Book Review: On China, by Henry Kissinger

How do you describe China? How could one understand a land with historic roots that spawn for almost 4000 years? No easy task, that’s for sure.

Henry Kissinger, the statesman credited for opening the US ties to Communist China in 1971, tries to do just that in its book “On China”.

On China, Henry Kissinger

On China, Henry Kissinger

The book is a framework for anyone willing to dive in the complex culture that China has carried throughout the ages. It is a vast exposition on what makes China so enduring and so different from the type of empire we have come to know in the west.

The reason “On China” is reviewed here, a blog on the future of retail, goes beyond the obvious (manufacturing). By reading Kissinger’s masterpiece, we will get a glimpse into the future, through the lens of the past. We can see China is not a rising power. It is a returning power. It is a land that fostered the strongest economy in the world through 18 out of the previous 20 centuries.

China predated the Roman Empire. It survived it and lived on to be reached by the British Empire. It survived this one as well and now it survives another one. The fact that its economy keeps rising and rising, its retailers take the world by storm and the country has moved beyond its Mao Zedong legacy shows the quiet force this country packs.

The Wei Qi principle

Henry Kissinger proposes the Wei-Qi game as a start point to understanding China. As opposed to the oldest western strategy game, Chess, Wei Qi has some key differences.

First of all – there are a lot more pieces that have to be used in the game. The pieces are all equally valued. As opposed to chess, the Wei Qi pieces are all just as valuable. There are no knights, no bishops, no king and no queen. All pieces are equally important and equally effective.

The point is not to find the pivotal action to winning the game. The point is to avoid being surrounded. Throughout China’s troubled history, generals have discovered how costly defeats are, when the enemy surrounds the troops. The war strategy has shifted from direct engagement to battles that are won before they are even fought, through good preparation, as the mythical Sun Tzu general would have noted.

These simple yet powerful differences and others such, have shaped China’s destiny throughout the centuries. Western history barely mentions the Chinese Empire, yet the court viewed itself as ruler of all that is “Under the Heavens”. The Chinese Empire rarely fought outside its borders (viewing such act as a crime). It nevertheless encountered its fare share of troubles with barbarians outside its borders, constantly being attacked. Unlike its western counterparts, it used diplomacy, rather than force to subdue weaker civilizations. The court was well taught by centuries of rich history on how to negotiate alliances, resisting attacks, integrating barbarians or even using politics to break alliances between its closest enemies. Sometimes using the enemies farther away to control those closest to the empire.

The fall of the empire

Throughout the centuries diplomacy and politic skill has been enough to keep the “barbarians” at bay. Eventually, even the Celestial Empire had to run out of luck. In the beginning of the 18th century, Western colonial powers, as well as Russia, were knocking on the gates of the Empire, trying to develop a commerce relationship. Russia, being closer and in a position to threaten China, was the first country, Kissinger notes, to be allowed to have a de facto embassy. The embassy was in fact an orthodox mission but it was a lot more than the British Empire had.

The British, as well as other colonial powers, were barely allowed a presence within the empire. Commerce was carefully regulated and restricted. In time, as diplomacy failed to get results, the British decided to use force. As China previously refused to get  western military technology, it was quickly overwhelmed by better trained soldiers, using more advanced weaponry. The “Barbarians” forced their way towards the capitol, eventually being stopped by Russia’s diplomats who negotiated a temporarily redraw. But this help from the friendly Russians was costly. China agreed to a humiliating act that would offer vast territories to Russia, in exchange for its help.

This humiliating treaties, rising internal instability, and the enemies at the gates eventually lead the empire to crumble. In 1912, the last Emperor abdicated, and China became a republic.

It wasn’t for the better, as China was virtually ungoverned. Henry Kissinger lists intervention by the United States to help the forming republic, supporting the existing nationalist government. But it was not this government that eventually won the power. It was a new leader, a communist leader: Mao Zedong.

The Communist China

Kissinger lists Mao’s rise with a reverence that may seem unnatural at times. After all – Mao is seen less like an enlightened leader in the western world, and more like a power hungry criminal that lead its country, as well as the party close to imminent self destruction. Whether it is diplomatic courtesy (you have to expect reverence from a high level US statesman) or genuine interest, if not admiration – Kissinger is clearly inclined to describe Mao as a Chinese savior. Whether it is the fact that he reunited China, or that China survived the Soviet Union’s threat, Henry Kissinger sees Mao as an important geopolitical player.

Mao defied and somehow survived both the US and the Soviet Union. Unlike the weakened European countries, Mao repeatedly declared his country was not afraid of the Nuclear Threat. No one will know if he was just bluffing to resist on the world stage, or he was actually not caring if 300 million Chinese would die in a Nuclear war. The “Great Leap Forward” and the “Cultural Revolution” would later point into the second direction.

The farthest enemy

Although Mao listed Confucianism and “the old ways” as obsolete and not to be used, he did resort to one of these tactics when the Soviet Union deployed 1 million soldiers at the Chinese-Soviet border. The soldiers were not much of a problem, but the nukes were. China and USSR were no longer comrades, and the Soviet Union was likely planning a preemptive nuclear attack. Mao decided to apply the old strategy of using the enemies from afar against those closer.

In 1971 Henry Kissinger lists its meeting with both Mao Zedong and Zhou Enlai. At the time, Zhou Enlai was the prime minister for over 22 years and he left a deep impression on the US statesman: “In 60 years of public life, I have never met a person more fascinating than Zhou Enlai“. This meeting extended in the next year with a visit from Richard Nixon and it was the the start in a long relationship between the two states.  It was also the visit that probably stopped a nuclear attack on China.

