How Google Could Have Changed the World With Nexus One — and Still Might
If you thought that the world would change with the release of a Google-branded phone Tuesday, be assured that sadly it did not.
At least not yet. It just got one more cool phone.
You can buy the Google Android OS phone, dubbed Nexus One, unlocked directly from Google. But in the United States the only place you can really take it to is the country’s fourth largest carrier, T-Mobile. Or you can buy it through T-Mobile for a hair under $200 and pay about as much per month as a Palm Pre owner and about $20 a month less than an iPhone user.
What would something revolutionary have looked like?
How about a smartphone starter plan, deeply subsidized by ads, that offered a cheap data plan to entice the “I don’t need a smartphone” crowd into joining the revolution? Even better, would have been an order form where you could buy the Google phone and then choose from three or more carriers who are competing to provide you with a data and voice plan — just as you do when you buy a laptop. Instead, there’s just the one option — T-Mobile, which costs basically the same as all the other smart phones.
Google clearly wants the mobile-phone world to look different, it’s just not clear that this phone or its current manufacturing strategy will actually bring about the changes in the telecom world that Google is looking for.
Now, getting on par with Apple (and in some ways past it) is no small feat, especially when Google made this phone in partnership with HTC, a business model that rarely leads to the hardware that the design team really wants. Compare the Nexus One, for instance, to the first Apple phone, which the world has seemingly forgotten — the Motorola ROKR. That phone was limited to having 100 songs on it, couldn’t buy songs over the air and was full of compromises. With the Nexus One, Google managed to make a device that Wired magazine’s Steven Levy called “curvy,” “classy” and “impressive.”
And that’s important, because Google has recognized that mobile computing is a massive part of the net’s future — and thus its own.
With the recent $750 million purchase of mobile-ad provider AdMob and its reported overtures to buy the popular local-business–rating site Yelp, Google is showing it clearly thinks that mobile (and local) is the next place on the net to mine for riches. But what it doesn’t like is all the ways that users could get detoured, from the time they pull the phone out of the pocket until the time their search travels to a Google server.
Remember that the more people use the internet and the faster the internet works, the more Google makes money. Low-cost, uncontrolled devices with low-cost connections equals more people using Google software and seeing Google ads, even if that phone is made by Motorola, Nokia or even Apple.
That’s why it’s pushing hard to break down barriers between the average user and an online Google ad, by finishing the mobile-computing revolution that Apple started, but didn’t finish because of Steve Jobs’ fanatical need to control the iPhone.
Google’s created the mostly open source Android OS, which manufacturers can and are using for free. That’s pushing Microsoft out of the market, and keeping carriers from doing stupid things like forcing a user’s browser home page to divert to its software store in perpetuity, no matter how hard they try to change it. And third-party-app developers can write programs for Android devices without getting permission, a stark contrast to Apple, which must approve every iPhone app and controls the only way to add programs to the device.
Google bet more than $4 billion in an FCC wireless auction in 2008 just to make sure that openness rules would adhere to new spectrum, which led the eventual winner — Verizon — to sue the feds. Google’s won a battle in D.C. to make the wireless companies subject to the same FCC rules that force cable and DSL companies to treat all online content similarly.
In short, Google wants to transform the phone market with its complicated charges, long contracts, bizarre fees and bundling of devices with service plans and make it more like how you buy a television or a computer: Buy the device. Then find the service. That’s even as cable and satellite providers look at the wireless companies and decide those contracts look like a mighty good way to keep customers.
But the question becomes how far does Google have to push, how much capital must it invest, how many devices must it design and regulators must it convince, before it can back out of the mobile hardware business and simply focus on software and advertising?
Here’s the scenario that might get us there: Google convinces HTC that it’s not suicide to create a phone that can be used on any U.S. 3G network (maybe two phones — one for GSM and one for CDMA) and then sells it unlocked. It’s a great phone, and lots of people want it, and there are lots of great apps that run on it.
Users then could then take it to whichever carrier they like, and get a data plan a la carte. The carriers will hate this, perhaps create unfairly high prices and very annoying “device registration fees” — trying to protect the money they make offering phones at an initial discount in exchange for a two-year contract.
But the FCC will have passed a rule forcing carriers to accept any device that doesn’t hurt their network — much as Ma Bell was forced to open its lines after 1968 — and Google, regulators and consumers will break down those barriers. Or the market could simply take care of it, with a desperate Sprint breaking ranks with the other large U.S. telecoms and accepting a Nexus or any other device with no registration fee and a fair price for users.
And that’s when Google will stop making phones, and you’ll know that the Nexus One actually meant something.
Photo: Google employee Sara Rowghani looks over a jumbo model of the Nexus One phone at a demo in Mountain View, California, on Tuesday.
Jeff Chiu/AP
Thursday, 7 January 2010
Innovation as Resource and China's New Magnetism
Innovation as Resource and China's New Magnetism
BY Jamais CascioWed Jan 6, 2010 at 1:00 PM
China is set to cut off access to rare-earth elements--and this might be a very good thing.
You've probably seen "neodymium" (actually neodymium-iron-boron) magnets advertised in techie-oriented magazines and gadget blogs. They're actually the strongest type of magnet available, and a pair of them can easily smash fingers. They're also incredibly useful, with small neodymium magnets found in everything from hard drives to wind turbines. Neodymium is one of 17 "rare-earth metals," and these elements have turned out to be critical to the rapidly-growing green technology industries. Rare-earth metals are used in hybrid and electric cars and low-energy lightbulbs, along with windmills (and numerous other greentech applications).
And China is the source for over 95% of the rare-earth metals now in use--something that increasingly looks like a problem. How we respond to this problem can tell us something about how we can respond to other imminent resource and sustainability crises.
Conventional wisdom says that we live in a globalized economy and if China can offer the metals at cheaper prices than other sources (namely, now-closed mines in South Africa, Greenland, and Canada), it's good for us all, right? The fact that many high-tech military technologies rely on Chinese rare-earth metals may give some people pause, but so far, so good. But that model assumes that China is willing to sell as much mineral as it can produce, to whomever wants to buy--and that assumption may no longer be true.
The U.K.'s Independent reports that China has been gradually cutting the amount of rare-earth elements it exports, now down 40% from seven years ago. China now exports only 25% of the rare-earth elements it mines. More worrisome, they say:
Industry sources have told The Independent that China could halt shipments of at least two metals as early as next year, and that by 2012 it is likely to be producing only enough REE ore to satisfy its own booming domestic demand, creating a potential crisis as Western countries rush to find alternative supplies... Beijing announced last month that it was setting exports at 35,000 tonnes for each of the next six years, barely enough to satisfy demand in Japan. From this year, Toyota alone will produce annually one million of its hybrid Prius cars, each of which contains 16kg of rare earths. By 2014, global demand for rare earths is predicted to reach 200,000 tonnes a year as the green revolution takes hold.
With industries relying on rare-earth elements making up a rapidly-growing part of the global economy, this isn't good.
So what are our options? We (as in, the non-China parts of the industrialized world) could try to pressure China to sell more, but that's unlikely to work--and China tends not to respond well to even mild criticism. We could try to rapidly reopen the now-closed rare-earth element mines, but mining is, frankly, an environmental nightmare and incredibly dangerous--hardly a sustainable practice.
Our best option is to innovate our way out of the problem. Ideally, we'd figure out a way to make what we need without those elements. In the shorter term, however, we'd want to figure out a way to obtain those necessary elements without either trying to push China around or reopening dirty mines. If the innovation manages to help solve an otherwise unrelated problem, too--a so-called "economy of scope"--so much the better.
Researchers from Leeds' Faculty of Engineering have discovered how to recover significant quantities of rare-earth oxides, present in titanium dioxide minerals. [...] The Leeds breakthrough came as Professor Jha and his team were fine-tuning a patented industrial process they have developed to extract higher yields of titanium dioxide and refine it to over 99 per cent purity. Not only does the technology eliminate hazardous wastes, cut costs and carbon dioxide emissions, the team also discovered they can extract significant quantities of rare earth metal oxides as co-products of the refining process.
This is, to me, a perfect example of how we should deal with resource problems. Not by simply fighting over the remaining scraps, or trying to get at marginal sources, but by looking at ways to increase supplies while reducing waste, with methods that have a smaller impact on the planet.
Can we do it for every limited resource? Probably not--but focusing research into how to use resources more efficiently, how to extract the resources with less waste, and ultimately how to move beyond them entirely will bring enormous benefits.
BY Jamais CascioWed Jan 6, 2010 at 1:00 PM
China is set to cut off access to rare-earth elements--and this might be a very good thing.
You've probably seen "neodymium" (actually neodymium-iron-boron) magnets advertised in techie-oriented magazines and gadget blogs. They're actually the strongest type of magnet available, and a pair of them can easily smash fingers. They're also incredibly useful, with small neodymium magnets found in everything from hard drives to wind turbines. Neodymium is one of 17 "rare-earth metals," and these elements have turned out to be critical to the rapidly-growing green technology industries. Rare-earth metals are used in hybrid and electric cars and low-energy lightbulbs, along with windmills (and numerous other greentech applications).
And China is the source for over 95% of the rare-earth metals now in use--something that increasingly looks like a problem. How we respond to this problem can tell us something about how we can respond to other imminent resource and sustainability crises.
Conventional wisdom says that we live in a globalized economy and if China can offer the metals at cheaper prices than other sources (namely, now-closed mines in South Africa, Greenland, and Canada), it's good for us all, right? The fact that many high-tech military technologies rely on Chinese rare-earth metals may give some people pause, but so far, so good. But that model assumes that China is willing to sell as much mineral as it can produce, to whomever wants to buy--and that assumption may no longer be true.
The U.K.'s Independent reports that China has been gradually cutting the amount of rare-earth elements it exports, now down 40% from seven years ago. China now exports only 25% of the rare-earth elements it mines. More worrisome, they say:
Industry sources have told The Independent that China could halt shipments of at least two metals as early as next year, and that by 2012 it is likely to be producing only enough REE ore to satisfy its own booming domestic demand, creating a potential crisis as Western countries rush to find alternative supplies... Beijing announced last month that it was setting exports at 35,000 tonnes for each of the next six years, barely enough to satisfy demand in Japan. From this year, Toyota alone will produce annually one million of its hybrid Prius cars, each of which contains 16kg of rare earths. By 2014, global demand for rare earths is predicted to reach 200,000 tonnes a year as the green revolution takes hold.
With industries relying on rare-earth elements making up a rapidly-growing part of the global economy, this isn't good.
So what are our options? We (as in, the non-China parts of the industrialized world) could try to pressure China to sell more, but that's unlikely to work--and China tends not to respond well to even mild criticism. We could try to rapidly reopen the now-closed rare-earth element mines, but mining is, frankly, an environmental nightmare and incredibly dangerous--hardly a sustainable practice.
Our best option is to innovate our way out of the problem. Ideally, we'd figure out a way to make what we need without those elements. In the shorter term, however, we'd want to figure out a way to obtain those necessary elements without either trying to push China around or reopening dirty mines. If the innovation manages to help solve an otherwise unrelated problem, too--a so-called "economy of scope"--so much the better.
Researchers from Leeds' Faculty of Engineering have discovered how to recover significant quantities of rare-earth oxides, present in titanium dioxide minerals. [...] The Leeds breakthrough came as Professor Jha and his team were fine-tuning a patented industrial process they have developed to extract higher yields of titanium dioxide and refine it to over 99 per cent purity. Not only does the technology eliminate hazardous wastes, cut costs and carbon dioxide emissions, the team also discovered they can extract significant quantities of rare earth metal oxides as co-products of the refining process.
This is, to me, a perfect example of how we should deal with resource problems. Not by simply fighting over the remaining scraps, or trying to get at marginal sources, but by looking at ways to increase supplies while reducing waste, with methods that have a smaller impact on the planet.
Can we do it for every limited resource? Probably not--but focusing research into how to use resources more efficiently, how to extract the resources with less waste, and ultimately how to move beyond them entirely will bring enormous benefits.
Tuesday, 5 January 2010
China's Changing, 'Learning-Minded' Party
China's Changing, 'Learning-Minded' Party
Robert Lawrence Kuhn, 01.04.10, 04:36 PM EST
An exclusive interview with a rising star in Chinese politics, Li Yuanchao.
