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Japan’s Corporate Comeback: Inside the Resolute Japan Model, w/ Wharton Prof. Michael Useem – EP260

Wharton Professor Michael Useem joins host Gene Tunny to discuss his new book, Resolute Japan, which unveils Japan’s emerging shift in management practices fueling a corporate revival. Japanese companies are adopting ambidextrous management, empowering frontline employees, and embracing Western practices while retaining stakeholder-first traditions. He emphasizes the importance of top management in driving change and the potential for Japan to regain global economic prominence by learning from both domestic and international best practices.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps for EP260

  • Introduction and Overview of the Podcast (0:00)
  • Japan’s Economic Downturn and Resurgence (3:30)
  • Methodology and Interview Process (5:44)
  • Innovative Management Practices in Japan (11:29)
  • Ambidextrous Management and Global Influence (21:51)
  • Challenges and Opportunities for Japan (42:36)
  • Economic Research on Management Impact (42:58)
  • Final Thoughts and Recommendations (52:47)

Takeaways

  1. Japanese companies are adopting innovative management practices, such as empowering frontline employees and embracing the “gemba walk” to better understand operations.
  2. Japanese companies are retaining their commitment to stakeholders, including employees, the community, and the country, while also becoming more open to adopting Western-style management principles.
  3. The concept of “ambidextrous management” is emerging, where companies are exploring new industries while exiting declining ones, demonstrating a willingness to adapt to changing market conditions.
  4. There is an increasing openness among Japanese companies to learn from and adopt best practices from other countries, which is helping drive their resurgence.
  5. The impact of top management changes can significantly influence a company’s performance, suggesting the importance of resolute leadership in driving change and improvement.

Links relevant to the conversation

Professor Michael Useem’s profile:

https://mgmt.wharton.upenn.edu/profile/useem

Resolute Japan book:

https://www.amazon.com.au/Resolute-Japan-Leaders-Corporate-Resurgence/dp/1613631820

OECD Economic Surveys – Japan 2024:

https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-japan-2024_41e807f9-en

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Transcript: Japan’s Corporate Comeback: Inside the Resolute Japan Model, w/ Wharton Prof. Michael Useem – EP260

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

SPEAKERS

Female speaker, Obsidian, Michael Useem, Gene Tunny

Michael Useem  00:03

Some of the impediments to competing globally, Japanese firms have begun to push back against those impediments, to adopt their own resolute method, and thus believe that companies everywhere in the world would behoove themselves to take a look at Japanese companies, close in if they have a partner, go to visit, walk around, what’s going on, what can we borrow back here in our home country that Japan is now mastering?

Gene Tunny  00:34

Hello and welcome to the show today, we’re joined by one of the foremost experts in corporate leadership. Professor Michael Yaseen from the Wharton School, and we’re talking about his new book, resolute Japan. In the 1980s Japan was seen as an unstoppable economic force, but the 1990s brought a sharp downturn, leading to the lost decades. Now, Professor you seems extensive interviews with top Japanese executives reveal how the country is experiencing a resurgence. Japan’s companies are adopting innovative management techniques, empowering frontline employees, embracing the gemba walk and incorporating Western practices while still valuing their stakeholder first traditions. In this episode, we’ll explore the remarkable resurgence we’re starting to see in Japan’s corporate giants. A special thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants, economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it. Professor Michael, you seen Welcome to the program. Gene,

Michael Useem  01:53

thank you for having me.

Gene Tunny  01:54

It’s good to connect. About your new book, resolute Japan. Now Japan is, yes, it’s a fascinating economy. I mean, you set it up the book by talking about the the fact that Japan had a reversal of fortune. They’re all the concerns or, well, in the US in the 80s, about how potentially Japan could overtake the US. And then there was some really now they seem crazy predictions of the coming war with Japan and all of that. But then Japan had the economic crisis in the 90s and the lost decade. But now it looks like things are turning around. And part of that is a a resurgence in corporate Japan due to new practices. So this is the this is the thesis of your new book, resolute Japan. Can you tell us please? Well, one is that summary broadly correct about the thesis of your book. And two, how did you get interested in this topic. What? What motivated you to write this book? Please. Michael gene,

Michael Useem  03:04

the thesis is absolutely on, on the mark. And just to elaborate a little bit before about 1990 to paraphrase the title of a book by one of my professional colleagues, Japan, was number one. The growth rate was extraordinary. Toyota cars were being sold all over the world. Panasonic is a brand that everybody came to know. Some of the largest banks in the world were Japanese banks. And then came 1990 and Japan went off a cliff. And in fact, it lost not only a decade, but it probably lost three decades, as at least indicated by the big stock index for the Japanese or the Tokyo Stock Exchange, which at one point was close to a value of 40,000 and us, by the way, is just a little bit above that. So there’s a certain parallel here, we hope not, with what happened in Japan after in 1990 the index got to 40,000 and then it just the index went off a cliff. Japan went into reverse. Searches on Google for the name Japan dropped by about 80% so coming into that 1990 turning point, the adverse turning point, Japan had become a model and Gene if I can just be a little bit colorful about and I’ll get to your second question in a second about that period, I had attended a conference that included a number of practitioners, A number of business leaders, a number of academics. It must have been around 1989 everybody was talking about, how are we going to learn from Japan how to run an economy, or at least big companies? Because they seem to be extraordinarily successful, and we at the end of three days of lots of academic. Can practical talk somebody, a CEO of a company, in fact, said we haven’t come up with any sure fire way to learn how Japan does it. So what we actually ought to do is teach Japanese managers to be like us. If we can’t raise ourselves up to them, we at least can bring them down to where we are. Well, as it turned out, Japan needed no help whatsoever. On that, the index plummeted down to about a value of about 10,000 it’s now, though, over the last couple years, it’s not only a lost decade, it’s probably a lost three decades. It’s 1990 almost, well more than 30 years later, almost 35 years the index over the last several months has just come back to life and is up over 40,000 right now. It’s quite remarkable. It’s one of the great comebacks. And our book is based on interviews with a number of Japanese company leaders, typically chief executive officers. We wanted to know. We didn’t go in with this question, but we ended up asking it because it was pretty obvious. It was the big question. We went into our interviews with over 100 was 102 leaders of big Japanese companies with other theories at hand, or other indications of what we might find at hand, but what we did find in talking over the last couple of years with people who run these well known companies, some less well known, is that they have adopted a new set of let’s call them leadership principles at the top, which seem to be doing the trick. So Gene started to go on so long on that, but that’s the long and the short of it.

Gene Tunny  06:46

Okay, now we’ll get to those leadership principles. I think I want to explore what they are. But first, can you tell us about the methodology I’m interested so you’re talking with Japanese corporate leaders, so C suite executives, who did the interviews? Did you have Japanese speakers, or were they conducted in English? Can you tell us a bit about how the interviews were conducted? Please?

Michael Useem  07:11

Really good question. I’ll give you a little background on it too. I myself have interviewed many, many senior leaders, sometimes directors, non executive directors at companies in the US. I’ve done that extensively and recently with several other colleagues, we did a similar study of leaders of Indian companies. We’ve done subsequent to that, a similar study of leaders of non state owned large Chinese companies like Lenovo and Alibaba. And our method is very simple. We simply call up or write and then send an email message and then, if accepted for an interview, we simply get on the phone, or, in the case of India, we actually went to India and talk directly, informally with those and generally speaking, we’ve received a lot of yeses from people in that high office. They’re busy. We appreciate that, but explaining what we’re doing, they seem to be drawn to it. In the case of Japan, because of COVID, we worked with a Japanese associate, a Japanese colleague, who is now the dean of the Waseda business school, one of Japan’s major business schools. He’s fluent in English and obviously in Japanese. And he arranged for interviews, typically zoom based interviews with the 102 individuals, in some cases, they were conducted in English. That was great for us, and other circumstances, no, but we had a simultaneous interpreter working with us. So between to put a put a bit of a stripe, or maybe a to tie a bow around the question, we decided based on our prior experience. Certainly this was coming partly from me as well, not just my other colleagues, by the way, and working also with a Wharton colleague. His name is far beer Singh. Is professor of strategy here at the Wharton School, the professor in Japan, the Dean now of the waste of Business School is a professor of management, and we essentially set out to hear we looked at the data that you can find, publicly released data, of course, but we worked on the premise that the best way to understand what companies are doing, or one very Good way, is to talk with people who are doing it, chief executives, board chairs and beyond. So we talk to people who are on the inside of Japan’s amazing comeback, right?

Gene Tunny  09:52

Okay, and what were the practices, or what were the the innovations in leadership, in. Management that you found in your interviews, please. Michael, yeah,

Michael Useem  10:04

this is the key, sort of the key, central issue that we were trying to get at. What exactly are Japanese senior executives and some board members doing now to stage this remarkable comeback? And by the way, the comeback is being matched by investor interest. Even Warren Buffett is now increasingly looking at Japan for investment opportunities. All this is because the Japanese share prices of many companies are way up and on. Talking with the 102 it’s we’re a little bit like anthropologists. We’re listening, how does, how does everybody but what are they saying they’re doing? And then we look for the common themes across what we’ve heard, and they’re really three or four. Let me just mention maybe the two, most important, number one, they are shaking off in some of the traditions of Japanese management, which in the day prior to 1990 seemed to be a very good thing, no layoffs. Seniority prevails, pretty much a male dominated world of management. And since 1990 but especially in the last 10 years, some, not all, but many companies have decided, almost Australian us great style, to rethink how they manage by instead of kind of making pronouncements from the from a high cast list of what People ought to do, they the CEOs, sometimes board directors as well, have made a point to listen to their middle and frontline employees. Instead of telling them what to do. There’s a much, much more of an act of seeking out from the ranks what should do, which is a way of saying, let’s talk to management much if it’s the consumer products company, much more in touch with consumers of that kind, they know far better than somebody at headquarters where the market’s going what’s critical and for reasons we could go into Japanese new fairly recently appointed Japanese managers have adopted what is almost commonplace in the west and in Australia, which is to you are the chief executive, you have enormous authority, but in making decisions, what people are saying in the mid ranks, and even better, let’s talk to some consumers. Case in point, just, I’ll end on this, just to anchor the point, Lawson is one of Japan’s great call them convenience stores, a little bit like we have in the US, 711 and I’m sure in Australia, have similar stores, very convenient, often open 18 hours. In the case of 711 7am to 11pm Speedway is another brand here in the US. Lawson is akin to those brands convenience stores. And the tradition at Lawson, going way back, is the people at the headquarters would say, look at this store. You need to stock the following, and here’s how you need to sell, and here’s how you need to bring what you’ve got on the store shelves to the attention of local customers. But a new chief executive came in and said, This is nuts. The people in the stores know far better than I do from from afar, what people should have available on the shelves. Case in point, to make that very tangible, there are a number of losses stores near Fukushima, the nuclear power plants that almost went sky high after the tsunami of 2011 in Japan. And the store already, this is now more than a decade ago, the stores were permitted to stock what people needed. Well, around Fukushima, what they needed was water. They needed food supplies. They needed gasoline. And instead of that coming from Tokyo, kind of a top down instruction, make these things available. Store managers simply said, we have authority. We’ve been delegated authority to get the job done, and we’re going to do it. There are a lot of course parameters around that. It’s not just a free for all of course, but it is a management method that is more familiar to companies in many companies out countries outside of Japan. That’s my number one. That’s our number one finding is a willingness to adopt some of the principles that describe management of large companies and many in many countries in Europe, certainly Australia and New. Zealand and in the US. But before we go too far with that, what Japan has not given up, what these large Japanese companies has not given up is the commitment to multi stakeholder obligations that is, unlike in the US, where we tend to focus on total shareholder return, market value plus dividends paid out in the given year. It’s the currency. It’s sort of the currency of the land. Japan has long put a huge emphasis, you know this, your listeners will know this, a huge emphasis on stakeholders. That’s one of the reasons that they were typically knowing that employees are one of the great stakeholders. No layoffs for a long standing tradition, no layoffs and seniority. That the the point I’m making is just to round it out. And then back to you is that some, not all, I want to stress not all, but many Japanese companies have retained that commitment to stakeholders other than shareholders. So the community, the country, the employees still are at are right up there on the level with the big investors, the big institutional holders, the as we call them, in the US, sometimes the small investors, the widows who have their life savings tied up in stock, say, in general motors. In the case of, let’s make a Toyota the closest parallel to General Motors. The commitment there, we did an interview there. The commitment is to not only shareholders, but retaining what was pre 1990 the commitment remains very strong, to make certain that the country serves the society, the community, and the people who make the automobiles that come off the line. Gene back to you. Oh,

Gene Tunny  17:01

great. Yeah, very good. So on Toyota. That’s interesting. One of my colleagues, Nicholas, grew and who’s an economist as well. He’s often on the show. He used to work on auto industry policy in Australia. Well, we had a car industry once that it was protected by the tariff wall, that’s another story. We got rid of that. But he he visited, like, he tells a story about, you know, visiting the Toyota factory back in the 80s or something, and just how impressed he was with their production methodology and how they actually did listen to workers on the factory floor. This was 40 years ago. So it sounds like Toyota were all already well advanced in moving away from very traditional business models. But have they made more changes? Are they more flexible? Or you talk about ambidextrous, ambidextrous management? Can you tell us a bit about how has Toyota itself changed a bit more about Toyota, please? Yeah,

Michael Useem  18:05

yeah. Well, Toyota was pretty much already there back in 1990 the phrase that comes from the title of a book written by several US observers of Toyota, the machine that changed the world. It’s a book that probably many of your listeners and viewers know, a person named Womack was one of the authors. If you want to track that down, on one of the websites, the Machine that Changed the World in Toyota, going all the way back to the 1940s right after the war, developed a course, and you alluded to it, the Toyota lean production system, and it worked extremely well, and still does work well, and in fact, in the US, just to anchor the point, a year ago, Toyota emerged as the number one producer of automobiles sold in the US General Motors, our historic giant of auto making, which at one point had 50% of the US auto market back in the early 50s, is now exceeded in cars sold in the United States by Toyota. And that’s essentially, I think, traceable to the fact that Toyota, going way back, came up with continuous improvement the lean production system. There are many features to it, and in some respects, Toyota was already there. Other companies less so, less concerned with the microcosm of the production line. You know this, I’ve walked through a Toyota plant. It is a marvel to see in that the micromanagement of people on the floor is quite extraordinary, very disciplined. And I say that because I want to reference the fact that these Japanese companies have not given up what has historically defined some of their stronger manufacturing and management. Methods, but they have, though, in addition to those methods, the discipline on the floor, and there’s a long tradition of Japanese managers doing what’s called a GEMBA walk, which I love as a concept. I wish it happened more often in my own sandbox here, which is to go to where automobiles or maybe home products, if it’s the consumer company of that kind, where they’re actually made, and then even equally important, where they’re sold, to see how the company can add more value to the production and to the sale of the products. So gene, it’s again a long winded way of saying that what we call resolute Japan is resolute in its ongoing commitment to many of these methods that serve these companies very well back in the 1990s but then as some of those methods were adopted by Western firms in North America, Europe and, I’m sure, Australia, the advantage that Japan had in the world market began to erode against some of the international firms, non Japanese firms that were becoming very good at Japanese and their own management methods. Quick summary point is that Japan has in the last decade many companies, certainly not all, but many have not given up the good that they had prior to the falling off the cliff in 1990 but they have since, especially over the last 10 years, come to appreciate, and you referred to it earlier on, appreciate that sitting on assets that are no longer performing is not a good idea. They got to move off from that traditionally, that was hard because they had to lay people off that was resisted, seen as UN Japanese, and so some of the impediments to competing globally that became increasingly pronounced, some of the impediments increasingly pronounced after 1990 Japanese firms have begun to push back against those impediments, to adopt their own resolute method. And thus, to a quick final summary point. We believe, myself and my two co authors here, believe that the world, companies everywhere in the world would behoove themselves to take a look at Japanese companies, close in, if they have a partner, go to visit, walk around, what’s going on. What can we borrow back here in our home country that Japan is now mastering, without giving up its traditional some of its traditional commitments, which turn out to be an asset as well.

Gene Tunny  22:51

Okay, and do you have a hypothesis for how this has occurred? How? Why have these methods? Why are they increasingly adopted what you call this resolute Japan model, the RJ model. Is it out of necessity? Is it out? Well, I suppose necessity is driving a lot of this. But is it? Are they? Are they doing? Are they studying in in other countries, their senior leadership, are that? Are they going on study tours? What’s the what’s your hypothesis? Could you tell us a bit about that, please?

Michael Useem  23:22

I think it’s yes, yes, and yes, they have made pilgrimages to, I’m sure, to various enterprises in Australia. They’ve come to the US. We have many Japanese students, for example, in our in our business programs at the Wharton School, some sent by their company. These are sometimes people in their 30s and 40s, not just 2627 year old students. So that’s a yes on that. I think the care seems to be a kind of discipline. When the bubble burst, when the Japanese market that had hit a value of 40,000 tumbled down to 10,000 in the years that followed. You can imagine that boards of directors and senior managers were extremely vexed by that, and it did seem to open up their eyes to what could they borrow, what could they adopt, what could they bring in from other national settings, even if there weren’t a lot of examples within Japan at the time, I think also American and some of the larger elsewhere based consulting firms, which you know this, bring ideas from one company to another. Here are some ideas on how to think about your strategy, how to sell your product. What is one is a good time to get out of a sector. How do you get out of a given arena and get into a new arena that can be more productive? I think it’s the combination of all the above. We asked all of the 100. And two managers to help us understand their appraisal to that question. And there was no simple single factor. It was a combination of many to make that put that in the positive, though, I think it’s an era where learning from other companies, wherever they may be, Japan, China, we spend a good bit of time in India, Australia, New Zealand, US, Mexico, Canada. Good to take a look, especially at companies in your own industry that are doing very well, even if they’re not in your home country. And in fact, we’ve been running into people who have done what might be called industrial tourism. They’ll take off a couple months. They’ll go to visit Apple they’ll look in the US here though. They’ll spend a couple days at Walmart. What exactly, even if they’re not in either of those particular industries, smartphones, in one case, consumer products. In another case, we believe, and this is, I think, evident in the fact that many senior managers now do, and I strongly advocate this. Make themselves, put themselves on it. Let’s call it a sabbatical. They’ll take off for a couple weeks. One person we’ve interviewed at length took a three month sabbatical, the CEO of a US firm, bank, in fact, go take a look at what other firms are doing. Most of what they’re doing you can’t import to your home territory, but some things are good. That’s a way gene of saying good ideas, fresh ways of dealing with relatively tough global economy these days are invented, often not here. So if we’re into NIH, not invented here, we only look at our own ideas, which was part of Japan’s problem, you’re probably going to end up in a small niche cornered in by companies that have, have looked around, have got some really good ideas on how to make better products at a lower price.

Gene Tunny  27:00

That’s good that they’re, yeah, they’re open to those, those ideas that they’re they’re flowing in. Because maybe this is more of a gratuitous comment, but Japan is, I suppose, seen by many, as a bit of a closed society or a hard society to to get into. And certainly they have very low immigration, like I looked at the OECD Economic survey for Japan before I popped on this call, and the population projections are just dreadful, and that’s that’s seen as a potential challenge economically. So perhaps they need to be more open to immigration. You know, they could absorb some of the immigration that some of the Western economies are taking and which are causing sort of growth problems for us now, and absorbing them anyway. That’s, that’s a good that’s a gratuitous comment. You don’t need to respond to that. But I just, I was, it just occurred to me when you were talking about their openness to ideas, well, maybe they could be a bit more open in other areas. So yes,

Michael Useem  28:04

and then to add one more area to that list, from my standpoint, you’re totally on the money. Japanese management is still very male dominated sport arena, and I think in time watching what’s happening in many European countries, maybe above all Scandinavia, but also even here in the US, the inclusion of women in middle and senior management ranks and going on to boards. Those trend lines in many countries are strongly up, not yet up in Japan, although there is some movement, and I actually think in time, excluding half the population from consideration of employment or service on your board seems a little bit arbitrary. I think because many Japan companies are open to ideas now not invented here, including the fact that we may want to look for people who didn’t grow up in Japan, aren’t Japanese citizens, aren’t of the male persuasion. I think next five or 10 years, stay tuned. We’ll see where that goes. But I’m cautiously optimistic that we’re going to get some movement and all the above.

Gene Tunny  29:18

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  29:53

now. Back to the show. I’d like to ask about this concept of ambidextrous. Business Management. You talk about Panasonic and how it it ended up with a new CEO for Amber, dexterity. Can you tell us a bit about that, please? What happened with Panasonic?