Mr. Enlai was eventually replaced and Mao left its position, leading the way for a new leadership. It was this new leader, Deng Xiaoping, that turned China from a starving, barely educated country, bathing in Mao’s shadow, to a growing economic power.

His work was later continued by Jiang Zemin, that encouraged education, technology developments and eventually helped China join the WTO in 2001.

Since 2001, just 13 years ago, China became a leading manufacturer, the sourcing choice for retailers worldwide, to a dominant power that now exports not only products, but rather leading businesses.

Henry Kissinger ends the book by reminding the reader of the Crowe Memorandum,  an analysis of pre-WWI Germany and the causes that lead to war. Though he envisions a future where the Pacific Powers (US and China) can collaborate in peace, he does pose the question of whether such a future is possible. The last paragraph cites Zhou Enlai, at the first meeting in 1971, when the Chinese PM mentioned their meeting will “shake the world”. The big question, for this new century, mr Kissinger asks, is could China and the US build the world, rather than shake it?

 

China Passes US in Terms of Online Retail. Europe Lags Behind with 12% Growth Rate

China’s Ministry of Commerce released data showing huge growth in terms of Online Retail. Chinese consumers spent $296.57 billion online in 2013, 13% more than their American counterparts ($262.51 billion in 2013). That means China is now the biggest market for online retail.

China showed a 41.2% growth YoY and is now the largest online retail market

Chinese online retail market showed a 41.2% growth rate from 2012, a result of a) an increase in online spending and b) an increase in the total number of internet users. The number of internet users in China grew 8.5% to a total of 618 million users at the end of 2013. As a result, China showed an increase of 52.4 million in online consumers.

Chinese B2C ecommerce expected to grow even faster in 2014.

Chinese B2C ecommerce expected to grow even faster in 2014. Source.

Although China surpassed the US in total online spending, one must not ignore the fact that the US still spends almost twice as much online than China. The total number of internet users in US, according to Internet World Stats is 277 million, 54% less than internet users in China.

As such, American users spend 945$ per year online, whereas Chinese users spend 478$ per year. Moreover, online retail in China is more or less a monopoly ran by the Ali Baba group, a company preparing for an american IPO. With  $248 billion in transactions handled in 2013 through its many subsidiaries, Ali Baba accounts for 84% of all Chinese online retail. That is NOT a balanced market.

Although the numbers amount in favor of Chinese online retail (large growth rates, increased number of consumers and a lot of room to grow) Ali Baba’s dominance does not paint a pretty picture. Whereas US online retail is a competitive and balanced market, the Chinese behemoth has clay legs. Sure – it had a astonishing growth and there certainly is a market there, but can the Chinese leaders take on mature, innovative markets? My bet is on NO. The centralized, planned uber-organization can work pretty well in China but in the competitive world of global markets it might run into trouble.

Europe lags behind and is expected to reach $318 billion in 2018

Europe shows a healthy, double-digit growth rate in terms of online retail, yet still lags behind the US and China. Forester shows that Europe will grow with a CAGR of 12% until 2018, when the market is expected to reach €233.9 billion ($318 billion).

This is neither good nor bad. Europe is still making peace with it’s new-found unity. The European Union still has to battle inequality between countries, has had a rough time battling recession and has just recently considered online retail as a viable alternative to classic retail.

Northern Europe is more mature in terms of online retail development, thus shows smaller growth. Southern and Eastern Europe has increasingly adopted online retail as means to reach its uncovered consumers and shows larger growth rates.

Make no mistake, however. Europe is a large market. It has 518 million internet users and there is still room to grow. There are more money to spend and surely Europeans will get moving soon. Just as soon as they get over this recession thingie.

 

Book Review: The World is Flat, by Thomas Friedman

“In China today, Bill Gates is Britney Spears. In America today Britney Spears is Britney Spears. And that’s our problem”. These three sentences perfectly describe the point I believe Thomas Friedman tries to get across in “The World is Flat“.

the_world_is_flatThe world has been radically transformed by politics, technology and economics in the past five centuries. The industrial revolution helped western countries and than companies rule the world. It all lead to a disparity between developed and underdeveloped countries. In the past century the force of governments was overcome by the force of companies spreading globally. And that is about to change.

The past three decades or so, the companies themselves helped a new entity rise above, in a connected world: the motivated and empowered individual.

“The World is Flat” is about the global individual and how he can rise above his own limits, when given the chance. Thirty years ago the birthplace was a pretty good predictor on the chance one has for success. Not anymore. Things have changed and Friedman shows the ten factors that lead to the new status quo:

The ten Flatteners (Forces that Flattened the World)

Thomas L. Friedman

Thomas L. Friedman

This global change didn’t happened all at once. Neither was it caused by one single force. Thomas Friedman lists ten factors that made the world a flat (or more connected) world:

No.1: 11/9/89 – The day the Berlin Wall fell became the day when communism started to crumble. Following the fall of the Berlin Wall, countries grew closer together and the world became smaller.

No.2: 8/9/95 – The day when Netscape went public. We know that the world wide web changed the way computers talked to each other and how people connected to these computers. Few of us know how important Netscape, the company founded by Jim Clark and Mark Andreessen, and its Mosaic browser were when Netscape had its IPO. Before Microsoft embeded Internet Explorer into Windows, Mosaic was the tech wonder that allowed people to access websites in a friendly manner.