While pundits pondered whether President Barack Obama, on his first trip to China, had been out maneuvered by President Hu Jintao or whether he had achieved his objectives with quiet diplomacy, a bigger, underreported, story was developing. China's leaders have recognized that for the Communist Party to retain its status as China's ruling party it must elevate its commitment to learning and innovation. Although previous generations of China’s senior leaders have emphasized learning, it now has been made prime Party policy--which will likely present a significant challenge to America's economic competitiveness.
Recently I sat down with Politburo Member and rising star in Chinese politics, Li Yuanchao, a champion of the learning-minded policy. A longtime colleague of China’s President Hu Jintao, Li is currently head of the Party's powerful Organization Department, which appoints and trains senior officials in government and executives in state-owned enterprises, a critical function in government and the economy. Li has pioneered new mechanisms for training and oversight of officials and executives, and has enhanced transparency in the process of governance in order to better serve the public interest.
Li said that China's leaders have determined to build a "learning-minded party." In China, relating current polices to past leaders helps legitimatize current policies, and Li stressed the Party's long-held devotion to learning. "When he was still in Yan'an (Shaanxi province) and living in the caves (1937-1948), Mao Zedong called on the Party to transform our study," said Li. "When reform and opening-up began, Deng Xiaoping stressed that we should learn the world's advanced knowledge. Then Jiang Zemin put forward that if China were to achieve modernization we must build a learning-oriented country and society. Recently, the Party's Central Committee, led by General Secretary Hu Jintao, asserted that a learning-minded party must be built, seeking to revitalize our penchant for learning so as to take up the arduous tasks and challenges ahead of us." These challenges include severe economic imbalances between different sectors of society, particularly urban vs. rural, coastal vs. inland; unemployment; corruption; unsustainable development; resource scarcity; pollution; and more. To China's leaders, social stability is a constant concern.
"To construct a learning-oriented Party," Le continued, "we need to learn both theoretical knowledge, such as Marxist classics and the theory of socialism with Chinese characteristics, and all the advanced human scientific knowledge and advanced experience. In addition to learning, we must also apply leading-edge science and technology. The Internet was invented in America," he added, "but has found its largest number of users in China."
"Surfing the Internet every day has become a habit for many leaders and officials, including myself," Li continued, calling it "compulsory homework." He noted how President Hu Jintao answered questions by netizens and interacted with Internet users online. "We often acquire new information and knowledge from the Internet," Li said. "For example, when we want to develop a certain industry, we first search it online to see how people in China or around the world are developing it."
"During my recent visit to the United States," Li recalled, "I visited Google's ( GOOG - news - people ) headquarters. When executives started to instruct me how to use Google's features, I told them it was unnecessary as I used them every day. I often do searches on the Organization Department to find latest news about the ministry and comments about us by Internet users."
"We ask our officials to cultivate a reading habit and encourage them to read more books, and more importantly, good books," Li said. "The Chinese have a habit of reading. Many families regard books as the most valuable family asset. They can do without cars, but there would be cases of books in the house. Recently we recommended a whole set of books in various genres to officials of the Organization Department. This may sound hard to believe, but we also included A Brief History of Time, a classic by Stephen Hawking. Not only do we want our officials to learn latest knowledge of physics and cosmology but also to develop a way of scientific thinking."
"Every year all ministerial-level officials in the Organization Department will take time out for intensive study and discussions together," said Li. "This year's topic was how to expand democracy in our work. We read books by Marxist classic writers, expositions on democracy by Deng Xiaoping, Jiang Zemin and Hu Jintao, even The Theory of Democracy Revisited by Giovanni Sartori. All of us read together. After we finished, we had comparative discussions, taking into account China's special reality."
"We believe that a ruling party only remains viable and vibrant when it masters state-of-the-art knowledge," Li said.
"Of course, in addition to reading books, we also acquire knowledge through evaluating our experiences," Li continued. "Each year the Party holds a plenum, where an important agenda item is to sum up our own recent experiences. For example, last year we summed up experiences of the 2008 [Sichuan] earthquake and relief efforts. By doing this, we improve how we deal with future situations, for example natural disasters."
Li calls talent "the primary resource of scientific development," and has established "democratic, open, competitive, merit-based" principles in selecting and promoting future leaders. In response to the financial crisis, and in order to achieve the "goal of making China an innovation-oriented nation," Li instituted a "Thousand People Plan" to attract high-level personnel to China from overseas, such as scientists, financial experts, entrepreneurs and senior managers. Li's plan promises high salaries and attractive government funding to elite Chinese professionals, especially top science and technology researchers, who are working abroad and willing to return home. (Many whom China hopes to repatriate have been pursuing careers in the U.S.) Recognizing China's new place in the world, Li stresses training leaders with international knowledge and perspective--the "internationalization of the mind," he says, is a needed new way to "emancipate the mind."
In 1978, Deng Xiaoping initiated China's reform by calling for the Chinese people to "Emancipate the Mind," which meant casting aside Mao's leftist ideological dogmatism. In recent years President Hu Jintao has called for further reform, empowered by a new kind of mental emancipation. Circumstances have changed; the world is more complicated, variegated. This is why Hu stresses creativity and innovation in all areas: science and technology, industry and commerce, global partnerships, political participation, and cultural and spiritual life in all their diverse expressions. Without a further emancipation of the mind, Hu says, China's development will face obstacles and difficulties.
"The change China is undergoing is the greatest China and the Chinese people have experienced in thousands of years," Li said. "It may also be the greatest sustained change in human history."
In a 2009 international computer competition--sponsored by the super-secret U.S. National Security Agency (for obvious reasons)--China fielded the most finalists (20), well ahead of second-place Russia (10) and far ahead of America (2). The worldwide winner of the algorithm-coding contest was an 18-year-old Chinese student.
I need not have to spell out the challenge ahead.
Robert Lawrence Kuhn, an international investment banker and corporate strategist, is a longtime adviser to the Chinese government. He is the author of How China's Leaders Think: The Inside Story of China's Reform and What This Means for the Future (John Wiley).
Robert Lawrence Kuhn, 01.04.10, 04:36 PM EST
An exclusive interview with a rising star in Chinese politics, Li Yuanchao.
While pundits pondered whether President Barack Obama, on his first trip to China, had been out maneuvered by President Hu Jintao or whether he had achieved his objectives with quiet diplomacy, a bigger, underreported, story was developing. China's leaders have recognized that for the Communist Party to retain its status as China's ruling party it must elevate its commitment to learning and innovation. Although previous generations of China’s senior leaders have emphasized learning, it now has been made prime Party policy--which will likely present a significant challenge to America's economic competitiveness.
Recently I sat down with Politburo Member and rising star in Chinese politics, Li Yuanchao, a champion of the learning-minded policy. A longtime colleague of China’s President Hu Jintao, Li is currently head of the Party's powerful Organization Department, which appoints and trains senior officials in government and executives in state-owned enterprises, a critical function in government and the economy. Li has pioneered new mechanisms for training and oversight of officials and executives, and has enhanced transparency in the process of governance in order to better serve the public interest.
Li said that China's leaders have determined to build a "learning-minded party." In China, relating current polices to past leaders helps legitimatize current policies, and Li stressed the Party's long-held devotion to learning. "When he was still in Yan'an (Shaanxi province) and living in the caves (1937-1948), Mao Zedong called on the Party to transform our study," said Li. "When reform and opening-up began, Deng Xiaoping stressed that we should learn the world's advanced knowledge. Then Jiang Zemin put forward that if China were to achieve modernization we must build a learning-oriented country and society. Recently, the Party's Central Committee, led by General Secretary Hu Jintao, asserted that a learning-minded party must be built, seeking to revitalize our penchant for learning so as to take up the arduous tasks and challenges ahead of us." These challenges include severe economic imbalances between different sectors of society, particularly urban vs. rural, coastal vs. inland; unemployment; corruption; unsustainable development; resource scarcity; pollution; and more. To China's leaders, social stability is a constant concern.
"To construct a learning-oriented Party," Le continued, "we need to learn both theoretical knowledge, such as Marxist classics and the theory of socialism with Chinese characteristics, and all the advanced human scientific knowledge and advanced experience. In addition to learning, we must also apply leading-edge science and technology. The Internet was invented in America," he added, "but has found its largest number of users in China."
"Surfing the Internet every day has become a habit for many leaders and officials, including myself," Li continued, calling it "compulsory homework." He noted how President Hu Jintao answered questions by netizens and interacted with Internet users online. "We often acquire new information and knowledge from the Internet," Li said. "For example, when we want to develop a certain industry, we first search it online to see how people in China or around the world are developing it."
"During my recent visit to the United States," Li recalled, "I visited Google's ( GOOG - news - people ) headquarters. When executives started to instruct me how to use Google's features, I told them it was unnecessary as I used them every day. I often do searches on the Organization Department to find latest news about the ministry and comments about us by Internet users."
"We ask our officials to cultivate a reading habit and encourage them to read more books, and more importantly, good books," Li said. "The Chinese have a habit of reading. Many families regard books as the most valuable family asset. They can do without cars, but there would be cases of books in the house. Recently we recommended a whole set of books in various genres to officials of the Organization Department. This may sound hard to believe, but we also included A Brief History of Time, a classic by Stephen Hawking. Not only do we want our officials to learn latest knowledge of physics and cosmology but also to develop a way of scientific thinking."
"Every year all ministerial-level officials in the Organization Department will take time out for intensive study and discussions together," said Li. "This year's topic was how to expand democracy in our work. We read books by Marxist classic writers, expositions on democracy by Deng Xiaoping, Jiang Zemin and Hu Jintao, even The Theory of Democracy Revisited by Giovanni Sartori. All of us read together. After we finished, we had comparative discussions, taking into account China's special reality."
"We believe that a ruling party only remains viable and vibrant when it masters state-of-the-art knowledge," Li said.
"Of course, in addition to reading books, we also acquire knowledge through evaluating our experiences," Li continued. "Each year the Party holds a plenum, where an important agenda item is to sum up our own recent experiences. For example, last year we summed up experiences of the 2008 [Sichuan] earthquake and relief efforts. By doing this, we improve how we deal with future situations, for example natural disasters."
Li calls talent "the primary resource of scientific development," and has established "democratic, open, competitive, merit-based" principles in selecting and promoting future leaders. In response to the financial crisis, and in order to achieve the "goal of making China an innovation-oriented nation," Li instituted a "Thousand People Plan" to attract high-level personnel to China from overseas, such as scientists, financial experts, entrepreneurs and senior managers. Li's plan promises high salaries and attractive government funding to elite Chinese professionals, especially top science and technology researchers, who are working abroad and willing to return home. (Many whom China hopes to repatriate have been pursuing careers in the U.S.) Recognizing China's new place in the world, Li stresses training leaders with international knowledge and perspective--the "internationalization of the mind," he says, is a needed new way to "emancipate the mind."
In 1978, Deng Xiaoping initiated China's reform by calling for the Chinese people to "Emancipate the Mind," which meant casting aside Mao's leftist ideological dogmatism. In recent years President Hu Jintao has called for further reform, empowered by a new kind of mental emancipation. Circumstances have changed; the world is more complicated, variegated. This is why Hu stresses creativity and innovation in all areas: science and technology, industry and commerce, global partnerships, political participation, and cultural and spiritual life in all their diverse expressions. Without a further emancipation of the mind, Hu says, China's development will face obstacles and difficulties.
"The change China is undergoing is the greatest China and the Chinese people have experienced in thousands of years," Li said. "It may also be the greatest sustained change in human history."
In a 2009 international computer competition--sponsored by the super-secret U.S. National Security Agency (for obvious reasons)--China fielded the most finalists (20), well ahead of second-place Russia (10) and far ahead of America (2). The worldwide winner of the algorithm-coding contest was an 18-year-old Chinese student.
I need not have to spell out the challenge ahead.
Robert Lawrence Kuhn, an international investment banker and corporate strategist, is a longtime adviser to the Chinese government. He is the author of How China's Leaders Think: The Inside Story of China's Reform and What This Means for the Future (John Wiley).
Monday, 4 January 2010
(1) 10 Things Microsoft Did Right over the Past Decade, (2) Microsoft's 2010 Will Rely on Windows 7 Sales, Yahoo Deal, Cloud
(1)10 Things Microsoft Did Right over the Past Decade
News Analysis: Microsoft had an interesting decade. The company made some mistakes, but it also did some things right that helped it maintain its position as one of the world's largest software companies and a top influencer in the global IT industry. We take a look at those 10 things Microsoft did right over the past 10 years.