Michael Useem  30:12

Yeah, yeah, sure. Well, maybe just to back up a little bit and add one more element to what’s what are pushing some of the changes we’ve been talking about, everybody can change. I teach a whole course on organizational change, so I’m optimistic that we’re not born as an a person for the rest of our lives. We can make changes. Some of the changes come hard, but they can be embrace and in our experience with these interviews, many of the companies that had not changed after Japan went off that their company went off the cliff with the other companies back in 1990 new management came in and said, the way we’ve been working in the past is nuts. And so we did see that that a number of companies, and Panasonic is one of those. And if you think about, what does it mean to be open to change if you’re running a company like Panasonic or Hitachi? Hitachi, by the way, 300,000 employees Panasonic, not as many, but these are just enormous companies, and they’re in many markets and ambidexterity, to use that phrase you used a few minutes back, as people become more ambidextrous, senior managers become more ambidextrous, what that means is they are more Ready to get out of a declining industry and more ready to even if they’ve never really been in some new terrain to get into it. So you need to exploit what you’re already good at. But you also need to know that DVD tapes, at one point were like number one around the world if you wanted to watch a film. But that industry died as streaming came along. Netflix in the US made that change. Blockbuster arch rival did not make that change. They were not ambidextrous. They were not willing to get rid of the DVD format in favor of the streaming service. Revision of films and beyond. So ambidexterity slowly coming, but definitely coming to Japan. It’s worldwide. Means that senior managers, probably in consultation with consulting firms, are working hard now about how do we get out of an industry that doesn’t have much of the future. Let’s go explore and see if we can’t get into something else. One person we spoke with at another company put it this way. He said to his senior team in in 10 years, 2030 this was an interview a couple years ago. Now, by 2030 I want 80% of our income to come from five sectors we’ve not been in before, and here they are. So kind of starting from scratch. And it was, I think, a good move, because the sectors he wanted to get into, one of his senior managers to pursue actively turned out to be growing, and other areas were dying. So ambidexterity references the call it the portfolio and a willingness new part of the resolute Japan to exit areas that are that are ultimately slated to phase out. Think about what digital has done to so many areas of business these days, and with some trepidation, you want your managers to explore, where else can we go with what with the strengths that we have, with the capabilities that we’re good at, that we wouldn’t even think of as necessarily part of our own company? Anyway, I think Panasonic is out there. Is that the frontier of doing exactly that Gotcha.

Gene Tunny  34:01

So which company was it that wanted, just so I get this right, what was the company that wanted to have 80% of its revenue coming from five new business lines? Is that Panasonic? Or is that another company?

Michael Useem  34:17

That’s another that is another company, but we heard the same thing in Panasonic, not quite so sharp edged, okay, but, you know, I’ll throw a phrase at you which kind of sums up the point when it comes to leading enterprise, what got you here won’t get you there. So we were really good at, for example, producing DVD players, but that got us, that got us to our executive vice president title. We were excellent at managing that technology. But those that are following us in these elements. Positions aren’t going to get ahead by doing the same thing. So it’s almost an axiom of leadership. If you’re good for four or five years with the fundamentals, thinking, strategically, communicating, persuasively, those don’t change, but the specifics do, and thus, what got you here in terms of what you’ve managed, will not get you say that the year 2030, and many Japanese firms that we interviewed, we heard a refrain, not in so many well, in so many words, not quite the same phrasing, but in so many words,

Gene Tunny  35:33

gotcha. And I think what I found interesting about the book is you do think you highlight the areas where Japan is still, it’s still strong and very, some very high tech production techniques, isn’t it? Is that, right? It’s involved in, yes, yeah. So there are there, they do still have a lot of there’s still some advantages and things that they’re doing very well,

Michael Useem  35:58

absolutely. And that’s why resolute seem to us to be the right title, because there’s it really refers to the attitude of top management, and that is a resolute determination to take what they do well, to borrow from other national settings, not to mention one another, to adopt the best practices for getting the job done the product sold in a way where consumers, or other business consumers, really want the product that the price offered. They are determined to kind of revamp how they getting the business done, which is a way of saying, this is at the micro level, the macro questions, which are the presume the the preserve of economists with wonderful insights into what can stimulate or discourage, say, Japanese business, all that’s very important. Let’s call that the macro drivers. But at the micro level, the people that go to work every day and run the enterprise, they have stumbled on resolutely, a new set of practices that we think are going to bring the Japanese stock market, that’s one of the macro consequences above where it is now, and bring back some of the Japanese competitors that the US competitors feared back in 1990 But for the last 30 years, I’ve not paid much attention to and we think that in time, companies, it’ll take a while, companies around the world are going to increasingly stop off in Tokyo, as they are looking for best practices around the world. Japanese resolute management or leadership, is one of the topics they need to take a look at.

Gene Tunny  37:43

And the book you mentioned that like, while this resolute Japan model is growing in, in in the adoption of it, it’s still only a minority of companies, isn’t it? Is it still? Is it 10% or so you said? But perhaps, yeah, right, yeah, right.

Michael Useem  38:01

There are beach ball and beach heads. But because I think that those that are in that 10% or whatever it might be, it’s still a minority, are bringing back the luster of their brand, the value of their products, not only in Japan, but worldwide, making Japan actually no wonder the stock market is up. These companies have become more competitive those that have been at the frontier. And we think that other other Japanese managers, or certainly a new generation of Japanese managers coming up the ranks, whether at JL or Nissan, they are going to, just by looking around thinking, they’re going to be thinking, well, look these, these companies that are our neighbors, maybe not in the same industry, they’re making pretty good headway. And just to make it a little bit more tangible, one of the one of the observations, or one of the extracted conclusions from our interviews is that Japanese managers, senior managers, increasingly, do not stand on their station. They’re willing to get out of the corner office to get out to where the this is the gemba walk to where the product is being made and sold, and to not tell people what to do when they’re there. This is what Elon Musk tends to do, as I think you know from his management or his ownership and management of Tesla, he not only walks the line, but he tells people then how to improve the line. In the case of these Japanese managers that are out of the corner office onto the shop floor, working with customers at Lawson’s directly. They’re on listening tours. They again, they said this to us. This is one thing we picked up. We say, Well, why would you go to a local store in the case of Lawson? Well, I kind of want to know what’s going on. How do they sell what? What do customers want these days? That’s. Different so gene, I think this is one of the, maybe the hidden engines of change, which is, and there’s a long tradition in many national economies of looking for better ways of getting a job done in management, by looking at what high performing companies are doing that are new, fresh and something that we could adopt resolutely and try in our own enterprise.

Gene Tunny  40:28

Yep, very good. So I found the bit in your book. I like this. There’s a good list of worldwide markets that Japan is dominating in a wide variety of product niches, and I think it’s a really good list, and I’ll just read a couple of them, silicon wafers. Japanese companies account for 60% of the global share of silicon wafers, for making semiconductors, bearings, so something probably not a lot of us think about. And there’s three companies, Japanese companies accounting for 34% of the global market. And there are variety of other important products there for manufacturing. So I think it’s, I think your book is useful just in that regard, and learning about what Japanese companies are doing its role in the global economy. So, I mean, I recommend it, because I think your thesis is an interesting one, and there’s some good evidence there. And also, yeah, all of the you know stuff, all of the information and knowledge about the Japanese economy and its role in the in the global, global supply chain. So I think that’s, that’s really good, right? Gene.

Michael Useem  41:34

Think, yeah, thank you, Annette. And just my, I guess, of going away thought, here is, how do we learn more about how these companies that are making semiconductors and ball bearings and glass and construction and equipment and auto electric autos? How do we learn about what they’re doing? Lots of commentary and business periodicals about that these days, Japan has kind of come back in terms of our paying attention, but in my own humble view, thinking about, how do we learn to lead what we have not let’s make it semiconductors. How do we acquire the capabilities to build a Fab Lab, a billion dollars at least, to put that up. And then how do we make the best of what we’re doing once we’re there? I actually think there’s no better way to understand that than to pay a visit to those that are doing it. And I say that gene in part because we run a program, and I’ve learned, I guess, through experience, we run a program for CEOs, and they so think about that a CEO who, at that point in life, pretty much knows everything about everything, marketing, finance, operations, how equity markets operate. And nonetheless, the CEOs they do come there, these are often new CEOs who want to learn more about the art of being at the top of a rather big pyramid in some cases. But having said that, I’ve noticed that they pay special attention to other top executives and directors in that new CEOs trying to learn the trade or the craft of being a company leader, I tell them to, you know, take a course, for example, at a university along the line, pick up a book or two. But above all, I’ve noticed, and I reinforce this now, spend some time with people who are making the changes, who are leading the new way of doing business, and you come back with a proof of concept and a couple of concepts that are going to make the difference. So going to Japan, taking a look, no better way to learn it than to see it.

Gene Tunny  43:54

I think that’s right. You’ve got time for two more questions. I hope. I think they might be, should be quick ones, one. I’m just wondering, are you talking to any economists, or any economic researchers that you know of interested in quantifying the contributions to Japan’s, you know, stronger economic performance in the last, what, several years, or whatever it is, or decade, relative to the period before in from 1990 through to the early, mid 2010s I suppose, because I think this is, you know, potentially, these new management practices part of that. But I’m not sure what fraction of that improved performance that account for. So that’s just wondering, if you, if you know of any research going on there. So

Michael Useem  44:43

gene, I don’t know of any research going on directly by economists just way outside my my field of knowledge, having said that, it’s really important to take those factors into account. Interest rates. So the Bank of Japan has been trying to shake off the senevolence of the last 35 years with various central government edicts that change how interest rates or what they are, for example, and other methods to try to stimulate the economy. Really, really important. But gene, here’s a summary way of thinking about the world we’re in. There are several really good studies of the impact of top management, aside from the world you’re in, the province of, say, economic research. What is the impact? For example, here’s how the research goes, what is the impact of a change in the top person at a company? Same kind of research is done for sports teams. So think about a rugby team, or, in our case, a US style football team, where the research has been done, if we don’t change the rules of American football, if we take the bulk of the sports club with the same players, the same venue, the same fans, and then we change out the general manager or the head coach and watch what happens next season. Same thing has been done for private sector companies in the US, the right or the wrong person, the right or the wrong management philosophy at the top can make as much as 20 to 30% difference within the next 12 to 36 months. What next one to three years? It’s a way of saying, I think, to come back to what’s implicit in your question, in in the Japanese government itself put forward policies, and it’s been working, by the way, in reforming governance in ways that I think are going to be very productive, new rules that guide board behavior, just as you had in your country. We certainly have had a lot in the US after the failure of Enron some years ago. All that’s really important. It’s part of the story of how we bring companies into the into the current era in the best possible sense, and how do we help them get the best possible job, job done, the best best possible performance out there. But having referenced all these, those call them more macro factors, very important. At the heart, at the end of the day, also at the heart of what’s going to make a difference is who is running the show, and what precepts or capabilities do they do they bring? Yeah, and I’ll end on I was a little bit shocked when I saw the data on sports teams. I’m thinking, if you got a great group of players, yes, a new manager coming in, a new coach, is going to make some difference. Maybe move a few players around in the positions they play, bringing over the next couple of years, new new players on the payroll. But in the short run, if you bring in a coach or general manager who knows a lot about how the sport should be played, they will increase the one loss record by up to 20 or 30% within one to three years, regardless of the context, regardless of everything macro. Yeah, and that the gene is why we actually focused, in this case, not on the macro factors, which are, among other aspects of Japan, widely researched, especially by economists. But we decided to take a look at the people who actually run the show within those macro factors. And they find some find leverage. They find the ways of making a difference in the affirmative sense, aided, by the way, now with some wind at their back, because Japan has been trying to shake off its senevolence for some years, which is, I think, by way of summary, saying, I think we need the micro. We need the macro, if we’re looking to understand the Japanese economy and it’s opportunities for comeback. Absolutely,

Gene Tunny  49:02

that’s a, it’s a good point about, like you made the point about sports. You really see it in sports teams. And I can’t think of any American examples, but the one of the classic sort of British examples is Alex Ferguson at Manchester United. So, you know, led to a really, you know, great period for that, for that club. So very good, very good point.

Michael Useem  49:27

If I can intervene here for just a second, here would be two examples in the US that will show up in your experience, in your home country, in the business sector, let’s take two big companies. Let’s take Disney, and let’s take Starbucks, and if we want to appreciate what they’re going to be doing in the next four or five years, both have been very troubled. Both have replaced their CEOs. We’ll see how it goes. Starbucks, I think, as you know, has. A triple boomerang CEO. So the famous port Schultz, who got it going retired, was called back retired a second time, has now be called, has been called back a third time. And I personally think same as your illustration from from football. I think that we’ll see what they bring to the table. It hopefully is positive. It may not necessarily be, but hopefully it is that they’re taking the helm, regardless of everything else that affects the ability of Starbucks to sell coffee and just make it in Melbourne or Disney to have its film shown or locally available by virtue of a whole host of economic factors. I think the person at the top can, and often they do, make an enormous difference, fairly short term, in a football in a football league or in the s, p5, 100 here in the US, absolutely.

Gene Tunny  51:04

Okay. My final question, Michael, it’s reading through the I read the OECD Economic survey of Japan, the 2024 before I like when I was preparing for this call. And there was a part of it that I’m wondering about, that they make an observation. And given your research, I’m wondering if their observation is perhaps it’s a like, I guess there’s truth to it, but maybe it things are changing, and things aren’t as bad as the OECD is. Yes, I just like to get your reaction to it. Yeah,

Michael Useem  51:41

yeah, no, I think there’s good reason to be pessimistic. We’ve touched on some of the factors that are still barriers, and some of those factors, I think, are not going to be readily thrown off as barriers in the short run. Having said that, there are enough companies that are adopting some of these new methods, greater focus on getting out of industries that are dying, getting into sectors that are prospering. A new kind of management at the top, a willingness of people in the corner office to get out of that office and walk the floor and get more directly acquainted and bringing ideas up from from the shop floor. I think these over time and time might could be five or 10 years, maybe more than that, are probably going to erode some of the other factors that mitigate against Japan’s comeback. But the comeback, I think, just to maybe a summary line on it, the sun back is significant enough and affecting enough companies that I think we’re getting close to a tipping point where companies that are still languishing are probably beginning to think, Well, geez, I’m looking over my shoulder. Hitachi is coming back. Panasonic is doing pretty well. The airlines are pretty competitive. We’re selling Toyotas like crazy in the North American market. How come my company is still kind of in the doldrums and so gene on that, I guess on that note, I end, uh, optimistically, but it may take some years,

Gene Tunny  53:15

okay, so, but it may be right for the OECD to write, then business dynamism is weak with relatively few startups. So they’re talking about, yes, yeah, okay, so there are some issues there, but you’re optimistic because you’re seeing these, this resolute Japan model, and the the trend is that that’s being increasingly adopted. And they said, That’s good news. Yes, yes,

Michael Useem  53:42

yes, yes to all the above. And maybe gene a question in the back of your mind, and certainly in the back of my mind, well, what exactly is moving the needle? What will the move the needle in the next five years? That leads one to be optimistic in the Warren Buffett sense, I’m going to put some money in Japanese stocks the way I haven’t in the past, and I think it’s because of the rational calculus that senior managers bring to the table. So imagine you’re the new chief executive of Lawson, the huge convenience store chain in Japan. And let’s say you’re one of the languishing firms some years ago, and you begin to say, well, what can I do? Well, you talk to maybe make a visit to Germany or the US or Australia. You talk to some of the people over at Toyota. You bring some of them maybe onto your board, which, by the way, is another driver of change we haven’t talked about, but refreshing the board, bringing new people on the board, bringing people onto the board who can speak independently to you as the top executive, is part of a bigger story that we could talk about some other time. So. Uh, by way of putting pulling all those factors together, if you are kind of in your office, you’re a 55 year old senior, let’s make it a chief executive of a Japanese company that just can’t seem to increase its revenue, let alone its income much over last year, you’re saying, Well, why is that? Especially when you see some other companies doing quite well. So I think it’s the contagion of success that is going to move, maybe not the government or policymakers, although they help in their own special ways, but are probably going to move individual people to say, just like you look at another sports team, well, what is it, in our case, that makes the New York Yankees or the Los Angeles Dodgers such great baseball teams? Well, their budget is one factor, but there are lots of other factors I’d like to find out what the other factors are.

Gene Tunny  55:59

Yeah, very good. We better wrap up there that that’s been terrific, Professor Michael, you seem co author of Resolute Japan. Thanks so much for coming on to the show. Really appreciate your insight. So I’ll put a link in the show notes to your book. I recommend if you’re listening, I think, and you you’re interested in Japan or management, and you know, management’s important for economic performance, so of course, I think it’s important to consider. So yeah, please consider getting a copy of the book, Michael, again, thanks so much for your time. Really enjoyed the conversation.

Michael Useem  56:34

Thank you. I appreciate the questions right on the mark. Let’s keep an eye out. We’ll hope Japan’s going the way it seems to be going.

Gene Tunny  56:42

Thank you Absolutely. Thanks. Michael Righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

Obsidian  57:33

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

The China Business Conundrum: One Bed, Two Dreams w/ Ken Wilcox, former CEO, SVB – EP259

Ken Wilcox, former CEO of Silicon Valley Bank, discusses his book “The China Business Conundrum” and the challenges of doing business in China. He explains the concept of “one bed, two dreams,” highlighting the disparity in goals between western and Chinese joint venture partners. Wilcox details his bank’s entry into China, emphasizing the strategic invitations and control exerted by the Chinese Communist Party. He recounts the extensive regulations and control mechanisms, including a three-year restriction on using Chinese currency. Despite the challenges, Wilcox values the experience, noting the complex interdependence between the U.S. and China.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About this episode’s guest: Ken Wilcox

Ken Wilcox was the CEO of Silicon Valley Bank (SVB) from 2001 to 2011, then the CEO of SVB’s joint venture with Shanghai Pudong Development Bank (SPDB-SVB) in Shanghai until 2015, followed by four years as its Vice Chairman. He currently serves on the boards of the Asia

Society of Northern California, the Asian Art Museum, and UC San Diego’s 21st Century China Center, as well as Columbia Lake Partners, a European venture-debt fund. He is on the Board of Advisors of the Fudan University School of Management in Shanghai and an Adjunct Professor at U.C. Berkeley.

Ken holds a PhD in German from Ohio State University and an MBA from Harvard Business School. He has given numerous speeches in both English and Chinese, published a variety of articles in the banking press, and recently wrote the management book Leading Through Culture: How Real Leaders Create Cultures That Motivate People to Achieve Great Things (Waterside Productions, 2020) and its accompanying workbook, How About You? (Waterside Productions, 2023). His account of establishing an innovation bank in China, The China Business Conundrum: Ensure that Win-Win Doesn’t Mean Western Companies Lose Twice, is forthcoming from Wiley.

To connect with Ken, please visit: www.linkedin.com/in/kenwilcoxsvb/

Timestamps for EP259

  • Introduction and Overview of the Podcast (0:00)
  • Ken Wilcox’s Journey into China (4:40)
  • Challenges and Strategic Invitations in China (8:10)
  • Guanxi and Corruption in Business Relationships (14:13)
  • State Control and Joint Venture Challenges (20:42)
  • Impact of SVB’s Collapse and Final Reflections (40:02)

Takeaways

  1. Joint ventures in China often suffer from differing goals between Western companies and their Chinese partners, a phenomenon Ken Wilcox refers to as “One Bed, Two Dreams.”
  2. The Chinese Communist Party (CCP) holds significant control over both private and state-owned companies, making it difficult for foreign businesses to operate independently.
  3. Guanxi, a system of mutual obligation and trust, plays a critical role in business relationships in China, but it often involves navigating corruption and complex social expectations.
  4. Foreign companies entering China are often targeted for their intellectual property, and the CCP uses strategic partnerships to gain technological insights.
  5. Ken Wilcox’s experience with Silicon Valley Bank in China illustrates the frustrations foreign firms face due to slow regulatory processes and overwhelming state control.

