, and bolster, their resilience by making their supply chains more flexible, baking critical redundancies into their organizational design and collaborating more closely with partners who can help reinforce their safety, come what may. The book includes instructive stories from organizations as diverse as Southwest Airlines, Zara, Johnson & Johnson, and the U.S. Navy.”

Five Days at Memorial: Life and Death in a Storm-Ravaged Hospital, by Sheri Fink (Crown, 2013). “I’m a huge fan of Fink’s stark and comprehensive story of how things came apart at one hospital in New Orleans after Hurricane Katrina. The Rockefeller Foundation was invited into New Orleans after the storm to help the city rebuild in a unified way, and while I saw the aftermath firsthand, this prize-winning journalistic account of the real-time decision making needed under such dire circumstances within a single institution is both harrowing and humbling. The book is incredibly well-researched, revealing the tangle of issues — race, class, geography, and an inescapable history — that contributed to the horror in New Orleans. Fink artfully illustrates just how ill-prepared New Orleans’s Memorial Medical Center — and, by extension, the city’s entire civic machinery — was for a crisis of this magnitude. The most important lesson for leaders in a world where crisis is the new normal: Despite the crisis plans Memorial had in place, management’s lack of situational awareness crippled its response.”

A Paradise Built in Hell: The Extraordinary Communities That Arise in Disaster, by Rebecca Solnit (Viking, 2009). “This book provides a vivid and inspiring portrait of several communities brought together by the crucible of disaster: San Francisco after the earthquake and fires of 1906; the 1917 maritime disaster in Halifax, Nova Scotia; Mexico City after its 1985 earthquake; and the more recent crises of 9/11 and Katrina. Solnit’s wonderful, paradigm-shifting observation is that, somehow, crisis brought out the best in these communities, individually and collectively. She describes the emotion brought on by tragedy as ‘graver than happiness but deeply positive,’ lending confirmation to the oft-referenced idea that a crisis is a terrible thing to waste. This wide-ranging investigation of human nature and how we manage to rise to the most unthinkable occasions offers incredible insight into the ways in which people and communities — and, one imagines, corporations, too — can build back stronger than ever.”

Cass Sunstein’s Required Reading

by Theodore Kinni

strategy+business, Feb 24, 2016

Legal scholars rarely attract much attention in the business world. But Cass R. Sunstein is a notable exception to the rule. That’s because the Robert Walmsley University Professor and director of the Program on Behavioral Economics and Public Policy at Harvard Law School has long explored the intersection of behavioral economics, cognitive psychology, and public policy — three disciplines that have many implications for corporations.

Sunstein is best known among businesspeople as the coauthor, with University of Chicago economist Richard Thaler, of Nudge: Improving Decisions about Health, Wealth, and Happiness (Yale University Press, 2008). In it, the duo describe how choice architecture — the way in which options are presented — affects how people make decisions. They advocate for embedding unobtrusive, non-mandatory “nudges” in choice architectures to encourage people to make healthier, more financially sound decisions. Subsequent concerns about the potential misuse of nudges (as a tool for manipulation and marketing) prompted Sunstein to launch new explorations into the ways and means of choice architecture. He presented those findings in two more recent books: Why Nudge? The Politics of Libertarian Paternalism (Yale University Press, 2014) and Choosing Not to Choose: Understanding the Value of Choice (Oxford University Press, 2015).

Concurrently, Sunstein teamed up with University of Chicago psychologistReid Hastie to explore another topic of perennial interest to corporate leaders. In Wiser: Getting Beyond Groupthink to Make Groups Smarter (Harvard Business Review Press, 2015), they delved deep into the various errors that can arise in group-based decision-making and offered techniques and tactics for avoiding them.

In addition to building an impressive academic career and a list of published works that includes more than 40 books, Sunstein also served in the Obama administration as head of the White House Office of Information and Regulatory Affairs from 2009 to 2012. In that position, he oversaw the approval of new federal regulations and was charged with confirming that they would do more good than harm.

When I asked Sunstein to share the books that most influenced his thinking on choice architectures and decision making, he offered the following titles and summaries of their contribution.