Although Microsoft made some mistakes over the past 10 years that adversely affected the company's position in the industry, the software giant has also done a lot of things right. Over the past 10 years, Microsoft has been able to maintain its position as the dominant software developer in the world. It has also stayed relevant both in the consumer space and the enterprise. That's a feat that few companies have been able to achieve.
Perhaps that's why discussions surrounding Microsoft and Windows are so heated today. Although many like to rail against Redmond, it keeps coming back stronger. With each bit of adversity, it seems that somehow, in some way, Microsoft is able to overcome the problem and offer something to customers that appeals to their desire. Of course, it hasn't succeeded every time. And the past decade has shown that Microsoft needs to be more diligent in its decision making. But the company has also done a number of things right that it can use as a foundation for all the future decisions it will make. Let's take a look.
indows Vista was a nightmare for Microsoft. Consumers hated it. The enterprise wouldn't even adopt it. And vendors, once the partners that did Microsoft's bidding, were forced to offer downgrade rights to customers that wanted to run Windows XP. Microsoft knew it had to do something to repair the damage that Vista caused, so it quickly released Windows 7. Microsoft's latest operating system is everything Windows Vista should have been. It's innovative. It's far more secure than previous versions of the operating system. And it appeals to customers. It's a great comeback product.
2. The move to Bing
Microsoft was in deep trouble toward the latter part of the decade. Although it commanded the software market, Google was cornering the search space without any worry of competition. Microsoft's Live Search was largely inconsequential. But rather than wave the white flag, Microsoft released Bing. Microsoft's latest search tool is outstanding. Its results match Google's search results. And thanks to some extras, like a visual search feature, it's a fine alternative to anything Google is offering up.
3. Get in on the gaming
When Microsoft first announced that it would break into the gaming space, some wondered if it could make it. As 2009 gives way to 2010, that question has been answered with a resounding affirmation that yes, indeed, Microsoft can take the gaming industry by storm. Over the past decade, Microsoft has turned its Xbox platform from the "other" console on the market into a gaming leader. The Xbox 360 is now even more popular than Sony's PlayStation 3. That's no small feat. And it should be commended.
4. The enterprise focus
As Apple and Google turned to the consumer over the past decade, Microsoft stayed true to its base—the enterprise. Windows is still the dominant force in the business world. Microsoft has so firmly cemented its position there that most companies wouldn't even consider deploying any other software. Going forward, Microsoft has almost ensured that the enterprise will be its playground.
5. Marginalizing Mac OS X
Apple's Mac OS X made significant strides over the past 10 years, but it's important to note that its rise in the market was largely inconsequential to Microsoft's bottom line. Through smart strategies and partnering with third parties, as well as vendors, Microsoft did a fine job of limiting the impact Mac OS X's rise really had on Windows. Did Apple's operating system steal market share away from Windows? Sure. But did it really change the OS market? No way. Microsoft is still on top by a wide margin.
6. Keeping Linux away
Some would argue that Linux is the operating system that more people should use. After all, most distributions are safe, they are generally lightweight and many are free. But the past 10 years haven't helped Linux gain a substantial footing in the OS market. I would argue that Linux is more well known than it was in 2000, but to say it is any more appealing to the mainstream is a bit of a stretch, even though more distributions have become user-friendly. That can be mainly attributed to Microsoft's ability to keep the OS at arm's length. Simply put, Redmond didn't allow the Linux craze to get out of hand. It was a smart move.
7. Addressing the Web
For too long during the past 10 years, Microsoft allowed Google and others to innovate on the Web. It might also be argued that the company has yet to do enough to stop Google's rise in that space. But over the past year or two, Microsoft has done a better job of realizing that the Internet is the future and it had better be in a position to capitalize on it. That's most evident in its acquisition of several online sites, as well as the launch of Bing and Bing Maps. Microsoft is getting ready to focus on the Web in the new decade.
8. The smooth transition
When Bill Gates announced that he would be stepping down from day-to-day activities at Microsoft, it sent shock waves through the industry. Bill Gates was the face of Microsoft. Investors placed millions of dollars in Microsoft stock because of their faith in its co-founder. It was a dicey situation. But Microsoft handled the transition of day-to-day activities from Gates to Steve Ballmer, the company's CEO, with aplomb. It made Ballmer a more vocal evangelist of the brand, while limiting Gates' influence. It reassured investors. It also proved that Ballmer was up for the job. Kudos, Microsoft. It could have been much worse.
9. Maintaining profitability
Being an extremely profitable company over a period of 10 years isn't always easy. In the tech industry, things change so rapidly that companies can be dominating a market one year and wondering why all the cash dried up the next—just ask Sony. But Microsoft maintained strong profitability numbers throughout the past 10 years. Today, Microsoft still earns billions of dollars of profit each year. And all that cash is being socked away for big acquisitions or investments the company might need to make in the new decade.
10. Cornering the netbook market
Although it failed to see the writing on the wall in so many markets over the past 10 years, Microsoft made one big move that will substantially improve its chances of maintaining profitability into the next decade: It cornered the netbook market. At first, netbooks ran Linux. But in a very short time, Microsoft was able to steal netbook-OS market share away from Linux to such a degree that today, it's in a dominant position in that space. That's no small feat. Netbook popularity has grown rapidly over the past year. Most analysts believe that that growth will continue. By solidifying its position with netbooks, Microsoft is positioned to profit heavily off those lightweight PCs.
(2)Microsoft's 2010 Will Rely on Windows 7 Sales, Yahoo Deal, Cloud
News Analysis: Microsoft underwent substantial challenges in 2009, few of which it will alleviate in 2010. However, a stronger economy could translate into increased sales, reversing its revenue decline, and some products launched in 2009 will likely continue their strong adoption trend. Areas such as cloud computing pose the chance for Microsoft to bolster its market share in the enterprise, but the company will likely find itself in critical shape in other areas, notably the smartphone space.
With declining revenues and robust competition in many of its product areas, 2009 was not exactly a banner year in Microsoft’s history. Will 2010 be any better? Redmond can certainly look toward a few bright spots: Both Windows 7 and Bing, its search engine, experienced disaster-free launches followed by solid early adoption rates, which could translate into greater success in the coming year.
However, Microsoft also faces substantial challenges. Despite a search-and-advertising partnership deal with Yahoo that could see Bing’s market share nearly triple, Google remains the dominant force in online search. Microsoft’s mobile division remains weak and is faced with substantial competition from the likes of Apple and RIM. And if the economy doesn’t pick up, then there’ll be no rising PC sales to buoy sales of Microsoft software.
So how will 2010 fare? The following traces out Microsoft’s prospects in certain key areas.
Microsoft-Yahoo Deal Goes into Effect, Presenting Bigger Google Challenge
Microsoft poured millions of marketing and development dollars into Bing, its search engine that launched in June 2009, but the biggest increase to its market share in 2010 will likely come courtesy of the search-and-advertising agreement struck between Microsoft CEO Steve Ballmer and Yahoo CEO Carol Bartz.
On July 29, Microsoft and Yahoo jointly announced a 10-year partnership that would see Bing powering search on Yahoo’s sites, while Yahoo assumed exclusive worldwide sales duties for both companies’ search advertisers. The deal is expected by both parties to be cleared by antitrust regulators and should go into effect in 2010.
When that happens, assuming that Yahoo’s market share ports over to Bing’s with a minimum of attrition, Microsoft’s share of the U.S. search-engine market could rise to close to 30 percent. Google continues to occupy roughly 70 percent of that market, so even a more robust Bing won’t present a survival threat. Nonetheless, 2010 will likely be the year where the world of online search narrows down to two engines whaling at each other for market share. Yahoo, meanwhile, seems intent on giving up the search game entirely for becoming a Web applications provider.
Bing and Google will also likely continue their grudge match over features. In November and December, Microsoft rolled out several new Bing features, including a beta version of Bing Maps that made it a more robust competitor to Google’s Street View. Additionally, Bing now features a more robust video-search page and results from Wolfram Alpha. In 2010, expect both companies to go through several new rounds of competing feature tweaks and add-ons.
Microsoft will also spend 2010 trying to push Bing into foreign markets, notably China; but with Google’s robust presence overseas, and the Yahoo deal restricted to the United States, Bing could have some trouble increasing its market share in those areas.
A Possible Revenue Rebound, Powered by Windows 7
The economic recession battered Microsoft. For the fourth quarter of fiscal 2009, the company reported a 17 percent decline in year-over-year revenue, with earnings arriving at $1 billion below Wall Street estimates. Results for the next quarter offered a somewhat shallower decline of 14 percent year-over-year, with operating income, net income and diluted earnings all continuing to fall by double-digit numbers.
Both Microsoft and its OEMs hope that companies with Windows-based IT infrastructure will use Windows 7 as an excuse to upgrade their systems, and buy the next generation of Microsoft products, in 2010. In both interviews with eWEEK and larger conference calls with investors and media, company executives have suggested that any uptick in sales of Windows 7 and associated products will be roughly in line with any rise in PC purchases through 2010 and beyond, irrevocably linking Microsoft’s fortunes to those of the wider tech industry.
A number of analysts seem to think a tech-refresh scenario is possible.
“It looks like the Win7 inspired upgrade cycle can start in late 2010 and run through early 2013,” Katherine Egbert, an analyst with Jefferies & Co., wrote in an Oct. 12 report. “We expect new hardware purchases to precede the software upgrades by about 6 months.”
But the economy could certainly hit the skids again, in which case a tech refresh would be necessarily blunted as companies battened down their budgetary hatches. In any case, Microsoft executives seem intent on curbing expectations: in an Oct. 23 earnings call, Microsoft Chief Financial Office Chris Liddell suggested that the company would remain “reasonably cautious” about the prospect of a tech refresh, echoing comments earlier in the year from Steve Ballmer.
Microsoft Throws Its Hail Mary Pass for Mobile
By the second quarter of 2009, Microsoft’s share of the mobile operating system market had declined to around 9 percent. October saw the release of Windows Mobile 6.5, but even the company’s executives admitted that the update to Microsoft’s Mobile OS was just a placeholder until 2010, when the company is expected to roll out Mobile 7.
Mobile 7 is supposedly a major upgrade to Microsoft’s operating system franchise, and the company has thus far kept details under wraps. However, continued pressure from a variety of competitors in the space, including Google, Apple and Research In Motion, makes Mobile 7’s quest for market share a decidedly difficult one.
Some have declared that quest an impossible one. “It’s time to declare Microsoft a loser in phones. Just get out of dodge,” Mark Anderson of the Strategic News Service told The New York Times on Dec. 10, in comments widely circulated. “Phones are consumer items, and Microsoft doesn’t have consumer DNA.”
But 2010 will ultimately determine whether Anderson’s comments prove accurate, and Windows Mobile becomes an also-ran, or if Mobile 7 allows Microsoft to retain or gain incremental share in the market space.
Microsoft Plunges into the Cloud, Again Facing Google
Microsoft built its business primarily on the desktop. However, it has taken steps to embrace the paradigm shift inherent in the rise of cloud computing, some of which will bloom to fuller life in 2010.
Jan. 1, 2010 marks the full “switch on” of Microsoft’s Azure cloud platform, composed of three parts that work in symphony to create Web applications and services: Windows Azure, an operating system as a service; SQL Azure, a cloud-based relational database; and .Net services, which provide both secure connectivity and federated access control for applications.
Customers will have three payment options for the service: a pay-as-you-go model, subscription format or volume licensing. Microsoft’s competitors in the space include Amazon and Google.
Given that cloud services represent a potential $150 billion market opportunity, according to research firm Gartner, it’s unsurprising that these companies are all fighting for market-share. For its part, Microsoft could help increase the acceptance of cloud computing within the enterprise.
“There are many enterprises that consider themselves Microsoft shops that have people that only know Microsoft tools and APIs,” Gartner analyst Ray Valdes told eWEEK in 2008, when the Azure platform was first announced. “Amazon and Google have been chipping away at these, but Microsoft is firmly entrenched.”
Microsoft may be positioned well for the enterprise cloud market in 2010, but its other cloud-based endeavors may prove a riskier bet. In a bid to compete with Google Apps, Microsoft will introduce browser-accessible versions of OneNote, Excel, Word and PowerPoint for Windows Live subscribers. Although these Web-based applications will lack the full functionality of the upcoming Office 2010, Microsoft is evidently hoping that enough users will gravitate toward their own cloud productivity suite in place of Google’s offering.