Links relevant to the conversation

Ken’s book “The China Business Conundrum”:

https://www.amazon.com.au/China-Business-Conundrum-Win-Win-Companies/dp/1394294166

Previous Economics Explored episodes on China:

China’s Economic Future Under Xi & the Australia-China Relationship w/ Emmanuel Daniel – EP253 

https://economicsexplored.com/2024/09/17/chinas-economic-future-under-xi-the-australia-china-relationship-w-emmanuel-daniel-ep253/

Enterprise China: what western businesses need to know w/ Prof. Allen Morrison  – EP171

https://economicsexplored.com/2022/12/26/enterprise-china-what-western-businesses-need-to-know-w-prof-allen-morrison-ep171/

Why we’re in the Decisive Decade with China & what the West should do w/ Dr Jonathan D. T. Ward – EP182

https://economicsexplored.com/2023/04/09/why-were-in-the-decisive-decade-with-china-what-the-west-should-do-w-dr-jonathan-d-t-ward-ep182/

China, Taiwan & the Indo-Pacific w/ Dr Greta Nabbs-Keller – EP146

https://economicsexplored.com/2022/07/04/china-taiwan-the-indo-pacific-w-dr-greta-nabbs-keller-ep146/

Lumo Coffee promotion

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Transcript: The China Business Conundrum: One Bed, Two Dreams w/ Ken Wilcox, former CEO, SVB – EP259

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Ken Wilcox  00:03

I know American business people who have done a lot of business in China over time, and they still cling to this notion that China has state owned companies and it has private companies. Well, it does, in a sense, but their distinction is not the same as the distinction in the US, meaning the Chinese Communist Party controls anything it wants to.

Gene Tunny  00:34

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. In this episode of economics explored, I’m excited to have a conversation with Ken Wilcox, the author of the China Business conundrum. Ken has an impressive background as a former CEO of Silicon Valley Bank, where he played a significant role in expanding the bank’s reach into China. Ken, in the conversation, also gives us his perspective on what happened with SVB last year. Ken refers to the Chinese expression, one bed, two dreams to illustrate the challenges of joint ventures in China, he explains that businesses often enter partnerships with different goals, especially in China, where government interests can add complexity and challenges. Join us as we explore the intricacies of doing business in China with our amazing guest, Ken Wilcox. A special thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants, economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it. Ken Wilcox, welcome to the program.

Ken Wilcox  02:16

Thank you very much. I’m happy to be here.

Gene Tunny  02:19

It’s excellent to connect. Ken, you’ve got a new book out the China Business conundrum. Ensure that Win Win doesn’t mean Western companies lose twice. So I’m going to be very interested in your perspectives on what that that conundrum is. So just simply, is the conundrum that I mean, China’s a huge market, but there are risks going into it, and any business going into it has to be aware of those risks.

Ken Wilcox  02:45

That’s exactly right. Actually. That’s the title that was assigned to the book by Wiley, our publisher. My original title, my working title, was a little different, and I thought it was a pretty good one as well. It was based on a phrase that’s used in China by almost everybody at some point in time or another. The phrase is one bed two dreams, which, in my opinion, adequately describes why most joint ventures don’t work actually anywhere, not just in China.

Gene Tunny  03:20

Okay, can you explain that one bed two dreams?

Ken Wilcox  03:24

One bed two dreams? Yeah, another way of looking at it is it probably explains the high divorce rate in the US as well, meaning people get together and but they each have a different vision of what they want to happen, how they want the relationship to evolve, what their goals are. And that’s, I think, really true with joint ventures, and especially so in China, exactly,

Gene Tunny  03:53

yeah, that makes perfect sense now that that’s, yeah, that’s, that’s interesting. Okay, and can you tell us how, how did you get involved in in China? Can you tell us a bit about your journey from because you’re in you’re in business, you’re in the financial sector at Silicon Valley Bank. Can you tell us how you ended up getting into the Chinese market? Please?

Ken Wilcox  04:13

Sure. Absolutely. So. I was with Silicon Valley Bank, fundamentally, for 30 years. You’re probably aware of the fact that our bank doesn’t exist anymore, as of about a year and a half ago, because of a huge mistake that was made by the CFO and not corrected by the board, at least not in time. Be that as it may, our business model was a really good one. Take some pride in that, because I was, in a sense, the author of the business model when I became CEO in 2001 at that point in time, our bank worked with technology companies, maybe 30% of our portfolio. We worked with real estate developers and we worked with small business. Business. And the big decision that I made in 2001 was this. I felt that, you know, there at that point in time, there must have been 13, 14,000 banks in the US, and all of them worked with real estate developers, and all of them work with small business, but we were almost the only one in the entire country that worked with technology companies, and in particular with early stage technology companies. So that was where we had a leg up on everybody else. And my feeling was, why compete against 13,000 other banks when you don’t have any specific advantage over them. Why not focus on what we do better than anybody else? So my first big decision I only made a couple in 10 years as CEO, was to ask two thirds of the portfolio to find another bank over time, and then we filled up that empty two thirds with technology companies. And then the second thing I wanted to do was go global. Because we were we had pretty well penetrated the US. At that point in time, we had, by far and away, the biggest market share going global for us, included, initially Israel, India, London in particular, but Europe in general, and finally, we set our sights on China. I was in China with a group of people from our bank in the year 2000 giving a speech at the first meeting of the Chinese Venture Capital Association. We spent a couple of weeks after the speech touring around, and it was pretty clear to us that there were budding innovation centers in China, that if the trajectory continued, would be huge. So we decided we really wanted to be there, and then ultimately, it takes a long time to get started in China. Ultimately, we were able to position ourselves in such a way that China was asking us to come and build a technology oriented bank, just like the one that we have here in the US, in either Shanghai or Beijing, and that was the invitation, more or less coincided with my stop date, meaning already in 2001 when I became CEO, I knew that I was going to retire at the end of 2010 would it be 10 years in that position, that’s sufficient. I was already of retirement age. We got the signal from Beijing to come to China, and when the board made the decision to accept the invitation, and looked around, unfortunately or fortunately for me, they couldn’t find anybody who wanted to go, except for me, so I talked to my wife, and she was as excited as could be. She said, that’s an adventure you can’t miss. So let’s go.

Gene Tunny  08:12

Gotcha Okay, and I’d like to explore what you found in China, because from your book, I get the sense that you’ve got to be wary of these invitations. It seems that they’ve they’re strategically trying to find business partners that they can get the IP of, they can, you know, get some technology or knowledge transfer from. And so you were, it sounds like you’re actively targeted. Is that, am I reading that correctly?

Ken Wilcox  08:41

Yeah, that’s exactly right. Exactly right. That’s one of the main points. In fact in my book, somewhere around the beginning of 2009 fully two years before I moved to China, I was encouraged to get together in a meeting with the person who was then party secretary of Shanghai. His name was Yu Jung Chang. When Xi Jinping came to power at the end of 2012 Yu Jung Chang was elevated from party secretary of Shanghai to a member to being a member of the Standing Committee, meaning one of the seven most powerful people in China. I had, I believe, four meetings with you, Jung Cheng in 2009 and during those meetings, he laid it on heavy. This is, honestly what he said. You may think I’m exaggerating, but he said, you know, Ken, you’re you’re one of the smartest people I’ve ever met. You really understand China better than almost any Westerner I’ve ever run into. We’ve scoured the universe and we’ve found your bank. It’s the one that we where we most. Higher then he explicitly said, more than Goldman Sachs, more than Morgan Stanley. We have to have you here. We’ll pave the way. And of course, I didn’t realize that this is all part of the process, meaning there were probably similar such meetings going on in other places in China, maybe even that same day, because flattering you beyond belief is the first step in the process. And of course, I’ll admit that I was more naive than would have been desirable. On the other hand, I wasn’t so stupid that I didn’t realize he was laying it on too thick, but same time, you know, it felt good. And I really wanted to build a bank in China, so we accepted the offer.

Gene Tunny  10:50

Okay? And then how did it go? So what was their your ongoing relationship with the officials, and how did they facilitate or hinder the setting up of the bank. How did the actual relationship progress, and what did they get out of it? You know, What benefits did you get from the relationship? And, yeah, I just want to understand how it evolved, and how you came to this view that you express in the book about the just the this China Business conundrum, please. Ken

Ken Wilcox  11:22

Sure. First of all, it was a very long process. Again, those conversations, as I said before, at the beginning of 2009 by 2010 we were in active conversations with the bank that would ultimately be our joint venture partner, kind of a shotgun bride, if you will. They were selected for us by the Chinese Communist Party. And the way it was described to me at the time was, of course, you realize, Ken, you’ll need to have a joint venture partner, but understand this is for your benefit, not for ours, because China is a risky place, and it’s so much different from what you’re used to, you’ll need a joint venture partner. And of course, that made perfect sense to me, and frankly, the conversations over about a year and a half period with our wood joint venture partner, went swimmingly. It was all very, very nice. And once I arrived in China, though, at the beginning of 2011 there were a lot of mixed signals, and there was a lot of hurry up and slow down. Hurry up and slow down. It became really quite confusing for me. In retrospect, I believe that I would have benefited by spending a couple of years, of course, I’d been in China at that point in time, probably at least 20 times by the time I moved but visiting and living are two different things, and it probably would have been better if I had spent a couple of years in China before we even embarked on this process understanding China from a political point of view, from a governance point of view, from a from A cultural point of view and from a business climate point of view. And I might not have been so naive, right?

Gene Tunny  13:27

Yes, you mentioned there’s this concept. I’m not going to pronounce it properly, is it Guanxi? How do you pronounce that? And could you explain what that is, please?

Ken Wilcox  13:37

Yeah, guanxi is probably maybe with the most commonly used word in the literature about how people do business in China, and all it really means, I think, is mutually beneficial relationship. In fact, I’ve gotten more than one lecture by members of the party on what guanxi is the benefits of Guanxi. The concept is, let’s say that gene that I want to develop a relationship with you, and you’re interested in developing a relationship with me. Every time I see you, I’ll bring you a small gift, and I’ll be constantly looking for opportunities to do you favors, and you’ll be doing the same thing for me in my direction. And over time, we build a relationship that is allegedly at least based on trust, it’s certainly based on mutual obligation, because I’ve given you so many things you owe me, and you’ve given me so many things I owe you, and in a sense, it’s be it’s even more important in today’s China. It’s an ancient concept, I believe. But it’s even more important in today’s China because the level of trust in today’s China between individuals is really very low. World as a result, I would say, of the way in which the Chinese Communist Party has governed since it came to power in 1949

Gene Tunny  15:12

Okay, so this guanxi, this is interesting, and you’re bringing these gifts. Are you bringing gifts to, at times, party officials or officials of state owned enterprises. I just want to understand how this, what’s the role of the state in in this, and does that mean that there’s some is it corruption in a way? Can you elaborate on that? Please? Just want to understand this whole system and whether there is any corruption involved in it.

Ken Wilcox  15:39

Sure. No, there’s, frankly, a huge amount of corruption involved in by the way, Gene I don’t mean to imply that there’s no corruption in the US or in Australia, but corruption takes many forms, and it’s often informed by culture. So it’s as I’m going to describe it, I would say it’s shared by many other countries, but somewhat unique in China and yes, I was dealing constantly with government officials. Because one thing that we don’t appreciate, we Westerners and Americans, maybe in particular, we may be more naive than most Westerners. We don’t appreciate is the extent to which other countries have different cultures. I think we operate under the assumption that people are pretty much the same all around the world, and of course, there’s an element of truth to that, but it’s also true that there are significant differences in culture, governance and the structure, the financial systems that can make a huge, huge difference in the way you conduct business. So certainly, one aspect of the party’s behavior is to shower favors and gifts on people like me. Frankly, I and I think that it’s it’s somewhat manipulative in the sense that it puts us in a position where we first of all feel obligated, and secondly, if we’re not careful what kind of gift we accept, we may actually end up feeling compromised, which may be one of the reasons why business people who end up being played and I would argue that almost all Western business people are played in China, largely by the government, meaning the Chinese Communist Party. One of the reasons that they don’t like to talk about it afterwards is many of them have been compromised to one degree or another. Yeah, I believe.

Gene Tunny  17:53

Yes, yeah. Oh, plausible for sure. And what sort of gifts are we talking about? Are we talking about bottles of wine? Are we talking holidays? Are we talking Rolex watches? What type of gifts are we talking about?

Ken Wilcox  18:06

All kinds of things, yeah, but I’ll give you three examples, and these are representative examples. One of them would be my conversation partner at our joint venture partner, the man who was the president of the bank at the time, I think about five or six months into our stay, after we arrived, he almost sheepishly asked me one day, he said, Ken, is it common in the United States for people to invite their business partners to dinner at their house. And I said, Yeah, that happens on occasion, for sure, it’s I actually somewhat rare in China, you don’t get invited into houses. Often you get invited to restaurants, but sell them into houses. So he said, Well, would you mind inviting me and my wife to dinner at your house? And I said, No, that’d be great. So we set it up. And my wife was shocked. She said, I don’t know how to cook Chinese food. We’ll have to get a caterer. In any case, he brought a gift with him. In fact, I I have it here somewhere. It’s a mythological creature made out of glass. It’s about 10 inches long. It’s kind of part lion, part dragon. In any case, I thought I’d seen that in a shop sometime in the month or two prior, and I thought this is a pretty expensive gift, so I checked it out the next morning, and it was, it was worth about $800 retail Well, our board, meaning Silicon Valley Banks board the interpretation of the Foreign Corrupt Practices Act precluded me from accepting this gift, right? So in a pickle there, that’s one example. Another example would be in Shanghai. There was a a. Woman who worked in the financial services department of the municipal government of Shanghai, who was in charge of what they call the Little Giants, and these are the government spends a lot of time studying the market, trying to figure out which startups are likely to be successful, and then nurturing them in one way or another in order to enhance the probability that they’ll be successful. And she wanted to develop a relationship with me, so she and her husband invited my wife and me on a trip to go to Shandong Province to Confucius’s grave, which is that’s an attraction. People like to go there. So we went. As soon as we got there, we were delivered by this couple into the hands of high level party officials. And I really we ended up not even seeing the couple for three days. And for three days, high level party officials were were taking care of us, and they wanted to pay for everything. They wanted to pay for the hotel and every dinner. And these were expensive hotels, I refused, and it was interpreted as somewhat of an insult. And the third thing that I’ll mention was in my second and third year there, I believe this is my strong recollection two times. Anyway, the head of HR in our joint venture, who was a member of the party, came to me with the good news that the party had decided to give me a bonus was about close to a half a million dollars, and it was meant for me. It wasn’t for anybody else. It was meant for me, and it was just for being such a good citizen. So what I did with it? I didn’t I didn’t want to forfeit the opportunity to add a half a million dollars to our equity base in the bank. So I took it and funneled it into the bank, which was contrary to their wishes. They wanted me to keep it for myself. But I also wonder how many people actually do that. My suspicion is that a number of people stick it in their own bank account. And I’m not saying that it’s always the case that they feel compromised to the extent that they don’t want to talk later about the way in which they’ve been played, but I will guarantee you they’ve been played, and that most people would not want to, would not want to complain about it in public, because they would be afraid of potential repercussions.

Gene Tunny  22:50

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  23:24

now back to the show. So yeah, a few things to explore out of that. Can we just go back to the joint venture partner that you had? Was this a? Was this a private sector, a bank? Is it? Was it another bank? Was it a was it state owned? Was Was there involvement of the Chinese Communist Party? Somehow? Can you just tell us a bit more about the that the partner?

Ken Wilcox  23:51

Yeah, I will. And let me also at the risk of something like I’m picking on your language, which I don’t intend to do, but I want to mention something else before I answer your question, and that is one of the reasons that we we have such difficulty, we Westerners, and maybe in particular, we Americans, is that we tend to we have mental models. We’ve got ideas in our head about the way things work based on our own experience of the US, we take those with us to China, and then we just superimpose them on China, and we begin to interpret what we see through the lens of these mental models. So that’s what you happen to accidentally mention one of my favorite between state owned and private I know American business people who have done a lot of business in China over time, and they still cling to this notion that China has state owned companies and it has private companies. Well, it does, in a sense, but their distinction is not the. Same as the distinction in the US, meaning the Chinese Communist Party controls anything it wants to. And you can be a so called private company, but they may very well. It’s highly likely if you’re the least bit successful own part of you, sometimes clandestinely through shell companies, they definitely will have a party committee which can supersede your own personal wishes or the decisions of the board. So you may be a private company, but you from by our US definitions, you’re sort of gravitating into being state owned. Now back to your question. Virtually all banks are primarily state owned in China. So yes, our joint venture partner was state owned, actually owned by the municipality of Shanghai. And because we’re I negotiated 5050, which is rare. It’s usually when you enter into a joint venture with a particularly, a clearly, unequivocally state owned Chinese company. The most you get is about 20% and I was so proud of myself because we negotiated 50% I didn’t realize at the time that it’s irrelevant, because in the end, the CCP will control you whether you own 10% or 50% or 80% so yes, our joint venture partner was a state owned company, and by virtue of the of that fact, our joint venture was functionally a state owned company,

Gene Tunny  26:51

gotcha, and what’s the status of it now? Is it? Is it ongoing? And what was it impacted by the collapse of SVB?

Ken Wilcox  27:00

Yes, it was impacted by the collapse of SVB. So I’ll tell you this, when we got permission to enter into this joint venture, we were literally the first western bank, I believe, to be given permission to enter into a joint venture with a Chinese commercial bank. I need to stick the word commercial in there, because it wouldn’t be true of investment banks. Morgan Stanley, years before, had been given permission to do a similar such thing, but we were the first western commercial bank given permission by the party to enter into a joint venture with a Chinese commercial bank. Our status meaning that permission and the banking license that went with that was as good as gold when we got it. A lot of people would have liked to have had it, and I’m sure we could have sold it for a pretty penny. Having said that, by the time SVB disappeared, which was a year and a half ago, on the one hand, our joint venture bank in China was, if not flourishing, certainly doing well enough to be desirable. On the other hand, relations between the US government and the Chinese government were at such a low ebb and continue to be, that nobody would have liked to have had it so when SVB was taken over by the regulators in the US in March of 2022 the regulators disassembled the bank in all of its parts and put them all on the auction block. And the US commercial banking operation was snatched up almost immediately by a bank from North Carolina Culver citizens and then other parts of the bank were bid on in the fullness of time. To the best of my knowledge, there is only one part that was never bid on by anybody, and that was our 50% ownership in the joint venture in China. And as a result, I think that the Chinese government, understandably, I can’t fault them for this, gave up on its being purchased by anybody and simply absorbed it about five or six weeks ago into our joint venture partner. So it just disappeared. Rod,

Gene Tunny  29:40

so the bank continues, right, okay, but the the SVB stake is gone, okay. Can I ask what you meant? You talked about control by the officials or the the Chinese? What? What did control involve? What are some, some examples of that?

Ken Wilcox  30:00

That I’ll speak about control in three different ways to give you a better sense, the first thing I want to say, which is arguably the most important, is that when we they granted us the license, meaning we talked about it for two years when I moved to China, we began putting the parts together. That was at the beginning of 2011 we finally, actually got the banking license at the end of 2011 so it took almost a year to put it once I was on the ground, it took almost a year to put it together, and putting it together mean, meant creating a bank from scratch and hiring people to fill all the positions. So by October of 2011 we had 62 positions filled. I believe there were only two or three Americans, I being one of them, the rest were all Chinese nationals. We finally got that, that license, the banking license. But when we got the banking license, they told us, the government told us, we’re so happy. This is a wonderful day when you get your banking license today. It’s a big success for both of us. However, there’s one thing that you probably aren’t going to like, but not don’t worry about it, and that is, there’s been a law on the books now since the end of the Mao era. You know, Mao was from 1949 until 1976 he basically dismantled the banking system. There were no banks in China for all that period. Then Deng Xiaoping came to power, late 70s, early 80s, and he ordered the RE establishment of the banking system. So what they told us in October of 2011 is, you know, we’re sorry that this is the way it is, but there’s a law in China that’s been around since Deng, and the law says that if there’s any new bank, and that your joint venture Bank is a new bank that has any foreign ownership, and your joint venture bank has foreign ownership because 50% of it is owned by SVB, and only 50% of it by the Chinese government. That new bank cannot use Chinese currency for the first three years. So that is definitely a form of control to the extent that we really didn’t have any business to do for three years, it would be gene like somebody saying to you, we’re so happy we’re giving you a license to open a restaurant, but sadly, and we’re sorry, this is the case. We wish we could undo it, but sadly, you’re not going to be allowed to be allowed to use food for the first three years, because without Chinese currency, there wasn’t much we could do. And so that was that is a major form of control, correct. The second thing that I will mention is that the situation in China is different from the situation in the US when it comes to banking licenses. If you get a the Federal Reserve or the Controller of the Currency granted you a banking license, you could do anything any other bank could do, starting on day one. And what I found out in November, in October of 2011 is yes, we got this banking license, but all it permits us to do is to call ourselves a bank, have a front door and welcome people to come in. It doesn’t allow us to do any banking business, per se, meaning, even if we had been allowed to use renminbi, Chinese currency, we couldn’t have opened deposit accounts, we couldn’t have made loans, we couldn’t have exchanged currencies, we couldn’t have done anything, because every single discrete banking activity requires A separate and discrete license. So to run a bank like ours, which is be true of almost any other bank for that matter, would require 2030 licenses. We by the time we disappeared, we still didn’t have all 2030 licenses. So that’s another form of control, correct? Yes, yes. The third thing I would say is the Federal Reserve came into existence a little over 100 years ago, I think 115 years ago, and in the last 150 years, let’s just say it developed a. Let’s just say, arbitrarily, this is a made up number, but 1000 regulations for banks. If the Federal Reserve has 1000 regulations for banks, the CBRC, which was then the regulator in China of banks, has 50,000 regulations, and they’ve only been in existence since 2000 and either one or two I forgot which so in, you know, in a little over a decade, they developed vastly more regulations than our Federal Reserve was able to develop in over 100 years. And interestingly, we had to report to the Federal Reserve about monthly. We had to report to the CBRC, our joint venture bank in China had to report to the CBRC daily. It was like running a McDonald’s where every night, you plug in the information of the day and it goes immediately to Chicago, where it’s interpreted, and then directions are shot back to you the next morning. And that happens daily in McDonald’s, and that happens daily with banks in China. So that’s a third level of control, which it’s utterly mind boggling, isn’t it? Yeah,

Gene Tunny  36:21

it sounds mind boggling. It’s quite, quite extraordinary. Just want to understand what did they end up getting out of it? Or like this, I get the sense that you think that the SVB got it, didn’t get the as good a deal as it as it could have, or that there was, you know, the the Chinese took advantage of SVB in a way, what did they end up getting out of it that you think was unfair in a way.