Quasi Rational Economics, by Richard H. Thaler (Russell Sage Foundation, 1991). “This collects many of Thaler’s greatest hits, in their original form: People dislike losses more than they like corresponding gains; they use separate mental accounts for money (vacation money, retirement money, spending money, savings); they care about fairness. The book contains the foundations of behavioral economics, along with a clear understanding of how people deviate from economic rationality. It's an eye-opener, and Thaler is a funny, brilliant, and terrific writer.”

Why Wages Don't Fall During a Recession, by Truman F. Bewley (Harvard University Press, 1999). “Bewley went into the field during and after the recession of the early 1990s to get to the bottom of wage rigidity. He discovered through hundreds of interviews with recruiters and leaders in business and labor that wages don’t fall in lockstep with falling demand, because people want to be treated fairly and they’ll punish their bosses and employers if they feel mistreated. That’s a major finding, which bears on economic behavior in general: Fairness matters. This is a thick book, but it is full of wisdom, and humanity to boot.”

Groupthink: Psychological Studies of Policy Decisions and Fiascoes, 2d ed.,  by Irving L. Janis (Houghton Mifflin, 1982). “This is the seminal work on group decision making, with one of the best titles ever. It’s all about conformity and deference to leaders, and why such deference is bad for organizations. In some ways it’s more like a set of short stories than social science, but they’re terrific stories — the Bay of Pigs, the escalation of the Vietnam War, and the Watergate coverup among them. The book is a warning to all leaders, along with prescriptions for doing better.”

Thinking, Fast and Slow, by Daniel Kahneman (Farrar, Straus and Giroux, 2011). “Already a classic — I think it’s one of the great books of the past 100 years. Somehow Kahneman manages to make every page a pleasure, and there is at least one ‘wow’ every two pages. If there’s one book to read on decision making, and about human foibles, this is it.”

How to Justify a Breathtaking CEO Pay Ratio

By Theodore Kinni
strategy+business, December 22, 2015

In August 2015, the U.S. Securities and Exchange commissioners voted 3-2 in favor of a new rule that requires public companies to report their CEO’s total annual compensation as a ratio to their employees’ median pay. The SEC didn’t rush into this decision. Far from it. The vote came five years after the passage of the Dodd-Frank Act, which mandated the rule, and two years (and 280,000 public comments!) after the SEC announced that it would consider complying with that mandate. Moreover, the rule has plenty of loopholes. For instance, it doesn’t apply to companies with annual revenues below US$1 billion. And it doesn’t take effect until 2017.

The delay and controversy were blamed on a number of plausible causes: that it was a ploy by unions to gain negotiating leverage; that it didn’t measure anything of consequence; that it would cost too much to implement. But it’s hard not to believe that the real reason corporate lobbyists and leaders weren’t enthusiastic about a swift adoption of this rule was fear. As the Economic Policy Institute has shown, the ratio of CEO pay in major companies to the median pay of their employees is somewhere around 300:1. Formally reporting such ratios in stark terms would likely add fuel to the already roaring fire surrounding economic inequality. In 2014, according to a Pew Research Center survey, the people of Europe and the U.S. pegged economic inequality as “the greatest danger to the world.” (In 2015, inequality dropped a ranking or so because ISIS took the top spot.)

The leaders who fret about class warfare might want to add Harry G. Frankfurt’s slim book, On Inequality(Princeton University Press, 2015), to their reading lists. Frankfurt is a professor emeritus of philosophy at Princeton University. He is also the author of On Bullshit (Princeton University Press, 2005), which topped the New York Times bestseller list a decade ago and opened with this provocative line: “One of the most salient features of our culture is that there is so much bullshit.” His definition of this barnyard epithet: a widespread tendency for people to use words and language to obfuscate.

In his new book, which contains adapted versions of two previously published papers, Frankfurt argues that much of the discourse around economic inequality fits the bullshit bill. He finds nothing morally objectionable about economic inequality per se. “The egalitarian condemnation of inequality as inherently bad loses much of its force, I believe, when we recognize that those who are doing considerably worse than others may nonetheless be doing rather well,” he writes.