Given that Google Apps have attracted attention among consumers, municipal governments and businesses, however, Microsoft could find itself in a bit of fight when it comes to spreading its own brand of Web-based productivity. But Redmond also doesn’t have much of a choice; in 2010, Google will attempt to spread Google Apps even further among the enterprise and consumers via the propagation of Google Chrome, its upcoming browser-based OS for netbooks and—potentially—more robust PCs. Browser-accessible versions of Office may blunt some of Google’s impact.
News Analysis: Microsoft had an interesting decade. The company made some mistakes, but it also did some things right that helped it maintain its position as one of the world's largest software companies and a top influencer in the global IT industry. We take a look at those 10 things Microsoft did right over the past 10 years.
Although Microsoft made some mistakes over the past 10 years that adversely affected the company's position in the industry, the software giant has also done a lot of things right. Over the past 10 years, Microsoft has been able to maintain its position as the dominant software developer in the world. It has also stayed relevant both in the consumer space and the enterprise. That's a feat that few companies have been able to achieve.
Perhaps that's why discussions surrounding Microsoft and Windows are so heated today. Although many like to rail against Redmond, it keeps coming back stronger. With each bit of adversity, it seems that somehow, in some way, Microsoft is able to overcome the problem and offer something to customers that appeals to their desire. Of course, it hasn't succeeded every time. And the past decade has shown that Microsoft needs to be more diligent in its decision making. But the company has also done a number of things right that it can use as a foundation for all the future decisions it will make. Let's take a look.
indows Vista was a nightmare for Microsoft. Consumers hated it. The enterprise wouldn't even adopt it. And vendors, once the partners that did Microsoft's bidding, were forced to offer downgrade rights to customers that wanted to run Windows XP. Microsoft knew it had to do something to repair the damage that Vista caused, so it quickly released Windows 7. Microsoft's latest operating system is everything Windows Vista should have been. It's innovative. It's far more secure than previous versions of the operating system. And it appeals to customers. It's a great comeback product.
2. The move to Bing
Microsoft was in deep trouble toward the latter part of the decade. Although it commanded the software market, Google was cornering the search space without any worry of competition. Microsoft's Live Search was largely inconsequential. But rather than wave the white flag, Microsoft released Bing. Microsoft's latest search tool is outstanding. Its results match Google's search results. And thanks to some extras, like a visual search feature, it's a fine alternative to anything Google is offering up.
3. Get in on the gaming
When Microsoft first announced that it would break into the gaming space, some wondered if it could make it. As 2009 gives way to 2010, that question has been answered with a resounding affirmation that yes, indeed, Microsoft can take the gaming industry by storm. Over the past decade, Microsoft has turned its Xbox platform from the "other" console on the market into a gaming leader. The Xbox 360 is now even more popular than Sony's PlayStation 3. That's no small feat. And it should be commended.
4. The enterprise focus
As Apple and Google turned to the consumer over the past decade, Microsoft stayed true to its base—the enterprise. Windows is still the dominant force in the business world. Microsoft has so firmly cemented its position there that most companies wouldn't even consider deploying any other software. Going forward, Microsoft has almost ensured that the enterprise will be its playground.
5. Marginalizing Mac OS X
Apple's Mac OS X made significant strides over the past 10 years, but it's important to note that its rise in the market was largely inconsequential to Microsoft's bottom line. Through smart strategies and partnering with third parties, as well as vendors, Microsoft did a fine job of limiting the impact Mac OS X's rise really had on Windows. Did Apple's operating system steal market share away from Windows? Sure. But did it really change the OS market? No way. Microsoft is still on top by a wide margin.
6. Keeping Linux away
Some would argue that Linux is the operating system that more people should use. After all, most distributions are safe, they are generally lightweight and many are free. But the past 10 years haven't helped Linux gain a substantial footing in the OS market. I would argue that Linux is more well known than it was in 2000, but to say it is any more appealing to the mainstream is a bit of a stretch, even though more distributions have become user-friendly. That can be mainly attributed to Microsoft's ability to keep the OS at arm's length. Simply put, Redmond didn't allow the Linux craze to get out of hand. It was a smart move.
7. Addressing the Web
For too long during the past 10 years, Microsoft allowed Google and others to innovate on the Web. It might also be argued that the company has yet to do enough to stop Google's rise in that space. But over the past year or two, Microsoft has done a better job of realizing that the Internet is the future and it had better be in a position to capitalize on it. That's most evident in its acquisition of several online sites, as well as the launch of Bing and Bing Maps. Microsoft is getting ready to focus on the Web in the new decade.
8. The smooth transition
When Bill Gates announced that he would be stepping down from day-to-day activities at Microsoft, it sent shock waves through the industry. Bill Gates was the face of Microsoft. Investors placed millions of dollars in Microsoft stock because of their faith in its co-founder. It was a dicey situation. But Microsoft handled the transition of day-to-day activities from Gates to Steve Ballmer, the company's CEO, with aplomb. It made Ballmer a more vocal evangelist of the brand, while limiting Gates' influence. It reassured investors. It also proved that Ballmer was up for the job. Kudos, Microsoft. It could have been much worse.
9. Maintaining profitability
Being an extremely profitable company over a period of 10 years isn't always easy. In the tech industry, things change so rapidly that companies can be dominating a market one year and wondering why all the cash dried up the next—just ask Sony. But Microsoft maintained strong profitability numbers throughout the past 10 years. Today, Microsoft still earns billions of dollars of profit each year. And all that cash is being socked away for big acquisitions or investments the company might need to make in the new decade.
10. Cornering the netbook market
Although it failed to see the writing on the wall in so many markets over the past 10 years, Microsoft made one big move that will substantially improve its chances of maintaining profitability into the next decade: It cornered the netbook market. At first, netbooks ran Linux. But in a very short time, Microsoft was able to steal netbook-OS market share away from Linux to such a degree that today, it's in a dominant position in that space. That's no small feat. Netbook popularity has grown rapidly over the past year. Most analysts believe that that growth will continue. By solidifying its position with netbooks, Microsoft is positioned to profit heavily off those lightweight PCs.
(2)Microsoft's 2010 Will Rely on Windows 7 Sales, Yahoo Deal, Cloud
News Analysis: Microsoft underwent substantial challenges in 2009, few of which it will alleviate in 2010. However, a stronger economy could translate into increased sales, reversing its revenue decline, and some products launched in 2009 will likely continue their strong adoption trend. Areas such as cloud computing pose the chance for Microsoft to bolster its market share in the enterprise, but the company will likely find itself in critical shape in other areas, notably the smartphone space.
With declining revenues and robust competition in many of its product areas, 2009 was not exactly a banner year in Microsoft’s history. Will 2010 be any better? Redmond can certainly look toward a few bright spots: Both Windows 7 and Bing, its search engine, experienced disaster-free launches followed by solid early adoption rates, which could translate into greater success in the coming year.
However, Microsoft also faces substantial challenges. Despite a search-and-advertising partnership deal with Yahoo that could see Bing’s market share nearly triple, Google remains the dominant force in online search. Microsoft’s mobile division remains weak and is faced with substantial competition from the likes of Apple and RIM. And if the economy doesn’t pick up, then there’ll be no rising PC sales to buoy sales of Microsoft software.
So how will 2010 fare? The following traces out Microsoft’s prospects in certain key areas.
Microsoft-Yahoo Deal Goes into Effect, Presenting Bigger Google Challenge
Microsoft poured millions of marketing and development dollars into Bing, its search engine that launched in June 2009, but the biggest increase to its market share in 2010 will likely come courtesy of the search-and-advertising agreement struck between Microsoft CEO Steve Ballmer and Yahoo CEO Carol Bartz.
On July 29, Microsoft and Yahoo jointly announced a 10-year partnership that would see Bing powering search on Yahoo’s sites, while Yahoo assumed exclusive worldwide sales duties for both companies’ search advertisers. The deal is expected by both parties to be cleared by antitrust regulators and should go into effect in 2010.
When that happens, assuming that Yahoo’s market share ports over to Bing’s with a minimum of attrition, Microsoft’s share of the U.S. search-engine market could rise to close to 30 percent. Google continues to occupy roughly 70 percent of that market, so even a more robust Bing won’t present a survival threat. Nonetheless, 2010 will likely be the year where the world of online search narrows down to two engines whaling at each other for market share. Yahoo, meanwhile, seems intent on giving up the search game entirely for becoming a Web applications provider.
Bing and Google will also likely continue their grudge match over features. In November and December, Microsoft rolled out several new Bing features, including a beta version of Bing Maps that made it a more robust competitor to Google’s Street View. Additionally, Bing now features a more robust video-search page and results from Wolfram Alpha. In 2010, expect both companies to go through several new rounds of competing feature tweaks and add-ons.
Microsoft will also spend 2010 trying to push Bing into foreign markets, notably China; but with Google’s robust presence overseas, and the Yahoo deal restricted to the United States, Bing could have some trouble increasing its market share in those areas.
A Possible Revenue Rebound, Powered by Windows 7
The economic recession battered Microsoft. For the fourth quarter of fiscal 2009, the company reported a 17 percent decline in year-over-year revenue, with earnings arriving at $1 billion below Wall Street estimates. Results for the next quarter offered a somewhat shallower decline of 14 percent year-over-year, with operating income, net income and diluted earnings all continuing to fall by double-digit numbers.
Both Microsoft and its OEMs hope that companies with Windows-based IT infrastructure will use Windows 7 as an excuse to upgrade their systems, and buy the next generation of Microsoft products, in 2010. In both interviews with eWEEK and larger conference calls with investors and media, company executives have suggested that any uptick in sales of Windows 7 and associated products will be roughly in line with any rise in PC purchases through 2010 and beyond, irrevocably linking Microsoft’s fortunes to those of the wider tech industry.
A number of analysts seem to think a tech-refresh scenario is possible.
“It looks like the Win7 inspired upgrade cycle can start in late 2010 and run through early 2013,” Katherine Egbert, an analyst with Jefferies & Co., wrote in an Oct. 12 report. “We expect new hardware purchases to precede the software upgrades by about 6 months.”
But the economy could certainly hit the skids again, in which case a tech refresh would be necessarily blunted as companies battened down their budgetary hatches. In any case, Microsoft executives seem intent on curbing expectations: in an Oct. 23 earnings call, Microsoft Chief Financial Office Chris Liddell suggested that the company would remain “reasonably cautious” about the prospect of a tech refresh, echoing comments earlier in the year from Steve Ballmer.
Microsoft Throws Its Hail Mary Pass for Mobile
By the second quarter of 2009, Microsoft’s share of the mobile operating system market had declined to around 9 percent. October saw the release of Windows Mobile 6.5, but even the company’s executives admitted that the update to Microsoft’s Mobile OS was just a placeholder until 2010, when the company is expected to roll out Mobile 7.
Mobile 7 is supposedly a major upgrade to Microsoft’s operating system franchise, and the company has thus far kept details under wraps. However, continued pressure from a variety of competitors in the space, including Google, Apple and Research In Motion, makes Mobile 7’s quest for market share a decidedly difficult one.
Some have declared that quest an impossible one. “It’s time to declare Microsoft a loser in phones. Just get out of dodge,” Mark Anderson of the Strategic News Service told The New York Times on Dec. 10, in comments widely circulated. “Phones are consumer items, and Microsoft doesn’t have consumer DNA.”
But 2010 will ultimately determine whether Anderson’s comments prove accurate, and Windows Mobile becomes an also-ran, or if Mobile 7 allows Microsoft to retain or gain incremental share in the market space.
Microsoft Plunges into the Cloud, Again Facing Google
Microsoft built its business primarily on the desktop. However, it has taken steps to embrace the paradigm shift inherent in the rise of cloud computing, some of which will bloom to fuller life in 2010.
Jan. 1, 2010 marks the full “switch on” of Microsoft’s Azure cloud platform, composed of three parts that work in symphony to create Web applications and services: Windows Azure, an operating system as a service; SQL Azure, a cloud-based relational database; and .Net services, which provide both secure connectivity and federated access control for applications.
Customers will have three payment options for the service: a pay-as-you-go model, subscription format or volume licensing. Microsoft’s competitors in the space include Amazon and Google.
Given that cloud services represent a potential $150 billion market opportunity, according to research firm Gartner, it’s unsurprising that these companies are all fighting for market-share. For its part, Microsoft could help increase the acceptance of cloud computing within the enterprise.
“There are many enterprises that consider themselves Microsoft shops that have people that only know Microsoft tools and APIs,” Gartner analyst Ray Valdes told eWEEK in 2008, when the Azure platform was first announced. “Amazon and Google have been chipping away at these, but Microsoft is firmly entrenched.”