Ken Wilcox  36:54

Let me steer clear of words like unfair. Okay, although I feel that way down deep, don’t want to use that word. I this was. This hearkens back to what I said at the beginning about my original title, one bed, two dreams. Yes, our dream, I can tell you what our dream was, very brief. We wanted to be, and were until we disappeared a year and a half ago, we wanted to be the most important player in the financial services arena, with respect to technology companies, and in particular, early stage venture backed technology companies. And we fundamentally achieved that we had about 60% market share in the US, and we had growing market share in innovation centers around the world. And we felt that innovation is a global industry. Unlike many other industries, you can have a mining industry that’s fundamentally local. You can have a farming industry that’s fun, agricultural that’s fundamentally local. But technology is global, inherently global. If you’re cutting edge, you have to be cutting edge everywhere, because technology is an abstraction, and as you well know, it travels around the world. No president can build a wall high enough to stop it. So that’s the role we wanted to play. And the other thing, of course, was we were hoping to make money for our shareholders. So that was our dream. What was their dream? Their dream was to understand our business model and how it worked, and that was first and foremost their dream. They didn’t, I don’t think they cared one wit how much money they made off us. I think they simply wanted to understand our business model. I think we were a great disappointment to them, because with by the end of the first year, I was able to discern that they had been operating under the mistaken perception that we had an algorithm that would enable us to differentiate between early stage technology companies that would ultimately be successful and those who wouldn’t. And when I, when they accused me at the end of the first year of bad faith because I hadn’t disclosed the algorithm when I explained to them, you know, I’m I’m shocked that you would think that we don’t have an algorithm. Ours is good old fashioned hard work and pattern recognition. To be a lender in our bank, it takes about 10 years. You have to go through an extensive apprenticeship, and that’s the way it works. There’s no algorithm. They were shocked in the same way that I was shocked. I. Uh, so that we were a disappointment to them, I think, and I think that that caused them to become increasingly less interested in our success as time went by. But that’s the the difference I would do want to explain one more point in time, because it’s so pertinent to the experience, and that is that when I found out in October of 2011 that we weren’t going to be able to do much business in the next three years anyway, because we wouldn’t be able to use, um, Chinese currency, I assigned what, what few banking activities we were able to engage in to other people, and I spent three years trying to find a path to Xi Jinping, because ultimately, in a society as authoritarian as the PRC, big decisions emanate from the top all the way down. And if anybody was going to give us an exception to allow us to begin using renminbi, it would have to come from the likes of Xi Jinping. So I sat down with myself and charted several paths from my humble station up to the top and worked those paths for three years, and I made some progress. There’s evidence that I made progress and that my plight and my story was known by people at the very top of China by the end of the three year period. However, I did not succeed in getting the exception. But here’s what did happen after three years, the government, slash party, came to me again and they said, this is such a happy day. Everything’s a happy day. That’s such a happy day because this is the day we can grant you permission to use renminbi, so it’s what we’ve all been working toward. And then they said, By the way, there’s one other request. We admire your business model so much that we want we’re starting next week, a brand new bank here in Shanghai, and we’re going to use your business model. And would you mind spending some time with the management team of this new bank, helping them to understand some of the things that they were not able to understand? Why? Watching you fundamentally doing nothing in the last three years? Yeah, so that’s how it played out.

Gene Tunny  42:45

Yeah, yeah. Go ahead.

Ken Wilcox  42:47

Let me just say one other thing, and that is when we got the license in October of 2011 they said to me, um, it it’s sad that we can’t let you use renminbi, but you can do what we would do, meaning here in China, we all help each other because we’re trying to succeed as a country. And you can teach your business model to Chinese banks in the next three years. That would be a good use of your time. And we will. We know that you’ve got a heavy burden with these 62 employees. We don’t want you to lose too much money, so we’ll give you subsidy for the next three years, not enough to be profitable, but enough to lose as much as you might otherwise. And they were constantly in the further the three year period, asking me to send groups to different banks in China to teach them how to how our business model works, so that they could begin to emulate it as quickly as is possible. And frankly, I wasn’t willing to do that. That would be what I call, in my book, The Green Hat award. And what I mean by that is there’s a belief, a common belief, in China, that you men shouldn’t wear green hats, because if you wear a green hat, it indicates to others that you’re being your wife is cheating on you, and I felt they should be wearing a green hat, because I I gotten our board support in building this new bank in China, and it was really so that I could teach my competitors the our business model, with which I hope you see the connection, if you don’t just uh, ignore

Gene Tunny  44:47

it, yeah, yeah. I mean, it’s, uh yeah, it’s extraordinary. So they’re wanting to, wanting you to teach competitors of of the bank, it’s just bizarre.

Ken Wilcox  44:58

Honestly. Faci. Board and say I was I taught a whole bunch of competitors how to use our business model. And so I want to underscore one thing you haven’t asked, but I’ll answer anyway. And the one thing I want to underscore was it didn’t work, but I really valued the four years in China was exhilarating. It was fascinating. With the most interesting four years of my life, my wife would say the same thing, that’s on the one hand, on the other hand, I do believe that the Chinese Communist Party is beyond a shadow of a doubt the most problematic business partner, joint venture partner that you could imagine? Yeah. Oh, it was a very mixed experience.

Gene Tunny  45:52

Yeah, I can I can understand. I’ve had a guest from Arizona State University on the show before, Alan professor, Alan Morrison there, and he’s written a book enterprise China. And he, you know, we talked a bit about the specifics of it and the involvement of the party and in businesses across China. And, yeah, similar, similar theme to to your book, I know you call it something different, don’t you call it, is it China rink you call the model,

Ken Wilcox  46:21

is the phrase that I use because think about it this way, and I’m sure it sounds exactly like what your other acquaintance in Arizona is pointing to. Think about it this way. If Cisco goes to China, it’s hardly likely that any other American technology company is going to assist Cisco in its attempt to compete in China, and the US government is unlikely to assist Cisco in its attempt to compete in China. I just picked Cisco arbitrarily, but Chinese banks sometimes help each other, and the Chinese government definitely steps into this fray, and through its many levers, helps Chinese companies succeed when we were, when I was at the absolute low point, thinking, this is never going to work, I had been, by the way, by way of background, I’d been on the board of the San Francisco fed for seven years, starting somewhere around 2005 I was on that board. And even after I went to China, I went back once a month for a day to attend those Federal Reserve Board meetings. So when I was at a low point in China, sort of midway through the four year period, I went during one of my monthly visits to the Fed, I took the opportunity to talk to the people in charge, and I said, Well, I don’t understand why. In 2011 I believe it was you granted three Chinese banks licenses to operate in the US, and they’re allowed to use American currency. Why on earth aren’t we? Aren’t we reciprocating another word for tap? And you know what their response was? Yeah, that’s not our job. You chose to go on your own. We didn’t send you, and our job is to ensure the safety and soundness of the American banking system. It’s not to succeed in China, or it’s not to discriminate against Chinese banks in order to balance the equation. And that say that in a means burdened way, it’s just there, yeah. So it is different, yeah, yeah,

Gene Tunny  49:04

absolutely. Ken has been a great conversation. I’ve learned a lot. And, yeah, it was good to explore your experience. I mean, I could probably talk to you for another hour, but I’m gonna have to, I’ll have to wrap it up, because you’ve got, you’ve got things to do, and for sure. And, yeah, it’s been, it’s been amazing. I think there’s that bigger conversation about policy toward China, and there’s that whole notion of decoupling and all that. And now there’s me, there’s very, you know, there’s the debate about trade policy towards China, but that’s, you know, that’s another, an issue for another another day, I suppose. Is there anything else you’d like to mention before we wrap up? Please? Ken, no, I

Ken Wilcox  49:48

think I’ve pretty much said it all. I very much appreciate the opportunity. We are in somewhat of a pickle here in the US. And for that matter, in Australia, because we are not withstanding the disengagement that we believe we’re executing right now. We are inextricably tied up with China and undoing those those ties is is not an easy thing. It’s an extremely complicated thing.

Gene Tunny  50:28

Exactly. I think that’s a great point to end on. Very good. Ken Wilcox, author of The China Business conundrum. I’ll put a link in the show notes to your book. I recommend people read it, because it’s great. Yeah, I love that brain hat story, or that mention of that and the guanxi learning about that as well. That was that’s been very useful, very good. Ken. Thanks so much for your time. Hope the book sales go well and yeah, hopefully we’ll connect sometime in the future.

Ken Wilcox  50:57

Thank you so much. I really appreciate the opportunity. Good luck to you,

Gene Tunny  51:02

right? Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explored.com or a voicemail via speak pipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week. You music.

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

Abundance Mindset: Exploring the Super Abundance Thesis w/ Marian Tupy, Cato Institute – EP258

Marian Tupy, a senior fellow at the Cato Institute, discusses his book “Super Abundance” with Gene Tunny. Tupy argues that resources are becoming more abundant relative to global population, a concept he calls “super abundance.” He explains that human ingenuity has led to cheaper commodities over time. Tupy refutes Malthusian predictions of resource scarcity, citing examples like the Haber-Bosch process for synthetic fertilizer. He also addresses environmental concerns, emphasizing that economic growth and technological advancements can mitigate issues like ocean and air pollution and resource depletion.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About this episode’s guest: Marian Tupy, Cato Institute

Marian L. Tupy is the founder and editor of Human​Progress​.org, and a senior fellow at the Cato Institute’s Center for Global Liberty and Prosperity.

He is the co-author of the Simon Abundance Index, Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet (2022) and Ten Global Trends Every Smart Person Should Know: And Many Others You Will Find Interesting (2020).

His articles have been published in the Financial Times, the Washington Post, the Los Angeles Times, the Wall Street Journal, The Atlantic, Newsweek, the U.K. Spectator, Foreign Policy, and various other outlets both in the United States and overseas. He has appeared on BBC, CNN, CNBC, MSNBC, Fox News, Fox Business, and other channels.

Tupy received his BA in international relations and classics from the University of the Witwatersrand in Johannesburg, South Africa, and his PhD in international relations from the University of St. Andrews in the United Kingdom.

Source: https://www.cato.org/people/marian-l-tupy 

Timestamps for EP258

  • Introduction and Overview of the Podcast (0:00)
  • Explaining the Concept of Super Abundance (2:30)
  • Methodology and Stylized Facts (6:48)
  • Julian Simon and the Bet with Paul Ehrlich (9:46)
  • Future Prospects and Human Ingenuity (12:45)
  • Environmental Concerns and Degrowth (22:59)
  • Population Growth and Resource Use (33:11)
  • Final Thoughts and Future Prospects (34:08)

Takeaways

  1. Tupy argues that human ingenuity continuously expands the resource base, making resources more abundant even as populations grow.
  2. The concept of “time prices” shows that resources are becoming cheaper relative to wages, supporting the thesis of super abundance.
  3. The famous Simon-Ehrlich bet demonstrates that commodities became cheaper over time, disproving doomsday predictions about resource depletion.
  4. Technological advancements, such as desalination and agricultural productivity, are key to sustaining resource abundance.
  5. Economic prosperity and technological innovation are essential for environmental protection.

Links relevant to the conversation

Marian’s book Superabundance:

https://www.amazon.com.au/Superabundance-Population-Growth-Innovation-Flourishing/dp/1952223393

Simon–Ehrlich wager Wikipedia entry:

https://en.wikipedia.org/wiki/Simon%E2%80%93Ehrlich_wager

Regarding the question, “Is it true that the majority of plastic in the oceans comes from Asia and Africa?” see:

https://www.perplexity.ai/search/is-it-true-that-the-majority-o-3aYOSMTyT6m9CcULDm7Iug

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Transcript: Abundance Mindset: Exploring the Super Abundance Thesis w/ Marian Tupy, Cato Institute – EP258

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Marian Tupy  00:03

The air in western rich countries is now cleaner than it has been since before industrialization. If you look at the Yale index of environmental protection and then you compare it with GDP per capita. If you combine these two statistics, what it shows you is a very strong correlation between income per capita and Environment Protection.

Gene Tunny  00:35

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. Today, I have a fascinating conversation with Marian TUPE, senior fellow at the Cato Institute, and co author of the book super abundance. Marian dives into an optimistic view of the future, highlighting how human ingenuity has consistently overcome perceived limits on our resources, even with a growing global population, we delve into the famous Simon Ehrlich wager with Marian, explaining how exploration and innovation mean that we continue to defy Malthusian predictions of decline. Toward the end of the episode, we shift gears and discuss migration, exploring its impacts on housing affordability, public service delivery and social cohesion. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored. Listeners. Details are in the show notes. Okay? Without further ado, let’s dive into the episode. I hope you enjoy it. Marianne TUPE, welcome to the program.

Marian Tupy  02:14

Thank you very much for having me.

Gene Tunny  02:17

It’s excellent to have you on so you’ve written a really interesting book called super abundance, and it’s on an issue that I think about a lot, which is on the Limits to Growth, whether there are limits to growth, whether we need to move to something called degrowth, which is becoming popular in certain circles. To begin with. Marion, could you tell us a bit about what is this concept of super abundance that you have? Please?

Marian Tupy  02:49

Well, super abundance is not just name of the book. There it is. It is also a it’s got a technical term, which is to say, when resources are becoming abundant at a higher rate than population growth. Because, why? Why bother about the link between population growth and and resources? Because, because, when people think about population growth, they usually think that there is sort of a fixed pie of resources, and the more people you have, the fewer resources you end up with. So you know, if you have 10 people at dinner, you know you have so much food to go around. If you bring 100 people to dinner, everybody has to do with a small plate, because, you know, more people are going to exalt resources more quickly. But of course, humanity is different. Humanity can grow the size of the pie. Humanity can bring additional resources to dinner, so that even 100 people can get fed, even 1000 people can get fed, or, for that matter, 10 billion people can get fed. But anyway, the point is that for the longest time, people were worried that as population increases, we will run out of resources. And in fact, what we found was that resources are becoming cheaper. And in fact, abundance of resources increasing at a faster pace than population. That’s what we call super abundance,

Gene Tunny  04:05

right? Okay, so what sort of resources do you mean are becoming cheaper? This is the majority of commodities you studied. Could you tell us a bit more about that please?

Marian Tupy  04:15

Yeah, I guess it’s useful to actually start by defining resource, if we can. You know, people talk a lot about natural resources, but I think that’s a bit confused. I think that you should really start by thinking about natural endowment, or you should talk about raw materials. You know, raw materials such as whatever minerals in the crust of the earth, metals, things like that. And when you apply human intelligence to raw materials, you end up with a resource. So take just soil, you know, it’s a it’s a raw material. It’s it’s that. But when you apply human ingenuity, such as, you know, using it in order to grow crops. Then the resource becomes wheat, right? And so in the book, we look at hundreds of different types of commodities, really, which is to say food, fuel, minerals, metals, and even, actually some services. But that’s that we can talk about it later. But the bottom line is that we look at, we could look at traded commodities, anything from uranium to zinc to iron to wheat and barley and oil and natural gas. Basically, you know, we start with the big 50, which are, which are measured, or rather, which are, which are being tracked by the IMF and the World Bank, and then we expand it going back 170 years. But yes, so, so there are these raw materials, and when you apply human intelligence to them, you get resources. That’s essentially how we define resource.

Gene Tunny  05:54

Okay, so have you established some stylized facts about the prices of these resources? Is that the main point of the book, and can you just go over that again? I just want to make sure I understand is, are you saying there’s a general tendency for them to become cheaper, or is it on average, they’re becoming less expensive, or is it the majority? Or is it a just one, a bit bit more to understand. Is it? I mean, are you trying to are you proclaiming a general law of super abundance? I just want to understand what, what your thesis is exactly.

Marian Tupy  06:27

Yeah. So usually, when people look at resources, they look at a real price of resources, meaning, you take a price of resource in, say, 1900 you compare it to a price of resource in 2000 you discounted for inflation, and that tells you whether something has gotten more or less expensive. Now, we were dissatisfied with this kind of analysis for a simple reason. We wanted to take the resources back in time as much as possible, and we wanted to include as many countries as possible. Now, when you start looking at resource abundance from a global perspective and over hundreds of years, you quickly run into a problem, which is, you know what happens to exchange rates? You know what happens to inflation rates? What if you don’t have inflation rates in 1850, or 1900 you know, how do you deal with it? And so we came up with a different methodology, which is called time prices. Basically, what we look at is nominal wage per hour, and we look at nominal price of a resource. So let’s say, let’s, let’s give a stylized example, a pound of beef costs you. Let’s say that you are making $20 an hour in the United States, and a pound of beef costs $20 Okay, so a pound of beef will cost you an hour of later, but if in 50 years time, the price of beef may go up to $40 an hour, but you are now making $80 an hour, then now you have two pounds of B for an hour of work. So everything we do, we do in terms of time cost or time price, it’s really the nominal price of something relative to nominal wage that you are making at the time of the purchase. And the beauty behind time prices is that inflation doesn’t matter because you are only dealing with nominal prices and nominal wages. So it doesn’t really matter whether the inflation is 10% or 1,000,000% over the intervening period, because you’re looking only at nominal prices, then it doesn’t really matter. And also, an hour of work is the same in Australia as in the United States, as in China. So that way you can basically make these comparisons between different countries over different periods of time, in in a in an intellectually honest and methodology methodologically sound way. Did that make that make any sense? Yeah,

Gene Tunny  08:56

yeah, that that does make sense. Understand what you’re what you’re doing there. I mean, I think the general point you make is a is a good one. And I mean, you go back long enough. I mean, you go back to the I mean, I remember when I was in school and we were hearing about the limits of growth and all of that, and and then that was, you know, before we had the rise of China and India and, you know, massive expansion of global trade world, GDP. More recently, we’ve had peak oil. That was prior to the financial crisis, that that proved not to be really something that we’re at yet, or at least doesn’t, we don’t appear to be at it. And so, yeah, I guess I’m very sympathetic to the argument about about super abundance. Can I ask? Is this a continuation of the work that Julian Simon has done? Is this because I see on your CV or your bio, you’re part of something called the Simon. Project. Could you tell us what that is and whether this is continuing his work? Yes, yes,

Marian Tupy  10:05

yes, absolutely. So. Julian was a, obviously, a huge inspiration, but so he was actually a senior fellow at Cato before I joined the Cato Institute. He died in 1998 but he was senior fellow there, so we never met. But what I wanted to do back in 2017 is to look at his work and update it, you know, to the present. And I found that his bet with with Ehrlich, he would still win. In other words, commodities continued to get cheaper, at least the ones that Julian looked at, but I was using the old methodology. I was just looking at real prices of commodities. And my co author, Gail Pooley, got in touch with me, and he says, well, let’s turn them into time prices. Let’s look, let’s look at the price of commodities relative to wages, how much more you can buy for an hour of work than your ancestors could. And then we published a paper in 2018 with this new methodology. And indeed we found, once again, that Julian was right. And then we decided to turn into a book which goes back to 1850 and basically what we find is that commodities, relative to wages, are constantly getting cheaper. If it’s a long enough period, everything is getting cheaper, including gold. The only thing that continues to become more and more expensive over the centuries is human labor, essentially the human input. And we might as well talk about Simon and Ehrlich wager, right? Yes, yes, yes, yeah, please. So Julian Simon, since we mentioned him, he was an economist at the University of Maryland, here in the United States, and he was basically looking at the data. And he was noticing that things were getting cheaper, even though population was expanding whilst over in California, at Stanford University, Paul Ehrlich, who is still alive, he’s 93 years old now, was predicting doom and gloom. He was basically saying, you know, as population increases, we are going to run out of everything, and there’s going to be mass famine. And, you know, starvation of hundreds of millions of people. And so they had a bet between 1980 and 1990 on the price of five commodities, nickel, tungsten, tin, chromium and copper. And basically, they made a futures contract for $1,000 and when the period came to an end in 1990 Ehrlich had to send a check for $576 to Simon, because commodities became 36% cheaper. Had Simon implemented our methodology, he would have won even bigger. He would have won by about 40, 42% rather than 36

Gene Tunny  12:45

very good. Yes, yeah, that’s, I’ll put a link in the show notes to that, that wager. Yep, I remember that because I think that was still very when I, when I first started learning economics, I think that wager had just, it had just been decided, and yes, it Yeah, certainly in Simon’s favor. But yep, I mean in terms of this idea of the limits to growth, or the, you know, how many earths we need to support ourselves, which is something I think you and your co author, Gail, were were reacting against, because in the blurb for your book, it goes generations of people have been taught that population growth makes resources scarcer in 2021 for example, one widely publicized report argue the world’s rapidly growing population is consuming the planet’s natural resources at an alarming rate. The world currently needs 1.6 Earths to satisfy the demand for natural resources, a figure that could rise to two planets by 2030 now what I’m interested in, Marion, have you thought about like your analysis? You’ve looked at it over. Was it 150 years or a couple 100 years? 170 170 What are you by the way,

Marian Tupy  14:05

it’s 170 because that’s, that’s all the data that we could get. Yeah. Gotcha, yeah.