No.3: The Workflow software. We are now all familiar with some kind of workflow software, be it Microsoft Word, Adobe Photoshop or some 3D rendering software. But at some point such things didn’t exist. When people started using them they could split parts of business processes and outsource them

“Open-source is nothing more than peer reviewed science. Sometimes people contribute to these things because they make science, and they discover things, and the reward is reputation” – Marc Andreessen on open source software

No.4: Uploading – the power of communities. When people first got online they were using the web just like they were using the TV or other “old media” – consuming. But the Internet was a two-way highway – it allowed for downloading, as well as uploading. Soon people started building websites, writing blogs and developing open-source software. It allowed for better collaboration and a new type of empowerment for the individual that was previously nonexistent.

No.5: Outsourcing. In 1999  three seemingly unrelated but soon to be very important events started to converge in India. The first – the country started producing more and more software developers in its IIT college. Second – fiber optic extended all across the globe and reached Indiay. Third – the Y2K scare was pushing every large company to update its software. As India’s software support was way cheaper, companies started hiring new people to help with the update. The outsourcing movement accelerated and then spread throughout the world.

No.6: Offshoring. On December 11, 2001, China joined the World Trade Organization. By doing so it agreed to the WTO terms governing exports, imports and foreign investment. That became one of the biggest steps in global commerce in the past millennium. Companies started offshoring companies to China where they could manufacture products at lower costs, lower taxes and export them worldwide.

No.7: Supply Chaining. What do Walmart, Amazon, Zara and HP have in common? Probably a lot but one of the most important things that makes these companies what they are is their supply chain. When the world got connected companies such as these spread their supply chain all over the world, to the places where products can be manufactured cheapest and at the best quality. Their supply chains brought the world together in a way governments and armies never could.

No.8: Insourcing. While you might not know this, companies such as UPS or FedEx are doing a lot more than just moving things from point A to point B. Of course, they do that but they also fix your Toshiba laptop, pack, inspect and deliver your Nike shoes and all in all handle logistics for many of the companies you love. How do they do that? They get inside the companies that contract them and help them be better at delivering value.

No.9: Informing. We take Google for granted. We can navigate to the answer for any question. We can access content written all over the world. Information became accessible as never before in human history, to anyone with access to a computer and Internet. Google, Wikipedia and others allowed information to flow everywhere in the world.

No.10: The steroids. Digital, virtual, mobile. When the book came out in 2005, the author listed the HP’s iPaq as a steroid for flattening the world. The device was supposed to be omnipresent allowing for constant connectivity. The irony is that the iPaq is now dead and another i-something (the iPhone) became the revolutionary device HP went for. These steroids are the digital enhancements that allow all the others to converge constantly and empower the individual.

The World is Flat is a book that might feel unpopular …

…especially for anyone in the western world, people that were told all their lives that they will have a job, they will have a house, they will drive a good car and they will have a happy family. And then comes Thomas Friedman and says – not so fast. There is a kid in China, or India or Eastern Europe that will work 3 times as hard for half your pay and he will be happy about it.

Thomas Friedman gets some very unfriendly reviews on this book and sure, some may be true (the writing style tends to get a little boring and repetitive at time) but most are unfair. It is not Friedman’s fault that jobs are outsourced. You shouldn’t blame the book for having to work harder for the same pay. The world IS flattening (it is not yet flat) and soon we will all need to run a little faster, just like a gazelle and a lion in Africa ….

“Every morning in Africa, a gazelle wakes up. 

It knows it must run faster than the fastest lion or it will be killed. 

Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. 

It doesn’t matter whether you are a lion or a gazelle: when the sun comes up, you’d better be running.”

 

The book is a must read for any retailer looking into understanding how the global world shapes the global commerce and what ecommerce has to do with it. Before long – it might become mandatory to understand retail on a global scale if you’re willing to survive in business.

Equal Opportunities for All. Are Electronic Markets Making the World a Better Place?

hands

In 1932, Ben Graham asked a tough question: “Is American Business Worth More Dead than Alive?”.  At the time US and the World were struggling through the depths of the Great Depression. The 1929 and 1930 stock market crashes left anyone with a sense of reality discouraged with stock exchange.

But Ben Graham, then a small investor with a brilliant mind, noticed something interesting. The stock market crashes left companies deeply undervalued. The companies were worth more taken apart than sold as a whole. They struggled with banks that not loaning them money and investors far too prudent.

30% of all listed companies had a larger value disassembled than sold as a whole. Their net quick assets (cash, marketable securities, and accounts receivable minus current liabilities) were worth more than the value investors were willing to pay for. Mr. Graham basically said: it’s now safe to invest again.

It’s 2014 and now we wonder how technology companies are evaluated. We strive to understand how something so seemingly small and useless as messaging app, a social network and an electronic market can be so highly valued. If Ben Graham would look at Amazon, would he decide to buy? Well I don’t know about the messaging app or the social network but if it were for the electronic markets, I bet mr. Graham would say: it’s now safe to invest again. Below you’ll find out why.

The Prodigal Student

Ben Graham lived until 1976. Although definitely not a poor man, he didn’t die a very wealthy one either. He had no problem ensuring his wealth increased steadily but he was more fond of reading Proust in French and Plato in Latin than gathering fortunes.

It was one of his disciples that reminded the world about Mr. Graham. It was this disciple, the worlds richest man for a very long time, that made Ben Graham famous, repeating his mentor’s name every chance he got.

Warren Buffet

Warren Buffet

Warren Buffet made his first investment when he was just nine. He ran his own business by the age of 14. He was a millionaire by the age of 32. He tried to get Ben Graham to hire him for years until the mentor finally accepted he was ready to join his company.