Microsoft may be positioned well for the enterprise cloud market in 2010, but its other cloud-based endeavors may prove a riskier bet. In a bid to compete with Google Apps, Microsoft will introduce browser-accessible versions of OneNote, Excel, Word and PowerPoint for Windows Live subscribers. Although these Web-based applications will lack the full functionality of the upcoming Office 2010, Microsoft is evidently hoping that enough users will gravitate toward their own cloud productivity suite in place of Google’s offering.
Given that Google Apps have attracted attention among consumers, municipal governments and businesses, however, Microsoft could find itself in a bit of fight when it comes to spreading its own brand of Web-based productivity. But Redmond also doesn’t have much of a choice; in 2010, Google will attempt to spread Google Apps even further among the enterprise and consumers via the propagation of Google Chrome, its upcoming browser-based OS for netbooks and—potentially—more robust PCs. Browser-accessible versions of Office may blunt some of Google’s impact.
China should win 2009 'Crisis Policy of the Year' Commentary: But 2010 will pose tough challenges
China should win 2009 'Crisis Policy of the Year'
Commentary: But 2010 will pose tough challenges
By Craig Stephen
HONG KONG (MarketWatch) -- As we start a new decade there appears to be increasingly polarized forecasts for China's economy, ranging from it leading the world out of recession to teetering on the precipice of collapse.
Reviewing the past 12 months, the lesson was surely not to underestimate the impact of Beijing's resolute policy response. Rewind and China was facing an export collapse, a moribund housing market that threatened to bankrupt its developers and an economy hemorrhaging jobs.
A massive lending program and infrastructure stimulus quickly got the economy back on track. Equity, property and commodity markets rebounded, and gross domestic product growth is expected to back near 9%, while Chinese initial public offerings led the world with a record-busting year.
For this crisis management, you might think that China's leaders should get a little more recognition. But somehow, the Time Magazine "Person of the Year" award for an economic crisis response went to Fed Chairman Ben Bernanke. Last time I looked, U.S. unemployment was at 10% and the greenback appeared in a terminal tailspin.
But despite the recovery, China's growth story still has a sense of unease. Where does China's economy go next? The bears warn China is poised to follow the U.S. and Japan with its own housing bubble bursting.
They are dismissive of indicators showing strength in China's economy (the purchasing managers index hit a 20-month high in December), saying that deep-rooted structural imbalances are growing. These include economy-wide overinvestment and capital misallocation, growing excess property supply and sky-high housing prices. Added to that are still-anemic domestic consumption and a serious over-dependence on exports.
What this will add up to is a bubble mixed in with large pockets of excess capacity -- not an economic miracle.
We have heard many times this was to be China's century, but it could be foolhardy to overlook this list of economic ills. Even if this somewhat exaggerates the situation, it will take some skilled policy making to finesse a broadening economic recovery.
Still, others are decidedly more upbeat on China's outlook. The economists at UBS in a new report offer reassurance that the "sky is not falling." They do not see evidence of structural problems in China's economy, although they concede there are cyclical risks after last year's lending spree. One figure that jumped from the page was that, last year, bank lending accounted for over 50% of GDP, they estimated.
UBS also reeled out a number of arguments that property-bubble fears are overblown. For affordability, it's the not the average urban resident that matters but the rising middle class. And to date, mortgage lending as a proportion of GDP has not increased, which is common when a bubble is reached.
China also has a manageable loan-to-deposit ratio of 70%, which makes it one of the most stable emerging-market financial systems, says UBS.
Still, it appears mainland Chinese leaders appear less sanguine about the property outlook. Last week, Premier Wei Jiabao warned that property prices have risen too fast and hinted taxes and loan interest rates may used to stabilize the market. See full story on Chinese premier's remarks.
Once again, much will depend on the policy response. A new memo to banks released over the holiday period gives a few clues of what to expect.
The expectation is for no change to interest rates for the first half of the year, but rather new administrative controls on lending. Consumer prices on the mainland climbed 0.6% last month from a year earlier, ending a nine-month run of deflation, so policy makers may have to move on interest rates sooner than they think.
What's certain is lending will be cut back from the 9.5 trillion yuan ($1.39 trillion) in 2009 to 7.5 trillion yuan this year, Merrill Lynch reports.
The memo refers to "smooth" lending, so the massive front-loaded lending of last year is likely to be avoided. It also encourages banks to make loans available for mergers and acquisitions. This should be good news for those able to consolidate markets and is a good theme to support equity-market valuations.
Much of course still depends on the external environment. China will be hoping there is more of a recovery in the major economies to give some momentum to its exports. Last year, China and its exporters benefited from being pegged to the weakening dollar, and if that trend is reversing, it will be another factor to consider.
China, like many emerging markets, also benefited from carry-trade investment, as investors borrowed Ben Bernanke's depreciating greenbacks at basement rates. Hot-money flows accelerated into China. If the assumption of a weak dollar has to be rethought (in December, the dollar had its first monthly gain in a year), so too will the risk of investing in China and other emerging markets.
This all means investors, as well as China's leaders, will have to keep a close eye on what the Man of the Year is doing in 2010.
Commentary: But 2010 will pose tough challenges
By Craig Stephen
HONG KONG (MarketWatch) -- As we start a new decade there appears to be increasingly polarized forecasts for China's economy, ranging from it leading the world out of recession to teetering on the precipice of collapse.
Reviewing the past 12 months, the lesson was surely not to underestimate the impact of Beijing's resolute policy response. Rewind and China was facing an export collapse, a moribund housing market that threatened to bankrupt its developers and an economy hemorrhaging jobs.
A massive lending program and infrastructure stimulus quickly got the economy back on track. Equity, property and commodity markets rebounded, and gross domestic product growth is expected to back near 9%, while Chinese initial public offerings led the world with a record-busting year.
For this crisis management, you might think that China's leaders should get a little more recognition. But somehow, the Time Magazine "Person of the Year" award for an economic crisis response went to Fed Chairman Ben Bernanke. Last time I looked, U.S. unemployment was at 10% and the greenback appeared in a terminal tailspin.
But despite the recovery, China's growth story still has a sense of unease. Where does China's economy go next? The bears warn China is poised to follow the U.S. and Japan with its own housing bubble bursting.
They are dismissive of indicators showing strength in China's economy (the purchasing managers index hit a 20-month high in December), saying that deep-rooted structural imbalances are growing. These include economy-wide overinvestment and capital misallocation, growing excess property supply and sky-high housing prices. Added to that are still-anemic domestic consumption and a serious over-dependence on exports.
What this will add up to is a bubble mixed in with large pockets of excess capacity -- not an economic miracle.
We have heard many times this was to be China's century, but it could be foolhardy to overlook this list of economic ills. Even if this somewhat exaggerates the situation, it will take some skilled policy making to finesse a broadening economic recovery.
Still, others are decidedly more upbeat on China's outlook. The economists at UBS in a new report offer reassurance that the "sky is not falling." They do not see evidence of structural problems in China's economy, although they concede there are cyclical risks after last year's lending spree. One figure that jumped from the page was that, last year, bank lending accounted for over 50% of GDP, they estimated.
UBS also reeled out a number of arguments that property-bubble fears are overblown. For affordability, it's the not the average urban resident that matters but the rising middle class. And to date, mortgage lending as a proportion of GDP has not increased, which is common when a bubble is reached.
China also has a manageable loan-to-deposit ratio of 70%, which makes it one of the most stable emerging-market financial systems, says UBS.
Still, it appears mainland Chinese leaders appear less sanguine about the property outlook. Last week, Premier Wei Jiabao warned that property prices have risen too fast and hinted taxes and loan interest rates may used to stabilize the market. See full story on Chinese premier's remarks.
Once again, much will depend on the policy response. A new memo to banks released over the holiday period gives a few clues of what to expect.
The expectation is for no change to interest rates for the first half of the year, but rather new administrative controls on lending. Consumer prices on the mainland climbed 0.6% last month from a year earlier, ending a nine-month run of deflation, so policy makers may have to move on interest rates sooner than they think.
What's certain is lending will be cut back from the 9.5 trillion yuan ($1.39 trillion) in 2009 to 7.5 trillion yuan this year, Merrill Lynch reports.
The memo refers to "smooth" lending, so the massive front-loaded lending of last year is likely to be avoided. It also encourages banks to make loans available for mergers and acquisitions. This should be good news for those able to consolidate markets and is a good theme to support equity-market valuations.
Much of course still depends on the external environment. China will be hoping there is more of a recovery in the major economies to give some momentum to its exports. Last year, China and its exporters benefited from being pegged to the weakening dollar, and if that trend is reversing, it will be another factor to consider.
China, like many emerging markets, also benefited from carry-trade investment, as investors borrowed Ben Bernanke's depreciating greenbacks at basement rates. Hot-money flows accelerated into China. If the assumption of a weak dollar has to be rethought (in December, the dollar had its first monthly gain in a year), so too will the risk of investing in China and other emerging markets.
This all means investors, as well as China's leaders, will have to keep a close eye on what the Man of the Year is doing in 2010.
2010 – the year of uncertainty
2010 – the year of uncertainty
Global Trends
By MARTIN KHOR
The new year will be marked by uncertainty on whether the economic recovery will strengthen or slip, and if there will be a global understanding or anarchy on climate change.
THE new year has been ushered in with fireworks and parties in Malaysia and around the world. It certainly will be an interesting year ahead. How it will turn out is anybody’s guess.
“Interesting” and “uncertainty” are key words as 2010 gets down to business. The first and main uncertainty is in the world economy. The dreaded Depression predicted for last year fortunately did not materialise. The big question is whether the recovery that started in the second half of 2009 will continue and strengthen in 2010, or sputter out, bringing about a new downturn.
The optimists have an upper hand at the moment, because we are in the midst of a recovery. The stock markets are on an up-trend, GDP growth has turned positive in the last quarter in most countries, and property prices are even soaring in some countries like China.
But the pessimists, and they include such heavyweights as Joseph Stiglitz and George Soros, are persuasive in arguing that the crisis of 2008-9 was caused by structural flaws in the Western economies which remain uncorrected and the present recovery is simply due to their being put on artificial life support.
That life support comprises trillion-dollar bailouts of banks and companies, huge government injections of liquidity, very low interest rates and massive fiscal stimulus, or large increases in government spending financed by thumping budget deficits.
The underlying weaknesses (global trade imbalances, over-consumption in the United States, over-leveraging of financial institutions, laissez-faire in the financial sector) remain. And when conditions make it impossible to retain the life support systems, the patient may relapse into a life-threatening state.
The present recovery phase should thus be used to strengthen the immune system and restore health so that the life support can be withdrawn without harm. Instead, there seems to be a return to “business as usual”, with the disgraced financial institutions in the Western countries fighting, quite successfully, to be free to continue most of their former practices, albeit with a little more regulation.
The fact that Goldman Sachs, Wall Street’s biggest investment bank, could reap record profits, and that so many other banks could continue with billion-dollar bonuses for their executives, shows the limited extent to which the governments were in the end willing to instill the required discipline, even on firms that just several months ago received huge government bailouts paid for by the public.
Just a year ago, when the global economy was tethering on the edge, there was a lot of interest in major reforms to the global financial architecture, including strictly regulating the financial institutions and limiting the massive speculative cross-border flows of funds that have led to destructive cycles of booms and busts in developing countries, as capital would first enter in search of quick profits and then move out on the slightest sign of trouble.
Today, there is hardly the same level of interest in correcting the flaws. There is one certainty, however. The American consumers, who were given so much credit to over-spend on housing and consumer goodies, will no longer be able to provide the demand boost to global economic growth, as they are now asked to account for their debts.
Even if the US economy continues to recover, there will be less consumer spending, especially since unemployment is high and growing. The European and Japanese economies are also too weak to take up the slack.
Moreover at some time this year, the major economies are expected to put into effect their “exit strategy”, or withdrawal of the life support of fiscal spending and loose monetary policy.
Although China will continue its high growth (which may reach 9% to 10% according to recent estimates), this is not sufficient to fill in the gaping hole in global effective demand.
As 2010 progresses, the effects of this new reality will be felt in developing countries, especially in South-East Asia, that have depended so much on export-led growth.
Up to some months ago, the countries were contemplating the need to switch to new development strategies that are less dependent on exports to major developed countries. Because of the recovery, they are now waiting to see if they can stick to the same model that served them so well in the past.
It would be wise for them to formulate options for new growth strategies, in anticipation of another slowdown or even recession in the big countries.