Gene Tunny  14:09

What are your thoughts on where we’re going? Because we’re still, I mean, up until, say, 2070 or 2080 we’re still going to have growing global population. We still have rising living standards in well, we’ve got convergence catch up in China, India, other emerging economies. Do you think this super abundance thesis will hold despite this continuing economic growth? Or do you have any? Do you have any concerns? How confident are you in the this super abundance hypothesis?

Marian Tupy  14:47

I’m 100% confident I’m not investing in commodities, and I wouldn’t, unless you know I think that there would be a good hedge against inflation. But. No, I don’t think that commodities are going to, you know that they are, that they are going to somehow explode in price. Now, before I answer that question, let me make a couple of points. So the world’s population is going to peak at about 18, sorry, 2065 maybe 2017 and it’s going to start declining. But the question over population growth and resources that’s remains relevant, even if population plateaus and even starts declining, because the expectation is that as we become richer, we are going to be using more resources. We are going to be consuming more resources. So it’s very important to understand the exact relationship between population growth and resource abundance. But but my prediction is that even if that, even if population continues to grow, or even if plateaus, or even if we just start consuming much more resources than we currently do, we are still going to have more abundant resource based and then we currently do for a simple reason that human ingenuity just doesn’t stop. I mean, human ingenuity depends on population growth. So the more people you have, the more ideas you are actually going to have in order to increase your resource base, right? So as I said, you know, in the olden days, maybe you could produce 40 bushels of corn or wheat per acre of land. Now you have 200 bushels of wheat per acre of land. That’s human ingenuity that is applying scientific methods, GMOs, genetic modified organisms, that is applying modern fertilizer, modern watering techniques and whatever else, and pesticides and fungicides in order to produce more food. That’s, that’s, that’s really, that’s all comes from the human mind, right? And so the more people you have, the the more opportunity you have to come up with new ideas. So what are the new ideas? One we can increase the supply of resources simply by discovering new fields, or, for example, oil, gas or whatever else, much of them continues to be unexploited, and certainly on much of it hasn’t even been properly, properly. You know, checked for for resources, we don’t really know how much oil or gas we have, how much iron we have, how much, how much other metals or minerals we have, because we have only explored a tiny percentage of the world. Secondly, we can of the planet. Secondly, of course, we can increase our technology so it enables us to get to resources which were previously uneconomically expensive. So you know, many of the oil fields and gas fields which we are exploring and exploiting here in the United States were prohibitively expensive under the old drilling methods, but are perfectly economical based on fracking, right? Recycling is is another way of doing it. Dematerialization is a great way of doing it. You know, if we can, if we can, if we can do more with less meaning. 20 years ago, you walked into any, any hotel room and it would have a thick copper cable running from the wall to your computer. That’s the only way that you could get on the internet. Now it’s been completely dematerialized. We can do that functionality without actually using any materials whatsoever. We can dematerialize our car fleet. For example, if we can have cars which are powered by AI, cars are 90% of the time cars are not being used. So basically, we could get rid of 90% of cars, including all the metal and plastic that goes into them, and simply have autonomous vehicles picking us up when we need it. So that’s another way of going around the problem of material use. So efficiencies, you know, we can have relative as well as absolute efficiency. So, you know, a can of Coke or water or whatever else uses much less materials than it used to in the past. But also when, when, when you look at very sophisticated economies such as the United States and the United Kingdom, what you observe is that the total, the absolute amount of resources they use every year in order to produce GDP, is actually decreased things. So there has been a certain level of decoupling between resource use and economic growth. So that’s that’s also important. So there are many different ways in which you can actually increase your resource base, but it all requires innovations. It requires new ideas that are born in human mind.

Gene Tunny  19:46

Yep, gotcha. And I mean, that requires that we have a, you know, a good education system, too. And I mean, well, that’s another that’s an issue for another, another podcast. But I was,

Marian Tupy  19:55

in case, I was, I was going into too many details. Let me put it this way. Yeah. Today’s population is 8 billion people. Half of us would be dead if it if it wasn’t for artificial synthetic fertilizer. Our ancestors, 200 years ago, used horse manure, and they used even human excrement. They would compost and do all sorts of other things in order to produce very little yield in agriculture today, what we are using is ammonia, which is essentially a compound made from natural gas. We are using natural gas in order to create artificial synthetic fertilizer, which enables our crops to grow very fast and very big and and who would have thought that you can use natural gas in order to fertilize our crops? But haber bosch discovered this process in the early 20th century, and ever since then, half of humanity has depended on this kind of fertilizer in order to feed humanity. But it was born in human mind.

Gene Tunny  20:56

Oh, exactly. And that’s, that’s one of the points that I think Ed Conway makes, in his book, material world, a substantial story of our past and future, which I’d recommend if you’re listening. And do you want to learn more about what’s been happening with our use of resources and materials, that that book’s absolutely fascinating. And, I mean, I’m sure yours will go along that. I mean, you’ve, you’ve got some great reviews already on on your book, which is terribly just on the I’d like to talk about this issue of exploration, because, yep, that’s, that’s one of the ways that we get around this, this constraint, because of it as if things do become scarcer, then the price increases, and that sends a signal that makes it economic to mine less, you know, deposits that are of that are harder to get to. It makes it economic, or it can support exploration activity. Have you crunched the numbers on to what extent is your super abundant story being driven by, you know greater discoveries. You know exploration, finding more reserves of resources. To what extent is it driven by increases in the efficiency of extraction? Or you haven’t, no okay, because

Marian Tupy  22:19

we didn’t break it down like that. And I don’t even know if anybody has done that, but, but the main point of the book is is things are getting cheaper because of human innovation.

Gene Tunny  22:32

Yeah, yeah. And so the other option is that it could be because of general productivity, the productivity more broadly, because we’re becoming wealth, more productive, wealthier,

Marian Tupy  22:44

sure, but of course, but productivity is just another word for innovation, right?

Gene Tunny  22:49

Yeah, yeah, yeah, absolutely, yep. I think it’s a valid hypothesis. Before we sort of wrap up, I just want to ask whether you think there are other constraints on growth like this is something that I’m confronted with. You know, I generally think, I think this whole degrowth argument, I’m not a fan of it. I’ve, I’ve argued against it in various places, so I’m not a supporter of it. What the degrowth advocates will argue is that we’re reaching these planetary boundaries. I mean, one, we have concerns about climate change, and that’s in their view, that’s leading to, well, there’s the increase in temperatures, there’s the concerns about heat stress and whether humans can cope with that. There’s concerns about, I mean, all of the concerns about what it means for agriculture and and also natural disasters. So there’s that, there’s also, there are concerns about ecological collapse, in some cases. To Have you thought about those issues at all. Marion, are you concerned? Do you see any limits to growth coming from from other issues, some other environmental issues?

Marian Tupy  24:00

Yes, so I try to think about it as much as I can, as time permits. But okay, so we need to distinguish between what I would call the primitive version of degrowth, which is the claim that we are going to run out of oil, or we are going to run out of pound or something like that, and then a more sophisticated version of degrowth, or the degrowth criticism, which would be something like, we are going to poison our oceans, we are going to run out of the biosphere. We are going to kill all the animals, etc, etc. Now, this is a huge subject, and I’m very happy to come on to your program in the future, but, but let’s, let’s take as many as we can within a within a reasonable time window. Let’s think about plastics in the ocean, and let’s think about pollution of the oceans. 90% 95% of all plastic in the oceans comes from eight rivers, all of them are in. Asia and in Africa. Two are in Africa. Six of them are in Asia. What does that tell us? It tells us that when a society is rich, such as Europe, you know, Australia, North America, people are so rich that they insist on living in a clean environment and being protect and protecting their environment, which is why stuff doesn’t plastic and other poisons do not emerge from our rivers into the oceans. It’s the poor countries that do that. So the answer to having clean oceans without plastic is actually economic growth and prosperity, which will allow Asia and Africa to implement the kind of environmental policies that we have in order to prevent poison from running into the oceans. Let’s look at a second subject, which could be something like the biosphere. So I’m an environmentalist as much as you are, and probably anybody else, in a sense that we like clean environment, we like animals, we like plants. We don’t want to destroy the Earth. I love nature. So now what is, what is the best way to protect the biosphere? What is the best way to ensure that there is plenty of acreage in the world where animals can thrive. Well, the best way to do it is to have hyper efficient agriculture so that we can produce more food on fewer and fewer acres of land. If 8 billion people in the world today lived on the same amount of land as our hunter gathering ancestors, we wouldn’t need one planet, we would need 10 planets, right? But because we can produce a lot of food on acre of land, and then we can produce twice as much food in 50 years, and maybe another twice as much in another 50 years, that should enable us to feed more people on less and less land, which means that we can return land back to animals. Jesse asubel from Rockefeller University once calculated that if the world’s farmer, the average world’s farmer, became as productive as the American farmer, we could return the land mass the size of India, back to nature. So it’s all about agricultural productivity, right? The more we can make our land, the better we are water. There are concerns over running out of out of fresh water. I’m not concerned because I know that this Desalination is absurdly cheap. Israel now recycles 98% of its water and it desalinates the rest. The ideal version of desalination is to combine desalination with solar or wind power. And in fact, Israel not just supplies its own water, but it actually supplies palestines and Egypt and Jordan with fresh water out of desalination, recycling. What else is there? Fresh air. Sorry, clean air. So this is something that obviously requires global action, because, you know, there are no property rights in in the atmosphere. However, I would like to point out that the air in western rich countries is now cleaner than it has been since before industrialization. So the particulate map in the air has been declining. And in fact, if you look at the Yale, the Yale index of environmental protection, and then you compare it with GDP per capita, if you combine these two statistics, what it shows you is a very strong correlation between income per capita and environmental protection. So we talked about, you know, animals and plants preserving biosphere, but by returning more land to nature, we are talking about our oceans. Now, another thing which we could talk about is overfishing. This is something that a lot of people are concerned with, and here the answer, of course, rests in aquaculture. Already, 50% of all the fish that are being consumed around the world are being grown for the specific purpose of being eaten by essentially seafood farmers. Right? These are not fish from the wild, and obviously what we want to do is to get to 100% as soon as possible. So there are all of these different ways in which we are supposed to bump against planetary, planetary boundaries, but, but when you look at again human ingenuity and the way that we’ve been able to tackle such things as, I don’t know, desalination or aquaculture, agricultural production, it. Gives you hope that we’ll be able to do this in the future. Just more of it.

Gene Tunny  30:06

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Gene Tunny  30:41

now back to the show. That figure you gave about plastics in the ocean that was striking. 95% of the plastics in the ocean come from eight rivers in Asia and Africa. I mean that that’s that’s extraordinary. I’ll have to look that up, because that’s a I know a lot of people who’d be, who’d be fascinated by that, and I know my the producer of my podcast, Josh, has asked me about that Pacific Island garbage patch in the past, and has said I should cover it on the show. So it’s, it’s interesting to know what the source of those plastics, predominantly is. Do you remember where that where that comes from is that one of Bjorn Lomborg figures. Would you know this?

Marian Tupy  31:29

I can’t remember, and I sure as hell hope that I’m I’m 90 How about this? I’m 95% right that it’s 95% of plastics out of plausible. We can

Gene Tunny  31:40

go, it sounds plausible, because I imagine that, yeah, because when you think about it, yeah, be we, like in Brisbane here, we’ve done a lot of work cleaning up the Brisbane River, so it looks a lot better than it did 20 or 30 years ago. So, I mean, it’s, it’s plausible. I mean, I know that, yeah, a lot of the environmental, uh, problems we see that, yeah, they they see more acute in those in those emerging economies. So anyway, I’ll have a I’ll have a look for that. I agree with your, your general point. The other thing that your remarks, what had brought, what came to mind in the 2000s here, we had a thing called the Millennium drought in Australia, and there were concerns that, oh, it’s never going to rain again, or we’re going to have much lower rainfall than ever. And you know that people were linking this to climate change. And then we had, and then we had record, or near record rainfall, or whatever it was, in 20, 1011, it just kept it just rained for weeks, and all the cashflows got soaked, and there’s massive flood. So Brisbane flooded. I was caught in the flood at Toowong, and, yeah, but prior to that, we were worried about water security, and we went on a recycle we built a recycle water plant, then we built a decal plant, a desalination plant at Tugan for I don’t know whether it was a couple of billion, it was a lot of money, and we, we hardly ever use it. We use it occasionally, for brief periods. It’s, it’s, it’s not, it wasn’t really required. It just goes to show you, if you, if you make your decisions based on some imagined catastrophe in the future, you can end up making some, some really bad, really bad decisions. So that was a you

Marian Tupy  33:27

I remember distinctly, I was skiing in Whistler in Canada in 2014 and, you know, the the old dogs who’ve been skiing there for, for for decades, were absolutely certain that 2014 was the last year in which it was going to snow. Because, you know, the year before there was more snow, and the year before there was more snow, and now it seemed like there was ever less snow up there. But these things are not linear. And of course, all the predictions about, you know, snow free winters, remember those from 20 years ago, all gone broad. You know, Arctic, ice free, Arctic that never happened. So, you know, the earth is warming. Planet is changing. Climate change is not a myth. It is not a lie. It is it is really happening, but figuring out what exactly is happening the exact consequences of climate change on the planet, that is much more complicated, and we certainly have time. Look, I’m not suggesting this is not a problem. What I’m saying is that the notion that we have six years left, or when, when Prince Charles was still Prince Charles, before King Charles, he said something like, you know, we have 48 months to fix the world, or something ridiculous. The point is that. The point is that a lot of people have been burned by making predictions about how the world is going to end. And we it’s not that we have five years or 10 years. We have decades in which. Need to think about maybe burning less fossil fuels, maybe having more nuclear, maybe having fusion energy, but we have time to adjust. And, you know, the world is not running out of anything, and we just have to be, you know, we just have to apply our ingenuity to fixing our problems. We have. We have fixed tremendous problems before. Let’s remember that life expectancy around the world, until recently, was 35 years. 50% of babies before the age of 15 died due to natural causes, and famines were omnipresent. 10s of millions of people died every year due to famine. We have solved a lot of problems, and there is no reason to think that we cannot solve them in the future. We are a very special animal. We can think. We can long term plan. We have reason, we have cooperation, we have trade. So you know that there’s there’s rational grounds for rational optimism. Absolutely,

Gene Tunny  36:02

very good. And it’s about ingenuity and relying on on free markets letting you know, providing the incentives for people to to innovate and to reap the rewards of their of their innovation. So very good. Mario Toby, anything else before we wrap up? I really enjoyed this conversation, and it’s a good start to the day. I’m in Australia, and it’s just it’s gone past 630 so it’s a really good start to the day for me having this conversation. Anything else before we wrap up?

Marian Tupy  36:36

I would just say I very much enjoyed my trip to Australia. You are the lucky country. Very beautiful. A lot of resources. Lovely people. Keep it going. I understand you are going to build some nuclear power stations. Is that true?

Gene Tunny  36:49

Possibly, I’m I think, I think they’re worth exploring. I’m skeptical about whether we will ever build them here in Australia. I think there’s too much of a an environmental movement here in Australia for us to ever build nuclear power. I could be wrong about that. It’s looking like the cost of moving towards 80% or 90% renewable energy, or whatever they want it to be, that’s just going to be too high. So we’re going to have to do something else that possibly could be nuclear. But just knowing the Australian, Australian politics of people, just how prominent the Greens movement is, I think it’ll be hard to get nuclear reactors built in Australia. But having said that, I mean, they could end up being the path of least resistance, or there is no alternative, because the alternative, at the moment, looks to be hideously expensive electricity due to this rollout of renewables and that are unreliable, we’re trying to build this Snowy Hydro. I don’t know if you’ve heard about our Snowy Hydro 2.0 project that that was initially supposed to cost. I don’t know. Maybe it was 10 billion. Now it’s blown out to 20 billion or so. I’ll put the right numbers in the show notes. So it’s just keeps blowing out, because I have all sorts of issues. We we ended up with one of the tunnel boring machines stuck in the rock, okay, like this is, it’s been stuck for months, and this is just this. It’s just symbolic of just how dread, hopeless this project has been. So we’re having to do these, you know, massive engineering projects to back up all of the intermittent wind farms and solar farms. And it’s just, yeah, it’s a, it’s a, well, you never know.

Marian Tupy  38:43

You never know. You know. In Europe, 10 years ago, it looked like the greens, the Climate Lobby was all powerful. They’re losing power all over the place because, basically, energy became so expensive that Europe industrializing. People’s standards of living are decreasing because energy and electricity is so expensive, and energy goes into everything. It goes into literally, it impacts the price of price of tomatoes in the shop. So you never know. We certainly see very positive changes amongst environmentalists here in the United States, they’ve now recognized the importance of nuclear. If you want to get away from, from from fossil fuels, at least to some extent. We are never going to get away from completely from fossil fuels. That’s just not possible. There is not going to be energy transition. We are just going to add new stuff to energy. We are still burning coal and sorry, we are still burning wood. So you know that’s not going anywhere but, but we can. We can. We can certainly limit it, and I’m a huge proponent of nuclear especially if we can learn to make it cheaper. So we’ll see. But certainly, congratulations on being born in such a beautiful country, and I hope that you can keep it prosperous and happy. Yes,

Gene Tunny  39:59

yeah. Yes, I hope so too. I mean, one, one thing I should note, because it just comes up with this issue of population, just if you got another second, because I did what I did want to wrap up, but I thought there’s one thing, one point you made about population before I agree with you. Over the long term, I think for any individual country, this relates to your last your concluding what, what was going to be your concluded covid, about Australia, and I think you’re generally right. I mean, it is a prosperous country. It is the lucky country. We’re facing big challenges in the short term or over the next few years, because we’ve had a massive surge in population post covid, which is related to very lax immigration policy settings that are very favorable to overseas students. So then possibly rorting of the student visas, because it’s, you know, it’s a way you can get access to the Australian Labor Market. So I think that’s one of the issues we’ve got to grapple with. I know that’s an issue in other countries too, but that would just be my one qualification to this general optimism about, you know, having a larger population, more more ingenuity, that sort of thing. So I just wanted to make that that comment, it just occurred to me. But if you’ve got any reactions to that, please, please, let me know.