On the other hand, Frankfurt also finds nothing inherently beneficial about economic equality. “Inequality of incomes might be decisively eliminated, after all, just by arranging that all incomes be equally below the poverty line,” he writes. “Needless to say, that way of achieving equality of incomes — by making everyone equally poor — has very little to be said for it.”

This might make On Inequality sound like a straw man argument for astronomical CEO salaries. But Frankfurt does not let companies off the hook. Rather than strive to eliminate inequality, he says we should focus on eradicating poverty. He proposes a “doctrine of sufficiency,” which asserts that we have a moral obligation to see that everyone has “enough” money. Frankfurt defines “enough” as a standard that allows people to live a happy life or, at least, one in which their unhappiness cannot be alleviated by more money.

Indeed, what does it matter if some employees have more than others, as long as all employees have what they need? Isn’t this the reasoning behind ideas like the $15 minimum wage? Fast-food workers across the U.S. aren’t going on strike for hikes to CEO-level pay. They simply want to earn enough from their work to live above the poverty line.

On Inequality contains plenty of fuel for flameouts on both sides of the economic inequality debate. And I suspect that Frankfurt would welcome them. (Certainly, they could help him sell lots of books.) But I came away from this volume thinking that any CEO who could run a profitable business that also provided a reasonable living for each of its employees would richly deserve a breathtaking pay ratio.

A Good Barrel for Bad Apples in Business

by Theodore Kinni
strategy+business, November 25, 2015

The business news headlines in the early fall of 2015 read like a scandal sheet. In September, the former owner of Peanut Corporation of America was sentenced to 28 years in prison for knowingly selling contaminated peanut butter that killed nine people and sickened hundreds more. Turing Pharmaceuticals, launched earlier this year by a hedge fund manager, purchased a 62-year-old drug that treats a parasitic infection called toxoplasmosis — the only drug of its kind — and bumped the price from $13.50 per tablet to $750. Volkswagen was coping with the fallout from revelations that engineers may have equipped diesel-powered cars with software aimed at deceiving emissions tests.

We tend to think of the people at companies who engage in such behavior as outliers, the few bad apples that spoil the barrel. But in their new book, Phishing for Phools: The Economics of Manipulation and Deception (Princeton, 2015), George A. Akerlof, Koshland Professor of Economics at University of California, Berkeley, and Robert J. Shiller, Sterling Professor of Economics at Yale University, argue that we should direct our attention to the barrel instead. The barrel is free markets, which, according to tenets that go back to Adam Smith, are guided by an invisible hand that ensures the individual pursuit of profit is transformed into common good. Unfortunately, that’s not the whole story.

“Free markets do not just deliver this cornucopia that people want. They also create an economic equilibrium that is highly suitable for economic enterprises that manipulate and distort our judgment, using business practices that are analogous to biological cancers that make their home in the normal equilibrium of the human body,” Akerlof and Shiller write. “Insofar as we have any weakness in knowing what we really want, and also insofar as such a weakness can be profitably generated and primed, markets will seize the opportunity to take us in on those weaknesses. They will zoom in and take advantage of us. They will phish us for phools.”

Phishing for Phools is an extension of the authors’ work on how psychological forces can warp markets, as described in their previous book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Princeton, 2009). The two Nobel Prize–winning economists — Akerlof in 2001 for his work on the market effects of asymmetric information, Shiller in 2013 for his contributions to economic forecasting — define phishing in a broader way than usual. They say it is any activity that entices us to do something that is not in our own interests, but rather in the interest of the “phisherman” (as opposed to the rational behavior assumed in conventional economic theory). They see two kinds of phishing going on in free markets. The first includes emotional and cognitive glitches. A gambling addict who feeds the paycheck needed to feed his family into a slot machine has been legally phished by a casino. The second includes misleading information that is purposely created by the “phishermen.” Investors who received doctored account statements from Bernie Madoff’s firm were illegally phished in this manner.