He than evolved continuously. Using Graham’s method he increased his fortune by the year. There were of course setbacks but he managed his money and his partners’ like no other.

But there was something Warren was not fond of: technology. He refused to be one of the early investors in Intel because he just didn’t understand technology. He was more focused on long term companies that he understood. Amid the Dot Com Bubble, when everyone was rushing in to buy tech stocks he said:

“Technology is just something we don’t understand, so we don’t invest in it.”

They laughed and they lost. The Oracle of Omaha, as mr. Buffet is often called in media, was right again. He left the bubble unwounded. An than he bought tech stocks.

Warren Buffet invested in IBM and Intel. These companies fit his principles. They were strong companies, that he could expect to own indefinitely. They survived the hype and escaped stronger.

Fairness and the money

Fairness is a concept that sometimes eludes our understanding. At least most of us. Warren Buffet is not like most of us. He was able to see beyond the hype when tech stocks were overvalued and he was able to see beyond the public opinion when important matters were disputed.

He and his wife were one of the few anti – segregation militants in Omaha, back when rasial differences were the norm. He fought strongly anti – semitism in his hometown. He pledged $31 billion to charity and now he is one of the strongest advocates of increased taxation on the rich.

“So let’s forget about the rich and ultra rich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased,” he said. “The ultra rich, including me, will forever pursue investment opportunities.” Warren Buffet

Warren Buffet was never an elitist. He believed everyone should have equal opportunities at pursuing his interests and he stands even today as the living proof fair opportunities make up for very successful people.

But for the recorded human history, wealth has been unequally spread. From the dawn of man kind, through the Roman Empire, the Middle Ages, the Industrial Revolution, one thing was constant: wealth is not distributed equally. For a very long period of time also wealth (especially inherited) also mean life opportunities.

Here’s how we perceive wealth disparity right now:

The long story short:

  • wealth is not distributed equally
  • not only is wealth not distributed equally, but it is actually in the hands of those that don’t deserve it
  • the distance between the lowest paid and the highest paid earners is absurd
Wealth Distribution 1983 - 2010

Wealth Distribution 1983 – 2010. Source: Professor G. William Domhoff, University of California.

Wealth disparity may indeed be a problem. If it meant the poor stay poor and the rich stay rich forever.

But it’s not really that way. At least not anymore.

In the past 20 years the top 1 percent increased their share of total net worth from 33.8% to 35.4%, with a peak of 38.5% in 1995. The next 19 percent increased their share of total wealth from 47.5% to 53.5% and all of these at the expense of the bottom 80%, who lost a 7.6% share of total net worth.

The rich 1% didn’t get much richer. The rich 20% got richer on the expense of the poor. It’s not the rich that take away from the poor. Nor is the middle class disappearing . The middle class is getting a lot richer.

There is a rich 1%. It’s just not who you think it is.

Think about it for a second. Are these categories fixed? Are people in the bottom 80% destined to remain there? Are the top 1% staying there forever?

The previous two examples, Warren Buffet and Ben Graham, although not dirt poor, did not come from rich families. Sure, they were not starving (well except Ben Graham, at an earlier point in his life), but they were definitely not rich.

Yes, Warren Buffet’s father was congressmen for 4 terms, but he did struggle at length in his youth to keep the family finances afloat. Through extensive work he managed to provide a decent lifestyle for him and his family, and thus young Warren was provided an opportunity to put his outstanding mind at work.

So did Ben Graham. His mother inherited a decent fortune from his father but lost it all in 1907, when he was just 11 years old. What he did receive was a brilliant mind and before 25 he already had a $500 000 small fortune.

It’s not inherited wealth. Graham and Buffet improved their financial status with as a result from their innate intelligence and hard work. They did not receive a fortune. They received a fair chance at earning their fortune.

They’re not the only ones. Forbes top 10 richest people are similar cases:

  1. Warren Buffet was born in a middle class american family, earned his wealth through heavy saving and intelligent investments. Worth  $60.3 billion.
  2. Carlos Slim was born to immigrant parents. Slim was early to invest (bought first share at 12). His story is a lot similar to Buffets, although he came from a much poorer background and in a poorer country. Worth $72 billion.
  3. Amancio Ortega, founder of the Zara brand and – was the youngest of four children. His father – a railway worker. His first job, at 14 – shop hand for a local shirtmaker called Gala. Worth $65.3 billion.
  4. Ingvar Kamprad – founder of IKEA – was raised on a farm. He started business as a little boy selling matches to locals. Worth $52.8 billion.
  5. Larry Ellison – founder of Oracle – son of an unwed mother and an italian pilot. He was given for adoption at the age of 9 months. Worth $43.3 billion.
  6. Sheldon Adelson – business magnate – his father was a taxi driver and his mother ran a knitting shop. Worth $37.5 billion.

And they’re not the only ones. Have a look at Forbes top 400 richest people and you’ll notice the self made billionaire is not the exception. Out of 400 richest people, 386 were self made. That’s an astonishing number. 96.5% of the richest 400 are self made.

So it is not inheritance that builds fortune. It’s sometimes the opposite. As numbers would have it wealth is a result of fair opportunities, a brilliant mind, drive and hard work.

Well … at least if you’re lucky enough to be born in the US.

The opportunity disparity in the world

Income per capita in the world. Source:

Income per capita in the world. Source: Keith Sill.

In the past, before the airplane, the radio, the telephone and eventually the internet chances looked pretty grim for those born outside rich countries. Capital was scarce, life was hard but most of all education was a real problem.