Marian Tupy  41:22

I mean, the question is, the question is, what? What is the negative effect? Is it? Is it increases prices of real estate, like increasing

Gene Tunny  41:30

real estate, just general congestion, I think, an inability of public services to keep up with the the population growth, yeah, just a general feeling that the country has, the country’s changing in a way that, yeah, think things just don’t seem to work as well, or it’s not the same country as generally, not as friendly or as Welcoming as it once was that would be, that would be the, my sort of take on it, yeah. But generally I think, yeah, it’s the housing issue, where it comes up the most, but it’s congestion in other areas too, well. I

Marian Tupy  42:12

mean, obviously I think that every country has a right to decide who comes in. You know, you know, I’m very I’m very liberal on immigration, but I do think that we need to know who is coming in. Are these people posing any kind of terrorist threat? Do they have criminal records? We just don’t know, because a lot of people come in illegally. I wish we could go back to the time from 20 years ago, when you know people would come in legally, and they would go through the process of having background checks and whatever else, and if they can contribute to the economy, then so much the better. And when it comes to housing, look, if Australia cannot solve it, I don’t know who can, because you’ve got a lot of land. One thing which puzzles me is that we have stopped building new cities, which is kind of bizarre when you think about it. People used to, yeah, cities left and right. And it seems just so difficult nowadays in the West to actually start properly, start a new city. You know, there are states in the United States where the federal government owns 90% of the land. If the federal government just gave it back to the States, and the states simply said, Go forth and conquer and build new cities. You know, it could be done. But ultimately, I don’t think that the issue here is lack of land. I don’t think there are the issue is lack of resources. I think the problem here is tends to be over regulation and governments putting putting barriers in in the way of human ingenuity and human enterprise. So, you know, there’s that’s certainly the case in the United States when it comes to housing. Yeah,

Gene Tunny  43:48

absolutely okay. We might end there. I think that was a good point to end on. Barry and Tubi from the Cato Institute. Thanks so much for all your work, for a great conversation, and I’ll put a link in the show notes to your new book, super abundance looks terrific and all the best for the future, and I hope to catch up with you sometime again soon. Thank

Marian Tupy  44:09

you very much. All the best.

Gene Tunny  44:12

Righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics, explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a writing. Thanks for listening. I hope you can join me again next week.

Obsidian  44:59

Thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

UBI Experiment: Success or Failure? Insights from Sam Altman’s Trial – EP257

In this episode, Gene Tunny dives into a recent Universal Basic Income (UBI) experiment funded by Sam Altman, CEO of OpenAI. Gene explores the key findings of the randomised controlled trial and discusses whether the positive outcomes are enough to convince sceptics. Are UBI recipients more financially secure, or are there deeper concerns about its impact on labour force participation and long-term wealth? Get Gene’s balanced analysis of this major UBI trial and its broader implications.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps for EP257

  • Introduction (0:00)
  • Defining Universal Basic Income (UBI) (4:21)
  • Overview of the OpenAI UBI Experiment (8:09)
  • Positive Findings from the OpenAI UBI Experiment (13:54)
  • Concerns and Criticisms of the OpenAI UBI Experiment (21:55)
  • Financial Impact of UBI on Household Net Worth (22:50)
  • Gene Tunny’s Skepticism About UBI (34:17)
  • Closing Remarks and Previous Episode Clips (37:57)

Takeaways

  1. Mixed Outcomes of UBI: The experiment showed some positive effects, such as increased financial flexibility and well-being, but also concerning results, such as a slight decrease in labour market participation.
  2. Spending Behavior: UBI recipients spent more on necessities like food and rent; interestingly, they were more likely to help others financially.
  3. Limited Educational and Employment Impact: Younger participants showed interest in further education, but there was no significant boost in human capital or labour productivity.
  4. Debate Over Financial Impact: UBI did not lead to clear improvements in recipients’ financial health. The study found increased debt in some cases, raising questions about UBI’s long-term benefits.
  5. AI and UBI: As technological advancements continue, UBI is seen by some as a solution to technological unemployment, though Gene and some experts remain sceptical about the scale of potential job loss.

Links relevant to the conversation

Bloomberg article “Sam Altman-Backed Group Completes Largest US Study on Basic Income”:

https://www.bloomberg.com/news/articles/2024-07-22/ubi-study-backed-by-openai-s-sam-altman-bolsters-support-for-basic-income

OpenResearch’s website:

https://www.openresearchlab.org

Pete Judo’s video on UBI experiment failing:

https://youtu.be/oyoMgGiWgJQ?si=j3T-3yaEL5Rajcpw

NBER working papers on the study

The Employment Effects of a Guaranteed Income: Experimental Evidence from Two U.S. States:

https://www.nber.org/papers/w32719

The Impact of Unconditional Cash Transfers on Consumption and Household Balance Sheets: Experimental Evidence from Two US States:

https://www.nber.org/papers/w32784

Two Computer Scientists Debunk A.I. Hype with Arvind Narayanan and Sayash Kapoor:

https://youtu.be/M3U5UVyGTuQ?si=qcqSflHCf837GisA

AI can do only 5pc of jobs, says MIT economist who fears crash:

https://www.afr.com/world/north-america/ai-can-do-only-5pc-of-jobs-says-mit-economist-who-fears-crash-20241003-p5kfil

Previous episodes:

https://economicsexplored.com/2022/05/03/a-ubi-advocate-on-its-benefits-and-costs-ep137-show-notes-transcript/

https://economicsexplored.com/2022/02/13/ubi-universal-basic-income-w-ben-phillips-anu-ep126/

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Transcript: The Future of VC: Blockchain, Web3, and Emerging Markets w/ Qin En Looi, Partner, Saison Capital – EP256

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Ben Phillips  00:04

I guess looking at history, over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods, of course, where you have some fire unemployment, but generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappeared.

Gene Tunny  00:38

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. I get asked a lot about the concept of universal basic income, ubi, and I’ve had some previous episodes on it. I had an advocate for UBI in episode 137 Michael Haynes and I had an academic expert, someone who’s done a lot of modeling of the welfare system and tax system, Ben Phillips, an associate professor at ANU. He’s somewhat skeptical about UBI, and I had that conversation with Ben in episode 126, so I’ll put links to those episodes in the show notes. So it’s, it’s a concept that I’ve, you know, I’ve talked to a lot of people about, I’ve been thinking about myself, and I think it’s time for an update, because I’ve seen a few reactions online to a new UBI experiment that was funded by Sam Altman from open AI, the chat GPT company, and the results of that came out a few months ago, so in July. And now this is a really fascinating study. It’s a large scale, randomized controlled trial, a large scale experiment. So they’re using the gold standard methodology, and it’s it’s for the US. So it’s arguably more relevant, more applicable to what a UBI could achieve in the United States or other advanced economies and some other studies that have been conducted in emerging economies, some people see the experiment as a success and as supportive of UBI, and others See it as a failure. Now what is the truth? That’s that’s what I’m trying to explore in this episode. So I’ve read the results of the study. I’ve read a couple of academic papers that have been produced using rigorous techniques. They’ve been published as NBR, so National Bureau of Economic Research working papers, so very high quality research papers, and we’ll go through the results of those in the episode. My view is that this study of the UBI experiment that’s been funded by Sam Altman, I don’t think this will get a UBI across the line. There are some positive results for UBI advocates, but I don’t think they’re enough to really convince the people who need convincing that this is a good idea. And there are some, there are some results you could perceive as negative or that really raise doubts about the whole idea of a UBI. So we’ll go through those. I’ll give my thoughts on what the results mean, and I’ll be interested in your thoughts too. So please let me know. You can contact me through email or via a voice message. So the information’s in the show notes that will allow you to do that. First, let’s recap what we mean by UBI Exactly. And there are various definitions of it, but essentially it comes down to a regular payment of some kind. So it’s a, say, $1,000 a month. Is provided to all adult citizens, and it’s unconditional. There’s no work requirements, or there’s no means testing. It’s not dependent on how much money you’re making already. You don’t have to there’s no eligibility requirements in terms of, well, it’s for people who are. Are unemployed, or they’re not earning enough money, or they’re a single parent, etc. It’s unconditional, and the idea is to provide a minimum level of income. It’s often described as a flaw to stand on, or a platform to to build your life on. The people who who advocate it do they see this as something that will help people well. It provides financial security, and it will allow people to pursue education, to pursue improving their health and fitness, their their well being. It will enable people to, essentially, you know, take some time out and try to find themselves that sort of thing. And it’s something that is seen as, uh, desirable, given that we know that there are these potentially massive technological changes happening we all know about AI that really surprised us a couple of years ago when chat GPT came out. I think that was a real shock to many of us, just how how good it, it is. I mean, obviously there are some some issues. You’ve got to be careful with what comes out of it. But really it was, it was rather extraordinary. And there are all sorts of forecasts of what AI could mean, and automation, what they could mean for the level of employment, the level of unemployment. There are concerns about massive technological unemployment. So unemployment related to new technology. Then there are also concerns about, well, what does this mean for inequality? And so what we see is some people arguing for UBI as a way to to correct those, those concerns. Now I’m I’m skeptical about some of those diagnoses, so I’m less convinced by that, but I can see the logic. I can see the rationale behind why some people are are arguing for for universal basic income. Another, another argument relates to just the nature of the welfare system and how the way we’ve set it up, where you have benefits being withdrawn as you earn more money, so you could lose part of your your pension or your your unemployment benefit. If you get a job, you’ll lose that, or you’ll lose food stamps, etc. Then that can create a disincentive to actually do better, to get a job, to work harder, and it can create a welfare trap. That’s one of the reasons why they make this. They think, well, let’s just have an unconditional benefit. There’s there’s no questions asked, and it’s just for a basic level of of support. And then if you want to make more than that, if you want to live better than that, provides, then you go out and you make the money to support yourself. Okay? So that’s, that’s essentially where these advocates of UBI are coming from. In my view, that’s what I’ve interpreted. If you’ve got a different view on UBI or what you think’s driving it, then, then let me know. Drop me a line. So let’s, let’s go on to this study in particular, and we’ll go through that. So this study, as I mentioned before, it was funded by Sam Altman, the CEO of open AI. It’s a large scale UBI experiment. It ran for three years, concluding in 2024 so this year, and it’s considered one of the most comprehensive Basic Income experiments so far, it involved 3000 participants across the US. So in Illinois and Texas, 1000 participants received monthly payments of $1,000 so that’s the treatment group, and then you had 2000 participants in a control group who received $50 monthly payments. And so they’re aged 21 to 40, and the duration was, was three years. So as I mentioned before, the open AI, they’ve published a variety of findings on their website, relating to employment and relating to what what people spent money on, education impacts health care and what it means for people’s well being or their their agency. Okay, I’ll put some links in the show notes to where those results are reported. A good summary is in a Bloomberg article that I found, and I’ll also put a link to that. And the way that they summarized it is as follows. They said that, like many of the other studies before. For it, this study has found that the recipients of the UBI, they spend more to meet their basic needs and to to assist others, and they don’t drop out of the workforce, but they work slightly fewer hours. The biggest thing that that advocates of UBI are taking out of this study, and this is this is Bloomberg summary, the researchers biggest takeaway is that cash provides flexibility, and the researchers in the for the project, they said that it can be used to address recipients specific needs. It’s responsive to changing demands and creates a possibility for increased agency. Bloomberg reports the researchers resist generalizations on the Find insane outcomes vary depending on recipients income starting out, their family structures and their priorities. So there are some benefits. So they talk about how, you know, people do end up spending more on their their basic needs. People were more likely to go to the dentist. That was seen as a, you know, a major, a major finding. Now, that’s, that’s something that’s important. I mean, as someone who’s had various dental issues through their life, I think, I think that is a good thing. There’s a bit of a bit of uncertainty about what it means for education and skills. It’s been reported that in the headline results, that recipients were significantly more likely to report plans for further education. So they’re planning to to undertake further education. Those 6% percentage points more likely, which was a 15% increase compared with the average control participants. So they’re they’re more interested in pursuing it. But then there’s one of the NBR studies that was of the data set it wrote in. This is in the abstract of this is a paper the employment effects of a guaranteed income experimental evidence from two US states. So this is NBR working paper, 32719, and this is by various researchers led by Elizabeth Rhodes, is the research director of the project, and the finding this is one thing I found interesting. We observe no significant effects on investments in human capital, though younger participants may pursue more formal education overall, Our results suggest a moderate labor supply effect that does not appear offset by other productive activities. Okay, right? So what they’ve found so younger participants may pursue more formal education. Okay, so they might be studying more, but they observe no significant effects on investments in human capital. So within the the timeframe of the study, they didn’t observe any significant increase in people graduating or obtaining particular qualifications, although they do note that younger people may pursue more formal education, this is the bit that I find potentially concerning or makes you question. Well, okay, well, is UBI really such a great idea? Because what these researchers have found in their analysis of the data coming out of this experiment is that the program resulted in a two percentage point decrease in labor market participation for participants, and a 1.3 to 1.4 hour per week reduction in labor hours. Okay, so it looks like, you know, some people did actually drop out of the workforce, although you could argue it’s not a huge number, and this is what I find. Is probably the most concerning, is that, essentially, people just took this what they did with those extra hours was engaged in leisure activity, so they watched Netflix, or maybe hopefully they went and did something more active, that they weren’t doing anything productive, so to speak. So they weren’t engaging in education activity. So I think that is potentially a bit of a concern with with the results of this experiment. Okay, we might just have another look at some of the more positive findings, because I don’t want to completely just be negative about this. Because. There could be some benefits from from UBI and particularly people having the money to be able to spend on necessities and increase in agency. So they seem to be the major positive findings that have, that have come out of this study, as I mentioned before, the key finding regarding spending cash is flexible and allows people to spend on their unique needs. So this is on open researchers page. Just go to their page on key findings spending, and what they find is that, in terms of the dollar amounts, the largest increases in spending in response to the cash transfers were on basic needs, food, rent and transportation. Now in proportional terms or in percentage terms, the largest increase so this is relative to the average spend of control participants, the largest increase was on financial support to others. So we’ll go over these results again. So so this is with this $1,000 extra a month, so recipients increase their spending by $310 well, this is the observed increase in spending. It looks like there’s some unaccounted for spending. That’s my impression from the studies. But they found that, based on this additional money, they spent $310 more a month, food, $67 rent, $52 and transportation, $50 more. So they they’re spending more. We’ll talk about the transport issue a bit spending category A bit later, because there’s a an interesting result there that does reinforce concerns over the UBI study. What they found this is the other finding that the greatest proportional increase in spending was in this category of supporting others, and that increased by an average of $22 a month. So that’s a 26% increase. And I mean that’s right, cash as open. Ai the open research, people say cash provides increased flexibility to support others. So, yeah, I guess that just shows. I mean, there are a lot of people in need, and we do try to look after our relatives where we can Okay, so that’s a summary of the findings regarding spending. And as you expect, you give people additional money, they’re going to spend some of that money. And so it’s probably a bit, probably no real surprise. You could take some comfort out of the fact that they are using it to spend on what, what are mostly essential items, and then they are helping out relatives or friends. They’re helping to support others. So, okay, maybe that’s not really that unexpected, but that’s seen as one of the great findings, or positive findings that people have. You know, they they did spend this additional money on what appear largely to be worthwhile things. So the other other significant findings that the open research people talk about is, well, they refer to a lot of it seems this is a bit of anecdotal evidence, but there are a lot of quotes in here about how people feel more in control of their destiny. So one recipient, Kendra, said it best, I feel more in control of my destiny because of not only the additional income, but the consistency of the income, it allowed me to plan, to forecast a dream, to achieve things that I thought I wouldn’t be able to achieve because I couldn’t see beyond them financially. And again, this is, this is one of the main, you know, this is one of the arguments in favor of UBI, that it does provide people with this flexibility. They can they can take risks, they can do something entrepreneurial. And one of the interpretations of of these findings is that UBI does help people do that. So there’s a there’s an increased ability to set and to achieve goals. There’s a finding about how it it helps facilitate people to move, to move neighborhoods, an 11% increase in the ability to to move. I. Okay, so moving that can be part of making a fresh start that can improve your your opportunities, your ability to get a higher paying job. So that’s potentially a positive finding, okay, so the that 11% so that was that’s an increase in the propensity to move relative to control participants. So if you go to the the actual page on open research, it said that recipients were 4.4 percentage points more likely to move neighborhoods and 11% increase compared to the average among control. Participants and recipients were four percentage points more likely to move housing units, a 9% increase relative to control participants, right? Okay, I’m not sure what the baseline rate of moving is there, but I’ll put a link in the show notes if you want to check that out. I suppose it makes sense that you get a bit more money. It does provide that flexibility to move maybe, and you know, there certainly could be benefits for doing that, particularly if it allows you to get a better job, move closer to family, or to move to a better school district, that sort of thing. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  22:03