Whether the phishing is legal or illegal, ethical or unethical, Akerlof and Shiller see it as being driven by the natural operation of free markets: “The free-market equilibrium generates a supply of phishes for any human weakness.” The two authors endeavor to prove this by describing an ongoing epidemic in phishing in a dismayingly wide variety of market contexts: in marketing and advertising; in industries where high-pressure sales tactics are common, such as auto sales, real estate, and credit cards; politics (the market for candidates); food and pharmaceuticals; innovation; tobacco and alcohol; and finance.

You’ll likely be familiar with many of the examples in the book, which are drawn mainly from contemporary inductees into capitalism’s hall of shame: Big Tobacco and its decades-long battle to discredit the link between smoking and cancer, the S&L crisis, the junk bond crisis, the subprime loan crisis. But they are worth rereading in order to understand what they have in common — that is, how and why they are all examples of phishing.

Happily, Akerlof and Shiller identify four obstacles to free-market phishing. There are “standards bearers,” who measure and enforce quality, such as the testing and certification of electronic appliances provided by Underwriters Laboratories. There are “business heroes,” such as Better Business Bureaus (and, presumably, rating sites, like Yelp and TripAdvisor). There are “government heroes” and their legal checks, such as the Uniform Commercial Code, and also “regulator heroes” like the Food and Drug Administration.

Unhappily, however, phishing continues, and the power of those who resist it is constantly being undermined by phishermen in search of larger hauls. As a case in point, the authors offer up the sad tale of the bond ratings agencies, whose cooptation by bond issuers resulted in reckless and inflated estimates that supported and intensified the explosion of subprime mortgages during the housing boom of the 2000s.

Phishing for Phools doesn’t offer much in the way of solutions. “The free market may be humans’ most powerful tool. But, like all very powerful tools, it is also a two-edged sword,” Akerlof and Shiller write. “That means that we need protection against the problems.” However, the only protection they prescribe is a greater recognition among economists of free-market phishing — a recognition that “it is inherent in the workings of competitive markets.” That would be a good a thing, I guess. But economists could debate the merits of this thesis until the end of time, and the rest of us would still be taken for phools.

Roger Martin’s Required Reading

by Theodore Kinni

strategy+business, October 7, 2015

Prosperity is a theme that runs through Roger Martin’s work in a continuous and unwavering line. Ranked third on the Thinkers50 biannual ranking of the most influential global business thinkers, Martin has served as a director and cohead of Monitor Company, dean and Premier’s Research Chair in Productivity and Competitiveness at University of Toronto’s Rotman School of Management, and, starting in 2013, institute director of the Martin Prosperity Institute. Throughout, he has sought to illuminate the ways and means of economic success for individuals, corporations, and nations.

A prolific writer, Martin has authored numerous books and articles detailing his findings. In The Opposable Mind: How Successful Leaders Win through Integrative Thinking,(Harvard Business Review Press, 2007), he explains how the ability to hold two conflicting ideas in constructive tension can enable leaders to make better decisions and produce superior ideas. In The Design of Business: Why Design Thinking Is the Next Competitive Advantage (Harvard Business Review Press, 2009) and Playing to Win: How Strategy Really Works (with A.G. Lafley; Harvard Business Review Press, 2013), Martin explains how to enhance corporate success through innovation and strategic thinking.

Finally, in Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL (Harvard Business Review Press, 2011) and, most recently, Getting Beyond Better: How Social Entrepreneurship Works (with Sally R. Osberg; Harvard Business Review Press, 2015), he examines the flaws that are undermining democratic capitalism and the potential of socially responsible business to heal and reinvigorate the system. 

Curious about the underpinnings of his own success, I asked Martin about the books that most influenced him in his professional journey. He offered up the following three titles... read the rest here.

Of invisible hands and impartial spectators

My new book post is up on strategy+business:

Adam Smith’s Other Book

Adam Smith’s use of the metaphor “an invisible hand” to suggest that the individual pursuit of self-interest could also benefit society as a whole has been embraced as a rationale for unfettered capitalism. But the theory has come under fire in recent years. For one thing, it’s hard to find the societal silver lining in cases like the abuse of subprime mortgage–backed derivatives, which led to the Great Recession.