The other big issue of 2009 was climate change. Unfortunately the much-anticipated Copenhagen climate conference ended in an anti-climax, without any new or firm understanding on how countries are to co-operate.
The new year will provide a chance for the countries to move beyond the blame game and pick up the negotiations again.
This much is clear. The challenge is not only to come up with a goal of cutting global emissions by 2050 but even more so to agree on each country’s allocation of emissions rights from now to that year.
The other challenge is to ensure that the developed countries live up to their pledge to fund the costs incurred by developing countries in shifting to a climate-friendly development path.
These are huge and complex issues, combining the science of what needs to be done physically with the economics of working out the economic pathways and costs of shifting to a less emissions-intensive development model, and the politics of distributing the burden of adjustment globally.
We might just conclude that the issues are too complex and highly charged for the world to reach an understanding, in which case there will be a fall from co-operation to anarchy, with each country looking after itself, and humanity will hurtle down the slippery slope to doom.
Or else a near miracle may happen, and 2010 could mark the beginning of genuine international partnership. It’s worth striving for. A lot is at stake.
Global Trends
By MARTIN KHOR
The new year will be marked by uncertainty on whether the economic recovery will strengthen or slip, and if there will be a global understanding or anarchy on climate change.
THE new year has been ushered in with fireworks and parties in Malaysia and around the world. It certainly will be an interesting year ahead. How it will turn out is anybody’s guess.
“Interesting” and “uncertainty” are key words as 2010 gets down to business. The first and main uncertainty is in the world economy. The dreaded Depression predicted for last year fortunately did not materialise. The big question is whether the recovery that started in the second half of 2009 will continue and strengthen in 2010, or sputter out, bringing about a new downturn.
The optimists have an upper hand at the moment, because we are in the midst of a recovery. The stock markets are on an up-trend, GDP growth has turned positive in the last quarter in most countries, and property prices are even soaring in some countries like China.
But the pessimists, and they include such heavyweights as Joseph Stiglitz and George Soros, are persuasive in arguing that the crisis of 2008-9 was caused by structural flaws in the Western economies which remain uncorrected and the present recovery is simply due to their being put on artificial life support.
That life support comprises trillion-dollar bailouts of banks and companies, huge government injections of liquidity, very low interest rates and massive fiscal stimulus, or large increases in government spending financed by thumping budget deficits.
The underlying weaknesses (global trade imbalances, over-consumption in the United States, over-leveraging of financial institutions, laissez-faire in the financial sector) remain. And when conditions make it impossible to retain the life support systems, the patient may relapse into a life-threatening state.
The present recovery phase should thus be used to strengthen the immune system and restore health so that the life support can be withdrawn without harm. Instead, there seems to be a return to “business as usual”, with the disgraced financial institutions in the Western countries fighting, quite successfully, to be free to continue most of their former practices, albeit with a little more regulation.
The fact that Goldman Sachs, Wall Street’s biggest investment bank, could reap record profits, and that so many other banks could continue with billion-dollar bonuses for their executives, shows the limited extent to which the governments were in the end willing to instill the required discipline, even on firms that just several months ago received huge government bailouts paid for by the public.
Just a year ago, when the global economy was tethering on the edge, there was a lot of interest in major reforms to the global financial architecture, including strictly regulating the financial institutions and limiting the massive speculative cross-border flows of funds that have led to destructive cycles of booms and busts in developing countries, as capital would first enter in search of quick profits and then move out on the slightest sign of trouble.
Today, there is hardly the same level of interest in correcting the flaws. There is one certainty, however. The American consumers, who were given so much credit to over-spend on housing and consumer goodies, will no longer be able to provide the demand boost to global economic growth, as they are now asked to account for their debts.
Even if the US economy continues to recover, there will be less consumer spending, especially since unemployment is high and growing. The European and Japanese economies are also too weak to take up the slack.
Moreover at some time this year, the major economies are expected to put into effect their “exit strategy”, or withdrawal of the life support of fiscal spending and loose monetary policy.
Although China will continue its high growth (which may reach 9% to 10% according to recent estimates), this is not sufficient to fill in the gaping hole in global effective demand.
As 2010 progresses, the effects of this new reality will be felt in developing countries, especially in South-East Asia, that have depended so much on export-led growth.
Up to some months ago, the countries were contemplating the need to switch to new development strategies that are less dependent on exports to major developed countries. Because of the recovery, they are now waiting to see if they can stick to the same model that served them so well in the past.
It would be wise for them to formulate options for new growth strategies, in anticipation of another slowdown or even recession in the big countries.
The other big issue of 2009 was climate change. Unfortunately the much-anticipated Copenhagen climate conference ended in an anti-climax, without any new or firm understanding on how countries are to co-operate.
The new year will provide a chance for the countries to move beyond the blame game and pick up the negotiations again.
This much is clear. The challenge is not only to come up with a goal of cutting global emissions by 2050 but even more so to agree on each country’s allocation of emissions rights from now to that year.
The other challenge is to ensure that the developed countries live up to their pledge to fund the costs incurred by developing countries in shifting to a climate-friendly development path.
These are huge and complex issues, combining the science of what needs to be done physically with the economics of working out the economic pathways and costs of shifting to a less emissions-intensive development model, and the politics of distributing the burden of adjustment globally.
We might just conclude that the issues are too complex and highly charged for the world to reach an understanding, in which case there will be a fall from co-operation to anarchy, with each country looking after itself, and humanity will hurtle down the slippery slope to doom.
Or else a near miracle may happen, and 2010 could mark the beginning of genuine international partnership. It’s worth striving for. A lot is at stake.
Sunday, 3 January 2010
Rebuilding the world after the twin crises - Obsolete economic thought !
Rebuilding the world after the twin crises
By ANDREW SHENG
FIFTEEN months after the panic triggered by the failure of Lehman Brothers, we should begin the debate how to rebuild the world after the crisis. Several disturbing questions remain. Are we still in the crisis? Should we reform at all? What should we rebuild?
After all, the rescue efforts by the leading central banks have brought financial markets back to almost pre-2007 levels. Commercial banks have been rescued through massive guarantees and liquidity, and interest rates have been brought down to near zero.
There are some who think that 2010 will be a good year with revived growth. Others believe equally fervently that the real crisis has yet to come. Who is right?
Several things are now clearer. We were dealing in 2007/2009 with two simultaneous crises – one financial, the other about climate change. One brought about a shift in the economic power balance, with the G-20 calling the shots instead of the G-7. The other is being resolved through the Copenhagen Round of negotiations. Three fundamental differences define the two crises. The first is that the financial crisis was primarily dealt with at the national level, whereas the climate crisis was dealt with at the global level.
The second is that financial crisis had short-term effects that required immediate action, whereas the climate crisis had uncertain long-term effects, where people do not feel the immediate pain and had no cause to support reform.
The third is that the Copenhagen negotiations confirmed the shift in power to the population giants of China, India, Brazil and South Africa, which brokered the deal with the United States.
The age of juggernauts has arrived
There was certainly a lot of hot air and emotions coming out of Copenhagen, with the African chairman of the developing economy caucus claiming that the amount of money offered by the advanced economies for climate change is just enough to buy coffins.
Those who are dead do not have to worry about climate change, so all the emotion is about what to do with the living.
However messy and unsatisfactory an agreement, Copenhagen is still a major achievement. Globalisation will never be the same again, because there is at last some universal recognition, however fuzzy, that we must solve the threat to climate change. But there is a major divide between the West and the rest.
The trouble with climate change is that all of us are dealing with unknown unknowns. Although the majority of the scientists are convinced that climate change has already passed the tipping point of irreversible damage to the environment, some think that these predictions of doom are a conspiracy to tax the wealthy countries.
The climate crisis and the financial crisis are inter-related, because both stem from excessive consumption of natural resources. The financial side collapsed first, because the West’s excess leverage was not sustainable.
The climate change crisis has a much longer time horizon. It may take 20 to 30 years before the weather change and resource scarcity become visibly so bad that those affected will then support the need for change. By then, it may be too late.
Mankind is like a frog in the pot of water. When the temperature in the pot is raised very quickly, the frog feels the pain and will jump out very quickly to escape. This was what happened in this financial crisis when G-20 acted decisively in the face of an immediate threat of financial meltdown.
However, since climate change is incremental, the frog will not react if the temperature rises slowly, until the moment comes when the frog is boiled.
Rebuilding from the ashes
I was partially wrong last year when I suggested that global solutions would not be as achievable as regional and national reforms.
In 2009, however, there was greater consensus at the global and national levels than at the regional level, but as recovery gathered steam, global opinion has once again diverged. The blame game is now rearing its ugly head.
Instead of being praised for being the first to have a substantial fiscal stimulus to regenerate domestic and global economic growth, China is now being blamed for maintaining a peg with the US dollar that gives it competitive advantage.
Hence, there are two things that must be rebuilt if the world is to move ahead on a stable keel. The first is the global financial architecture, which will involve transparent rule changes and architectural adjustments that reflect the changing balance of economic power.
The second is the hidden rules that underlie serious differences of views on the crises and their solutions, namely, the differences in economic thought and philosophy between the East and West.
Obviously, rebuilding physical structures is easier than re-building mindsets, but one cannot change without the other.
The global financial architecture revamp
So far, the only area of global consensus is that the present global monetary structure is flawed and unsustainable. Of course the global financial crisis happened because of problems and mistakes at the national level. But national problems had global origins.
The Triffin Dilemma states that the central bank of the major reserve currency has to run a monetary policy that may be contradictory to its domestic needs. As the issuer of the reserve currency, the United States provided the world with ample liquidity but at the cost of running larger and larger current account deficits.
The role as world’s consumer of last resort enjoyed global support because the East and South producers and savers (including Germany and Japan) were willing to finance that deficit.
Unfortunately, in 2008, the United States over-extended its leverage in the financial sector, had a bubble deflation and now needs to rebuild its balance sheet by deleveraging and increasing domestic savings.
Since the United States is nearly one quarter of global gross domestic product (GDP), the cutback in consumption will slow global growth, thus giving time to the world to restore its imbalances from both the regional and ecological points of view.
Unfortunately, the G-3 rescue plan of doing “whatever it takes” to relieve pain used huge public sector deficits to assume losses of the private sector.
The solution replaced excessive financial sector leverage with large unsustainable public sector leverage, and instead of changing the incentives to deter excessive speculation that worsened the bubble, it rewarded speculators by providing zero cost funding through the central banks.
It replicated the Japanese solution of the 1990s with almost identical consequences of large carry-trades, creating volatile capital flows to emerging markets.
In essence, the world is now suffering a reverse Triffin Dilemma. What appears appropriate for the monetary policy of the reserve currency country is wrong monetary policy for the rest of the world.
I for one would not object to zero interest rate policy if this went towards subsidising the damage suffered by the US real sector, but instead, most of the benefits were captured by the financial sector that paid itself more in the form of huge bonuses.
Hence, combating the deflation in the bubble in the West seems to require a bubble in the East instead.
The unspoken assumption is that if the Eastern savers were to become large spenders to replace lost Western spending, the world would return to its high-growth path. This argument forgets that it was excessive expenditure that drove unsustainable resource depletion in the first place.
There are four flaws to this line of reasoning, namely, consumption bias, price distortion, tool ineffectiveness and institutional misalignment.
First, there is an unspoken inference that increased consumption by the emerging markets to correct their excessive savings is the correct solution to the global imbalance.
However, if every Chinese or Indian were to consume at the per capita consumption level of the average American, there would be no natural resources left.
Clearly, once the emerging markets increase their consumption, their lifestyle must change to a more ecologically sustainable form, involving more green and energy/resource saving technology that will take time to evolve.
Every economic and ecological historian remembers that excessive consumption was the underlying cause of the fall of civilizations, from the Mayans to the Romans.
Second, the switch to more ecologically sustainable lifestyle will not happen without changing the fundamental incentives, particularly price signals.
Most market economists would agree that the main defect of this fossil fuel-based global economy is the under-pricing of energy and water through politically-driven subsidies.
This under-pricing of non-replaceable natural resources is the main reason why the current mode of production is wasteful, inefficient and destructive.
The world could be much more ecologically sustainable and efficient if more resources were devoted to correcting distorted prices, taxation and subsidies, and improving public education towards acceptance of more green technologies and lifestyles.
All these could be achieved at national levels, with a modest amount of global or regional assistance or aid.
Third, many serious Western economists seem to think that the silver bullet to the global imbalance (and also for China’s own good) is revaluation of the nominal exchange rate and that every argument to the contrary is “misguided”.