Now, back to the show. Okay, so there’s some of the findings of this new study, this open research study of UBI and certainly there are some, there are some positive findings, people are more likely to spend on they’re spending more on what you could say are necessities. They’re helping relatives. They’re more likely to go to the dentist. They feel more agency. These are all positive things. Now, on the other hand, we see that they have reduced their their working hours, and what we find is that the impact on their financial situation is not what may be expected. And this comes out of the second NBR research paper that you can find on via their website. There’s a paper that has some really intriguing results, and it’s the impact of unconditional cash transfers on consumption and household balance sheets, experimental evidence from two US states. So that’s NBR working paper. 32,784 it’s just incredible how many working papers they produce. I think when I first started looking at NBR working papers at university, they’ll probably up to number. I mean, it would have been several 1000 by then. I’m not sure if it had reached five figures. I’ll have to, I’ll have to put that in the shadows. But, yeah, it’s just amazing how much research comes out of that. So that’s the elite Economic Research Group in in the US. That’s, I think it’s attached to Harvard. It’s attached to one of those Ivy League universities. It’s they, they’re responsible for a lot of good research, and a lot of it goes on to be published in the top journals like American Economic Review, quarterly, Journal of Economics, etc. So all that is to say that this is a really high you’d expect. This is a really high quality study, and they’ve they’ve used really good statistical techniques to try to work out what’s going on to to determine causality, what, what’s what’s really been the impact of of this experiment, or what’s the UBI Well, they’ve used an experimental design which does help you infer something about causality. They’ve said it’s by Alexander Bartik, Elizabeth Rhodes, David Brockman, Patricia Kraus, Sarah Miller and Eva vervelt, so I’ll put a link in the show notes. Looks like a great study, and this is, this is the study that has prompted some critics of UBI or, well, some scare. Dix, I suppose. Or some people who look at the data, they’re they’re empirical people. They’ve raised big questions about UBI after this study. And there’s a great video by Pete judo. He does a lot of good work on academic malpractice. He’s got some great videos out there that are worth watching. And he’s released a video UBI failed, and everyone is pretending it didn’t, so that is definitely worth watching. And it’s that video I saw that, and then that made me think, well, I should have a closer look at what these these findings are and and just see if that is, if that is the case that the UBI experiment has failed, I’ll just go over what Pete Judo has, what his main points are and, well, what he’s taken out of it is that, okay, look, one of the main things that is advanced as a benefit is that people who get UBI are 10% more likely to go to the dentist. And he’s saying, well, they seem to highlight that because there’s not really a lot of other great findings in the study, or nothing. That means that the experiment shows that UBI as a is a total winner, and he notes that the coverage doesn’t mention the fact that people who receive the UBI ultimately they end up with a reported $1,000 lower net worth compared to the control group you think. You hang on, what’s going on there. That’s a bit of a surprising finding. And this comes out of that, that paper, that NBR, paper I was just talking about before, about the balance sheet impacts of UBI. So let’s, let’s have a look at what that study that that $1,000 negative impact that he was talking about, that that is in the paper. They do report that, but they do know that there’s a lot of uncertainty about the magnitude of those impacts, and their conclusion is that this is how they write it. This is very, very academic. I guess they’re being careful about what they conclude and how strong you know, based on the data, how confident are we in these results? And they write that we find noisily estimated, modest positive effects on asset values driven by financial assets. Okay, so people save some of the the UBI that they get. They have higher they have higher cash balances, although they’re saving them temporarily, I suppose, or they’ve just got more money in their bank account on average, but these gains are offset by higher debt, resulting in a near zero effect on net worth. Okay? So based on their analysis of the data, they they can’t see any real impact, or any significant impact on on net worth. What what you see is that there’s some additional financial assets, higher bank balances, but then they’ve taken on some additional debt, okay? And so what happens is that there’s really no impact on on net worth, and they conclude these results suggest that large temporary transfers increase short term consumption and improve financial health, but may not cause persistent improvements in the financial position of young, low income households. Okay, so that’s the that’s the group that this study was focusing on. So it doesn’t really provide much of a longer term benefit the results in this study. That’s what Pete Judo was referring to in his video, and he concluded, well, this study shows that they’re they’re actually worse off. What’s going on there? I’ll put a link in the show notes, as I said to this paper, and I’ll just highlight some of the key parts of it so you can see where the results are coming from with that Pete Judo has has referred to what he’s what he’s referring to. There’s a there’s a passage on starting in. On page three. So combined these treatment effects on asset and debt indicate that the transfer decreased household household net worth by about $1,000 the net worth estimates are noisy, but we can rule out rises in net worth of more than $5,700 including real estate and mortgages, or $3,000 excluding real estate and mortgages. Okay, so what they’re saying there is, there’s because of the just the fact that of random variation in people, there’s statistical noise, sampling error, so to speak. You have to be careful interpreting these numbers. That’s essentially what they’re they’re they’re saying there, and they do put a footnote to that statement about the the transfer decrease in household net worth by about 1000 were they right? It’s important to note our sample consists of low income households, many of whom had little in the way of savings or assets. At baseline, median net worth was essentially zero. Median savings were was less than $1,000 and only 61% of participants had at least $100 in savings. Okay, it’s hard to know what to make of that. I suppose they’re saying, Well, we’re talking about people who didn’t have much to begin with. Perhaps they’re using that as a way to justify why they may have taken on more debt. I mean, what we find is that they use this extra money to help them borrow money to buy a car, to buy a vehicle. So I’ll go to that part of the paper in a moment. Whatever they’re trying to say there. Essentially the main point is that, okay, that if you crunch the numbers, it looks like it does reduce household net worth by $1,000 but we’re not really sure what that means. And if that’s a general finding that UBI actually makes people poorer over the the long run, who knows? I mean, I I think they’re probably right to be, to be a bit cautious of making that conclusion. So I think their their general conclusion that we can’t really find any impact on household net worth, that’s probably a reasonable conclusion. And the other point is, I mean, maybe $1,000 worse off. Okay, well, is that such a is that such a big deal? I mean, is that significantly they’re saying, well, that’s not really significantly different from from zero. $1,000 isn’t what it once was. So I can, I can see why they may have reached that conclusion. What I did find interesting. I found that the fact that what the UBI enables people to do is it must improve, or it makes them more likely to want to get a car loan, they feel more likely to be able to to service a car loan. And we find that this is a finding on page 31 of the paper total auto debt rose by about 17% 17% of the control mean, and monthly minimum payments on auto loans rose by 16.5% of the control means. So maybe they went out, they they got a new car, they sold their old car, bought a new one, and they they financed that. So they got some additional auto debt, and that’s offset the gain from the higher cash balances to and they’ve had practically no change in in net worth, or possibly even a negative net worth, and that’s the finding that Pete judo’s picked up on. Okay, I guess the thing to conclude from that is that UBI doesn’t improve your financial circumstances over the long run, or this at least over the three year period that they they studied, and again, the group that they’re looking at, or they’re considering, is young, low income households in the United States. So again, I’ll leave it to you to check out. You can check out some of these findings. I’ll put some links in the show notes. See what you think. Make up your own mind, it looks like those studies are very rigorous, and results that do to me. I mean, they they do raise questions about whether UBI makes sense as a policy. I don’t see results, that would make me think, Wow, that’s amazing. Let’s roll this out across the population. And if you, if you’re a regular listen to this show, if you listen to my previous episodes on UBI, you’d know that I’m pretty skeptical about UBI. It would be hugely expensive. Of I also think it’s unnecessary. I don’t believe in the forecast of mass technological employment. I think that the market will adjust. And as economists, we’ve got great faith in in the price mechanism. We’ve got great faith in in markets, uh, eventually clearing, and we have great faith in the the ingenuity and entrepreneurial activity of people. So I’m rather skeptical about this forecast of mass technological employment. And one thing I’ve noticed is that there’s, there is a growing skepticism about just how significant or how transformational some of the recent AI developments have been. I’ll put some links in the show notes, some some videos that I’ve seen lately from there was some computer scientists. I think one of them was from MIT. So top computer scientists debunk AI hype, and they talk about AI snake oil. So they think that some of the benefits of, particularly the large language models, are oversold. And there’s also this has been widely reported. Daron simoglu, who’s professor of economics at MIT, really top economist, and he’s come out and said, Look, AI can only do 5% of jobs. I mean, that seems, yeah, that seems probably fair enough for me to consider it’s limited in the number of jobs that can take over. The more likely scenario is it will increasingly use AI as a co pilot so it’s helping us become more productive. And I mean, as this is one of the reasons economists, probably most economists, probably don’t worry too much about this forecast of mass technological unemployment. I mean, what’s going to happen is that if we are increasingly using AI as a co pilot, and then that’s helping reduce the cost of delivery. That means we can do things a lot quicker. That means various professionals, lawyers, accountants, can can provide their analysis and advice much quicker. Then it becomes cheaper, and then there’s more demand for it from from consumers or from from business for business to business transactions. That’s one of the reasons I would be skeptical about all of these doom and gloom forecasts.

37:36

Check out

Gene Tunny  37:37

those videos. They’re great. Provide you with with much more with it, well, like provide a bit of comfort. Of course, the future is inherently challenging to predict, so who knows? I mean, chat GPT was a bit of a revelation, so who knows what? What else is, what other technological developments will come up? But that’s not, that’s not the base case, in my view, that will have mass Technological Unemployment, right? So what I want to do to finish off the the episode is, I’ll, I want to put some, want to play some clips from previous episodes I’ve had on UBI, well, the previous one with Ben Phillips, I think Ben really summarized this the high cost of UBI and why. It doesn’t seem to make sense, given where we are now, the type of tax and welfare system that we have at the moment, it’s hard to see how we can actually transition to to UBI and may not actually be be sensible. And then there’s also another clip I’ve got, which is the second clip that I’ll play on this issue of technological unemployment. I think we’re essentially we, I mean, Ben, sort of, you know, make some some good points about how we’ve had sort of concerns about mass technological unemployment before, and they really haven’t. It really hasn’t occurred. So to end the episode, I’ll play those clips so you can, you can check out those clips to sample what’s in that. That UBI episode with Ben, and if you want to listen to that, please go the full episode, then please go back and have a listen. I’ll, I’ll put a link in the show notes. I think Ben is one of the people who has really analyzed what a UBI would mean in practice. And I think that’s that’s the sort of thing that if you are going to advance a UBI, you should think you should do the analysis. You should crunch the numbers on what it means, what it’ll cost, what it means for other welfare programs. So yeah, how do you make sure that you don’t have all these people who end up worse off if you just get rid of the existing welfare system and replace it with the UBI I think that’s a that’s a significant thing to think about, all right? Okay, so thanks for listening to my update on UBI. As more studies come out, I’ll, I’ll talk about those. I’ll also try to go back to some previous studies and compare what this study has found with some of those others that could be useful. But for now, I’ll, I’ll play these clips from the previous episode with Ben, so you can get a sense of of what’s in that episode. Okay, thanks for listening.

Ben Phillips  40:31

Yeah, so the current system gene, just to put in perspective, so we, we currently pay out about a little over $100 billion per year in welfare payments to adults. There’s another sort of 20 or so million to in family payments that which is effectively for the cost of children. So you put that to one side, if you also about $100 billion so the most expensive welfare system under a UBI, say, under the green scheme, would be somewhere around about $500 billion per year. So you’re looking at an additional $400 billion per year. Keep in mind, Gene, the current, current federal tax, tax receipts is about 500 billion. So you go from 500 billion to 900 billion, that’s an unbelievable amount of money. And as you probably remember well, Gene, we had a big argument, big fight, about carbon pricing, and say, 2012 that was over about a $5 billion tax. Now, regardless of what you thought of the carbon price, we’re having a big argument over 5 billion. How would we go with an additional 400 billion? Having said that, of course, you don’t have to have a full blown measure, the full blown universal basic income, but even the more sort of the cheaper versions say the like, the affluence tested model that we’ve we’ve modeled was more like a bare minimum of $100 billion per year. So you still looking at having to sort of double the welfare system in Australia and knock on from that is to increase taxes by, you know, 20 30% across the country. So I think I’m in the current environment, that’s very unlikely to ever happen, but it’s still it’s an interesting idea to think about, I guess so hibi, I

Gene Tunny  42:04

mean, it certainly would be a nice thing to have just thinking about it. I mean, and one of the advantages that’s put all the pros, or the the the arguments in favor of it is that would allow us to to be able to choose our lifestyle. And I mean, we could take a few months off and divide it to yoga or to improving our wellness, that sort of thing, or writing a book. So look, there are. I can see the the attraction of it. It’s just the fiscal cost of it and implementation. We’ve already got this welfare system in Australia, at least that seems to do a reasonable job at at not too high a cost. But I can see the attraction. What about this? There’s this vision of the future where, with AI on automation, we have massive job losses, even among white collar professionals. Now, I mean, you know, we’re economists, so we’re probably great believers in the market adjusting and eventually people finding new jobs in this in the services sector. But do you have any thoughts on that? Ben, I mean, how, how big a risk is AI and automation? And I mean, to what extent that, does that improve the argument for a UBI, if that’s the case, that we could see these mass job losses in the future?

Ben Phillips  43:37

Yeah, look, I would probably a bit like yourself gene, bitter by my economics background, and I guess looking at history, over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods, of course, where you have some high unemployment, but generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappear and that there is the argument, as you say, that basic income advocates that have have a UBI for that potential outcome in the future, but I’m skeptical of it. Gene that said I’m not, I’m not a futurist, so I don’t really know what what the future holds in that area. I could be wrong, but I’m a little skeptical, just given that we’ve had very large technological change in over the last, you know, century, and people still remain in jobs. Yes, there are issues, you know, for certain people in certain industries, but that’s sort of part of the part of the ebb and flow of the economy,

Gene Tunny  44:47

righto, thanks for listening to this episode of economics explored if you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economicsexplored. Dot. Com or a voicemail via SpeakPipe, you can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

Obsidian  45:35

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

The Future of VC: Blockchain, Web3, and Emerging Markets w/ Qin En Looi, Partner, Saison Capital – EP256

Qin En Looi, a partner at Saison Capital, discusses the venture capital landscape, particularly in emerging markets like Southeast Asia, India, and Latin America. Saison Capital, backed by Credit Saison, focuses on early-stage investments and has $150 million in assets under management. The firm has seen three exits and emphasizes the potential of web3 and decentralized finance (DeFi). Looi highlights the efficiency and cost advantages of DeFi, citing examples like Thala, a decentralized currency exchange, and Helix, which tokenizes private credit. He also notes the geopolitical implications, such as near-shoring to Mexico, and the positive impact of the recent Fed rate cut on private investments. NB This episode contains general information and should not be considered financial or investment advice. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About Qin En Looi, Partner at Saison Capital

Qin En Looi is a seasoned venture capitalist with a wealth of experience in fintech, B2B commerce, and web3 startups. At Saison Capital, he leads pre-seed and seed investments and advises multiple Southeast Asia-based web3 startups. His previous roles include co-founding Glints, the leading talent ecosystem in Southeast Asia, and earning recognition from Forbes 30 Under 30. Qin En is also the creator and host of the successful podcast “Parents in Tech.”

Timestamps for EP256

  • Introduction (0:00)
  • Venture Capital Terminology and Investment Strategy (3:19)
  • Evolution of Venture Capital and web3 (5:49)
  • Qin En Looi’s Journey into Venture Capital (9:56)
  • Investment Focus on web3 and Decentralized Finance (12:29)
  • Helix and the Future of Private Credit (20:02)
  • Geographic Expansion and Global Opportunities (26:34)
  • Concerns About Geopolitical and Economic Tensions (33:59)
  • Impact of Fed Rate Cuts on Private Investments (36:40)
  • Final Thoughts and Future Outlook (39:27)

Takeaways

  1. web3 Opportunities in Emerging Markets: Southeast Asia and Latin America are ripe for blockchain and decentralized finance innovations, with venture capitalists looking to capitalize on these growing markets.
  2. Blockchain and Financial Inclusion: Qin En argues Blockchain technology offers faster and more efficient financial services, helping to increase financial inclusion in underserved regions.
  3. Decentralized Finance (DeFi) as a Game Changer: Qin En argues DeFi platforms such as decentralized exchanges are transforming traditional financial models by enabling permissionless, trustless transactions.
  4. Private Credit on Blockchain: According to Qin En, tokenizing real-world assets like private credit offers new ways to reduce costs and increase liquidity, opening up more investment opportunities.
  5. Geopolitical Risks and Global Expansion: VC firms like Saison Capital are navigating geopolitical tensions by expanding into new markets such as Mexico, taking advantage of nearshoring trends.

Links relevant to the conversation

Saison Capital: https://www.saisoncapital.com/ 

Information on United States-Mexico-Canada Agreement (USMCA) which replaced NAFTA:

https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement

Lumo Coffee promotion

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Transcript: The Future of VC: Blockchain, Web3, and Emerging Markets w/ Qin En Looi, Partner, Saison Capital – EP256

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Qin En Looi  00:03

No one knows how things could be, right? I think there’s just so much uncertainty at the end of the day. I think our role is to understand what is happening, to be able to respond to it quickly, where we can and for the rest part, you know, just just sort of like, accept that this is sort of an environment that we’re in.

Gene Tunny  00:29

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. This episode, I’m joined by chin N Louis, a partner at Saison capital, an early stage venture capital fund based in Singapore. Chin en shares some great insights into venture capital investing, particularly the opportunities in emerging markets like Southeast Asia, India and Latin America. He discusses the focus that Sazon capital has on web three and decentralized finance, and he argues that blockchain technology can enable faster, more efficient financial services and increase financial inclusion. Righto, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Without further ado, let’s dive into the episode. I hope you enjoy it. Hinan, welcome to the program.

Qin En Looi  01:56

Thank you for having me. Oh, it’s

Gene Tunny  01:58

very good. And yeah, keen to chat about your your VC firm, so you’re based in Singapore, and, yeah, doing all sorts of interesting things. Can you just tell us a bit about the business, please?

Qin En Looi  02:10

Absolutely. So I’m a partner at Saison capital. We are early stage venture capital fund that is backed by a large Japanese traditional finance institution called credit. Saison, I’m very proud that we are one of the few early stage funds that is built for speed, and also one of the few early venture funds that can directly invest in digital and crypto assets.

Gene Tunny  02:31

Gotcha, so you mentioned you’re backed by a Japanese financial institution, so it’s providing you with the capital in to invest. Is that what you mean? Do you have other investors or clients?

Qin En Looi  02:44

Exactly? It’s only a single LT fund, so I only have one LP to report to, and sort of one shareholder. And that gives us a lot of flexibility that a typical fund would not be able to I’ll give a specific example. So for season capital, we are not just active direct investors, direct in the sense that we invest in startups, but we also are able to invest in other early stage venture funds. To date, we have done 1818, venture capital fund investments that really helps us to build an understanding globally of what the landscape, the investment landscape is shaping up to be, right?

Gene Tunny  03:21

Got you. So there’s some terminology I want to get make sure I understand. So LP, that stands for limited partner. Is that right? Yes.

Qin En Looi  03:30

And LP is the individual or the shareholder who contributes capital to a venture fund. So at the end of the day, most venture capital funds do not manage their own money, like say, a family office. Venture capital fund is essentially an asset manager in the very particular asset class. So a LP, a limited partner is who provides, is the individual institution that provides capital for the venture funds,

Gene Tunny  03:58

gotcha, and there are also general partners. Is that correct? The GPS?

Qin En Looi  04:04

Yes. So GPS, are people like myself who run the fund, gotcha, gotcha.

Gene Tunny  04:09

And do you disclose your assets under management, or how much you you invest on behalf of clients? Or is that? I mean, if that’s confidential, that’s fine. I was just interested in the scale of of your operation? Yeah,

Qin En Looi  04:21

absolutely. So we have 150 million US dollars assets under management. But what we like to say is that this is also a evergreen Fund, in the sense that every year we can always request for more budget from our parent company if needed. Because, once again, we are not set up like the typical venture fund where, you know, you go out, you raise, it’s a closed end fund, right, whereas ours is a bit more of an open ended Fund, which means that we can always just take on additional capital from our parent company,

Gene Tunny  04:50

yeah, gotcha right. And with, with venture capital, I mean, it’s a tough game, isn’t it, because you. Like, I’ve listened to Tim Ferriss talk about this on his show. And, I mean, essentially, you know that a lot of the things you’re investing in not necessarily get the ROI, I mean, the you know, because a lot of them, it’s experimental, or it’s very novel, but you’re relying on just one of them to to to hit it big, and, you know, go to the IPO, or to have the to have the buyout, and then you get that outsized return. Is that essentially the the VC strategy is that the top of is that your strategy? Or how do you think about the your investment strategy?

Qin En Looi  05:37

Yeah, I mean, Gene, what you said is exactly sort of the textbook definition how venture has been over the past few decades. But to be honest, I think we are today at an inflection point right where I feel like venture capital really has to evolve, and we have to find new ways to create value. So exactly to a point the old ways, it’s making a whole bunch of investments, expecting most of them to fail, but those that succeed deliver exceedingly like we call those home runs, right? They deliver incredible, phenomenal returns that more than make up for it. And usually those exits come in the form of, like you said, IPOs or trade sales. That model started in the US. It has, it has and still works in the US. But I think what very quickly people are realizing is that in many parts of the world, especially in the parts that we operate in, in Southeast Asia, in India, in Latin America, that’s starting to pose a challenge, primarily because these IPO, these MNA routes, are not as deep, right in terms as compared to the US. In the US there’s the rich capital markets. There are many corporations with large war chests that can deliver those kind of returns, but hey, you don’t find many of that over here, right? Some of the largest corporations across these markets are very traditional companies that probably don’t appreciate the tech multiple and also the same thing we see on public markets, some of the largest companies, largest tech companies that went public coming out of Southeast Asia, their outcomes are not as desirable. So I think really where we are today, it’s a very interesting position where dpi, which is basically the money that’s actually returned to LPs, the money that’s actually returned from venture funds to to their investors, is at an all time low, and many people are sort of questioning the value of this asset, plus, and we really hope to be part of the conversation that reinvents what that looks like.

Gene Tunny  07:36

Gotcha, did you say dpi, is that dividends paid to investors? Yes, that’s right. Okay. Oh, good. That makes sense, right? And where are you in your, in your evolution as a as a fund or as an in VC? Is it early days? Have you had any exits of any of your the companies you’ve invested in? Has there been an exit? Where are you in that sort of journey?

Qin En Looi  08:00

Yeah, we’re still relatively early as a fund, having started just investing in 2020 but the good news is that we have already seen exits, right? We, in fact, we are three exits that have happened, that have delivered great returns for us. But look, I think for many of our portfolio, it’s still the early days, especially because we often invest before the Series A round. So generally we’re considered earlier stage investors. And you know, the cycles of these take more than 10 years. But I think you know what, what excites us? It’s really where, sort of the broader web three and digital asset industry comes in. Because essentially, we see that space as accelerating liquidity and return timelines, right? You can see what you want about the crypto, about the web three space. You know, a lot of people love it, a lot of people, even more people hate it. But what is undeniable is the ability to generate liquidity for investors at unparalleled speeds. Right? Exactly to your question around, have we seen exits? Have we seen returns? Those three exits that we have in the in the non web three space are more exceptions, rather than the norm, whereas in the web three space, generally, we see exits at, you know, between year three to year five of the company’s life cycle. So practically, as investors, our approach to to approaching the web three, the digital asset investment space, it really comes driven from, you know, there is opportunity there, but the more importantly, there’s also liquidity. Yeah,

Gene Tunny  09:26

yeah. Okay. Well, I’ll ask you about that in a moment, just before we get there, I think some, you know, many listeners would be interested in your story. How did you get into VC in the first place? Because it seems just you’re relatively young, and you know, obviously doing very well. So what’s your story? I’d be interested.

Qin En Looi  09:45

Thank you. To be honest, I would never imagine myself being a being a VC, but my story started 11 years ago. I was the first generation of venture backed founders in Southeast Asia. I often joke with. The Founders I work with now, don’t talk to me about valuations, because I did my startups seed valuation and post money valuation at $1.5 million today, seed rounds are $1.5 million but the valuation I raised 1.5 million right? So 11 years ago, together with two other co founders. We co founded glins, which today is the largest recruitment platform in Southeast Asia, the largest tech enabled recruitment platform. The company today is a series D company. There’s very small, $80 million and I was with the company for the first five years. So really, sort of going through that zero to one journey, expanding out of Singapore to the Southeast Asia region was a phenomenal journey. Made plenty of mistakes, but also took away plenty of lessons. After building glints, I went off to BCG, both on the classic consulting side, but more interestingly on the venture building side. So that was when in 2020 2021, when BCG, digital ventures today is called BCG X was really supporting corporates to build startups. Did that for almost three years before Cezanne reached out and say, Hey, do you want to cross the table and become an investor? I thought, why not? Why not step back into the startup ecosystem, albeit in a different role? And it has been a great journey since I remember joining in 2021 right at the peak of the bull market, both in the web to web three sense when due to getting done, it’s insane, right? I remember those days when you you meet a founder for the first time, like over or over call like this, and they tell you, Look, we need you to commit by tomorrow. And so those are the crazy days. And of course, we rode the wave down. But, you know, with with the current environment we’re in, starting to see a bit of recovery, overall, excited, right? And I think I count myself fortunate to sort of see a bit of a cycle, because that really helps me to shape my perspectives.