Starting with the industrial revolution, unless you were born in the Western Europe or the Western Offshoots (United States, Canada, Australia and New Zealand) your chances of getting a decent lifestyle were slim to none. Getting an education – even worse.

So if you are reading this from a computer in the western world and you are complaining about the 1% stealing your wealth know this: 96.5% of Forbes 400 are self made. You have an equal opportunity at getting rich.

Those born outside don’t have this opportunity. Or do they?

Technology made Western World rich

As the world moved from the pre-industrial to post-industrial era some won and some lost. Income grew and grew, helped by the magical vector of technology. Human workforce was replaced by exponentially growing human ingenuity.

The working hand was replaced by the steam-powered machine. Carriages were replaced by cars, trains and railways. Houses were replaced by steel and concrete behemoths. In the western world people were no longer working the fields but rather in factories and offices. Capitalism fought and (relatively) quickly replaced all other economic ideologies.

Marketing and advertising were born to help sell excess production. The stock markets were fueled and exploded. Multinational companies roamed the world to sell the products the West could make better, faster and cheaper.

Technology patents piled up until masses of workers became nothing but managers, lawyers, tradesmen, pencil-pushers. Those brilliant enough to harness the power of technology and improve their peers’ lives were rewarded with vast fortunes.

The temple of the mighty dollar discovered and pushed new concepts and new ways of doing things, growing faster and faster apart from the rest of the world. Until it built the personal computers and the Internet.

The Internet leveled the playing field

When the Internet came online it was a military application. It quickly evolved into an academic research network that spread throughout the world. There weren’t too many people willing to bet big on its economic impact yet the internet economy is now expected to reach 4.2 trillion by 2016.

Robert Lucas, Nobel Laureate

Robert Lucas, Nobel Laureate

Nobel Laureate Robert Lucas stated that economies that are at the forefront of economic and technological development will grow by approximately 2% per year. Those below them are usually kept below by what he called “technology frontiers”. Advances in genetics, IT, robotics and others that help labor and capital be more productive, are technology frontiers. Once technology frontiers disappear, lower economies will grow 2% + an additional growth rate determined by the income gap between itself and the richest country. So – the later the technology frontiers disappear, the bigger the income gap. The bigger the income gap, the faster the growth. The world tends to balance inequality.

Countries that are later to develop can adopt new technologies easier and the main factor that helps emerging markets evolve is technology and education.They can freely adopt and integrate these, without having to go through the research and developed the countries at the top of the food chain had to.

Even though countries may start development later, they tend to reach the same point in terms of income.

Even though countries may start development later, they tend to reach the same point in terms of income.

Internet made everything easily accessible. It quickly became the gateway for anyone willing to access the sum of all human knowledge. Western colleges now post courses online free of charge. Online academies help students become specialists in any desired field, ranging from business, to communication to computer sciences.

In a simulation of Lucas’s model (on the left) you can see how countries that are later to break through technology frontiers are also those with the fastest growth. For most countries the bulldozer that broke through the technology frontiers was the Internet.

With the widespread adoption of the Internet, global opportunities shifted quickly. Countries that were previously kept in the dark by economic conditions, lack of education and poor access to information now had a fighting chance. They were no longer tied to menial jobs and export of raw materials. Giant leaps were made in the past twenty years in terms of global access to information and decreasing the opportunity gap between the Western Countries / Western Offshoots and the World.

Jan Koum’s rags to riches story is deeply iconic on how much the field was leveled in the past years. He grew up in a village near Kiev, Ukraine. He lived through poor conditions until he put his skills to use in the US. Just as his country was being torn apart by an anti-government revolution he sold his company, WhatsApp, becoming a billionaire at just 38.

And it’s not just software, code and people. Goods are quickly moving from country to country, continent to continent. All due to the new electronic markets, enabling global access for small to medium producers and retailers.

Companies such as Amazon, Ebay, AliBaba.com are connecting the world and taking out the middle man. With less losses on the way to the end consumer, products are cheaper and competition is itself leveled. Everyone gets an equal opportunity and a decent start.

The electronic markets are changing commerce for the first time in human history

Take China for example. It was pretty late to the party in terms of economic development. When it did start to grow, it took the world by storm. 

As for electronic markets, China hadn’t had to invent or discover the internet. It just adopted it. It made a great leap forward in terms of manufacturing. It made an even bigger leap forward when it comes to e-tailing and electronic markets:

China's compound Growth rate, 2003-2011 - 120% . China grew 7 times faster than the US.

China’s compound Growth rate, 2003-2011 – 120% . China grew 7 times faster than the US.

If you look carefully at the China’s e-tailing market growth, the growth rate it’s pretty similar to Robert Lucas’economic growth theoretical modeling. China’s quick adoption of ecommerce as a means to get a larger retailing coverage was a breakthrough in a very important technology frontier: electronic markets.

AliBaba.com compared to Amazon and Ebay

AliBaba.com compared to Amazon and Ebay

It is estimated China’s internal ecommerce market will reach $655 billion by 2020. The figure, as astonishing as it may seem, is dwarfed by AliBaba.com’s sales figures.

AliBaba.com, China’s main ecommerce company, is focused on B2B / C2C transactions between Chinese manufacturers and the rest of the world and it reported gross sales of $170 billion in 2012. That figure has only been ever  reported by two companies: Walmart and AliBaba. It was founded in 1999 by 18 people and an initial investment of 22 million dollars. Now it is the largest ecommerce company in the world and quickly becoming an unbeatable force in retail as a whole.