Before we ride the father of modern economics out of town on a rail, however, we should acknowledge that our current interpretation of his metaphor is an exaggerated one. Smith briefly mentioned an invisible hand only three times in his published works and only once in his 1776 economics classic An Inquiry into the Nature and Causes of the Wealth of Nations—and never did he imbue it with the economic heft it has taken on in the past century or so. We’ve also separated the invisible hand from another essential Smithian metaphor: “the impartial spectator.”

If, like me, you haven’t heard of the impartial spectator, you might find Russ Roberts’s How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness (Portfolio, 2014) enlightening. In it, Roberts, an economist at Stanford University’s Hoover Institution, explores Adam Smith’s other big book, The Theory of Moral Sentiments, which Smith published in 1759 (17 years before The Wealth of Nations) and then substantially revised in 1790, the year he died.

The Theory of Moral Sentiments isn’t about economics. It is, Roberts says, a “road map to happiness, goodness, and self-knowledge.” He explains that while Smith acknowledges that we humans are essentially self-interested, he also says there’s more to us than that. Consider the first sentence in Smith’s book:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

Further, Roberts explains, Smith argued that there are internal governors of our natural self-interest that stop us from doing harm to others: “Smith’s answer is that our behavior is driven by an imaginary interaction with what he calls the impartial spectator—a figure we imagine whom we converse with in some virtual sense, an impartial, objective figure who sees the morality of our actions clearly. It is this figure we answer to when we consider what is moral or right.”

Roberts goes on to tell us that Smith saw the impartial spectator as neither god nor government. In the fashion of the Enlightenment, Smith believed the impartial spectator to be an internalized representative of our collective humanity—“reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct.” Smith continues:

It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the slightest injury to another, in order to the obtain the greatest benefit to ourselves.

Good stuff, but perhaps it’s a bit too easy to dismiss as classical claptrap. Maybe that’s why so many of us know about Smith’s invisible hand and so few of us know about his impartial spectator. But I know about both now, and I wonder if the former can operate properly without the latter. In other words, is it possible that the benefits of the invisible hand can be realized only in conjunction with the guiding hand of the impartial spectator?

Perhaps the abuse of mortgage-backed collateralized debt obligations (CDOs), as just one of many examples of market failures, was a direct result of the mechanism of the invisible hand operating without regard for the impartial spectator. If mortgage officers had been listening to their impartial spectators, would they have encouraged home buyers to sign for loans they clearly could not service? Would market makers have flogged CDOs that they knew were fatally flawed? Thanks to Russ Roberts, I’m pretty sure how Adam Smith would have answered these questions.

s+b's Best Business Books 2014

It’s striking how quickly and directly the seven reviewers in our 14th annual best business books special section get down to brass tacks. In the opening essay, Strategy& senior partner Ken Favaro picks the three books that offer new thinking about strategy that is practical and compelling. Marketing expert Catharine Taylor peels away the hype and spin of her discipline to identify books that get to the essence of the brand experience. Veteran business editor and author Karen Dillon reviews the books that will help you hone your decision-making chops—with or without an assist from big data. James O’Toole continues his unbroken run of best business books appearances by taking on a perennially relevant topic whose parameters he helped define: organizational culture. Longtime s+b book reviewer and contributing editor David Hurst identifies three books that explore not only the how-to of technological innovation, but also how technology is driving innovation in every sphere of our lives. Triple-bottom-line pioneer and first-time contributor John Elkington reviews books that provide actionable means for dealing with the seemingly intractable challenge of sustainability. And in the final essay, another notable first-timer, economic columnist Daniel Gross, reviews three books that cut through the hot-button issue of global income inequality to get down to hard facts—the Cockney twist on which is sometimes pegged as the origin of the phrase get down to brass tacks. Enjoy the reading—then, put it to work.  --Theodore Kinni

 

INTERACTIVE FEATURE

Best Business Books 2014 – In Pictures

Click here for a slideshow of our picks for the Best Business Books of 2014 in seven categories.