Unfortunately, two facts argue to the contrary. Given that China’s current GDP is US$4.8 trillion compared with the combined GDP of G-3 at US$37 trillion, a revaluation of the yuan by, say, 40%, would only increase China’s GDP by US$1.92 trillion or less than 5.2% of the G-3’s GDP.
Hence, to rely on China to replace the G-3 global engine in the short run is quantitatively unrealistic.
The other evidence to the contrary is the Japanese experience with the massive revaluation of the yen after the Plaza Accord in 1985, which had the opposite result of solving the global imbalance.
The Japan-US trade surplus did not disappear and Japan suffered a massive asset bubble that damaged its financial system and resulted in deflation for almost two decades. In other words, revaluing the exchange rate may be a cure worse than the problem itself, both for China and the world.
Fourth, the Bretton Wood institutions are neither geared nor prepared for the important roles of global public good providers that are required to restore global balance.
Quantitatively, their resources are now too small relative to global needs. The fact that their major resources depend on their capital base (which stems from the fact that they are controlled by the West) means that their combined financial resources are one-fourth of total official reserves of the surplus countries (US$4 trillion) and less than 0.5% of conventional global financial assets (US$214 trillion).
Quantitatively and qualitatively, the Bretton Wood institutions cannot act as central banks of last resort, nor undertake fiscal action to alleviate the effects of global imbalance or crises. These are still the domains of national authorities.
How to change this unsatisfactory global architecture is much more controversial and cannot be done overnight. It is one thing to complain about a single dominant power, but to build a global central bank, regulatory system and reform international financial institutions without global fiscal structure and with a G-20 of profoundly different views will be a daunting task.
My prediction is that there will be relatively little change, because there is no good unifying vision of what could be a viable alternative. To have a coherent architecture requires an architect. Sadly, we do not have anyone remotely like John Maynard Keynes to show us the way.
The crisis in economic thought
Our greatest obstacle to real reform is the failure of current economic thinking to predict and explain both crises in a consistent and coherent mode. Current economic theories are at best partial, explaining one crisis without taking into consideration the other.
Based on the historical delay in economic theory in predicting and explaining the Great Depression, we should not be surprised.
The Great Crash happened in 1929, but John Maynard Keynes’s General Theory was not published until 1936 to challenge the neo-classical orthodoxy. It took another decade before the General Theory was more widely accepted and adopted in using counter-cyclical fiscal tools.
Despite its failings in the 1930s, the neo-classical framework was revived in the 1970s through Milton Friedman and the Free Market School. Buttressed by the Efficient Market hypothesis and the wide adoption of financial models, the neo-classical orthodoxy proved very hard to dislodge, even today.
Rival theories of the European institutional school were basically ignored by the mainstream economists or begrudgingly incorporated at the fringes.
The neo-classical macro-economic theory was tautologically perfect, so long as its basic assumptions held. But the simplistic assumptions of perfect information, zero transaction costs and ceteris paribus (other things being equal) cannot hold because the market is dynamic and constantly evolving.
Other things cannot be equal. Central banks and monetary policies cannot be independent of the market. They are mutually inter-connected, interdependent and inter-active – a problem that even recent evolutions in game theory could not model effectively without very restrictive assumptions.
Clearly, we need much more complex non-linear explanations of human and market behaviour, including how different institutions react to imperfect information.
Without a more system-wide theory that embraces the crises of human interaction (financial crisis) and the human-natural interaction (climate change), we are reacting blindly. Partial solutions for one crisis may exacerbate the resolution of the other.
Hence, the real intellectual crisis today is one of obsolete economic thought, of departmental silos trying to cope with complex inter-related issues that are beyond the power of any single bureaucracy, and of fragmented nations dealing with global problems that affect all humanity.
To put it bluntly, our present economic theories cannot explain climate change adequately, just as Mayan priests found that more human sacrifices will not bring rain.
The twin crises are not just about man dealing with man’s follies but about man struggling with changing Mother Nature at the same time.
The dominant Western scientific logic of linear thinking has been operationally translated by traditional top-down bureaucracies into short-term “fixing the urgent rather than the important”, ignoring externalities that are difficult or cannot be measured, and sacrificing long-term benefits by dealing mostly with the immediate problem at hand.
Having consumed too much, the West is now blaming the East for saving too much, forgetting that the East’s savings come from producing for Western consumption at the expense of polluting their own environment and exploiting their cheap labour.
If the West did not consume, the East could not have had the income to generate their savings. Both sides gained but Mother Earth lost.
We ignored the externalities of ecological degradation because conventional economic theory and national statistics found them either difficult to measure or convenient to assume away.
Hence, the quick fix is not about asking the East to consume more to replace the decline in Western consumption, but to think a little more long-term on how to make human development more sustainable without destroying our environment.
We all need profound changes in economic thinking, including measures of “green” GDP that would enable us to measure more accurately the consequences of unsustainable consumption and production.
Parallel to building these new standards of sustainable growth will be the need to re-build our institutions.
The financial crisis was operationally an institutional crisis because the national and global institutional structures cannot cope with the externalities of financial institutions that operate globally, but are regulated and die nationally.
Rescuing these “too large to fail” dinosaurs are now beyond national resources. We need to appreciate that networked institutions are enmeshed into the global ecosystem and are not easy to remove surgically. Nor are their externalities easy to isolate or contain.
What is clear is that even though technology through scientific research and development has been able to defer the Malthusian doom, we must be realistic that as the world gets more and more inter-connected through telecommunications and modern transport, a more crowded world creates more and more disexternalities.
Hence, using lineal projections of growing prosperity in terms of conventional GDP cannot disguise the reality that there must be a change in the lifestyles of the majority of the world population in order to make our rise in standards of living more sustainable.
The clash of mindsets
An important consequence of the twin crises is that it has forced us to re-examine all options.
I am forced to conclude that the differences in approach are not one of Samuel Huntington’s “clash of civilisations”, but a more fundamental “short-term, partial and linear” mindset versus one that is more “long-term, system-wide and non-linear”.
The first one is easy to classify as current Western thinking, whereas the latter cannot be classified as distinctly Eastern, because there is no clearly articulated consensus amongst Eastern intellectuals whilst there is a growing strain of Western intellectuals moving in that direction.
In other words, we are caught between an unacceptable set of conventional follies that do not help us, and an intellectual wilderness without a “new Keynes” to guide us.
I am asking the emerging markets to start thinking seriously about how to change lifestyles in a manner that would be financially and ecologically sustainable.
Pragmatically, it is unlikely that there is a single person brilliant enough to think through the complex issues that we have before us.
The process of thinking through the implications of living in a smaller planet on a sustainable basis will have to be multi-disciplinary, with specialists from all fields, both physical science, ecology and even philosophy and behavioural science.
The issue of climate change is one that affects the future of all Mankind and not just any single nation. The debate in Copenhagen was unfortunate because it was framed as a blame game between the advanced countries and the rest.
The advanced countries are trying to stop the growing carbon emissions from the faster growing emerging markets without paying too much for it, whilst the emerging markets insist that since the advanced economies are responsible for most of the current status of carbon emission, they must bear the bulk of the burden.
The trouble with the climate change debate is that it is a tragedy of the commons on a global scale that cannot be resolved until we lower population growth and consumption levels to a more sustainable level.
It is a future disaster for which current economic thinking is not helpful. Like death, no one knows for sure when it will happen and perhaps no one wants to know. But we all have to deal with this, if not in our lifetime but for our children.
The world is clearly at the knife-edge of major changes that will require outstanding statesmanship between the West and the rest. When the world is crying out for heroic big decisions, global leaders are more likely to fudge the moment with good-sounding rhetoric but cautious small steps.
Experience will suggest that a muddled solution buys time for the community as a whole to digest what the options are. But the global clock is ticking.
Looking back at history, I now realise that turning points in history go through huge periods of turmoil, resolved either through war or profound intellectual conflict.
Thus, re-building a new intellectual framework to deal with the new environmental challenges will require first the creative destruction of the old economic orthodoxy.
China did not resolve the period of the Warring States till Confucianism won the clash of the Hundred Schools. The Renaissance in Europe resolved the separation between religion and the state that sowed the seeds of the scientific and industrial revolution.
So far, history has been written about how Man conquers Man, in which the conquest of the environment has been taken for granted.
Modern society has forgotten how Man emerged first amongst animals because he used knowledge to conquer Mother Nature. But the population of Man was small relative to the planet then. Human societies destroyed by the environment, such as the Khmer Civilization, the Mayan and the Easter Island cultures have been buried and ignored, because we all suffer from disaster myopia.
It is time that we begin once again a new intellectual revolution, about the application of science and technology to a sustainable living in a small planet.
If this cannot be done at the global level, then it must be done at the national and civil society levels. It is easy for Man to conquer other Men, but to conquer himself and his own greed, that is the most difficult task of all.
● Datuk Seri Panglima Andrew Sheng is adjunct professor at Tsinghua University, Beijing, and Universiti Malaya. He is a former chairman of the Hong Kong Securities and Futures Commission.
By ANDREW SHENG
FIFTEEN months after the panic triggered by the failure of Lehman Brothers, we should begin the debate how to rebuild the world after the crisis. Several disturbing questions remain. Are we still in the crisis? Should we reform at all? What should we rebuild?
After all, the rescue efforts by the leading central banks have brought financial markets back to almost pre-2007 levels. Commercial banks have been rescued through massive guarantees and liquidity, and interest rates have been brought down to near zero.
There are some who think that 2010 will be a good year with revived growth. Others believe equally fervently that the real crisis has yet to come. Who is right?
Several things are now clearer. We were dealing in 2007/2009 with two simultaneous crises – one financial, the other about climate change. One brought about a shift in the economic power balance, with the G-20 calling the shots instead of the G-7. The other is being resolved through the Copenhagen Round of negotiations. Three fundamental differences define the two crises. The first is that the financial crisis was primarily dealt with at the national level, whereas the climate crisis was dealt with at the global level.
The second is that financial crisis had short-term effects that required immediate action, whereas the climate crisis had uncertain long-term effects, where people do not feel the immediate pain and had no cause to support reform.
The third is that the Copenhagen negotiations confirmed the shift in power to the population giants of China, India, Brazil and South Africa, which brokered the deal with the United States.
The age of juggernauts has arrived
There was certainly a lot of hot air and emotions coming out of Copenhagen, with the African chairman of the developing economy caucus claiming that the amount of money offered by the advanced economies for climate change is just enough to buy coffins.
Those who are dead do not have to worry about climate change, so all the emotion is about what to do with the living.
However messy and unsatisfactory an agreement, Copenhagen is still a major achievement. Globalisation will never be the same again, because there is at last some universal recognition, however fuzzy, that we must solve the threat to climate change. But there is a major divide between the West and the rest.
The trouble with climate change is that all of us are dealing with unknown unknowns. Although the majority of the scientists are convinced that climate change has already passed the tipping point of irreversible damage to the environment, some think that these predictions of doom are a conspiracy to tax the wealthy countries.
The climate crisis and the financial crisis are inter-related, because both stem from excessive consumption of natural resources. The financial side collapsed first, because the West’s excess leverage was not sustainable.
The climate change crisis has a much longer time horizon. It may take 20 to 30 years before the weather change and resource scarcity become visibly so bad that those affected will then support the need for change. By then, it may be too late.
Mankind is like a frog in the pot of water. When the temperature in the pot is raised very quickly, the frog feels the pain and will jump out very quickly to escape. This was what happened in this financial crisis when G-20 acted decisively in the face of an immediate threat of financial meltdown.
However, since climate change is incremental, the frog will not react if the temperature rises slowly, until the moment comes when the frog is boiled.
Rebuilding from the ashes
I was partially wrong last year when I suggested that global solutions would not be as achievable as regional and national reforms.
In 2009, however, there was greater consensus at the global and national levels than at the regional level, but as recovery gathered steam, global opinion has once again diverged. The blame game is now rearing its ugly head.
Instead of being praised for being the first to have a substantial fiscal stimulus to regenerate domestic and global economic growth, China is now being blamed for maintaining a peg with the US dollar that gives it competitive advantage.
Hence, there are two things that must be rebuilt if the world is to move ahead on a stable keel. The first is the global financial architecture, which will involve transparent rule changes and architectural adjustments that reflect the changing balance of economic power.
The second is the hidden rules that underlie serious differences of views on the crises and their solutions, namely, the differences in economic thought and philosophy between the East and West.