The company is a prime example of how a previously complicated international supply chain can turn into a click of the button. AliBaba is responsible for developments in key areas of China’s economy:

  1. increasing exports by connecting manufacturers and retailers (B2B)
  2. improving retail coverage for the internal and external customer (C2C)
  3. improving Chinese suppliers reliability and accountability through its certification programs

Companies such as AliBaba, Amazon , Ebay are supplying the world with something it badly needs: equal opportunities. With electronic markets easily available and growing fast, people all over the world are starting to have, for the first time in history, equal chances at attaining success.

It’s not Equality, but Meritocracy  is as good as it gets

By empowering individuals to access the same wealth of possibilities, the new tech companies are changing the way we think of human development.

Our history has been sadly occupied by mostly dynastic forms of leadership. Aristocracy, brute force ruling, totalitarian states have one thing in common – unequal opportunities for those that deserve them.

Marxism brought a fake yet inciting concept: that all man are equal. Indeed we are all created equal. We should have equal opportunities. But perfect equality is neither attainable nor fair. Even among equally gifted individuals, drive and hard work can shift the balance more than we care to admit.

Equal access to opportunities is needed and desirable. We have to make it possible that even if the future cancer – curing Nobel Laureate is born in a poor village in Africa, he has the chance to rise. Even if the physicist that will invent faster than light travel will be born in a poor family, he has the chance to reach his full potential.

Our electronic markets are so far the only way we can ensure equal opportunities to all mankind. What made Warren Buffet rich was a brief period of time when stocks were great to buy, his innate intelligence, his access to the best information he can get, a close relationship to an intelligent mentor. And hard work.

Beside innate abilities that turn out to be not so important, everything else above is now available or shortly be available to each citizen of the world.

Companies that are building electronic markets are not overvalued. They are a new breed of companies that work for the betterment of mankind. Knowingly or not. That’s why we need to look at them not from the previous brick and mortar, asset only point of view, but a new one. We need a perspective where we look at a company and choose to invest in it based on a simple question: “Does this company get us closer to an equal opportunity world?”

It’s not all good …

However – be sure equal opportunities do not mean equality. Man was not born a machine. He is a creative force of nature and as long as it will use his creativity and intellect, opportunities will be used.

Unfortunately a dark veil has been pulled over, at the dawn of our productive society. Many of us still act as if we depend on simple, repetitive jobs to make a living. Whether it is our instincts fighting the technology we hardly understand or  a self perpetuating fallacy we must stop trying to act as machines.

The world is potentially free. We must leave all repetitive tasks to technology and become the creators we are able to become. Those that fail at this will be the 80% struggling tomorrow.

Does internet help education?

“The printing press helped education”. It’s pretty hard to argue with that. When Johannes Gutenberg invented the printing press he had a simple idea in his mind: to help more people read the Bible. Also – make some money out of it (Gutenberg was a goldsmith so we might assume he had some economic motivations).

The printing press helped Europe escape the Dark Ages

 

The printing press

Back then The Church held a monopoly on Bible printing and distribution. Most of the Bibles were hand written in Latin and it was frowned upon, to say the least, to translate or own one. There were few people able to read, let alone read Latin, so the Church held the absolute truth as priests were able to interpret the Bible in any way they found it appropriate.

Johannes Gutenberg changes all that in 1440 with his invention of the printing press. He is credited with having printed the world’s first movable type book, a 42 line Bible.

The context was favorable as Europe was seeing a post-medieval rise in learning, the early notions of capitalism appeared and manifested themselves through a high interest in product efficiency. In just a few decades the printing press spread throughout Europe. This is not as impressive now as we take book publishing  and distribution for granted, we read our books on tablets or the Kindle but back then it was unheard of any technology to spread that fast. In under 4 centuries the book printing output rose from one million to over one billion books.

Soon people began printing more than Bibles. Authorship actually started meaning something. Back when the printing press did not exist the author was not really important. A copy of Platon’s Republic in Paris may have been entirely different from the one in London. Authors where sometimes unknown and most didn’t find any interested in writing something that brought no profit or recognition in return.

The sciences blossomed as people were able to exchange ideas in writing. The arts started blossoming as literature was finding its way to the masses. The first newspaper was printed in 1620, almost 200 years after the invention of the printing press. Illiteracy dropped as educational means were now available and the life quality increased.

We may never know how important the printing press actually was to the evolution of mankind but  we can guess that were it not for the printing press we might still be living in the dark ages.

There was a time when we didn’t have internet access

Imagine the world without internet. It’s pretty hard to do that now as you have probably spent at least an hour today sending and receiving emails, using Google, shopping online or reading the news on your favorite news portal. If you are older than 25 you might remember a time when the Internet was something closer to science-fiction than everyday utility. There was a time when you actually had to wait more then a few days to send a letter to someone across the globe.

How did the Internet came to be?

ARPANET

Back in 1950 a point to point computer communication between mainframe computers and terminals was developed. A decade later this led to the development of several networks and in 1970 one of these networks, the ARPANET, a military developed network, developed the concept of internetworking, basically a network of network. 1982 saw the implementation of TCP/IP, a protocol to allow interconnection. A few years later ARPANET was decommissioned and in 1995 the internet was commercialized.

Bam! Everything exploded! Well – not actually. At that young age the internet was still mainly used for scientific purposes and information exchange.

Soon, though, people started experimenting with email systems, eCommerce, self-publishing, and others such.

A big breakthrough in research and education were the search engines. Before Google there was Altavista and Yahoo. Yahoo was actually a web directory that helped users find websites based on interests. The development of Google meant people didn’t need to browse for hours to find what they were looking for (we might remember the days when a 64kbs dial-up connection was considered a luxury).