Contents:

s b’s Top Shelf   

Strategy To the Nimble Go the Spoils by Ken Favaro Marketing Brand Diving by Catharine P. Taylor Executive Self-Improvement The Human Factor by Karen Dillon Organizational Culture The Nothing That’s Everything by James O’Toole Innovation Greasing the Skids of Invention by David K. Hurst Sustainability Tomorrow’s Bottom Line by John Elkington Economics All Things Being Unequal by Daniel Gross

Soccer and economics

My new book post is up on s+b's blog:

What the Beautiful Game Reveals about the Dismal Science

A lot of people watched the World Cup in Brazil this past month. The final numbers won’t be in for a while, but with record-breaking viewership for the first round of matches and a big bump in the U.S. audience, it’s a good bet that the 2014 Cup eclipsed the more than the 3.2 billion viewers (nearly half the people on earth) who tuned in at some point or another during the 64 matches in 2010. It’s also a good bet that Ignacio Palacios-Huerta, a professor at the London School of Economics and Political Science, is one of very few soccer fans who watched this year’s matches for insights into perverse incentives, market efficiency, and other economic concepts.

What can the beautiful game tell us about the dismal science? As Palacios-Huerta explains in Beautiful Game Theory: How Soccer Can Help Economics (Princeton University Press, 2014), soccer—and indeed many other professional sports—is a terrific laboratory for testing economic theories. “There is an abundance of readily available data, the goals of the participants are often uncomplicated (score, win, enforce the rules), and the outcomes are extremely clear,” he says. “There is an abundance of data, the goals are uncomplicated, and the outcomes are extremely clear.” 

Take incentives, for instance. We’re often warned that incentives can have unexpected consequences, but it’s tough to isolate the effects of an incentive—such as stock options, for instance—in the business world. Are senior executives neglecting the long-term well-being of their firms to bump up the value of their options in the short term, or is something else going on? Are managers sabotaging one another to boost their own performance in forced ranking systems or not? That’s tough to prove without a smoking gun, and managerial saboteurs tend not to leave that kind of evidence lying around.

For a more rigorous test, Palacios-Huerta and his colleague Luis Garicano examined the outcomes stemming from a 1994 FIFA rule change in which three points, instead of two, were awarded in round-robin tournaments for a win. (It was an attempt to drive up soccer scores and attract U.S. fans, who presumably find the subtleties of the game far less appealing than a Pelé-style bicycle kick into the net.) In doing so, the economists found empirical evidence for the risks attendant in strong incentive plans.

By analyzing the incidence of dirty play before and after the rule change, they discovered that increasing the points awarded for a win caused a rise in sabotage on the field: fouls and unsporting behavior resulting in yellow cards increased. By analyzing the results of matches, they further determined that the rule change did not change the number of goals scored. Teams played more aggressive offense until they got their first goal, then they hunkered down defensively to protect the win. “The beautiful game became a bit less beautiful,” concludes Palacios-Huerta.

In Beautiful Game Theory, Palacios-Huerta also reports on how he used soccer to prove the long-standing efficient-markets hypothesis—a theory suggesting that in the stock market, for instance, information is processed so efficiently that “unless one knew information that others did not know, no stock should be a better buy than any other.” The problem with proving this hypothesis is that you can’t stop time to analyze the effects of a piece of news on the market. But time does stop in a soccer match.

Palacios-Huerta realized that at halftime, “the playing clock stops but the betting clock continues.” So he identified matches in which a “cusp” goal was scored just before the halftime break, and then analyzed the changes in betting odds during the break at the Betfair online betting exchange. He found that Betfair lived up to its name: “Prices impound news so rapidly and completely that it is not possible to profit from any potential price drift over the halftime interval.”

This is good news for sports bettors, but it’s far less reassuring in light of the New York Times exposé that broke on May 31. It seems that some gamblers are allegedly paying off referees to use penalty calls to rig soccer matches. Efficient or not, when it comes to economic markets, it seems like somebody always knows something that no one else knows.