Obviously, rebuilding physical structures is easier than re-building mindsets, but one cannot change without the other.
The global financial architecture revamp
So far, the only area of global consensus is that the present global monetary structure is flawed and unsustainable. Of course the global financial crisis happened because of problems and mistakes at the national level. But national problems had global origins.
The Triffin Dilemma states that the central bank of the major reserve currency has to run a monetary policy that may be contradictory to its domestic needs. As the issuer of the reserve currency, the United States provided the world with ample liquidity but at the cost of running larger and larger current account deficits.
The role as world’s consumer of last resort enjoyed global support because the East and South producers and savers (including Germany and Japan) were willing to finance that deficit.
Unfortunately, in 2008, the United States over-extended its leverage in the financial sector, had a bubble deflation and now needs to rebuild its balance sheet by deleveraging and increasing domestic savings.
Since the United States is nearly one quarter of global gross domestic product (GDP), the cutback in consumption will slow global growth, thus giving time to the world to restore its imbalances from both the regional and ecological points of view.
Unfortunately, the G-3 rescue plan of doing “whatever it takes” to relieve pain used huge public sector deficits to assume losses of the private sector.
The solution replaced excessive financial sector leverage with large unsustainable public sector leverage, and instead of changing the incentives to deter excessive speculation that worsened the bubble, it rewarded speculators by providing zero cost funding through the central banks.
It replicated the Japanese solution of the 1990s with almost identical consequences of large carry-trades, creating volatile capital flows to emerging markets.
In essence, the world is now suffering a reverse Triffin Dilemma. What appears appropriate for the monetary policy of the reserve currency country is wrong monetary policy for the rest of the world.
I for one would not object to zero interest rate policy if this went towards subsidising the damage suffered by the US real sector, but instead, most of the benefits were captured by the financial sector that paid itself more in the form of huge bonuses.
Hence, combating the deflation in the bubble in the West seems to require a bubble in the East instead.
The unspoken assumption is that if the Eastern savers were to become large spenders to replace lost Western spending, the world would return to its high-growth path. This argument forgets that it was excessive expenditure that drove unsustainable resource depletion in the first place.
There are four flaws to this line of reasoning, namely, consumption bias, price distortion, tool ineffectiveness and institutional misalignment.
First, there is an unspoken inference that increased consumption by the emerging markets to correct their excessive savings is the correct solution to the global imbalance.
However, if every Chinese or Indian were to consume at the per capita consumption level of the average American, there would be no natural resources left.
Clearly, once the emerging markets increase their consumption, their lifestyle must change to a more ecologically sustainable form, involving more green and energy/resource saving technology that will take time to evolve.
Every economic and ecological historian remembers that excessive consumption was the underlying cause of the fall of civilizations, from the Mayans to the Romans.
Second, the switch to more ecologically sustainable lifestyle will not happen without changing the fundamental incentives, particularly price signals.
Most market economists would agree that the main defect of this fossil fuel-based global economy is the under-pricing of energy and water through politically-driven subsidies.
This under-pricing of non-replaceable natural resources is the main reason why the current mode of production is wasteful, inefficient and destructive.
The world could be much more ecologically sustainable and efficient if more resources were devoted to correcting distorted prices, taxation and subsidies, and improving public education towards acceptance of more green technologies and lifestyles.
All these could be achieved at national levels, with a modest amount of global or regional assistance or aid.
Third, many serious Western economists seem to think that the silver bullet to the global imbalance (and also for China’s own good) is revaluation of the nominal exchange rate and that every argument to the contrary is “misguided”.
Unfortunately, two facts argue to the contrary. Given that China’s current GDP is US$4.8 trillion compared with the combined GDP of G-3 at US$37 trillion, a revaluation of the yuan by, say, 40%, would only increase China’s GDP by US$1.92 trillion or less than 5.2% of the G-3’s GDP.
Hence, to rely on China to replace the G-3 global engine in the short run is quantitatively unrealistic.
The other evidence to the contrary is the Japanese experience with the massive revaluation of the yen after the Plaza Accord in 1985, which had the opposite result of solving the global imbalance.
The Japan-US trade surplus did not disappear and Japan suffered a massive asset bubble that damaged its financial system and resulted in deflation for almost two decades. In other words, revaluing the exchange rate may be a cure worse than the problem itself, both for China and the world.
Fourth, the Bretton Wood institutions are neither geared nor prepared for the important roles of global public good providers that are required to restore global balance.
Quantitatively, their resources are now too small relative to global needs. The fact that their major resources depend on their capital base (which stems from the fact that they are controlled by the West) means that their combined financial resources are one-fourth of total official reserves of the surplus countries (US$4 trillion) and less than 0.5% of conventional global financial assets (US$214 trillion).
Quantitatively and qualitatively, the Bretton Wood institutions cannot act as central banks of last resort, nor undertake fiscal action to alleviate the effects of global imbalance or crises. These are still the domains of national authorities.
How to change this unsatisfactory global architecture is much more controversial and cannot be done overnight. It is one thing to complain about a single dominant power, but to build a global central bank, regulatory system and reform international financial institutions without global fiscal structure and with a G-20 of profoundly different views will be a daunting task.
My prediction is that there will be relatively little change, because there is no good unifying vision of what could be a viable alternative. To have a coherent architecture requires an architect. Sadly, we do not have anyone remotely like John Maynard Keynes to show us the way.
The crisis in economic thought
Our greatest obstacle to real reform is the failure of current economic thinking to predict and explain both crises in a consistent and coherent mode. Current economic theories are at best partial, explaining one crisis without taking into consideration the other.
Based on the historical delay in economic theory in predicting and explaining the Great Depression, we should not be surprised.
The Great Crash happened in 1929, but John Maynard Keynes’s General Theory was not published until 1936 to challenge the neo-classical orthodoxy. It took another decade before the General Theory was more widely accepted and adopted in using counter-cyclical fiscal tools.
Despite its failings in the 1930s, the neo-classical framework was revived in the 1970s through Milton Friedman and the Free Market School. Buttressed by the Efficient Market hypothesis and the wide adoption of financial models, the neo-classical orthodoxy proved very hard to dislodge, even today.
Rival theories of the European institutional school were basically ignored by the mainstream economists or begrudgingly incorporated at the fringes.
The neo-classical macro-economic theory was tautologically perfect, so long as its basic assumptions held. But the simplistic assumptions of perfect information, zero transaction costs and ceteris paribus (other things being equal) cannot hold because the market is dynamic and constantly evolving.
Other things cannot be equal. Central banks and monetary policies cannot be independent of the market. They are mutually inter-connected, interdependent and inter-active – a problem that even recent evolutions in game theory could not model effectively without very restrictive assumptions.
Clearly, we need much more complex non-linear explanations of human and market behaviour, including how different institutions react to imperfect information.
Without a more system-wide theory that embraces the crises of human interaction (financial crisis) and the human-natural interaction (climate change), we are reacting blindly. Partial solutions for one crisis may exacerbate the resolution of the other.
Hence, the real intellectual crisis today is one of obsolete economic thought, of departmental silos trying to cope with complex inter-related issues that are beyond the power of any single bureaucracy, and of fragmented nations dealing with global problems that affect all humanity.
To put it bluntly, our present economic theories cannot explain climate change adequately, just as Mayan priests found that more human sacrifices will not bring rain.
The twin crises are not just about man dealing with man’s follies but about man struggling with changing Mother Nature at the same time.
The dominant Western scientific logic of linear thinking has been operationally translated by traditional top-down bureaucracies into short-term “fixing the urgent rather than the important”, ignoring externalities that are difficult or cannot be measured, and sacrificing long-term benefits by dealing mostly with the immediate problem at hand.
Having consumed too much, the West is now blaming the East for saving too much, forgetting that the East’s savings come from producing for Western consumption at the expense of polluting their own environment and exploiting their cheap labour.
If the West did not consume, the East could not have had the income to generate their savings. Both sides gained but Mother Earth lost.
We ignored the externalities of ecological degradation because conventional economic theory and national statistics found them either difficult to measure or convenient to assume away.
Hence, the quick fix is not about asking the East to consume more to replace the decline in Western consumption, but to think a little more long-term on how to make human development more sustainable without destroying our environment.
We all need profound changes in economic thinking, including measures of “green” GDP that would enable us to measure more accurately the consequences of unsustainable consumption and production.
Parallel to building these new standards of sustainable growth will be the need to re-build our institutions.
The financial crisis was operationally an institutional crisis because the national and global institutional structures cannot cope with the externalities of financial institutions that operate globally, but are regulated and die nationally.
Rescuing these “too large to fail” dinosaurs are now beyond national resources. We need to appreciate that networked institutions are enmeshed into the global ecosystem and are not easy to remove surgically. Nor are their externalities easy to isolate or contain.
What is clear is that even though technology through scientific research and development has been able to defer the Malthusian doom, we must be realistic that as the world gets more and more inter-connected through telecommunications and modern transport, a more crowded world creates more and more disexternalities.
Hence, using lineal projections of growing prosperity in terms of conventional GDP cannot disguise the reality that there must be a change in the lifestyles of the majority of the world population in order to make our rise in standards of living more sustainable.
The clash of mindsets
An important consequence of the twin crises is that it has forced us to re-examine all options.
I am forced to conclude that the differences in approach are not one of Samuel Huntington’s “clash of civilisations”, but a more fundamental “short-term, partial and linear” mindset versus one that is more “long-term, system-wide and non-linear”.
The first one is easy to classify as current Western thinking, whereas the latter cannot be classified as distinctly Eastern, because there is no clearly articulated consensus amongst Eastern intellectuals whilst there is a growing strain of Western intellectuals moving in that direction.
In other words, we are caught between an unacceptable set of conventional follies that do not help us, and an intellectual wilderness without a “new Keynes” to guide us.
I am asking the emerging markets to start thinking seriously about how to change lifestyles in a manner that would be financially and ecologically sustainable.
Pragmatically, it is unlikely that there is a single person brilliant enough to think through the complex issues that we have before us.
The process of thinking through the implications of living in a smaller planet on a sustainable basis will have to be multi-disciplinary, with specialists from all fields, both physical science, ecology and even philosophy and behavioural science.
The issue of climate change is one that affects the future of all Mankind and not just any single nation. The debate in Copenhagen was unfortunate because it was framed as a blame game between the advanced countries and the rest.
The advanced countries are trying to stop the growing carbon emissions from the faster growing emerging markets without paying too much for it, whilst the emerging markets insist that since the advanced economies are responsible for most of the current status of carbon emission, they must bear the bulk of the burden.
The trouble with the climate change debate is that it is a tragedy of the commons on a global scale that cannot be resolved until we lower population growth and consumption levels to a more sustainable level.
It is a future disaster for which current economic thinking is not helpful. Like death, no one knows for sure when it will happen and perhaps no one wants to know. But we all have to deal with this, if not in our lifetime but for our children.
The world is clearly at the knife-edge of major changes that will require outstanding statesmanship between the West and the rest. When the world is crying out for heroic big decisions, global leaders are more likely to fudge the moment with good-sounding rhetoric but cautious small steps.
Experience will suggest that a muddled solution buys time for the community as a whole to digest what the options are. But the global clock is ticking.
Looking back at history, I now realise that turning points in history go through huge periods of turmoil, resolved either through war or profound intellectual conflict.
Thus, re-building a new intellectual framework to deal with the new environmental challenges will require first the creative destruction of the old economic orthodoxy.
China did not resolve the period of the Warring States till Confucianism won the clash of the Hundred Schools. The Renaissance in Europe resolved the separation between religion and the state that sowed the seeds of the scientific and industrial revolution.
So far, history has been written about how Man conquers Man, in which the conquest of the environment has been taken for granted.
Modern society has forgotten how Man emerged first amongst animals because he used knowledge to conquer Mother Nature. But the population of Man was small relative to the planet then. Human societies destroyed by the environment, such as the Khmer Civilization, the Mayan and the Easter Island cultures have been buried and ignored, because we all suffer from disaster myopia.
It is time that we begin once again a new intellectual revolution, about the application of science and technology to a sustainable living in a small planet.
If this cannot be done at the global level, then it must be done at the national and civil society levels. It is easy for Man to conquer other Men, but to conquer himself and his own greed, that is the most difficult task of all.
● Datuk Seri Panglima Andrew Sheng is adjunct professor at Tsinghua University, Beijing, and Universiti Malaya. He is a former chairman of the Hong Kong Securities and Futures Commission.
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