The internet and education.

Altavista

Now we can find almost any kind of information online. The search engines crawl billions of webpages on a daily basis, everyone with an access to a computer and  internet can easily publish an article and Amazon is already selling more instant-delivery eBooks everywhere in the world.

Some of the most important universities in the world now have free access to online courses. Have a look at this list to get a glimpse into how much information is available to anyone willing to spend the time to learn.

As  mobile internet consumption rises new education approaches emerge. Apple launched iTunes U, a collection of higher education courses in audio or readable format.  Hard to reach populations are actively taught through mobile internet connections.

Some of the most prestigious universities in the world have online courses that offer a degree with lower education costs for those in less economically stable areas.

The Wikipedia

Yes, “THE” Wikipedia is probably the greatest education feat in the human history. Human knowledge is now accessible for free to those that want to learn more, understand more. It features more than 4 million English articles and is available in 278 languages.

Wikipedia drove the paid print version of Encyclopedia Britannica to extinction as generous article contributors have made Wikipedia the go-to place for fast research.

Internet has changed many things for the better but education is the field that changed most. Never in our history has so much information been available to so many. I believe in a future where individuals are empowered, informed, educated. Internet has mad that possible as education and information became publicly available.

 

Gift economy – an idea to change the world

We live in a society organized on the principles of scarcity as driver for profit and social recognition. Our free market system works on a pretty simple principle: people exchange goods with each other with the help of a monetary system. As a result the ones that are better at playing this game get more social recognition, live longer, better and attract better mates.

Open markets vs Centralized planning.
Capitalism vs. Communism

The last hundred years proved that the open market is a better response to people’s needs and wants than the communist economic theory. Communism failed to deliver the results it promised. Centralized economic planning eventually lead to mass social movements, frustration and eventual destruction of communist regimes. The communist governments were parasitic in essence, planned the economic development and backed their decisions through military force.

There are still some communist states at the moment and the highest profile is clearly China. With a booming economy one might wonder what did China do and other communist states (such as the former Soviet Union) did not.  First of all, given time, the Chinese regime will have to change its approach to governance. It already started doing so. Right now China is not as communist as we expect it to be. Collective ownership and central planning are rarely found in China’s economy as every business is at least partly private.

Although there is still just a single party, the almighty Communist Party, the economy is a mixture between capitalism and communism, with very few Marxist methods. Local leaders are evaluated based on economic growth indicators and are encouraged to find innovative ways of fostering growth.

Therefore – the one communist regime that did make it is not that communist to start with. Basically the Chinese government managed to reach a smooth transition to capitalism.

We can see that capitalism was a better bet than communism but is there something better than capitalism? I believe so and we can see this in a very old type of economy that resurfaced in the Internet Age: the gift economy.

The gift economy

Think about the the post you are reading right now – you are getting information that was distributed freely. It is hosted on a free blogging platform, developed as open-source software, based on an open-source programming language, having data stored in an open source database. This is an example of how “free” and “open” can happen. You are able to read this because I wanted to share this information with others, some people thought of the idea of hosting blogs for free, some other people contributed freely to the blogging software and some other people developed the tools to make this happen. Asking nothing more in return than gratitude and recognition.

“I can’t buy food with gratitude and recognition”. Of course you can’t but you gratitude and recognition mean prestige and prestige is a very good way to land a good job or deal.

Have a look at what some of the best developers in the world are doing: they write free software, they get recognition, they get people using their free services and then get founded by venture capitalists to expand their software into large companies. Take Facebook for example: it charges nothing, its prototype was built and distributed freely by Mark Zuckerberg. In time the social network made Mark very rich and it all started with a gift he offered to the world.

If you think about it, what we call wealth is basically a recognition of our contribution to the world. We provide a service or product, the price people agree to pay for this is just quantified recognition. That’s basically the whole basis for our current economy.

If we were to take out the monetary system we would basically have a gift economy that would cycle through groups of individuals.

Why did the internet develop a gift economy?

I believe the Internet is not just a technology. It is a world in itself. It has its own rules, its own citizens, its own localized governing groups (highly influential internet users that can provide leadership for their friends or fans). It must develop its own economy. As this economy does not (yet) have a specific largely spread monetary system (we still use offline payment methods) we needed to find a way to address this issue.

Books and ideas as gifts: Paolo Coelho allows people to pirate his work.

Gifts are the solution and intellectual property is exactly the kind of product we can offer without losing anything and at the same time gaining prestige and recognition. Best selling writer Paulo Coelho was talking about piracy and the S.O.P.A. (Stop Online Piracy Act) in some terms we would not expect from someone that makes a living (actually a fortune) from selling his books:

As an author, I should be defending ‘intellectual property’, but I’m not.

Pirates of the world, unite and pirate everything I’ve ever written!

The good old days, when each idea had an owner, are gone forever.
First, because all anyone ever does is recycle the same four themes: a love story between two people, a love triangle, the struggle for power, and the story of a journey.
Second, because all writers want what they write to be read, whether in a newspaper, blog, pamphlet, or on a wall.

If we think about it his actions are actually very sound in terms of business: he wouldn’t sell anything unless people would know about his work. The more people know about his work, the more prone to buying they are. Behavior economics principles state that we care about other people think and we are prone to do the right thing. We know about the writer as we have read his books online. So did our friends. We know that he should get some kind of financial incentive for the work he put into writing the books. The easiest way to do that is to buy the books.

As a result Paolo Coelho, a writer that somehow pirates his own books, has sold more than 100 million books. “This has nothing to do with giving away your work for free” you might think. Yes it does. Uploading a free Russian translation of his book “The Alchemist” resulted in an increase in book sales from 1000 to 1 000 000 books per year.

Shockingly … Africa still has a poverty issue.

Piracy and Gift Economy

Piracy is an issue of great debate this days. Supposedly this form of information sharing is harming the media industry. I guess piracy plays its part. However, piracy is the cause AND effect of increasing knowledge, curiosity and need to access information.

Wealth distribution inequality

Wealth is not distributed equally. Not by a long shot and the gap is increasing fast. Here are just a few facts (Sources: The Conference Board of Canada, Fight Poverty):

  • 42 % of world income is distributed among the first 10% of world’s richest people
  • 1 % of world income goes to the poorest 10% 
  • half the world’s population lives with under 2 $ per day
  • 20% of the population consumes 86% of world’s goods

Those numbers are astonishing and poverty is not going to go  away unless we do something about it. Foreign aids do not help as corruption seems to go hand in hand with poverty. State loans don’t help either as the poorest countries seem to be the ones most prone to impose the repayment of loans to their already impoverished citizens. Humanitarian donations and philanthropic concerts performed by Bono don’t work either as they usually help the ones that need it less: the rich and powerful.

There is however something that does work: education. Studies showed that education is very effective in fighting poverty. Educated individuals improve their own life quality and help economic development.

Empowered, informed, educated

Empowered, informed, educated should be the three words on any agenda that addresses poverty issues. With the proper infrastructure anyone in the world can have access to information that can make the difference between famine and prosperity.

The gift economy can help those in need more than money can. Right now the motivated individual can find all kinds of information online regarding all sorts of topics from survival techniques to quantum physics and advanced health courses.

Internet is already helping lives. The information should be free if we are serious about addressing world issues. Piracy helps. Software companies are outsourcing their IT departments to countries like India thus lowering costs. Fun fact: piracy rate in India is 64%. Do you see a correlation there? I do. Those people needed to learn  and increase their revenue before they could pay for software. If they would not have had access to software and information they would have never had the kind of skills that allows India to have the economic growth it has (see chart).

Looking at numbers and charts we cannot fully understand the impact gift economy and information sharing has had on countries like India. But think about the numbers of lives that were saved, the millions of people that could afford to eat each day and the impact this has on the future to better understand the bigger picture.

Gift economy is changing the world

Many people are worried about the impact gift economy has, the way information sharing is changing the world. That’s why we are seeing more and more talks regarding things like SOPA, ACTA or other intellectual property management acts. The media is changing, software is changing, access to information is changing and that means less money for those in control right now. It also means a better future, a future where everyone actually stands a chance at living a decent life.

There are 7 billion people in the world right now and the numbers are growing fast. Relying on centralized organizations to improve life is not the way to go. The individuals need to be empowered, informed and educated if we are to survive the next millennium. The gift economy is still in its youth but things are moving fast in the age of Internet. Ideas spread fast and the gift economy is the kind of idea that changes civilizations. As Voltaire said:

“An invasion of armies can be resisted, but not an idea whose time has come.”

Mobile phones to help save lives

There are almost 6 billion mobile phones in the world and almost three quarters of these mobile phones are in developing countries. The mobile phones are probably the best connection people of the world have right now. With costs dropping and mobile penetration closing in to 100% mobile phones might be some of the best ways to tap into human behavior, especially in the developing world.

Digicel, the largest mobile operator in Haiti offered anonymized data regarding the post-earthquake behavior of almost 600 000 people. Results were astonishing. Using the data provided scientists Xin Lu and Linus Bentsson managed to create an algorithm that was able to predict with a 85% accuracy where were people going to go after the disaster.

Mister Xin Lu and Linus Bentsson started FlowMinder.org , a place where they can share their research and mobile operator data for NGOs and relief agencies. They believe that the 30 million people displaced by natural disasters can benefit form this and offer Haiti study as a proof of concept.

What are the opportunities and dangers ?

Several uses can be found in working with such data:

  1. Mobile medical assistance – there are places where the patient to doctor ratio is close to 20.000:1 . Using mobile services and self-help information we can states and private companies can setup healthcare automated services that can deliver helpful information to those in need. Moreover such services can help track the appearance of epidemics and evolution of diseases.
  2. Mobile war relief – on most cases war victims are just estimated statistics and data is gathered rather slow. Real time information is of the utmost importance when dealing with war casualties and refugees. NGO’s and relief agencies can quickly get an outlook on the situation and provide assistance where and when is needed most.
  3. Help fight literacy issues with mobile services – Ghana has an adult literacy level of 64% and an mobile penetration of 80.5% . Using mobile services and in the future rich media streamed through smartphones is a quick and cheap way to fight illiteracy issues.
  4. Help setup the base for barter-based markets in developing countries – using classifieds like services through mobile phones governments in developing countries can fight poverty and hunger while at the same time encouraging micro-entrepreneurial movements.

The dangers of  using mobile data

While many positive ways to use mobile services can be found there are several issues that arise such as privacy, ethical usage of data, security of provided data etc. For example – having data publicly available in a natural disaster such as the Haiti earthquake one might wonder how would this kind of data be used by robbers.

Even worse – in such tragic events such as war, public availability of data can, in the wrong hands, result in many deaths and suffering.

I can only hope that in this connected world we will all feel closer to one another, we will be able to put aside our differences and use technology for good rather than personal interests.