Gene Tunny  11:57

Yeah, absolutely, wow. It’s a good yeah, good story, yeah, I’ll have to look up glints. Did you say it is B, L, i n t, s, that’s right. Great. You said Southeast Asia. So you’re talking about Manila and Jakarta, like Indonesia, Philippines, right? Yes, yes.

Qin En Looi  12:14

Indonesia remains our largest market, but we also have presence across Philippines, Malaysia, and even, actually, a bit of East Asia, so Taiwan and Hong Kong too,

Gene Tunny  12:24

yeah. What I’ve noticed about Indonesia, when I’ve spent some time there and done some work over there, is just, they’re very good with the apps, like they had, I remember they had, yeah, but like, 10 years ago, they seem to be even more advanced than, you know, further along in their, you know, relationship with apps and, you know, using, was it go Jek or something? I’m trying to, yeah, I thought, and you could get a scooter and they deliver stuff, although that was really great. So they seem to be more savvy than some of us here in Australia. So that was, that’s great, okay, and you mentioned web three and exits from there, and you talked about the ability for it to generate liquidity. What sort of web three? What broadly are we talking about with web three? What types of businesses have you invested in, and what ones were exited? Or was there an exit?

Qin En Looi  13:16

Yeah, you know, when we started the web three journey, we wanted to take on the approach where we don’t know what we don’t know. So the right way to do it is to really learn as much as possible. We ended up investing, and we started out as very sector agnostic, investing, everything from the infrastructure you’re talking about, wallets, tooling to, of course, the applications. We did games, we did decentralized finance, we did real world assets. So we did, in short, a whole bunch of stuff. Now, kind of after about one and one or two years into that journey, we started to to figure out what our thesis was, and our thesis became the focusing on finance applications, on web three, broadly, they can be divided into two categories, decentralized finance, as well as real world assets or tokenized assets. So these are two, even though both are sort of finance related, both couldn’t be further apart. Decentralized finance, as the name suggests, is the idea where everything is permissionless, everything is trustless, everything is anonymous, whereas real world assets is really about bringing some of these real financial assets onto the blockchain, serving very different audiences, but I think both have created great investment opportunities for us. Gotcha. And

Gene Tunny  14:34

can you give us an example of both the defi and the tokenized assets, just so we can understand what, yeah, what are you talking about? Please, absolutely.

Qin En Looi  14:44

So, for example, one of the things that we invested in defi is what we call decentralized exchanges. Simply put, it’s, it’s a money changer business, right? Imagine today you interact with a blockchain ecosystem, and you want to, you know, get some. Currency, or in this case, get some tokens to spend, whether on products or services. You need to swap, right? It’s just that. How? Let’s say, when I go to Malaysia, I go to the US, I cannot just use my Singapore dollars. I need to swap to the native currency. So decentralized exchanges essentially provides a way for you to swap, or basically the money changer business. But what’s really interesting is not just from a customer point of view, say me swapping my Singapore dollars to US dollars, but actually the ability for you and I to both also be the money changer, right? And all of this is facilitated by the blockchain, by the smart contracts. So let’s say today I have two pools of capital, two pools of tokens, two pools of currency, let’s say Singapore dollars and US dollars. In the web, two world, I need a license to be a money changer, right? Otherwise I could go to jail. But decentralized finance works such that I can without asking anyone for permission, without anyone knowing who I am, I can deposit both my Singapore and my US dollars, the equivalent in tokens, of course, and essentially earn fees becoming a money changer, right? So I think that’s really sort of one of the cool and interesting things about decentralized finance. It really lowers the barrier to a lot of these, these applications and these use cases. So one of the more successful ones that we have done is called Tala. It’s T, H, A, L, E, it’s a decentralized exchange on one of the faster growing blockchains called Aptos apt us, right? So, you know, really sort of figuring out, where are the different each blockchain is almost like a new country we try to invest in, almost like the infrastructure of each of these new countries, right? For example, this new country coming out, you want to be investing in the airports, the railroads. That’s essentially what we have done, and that’s what we see decentralized finance as an example. Now, in the real world asset, that’s something that’s a bit more interesting, I think, something that’s a lot more relatable. We’ve invested in companies that essentially use the blockchain to reduce costs and increase access. Right? One of those companies is helix, H, E, L, i, x. They come from a very strong financial background, having dispersed more than 400 million US dollars worth of private credit. To date, most of this business remains in Southeast Asia. So the question is, how can we offer Southeast Asia credit opportunities to the world, right? And what they’re really doing is they’re using the blockchain to increase inclusion, to reduce the cost of distribution, and they have done that very successfully. And we’re super excited to back there.

Gene Tunny  17:33

Gotcha Okay, I want to ask follow ups on both of those. So both, yeah, really compelling examples with the defi, with parla Taylor, T, H, A, L, E, Tala Gotcha. Okay. How does it compare in terms of efficiency, in terms of cost to the users, relative to traditional methods, absolutely.

Qin En Looi  18:03

So I think that’s one of the things, right? Aptos, as with many other blockchains out there, are, like the modern blockchains that make it really, really cheap. We are talking about a fraction of a cent to do any transaction on the blockchain. So really, that’s one. Secondly, you have instant settlement, which I think is insane, right? Today I saw a stat. I saw a study that says, on average, it takes 18 hours to move us dollars through the SWIFT network, which is insane, because that’s pretty much the time of the longest flight from Singapore to New York. So you’d be better off putting the money, the cash, on the plane and flying it over. People call it crazy, but that’s that’s how long it genuinely takes to move fiat money today, as compared to, for example, Tala apton. So broadly, many of these, what we call high throughput blockchains, where settlement is less than one second, right at the cost that is a fraction of a cent is like point that’s like, you need to put five zeros behind the decimal point. And that’s, that’s the cost. So I think really that’s that’s some of the speed and efficiency advantages, but I think more than that is also the idea of it’s trustless, right? What I mean by that is that the blockchain, it’s public, and it’s immutable. Once you do a transaction, it cannot be reversed. And there gives a lot of sense of security that the traditional world does not have today. If I open up my Robin Hood, I open my bank app, it says I have, let’s say, $5,000 I don’t really own that 5000 right? It’s actually an IOU from the bank telling me that if I want to withdraw $5,000 they would pay it back to me. We saw what happened last year with Silicon Valley Bank. Clearly, you know, these centralized institutions do fail sometimes, yeah? And so that’s really sort of the benefit of decentralized finance, yeah,

Gene Tunny  19:47

gotcha. Okay, I might be getting confused between the different different companies. So you mentioned there’s a currency exchange, yeah? So that that’s Tala. Is it? Tela, exactly, and what’s, what’s helix again, sorry, Jan, I just forgot. Sure.

Qin En Looi  20:05

No problem. Helix is bringing Southeast Asia private credit onto the blockchain. Ah, gotcha,

Gene Tunny  20:10

right, private credit onto the blockchain. Okay, and you mentioned you were expanding. You’re making it more inclusive, and just interested in more about it, like who’s What do you mean by private credit? You mean companies with spare cash or high net worth individuals who are willing to lend that money out. Is that correct? Yes, okay, yes, exactly.

Qin En Looi  20:32

So private credit, it’s a simple model of today. You are high net worth individual, or you are a company you you want to generate yield that is above the risk free rate, but not take too much risk, right? So private credit opportunities generate generally anywhere from 10 to, let’s say, 15% APY, not the best, but it’s a lot safer, right? Than, let’s say public equities out there. So, so the model private credit, it’s essentially debt and lending, right? You lend to other companies. And, of course, you, you, you are senior in terms of the the repayment stack. So should anything go wrong? You get paid back first, as compared to, let’s say, the equity shareholders, yeah,

Gene Tunny  21:14

yeah, gotcha. Okay. And so helix, what it what does it do? It matches the the the lenders, with the borrowers, is that what’s going on that

Qin En Looi  21:24

and what they’re doing, it’s a few things, right? I think, first and foremost, often, what creates a lot of fees, it’s the fund administration, right? You need different parties, different different people, different vendors, to come on board, to attest to, to do many things, to audit and all of that. What helix is doing is, by bringing a lot of these processes on the blockchain, you can actually save a lot of that middleman costs, and these savings get passed on to your ad investors. So firstly, what helix is doing, it’s at least on the back end, reducing the costs of investment. That’s one. Now, the second thing that they’re doing is exactly like you mentioned, they’re bringing it onto the blockchain so that the current, you know, there’s this 100 and $20 billion worth of stable coins on the blockchain today, right? Many of them are sitting idle. They are not generating any you so what helix is doing is bringing these 10 to 15% yield that is has been proven. There’s a track record. It’s regulated in Singapore by the Monetary Authority of Singapore, and he has a $400 million track record with zero defaults. All of these benefits of such this particular financial product, they are bringing it onto the blockchain, so that if today you are a stable coin holder, you can directly access and invest in this opportunity.

Gene Tunny  22:48

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  23:23

Now, back to the show. So you mentioned I’ll have to look this up. So you said $400,000,000.00 defaults, exactly. I mean, this is immediately. I’m sort of asking, just thinking, how is that even possible? How can you have zero defaults? What’s what’s going on here? I mean, what’s the how do you ensure the people who borrow the money have an ability to pay it back? Is there? Is it fully collateralized? Is it? I mean, what’s what’s going on here? Yeah,

Qin En Looi  23:57

absolutely. I think first, first things, first for us as not Saison capital, but our parent company, credit Saison, our primary business is in lending. So we understand risk. We understand all these factors very well. The Golden principle lending, it’s any fool with money, can lend it out. The hardest part is always collecting it back. So to answer your question, yes, in fact, the way helix does it is through multiple layers of security. For example, helix does not lend directly to consumers. It does not directly lend to the small and medium companies. Instead, they lend to fintechs, and these fintechs do the lending to consumers or SMEs. So what it means is, yes, there’s a middleman, but this middleman also takes first loss responsibility. So today, helix, let’s say, lends to FinTech company, a FinTech company, a lens it out. Of course, there are always losses and all of that, but helix will often sit senior, which means, let’s say the first 20, 30% of. Of let’s say the pool is a million dollars for for the sake of argument, the first 200 to 300k of that pool is actually contributed by the company itself, the FinTech itself, the what we call the originator, right? And this is what we call the junior tranche. So if there’s any losses, it comes from the junior tranche. Now where helix sits, it’s on the senior trench. It sits above that. So essentially, there’s a way to do it, and if you do enough due diligence and you structure it properly, there are ways such that the senior guys enjoy a youth that and enjoy no losses, no defaults. Of course, the bulk of the returns comes in June, right? You’re talking in junior. You’re talking about a lot higher returns. You’re talking about 2030 could sometimes even reach 40% yield. But of course, higher risk, higher reward, and the junior piece is usually taken by the companies itself to prevent moral hazard. So where helix comes in is offer senior secured capital, and usually there’s a there’s quite a generous buffer below them the interest, zero defaults, right?

Gene Tunny  26:02

Okay, yeah. I mean, I don’t mean to be skeptical, but I always, you know, just the economist in me. I guess economists are naturally skeptical of this sort of thing, and they go to too good to be true. And just thinking about, yeah, what’s the I mean, I because I was in the treasury here in Australia during the financial crisis, and yeah, I just remember, yeah. You just, you just know how things can go wrong. Everything sort of collapses at once. So just sort of naturally, yeah, naturally, a bit, a bit skeptical, but yeah, it sounds fascinating. I have to look more into it. It’s, yeah, it’s incredibly amount of innovation that is occurring out there, and you seem to be at the forefront of it. Where are these companies that you’re investing in located? I mean, are they in Southeast Asia, or are they in the States or Europe? Where are they? Yeah,

Qin En Looi  26:56

I would say about half in Asia and half in Western markets. Western markets heavily being concentrated in the US. That’s one of the things that we love about web three, right? Everything is sort of so global. Really, anyone from anywhere can can build successful companies. Some of the largest companies in the space are also built entirely remote and distributed teams. So yeah, we take a very global approach. I travel around a lot. As a result, I make a trip to the US at least twice every year to make sure that we stay on the pulse. But that is also actually where investing in other early venture funds helps, right? Because we are LPs, we are investors in those funds. We work very closely with those GPS with those venture capitalists to expand our due flow and our network access. Gotcha.

Gene Tunny  27:43

Do you have any investments in Australia? Do you are there

27:52

any? Yeah,

Gene Tunny  27:53

I’m interested, because I think things have started improving here. I mean, for years, the view was there really wasn’t, there wasn’t a lot of opportunities for startups you had to go to over the Silicon Valley. And so that’s why there was a colleague of mine at Treasury, Anthony Goldbloom, who he, I guess he got an angel investor here to help him out, but then he had to go and, you know, raise money over in Silicon Valley, and you get work with some great people there, and they ended up selling that company, Kaggle, to Google. So he did really well. But yeah, I mean, that’s, I always remember he had, you know, he essentially had to go over there to get things moving. I just wondered, to what extent, you know, now, how things have evolved. And because there are a lot of people here, they’re more angel investors, more people willing to take a chance on startups. So, yeah, I was just wondering if you had any, if you hadn’t in any investments in Australia, but yeah, that’s fine, yeah, if you, if you, hopefully, you’ll find some, some good ones, right? Oh, so we’ve talked about web three. Are there any other areas of interest, any other I don’t know what do you call them, thematics or verticals that you’re that you’re investing in? Yeah,

Qin En Looi  29:14

I mean the planning. But maybe I can share the biggest one outside of web three. It’s actually our geographic expansion into Latin so 18 months ago, our parent company opened up offices in Sao, Paulo, Brazil and also Mexico City. I think we’re super excited about the opportunity to create more awareness about Latin America, traditionally, especially for folks in Southeast Asia and Australia, it has been a really long and far journey, right? It’s we’re separated by more than 30 hours of flight, one that I took not too long ago and will be taking again next month. But look, I think for us, we see massive opportunities in Latin America. Brazil’s FinTech ecosystem is truly, I would say, cutting edge. The Central Bank was number one central bank. In the world. They are probably the first that would launch blockchain in the financial industry at scale. So I think really sort of for us as not just web three, but I would say broadly FinTech investors, we are spending a lot of time and attention in Latin America,

Gene Tunny  30:18

right? Okay, that’s interesting. I like to look more into that. Yeah, that’s a hot tip, I think, if you’re, if you’re seeing those opportunities there, and I mean, that could help their general economic development and catch up to to the the more, you know, the more advanced economies. I mean, I guess the Yeah, because I think yeah, they generally do need to do a bit of, a bit of catch up to the the advanced Western economies. So that’s that’s really fascinating. I have to, have to look more into that. Okay, Jen, this has been a fascinating conversation. Yeah, I’ve learned a lot of it’s a sort of conversation I have, and then I think, Oh, gee, I’m gonna have to go away and do hours of research on this, lots of really cutting edge stuff. What’s I might just final question about the whole sort of geopolitical and an economic, geo economic, I suppose, situation, to what extent are you? Are you concerned about the broader trends or the developments in the world? I mean, i It seems that we’re, you know, at one of the riskiest sort of times in in world history, for a long time, since probably the early 80s, really, if you think about the probability of a major global conflict, you know, is that, is that something you think about as, as Vc investors, or you just try and do that, you know, you just sort of, oh, put that to the side. We’ll just do the best we can. I mean, how are you thinking about the global situation? Yeah,

Qin En Looi  31:54

no, no, it remains super important, because at the end of the day we, I mean, venture, it’s a very small asset class in a broader world of the whole economy, right? And I think the way we see it, it’s, you know, we have to see where the tide is turning. We have to see where the wind is blowing in order to know what’s next. I think you’re right, right? All these tensions, all these geopolitical issues, are creating a lot of risks. I think some we just have to accept, some we have we can mitigate, and some we can even turn into opportunities. For example, I mean, just going back to the Latin America expansion, right? I mean, Brazil was obvious choice. It’s the largest country in Latin massive FinTech ecosystem. So it’s almost like a no brainer. The question is, why Mexico? Right? Mexico, it’s not, not nowhere close to to that, but actually, sort of, our decision to invest in Mexico heavily also actually came from, a result from this geopolitical tensions right in the past, China, Asia, is a huge sort of manufacturing and and and sort of production place for Western countries, especially the US, but we’re seeing a reversal of the trend because of these tensions to what we call near shoring right. So a lot of these key production is moving to Mexico, which, in turn, is kind of stimulating the whole sort of country, the whole economy. And hence, that’s why we’re there. So I think, I mean, that’s just one very, you know, small and perhaps example, but it just shows that, yes, it matters. I think to a large extent, a lot of these are risks that we just need to be on the lookout for. There’s not much we can do about it, but that presents opportunities. We won’t hesitate to go after it. Yeah,

Gene Tunny  33:34

it’s good point about Mexico. So Mexico, I’m trying to remember the name of the trade relationship that has with the US and Canada. It used to be called NAFTA, but they read, Trump renegotiated, I think, and got a new name. I have to put it in the show notes, but I thought that was a good point. I should ask. I mean, what about China? I mean, this is something that is, you know, I ask a lot of guests about this now, because where Australia is so heavily, well, China’s a major our major trading partner, I suppose, in terms regarding our exports of our commodities, it’s just extraordinary. And there’s the growing tension, it seems that, you know, a lot of people in the United States are concerned about policy under Xi Jinping. They’re concerned about growing, you know, China’s sort of ambitions for Taiwan. And, you know, there’s this, this growing. This is view that seems to be that the Americans appear to have, that there were in this strategic conflict. And so we’ve sort of shifted from it’s, you know, China’s, uh, entry into the global economy is amazing. And this the whole sort of globalization thesis. We’re moving away from that, and it’s more sort of decoupling now. So I’m just wondering how you think about that. What are you seeing regarding the, you know, this whole sort of issue of the US, China tension? You have any thoughts on that? Yeah,

Qin En Looi  35:01

I think at a high level, look, I don’t think this conflict is going to get resolved anytime soon, right? There clearly is two superpowers, and they sort of always want to one up each other. We’re already seeing it at various levels, right? I think, sort of the way I think about it, it’s sort of the way Singapore has been playing it, which is increasingly difficult, but you know, I think so far, Singapore has done a great job, which is to remain neutral, right, to be friendly, I think. And it’s not just on that political level, but even, I think for us as a venture asset class, at the end of the day, I think we make the most noise as compared to many other asset classes, but we are very small, right? So I think it’s important to to understand the world, the circumstances that we sit in, and try, I would say, try not to take sides, right? Because you don’t want to end up on the wrong side of the equation. No one knows how things could be, right? I think there’s just so much uncertainty at the end of the day. I think our role is to understand what is happening, to be able to respond to it quickly, where we can, and for the rest part, you know, just just sort of like, accept that this is sort of an environment that we’re in. So yeah, I think that’s sort of that sort of broadly my take on it, to remain neutral as much as possible,

Gene Tunny  36:18

right, right, fair enough. Shannon, it’s been a Yeah, fascinating conversation. Any final thoughts before we wrap up? Anything you think you know is worth talking about as at 21st of September, 2024 any anything on your mind, anything you’re you’re concerned about, anything you’re excited about that we haven’t touched on?

Qin En Looi  36:38

Yeah, no, I think you know, with sort of the Fed announcing the 50 basis points rate cut just two days ago. Look, I think that, hopefully that the tide has turned. I think especially for private investment classes, the private credit, private equity, venture capital. I think this is much needed news and optimism for us, because even though the public markets have somewhat picked up a little since last year, the private markets have remained relatively challenging. So to all the founders and also to all the investors out there who are operating this space, I would say, get you know, remain optimistic, remain encouraged. We can look forward to better days in the very near future,

Gene Tunny  37:17

right? Oh, okay, could you just expand on that? I’m interested in that. So how do you see it as a as affecting the firms, the startups, the venture funds? How do you see that, that 50 basis point cut? I mean, I’ve got a sense of how it will and I’ve got my own views, but yeah, just if you can expand on that, how you see it as as beneficial? Please.

Qin En Looi  37:39

Yeah, yeah. Look, I think in a, I mean, fast forward back to when it was zero interest, right? I think capital was cheap. A lot of capital flowed into these private classes. What has happened, whereas with sort of the bear market, is essentially, firstly, the cost of capital became a lot more expensive, and more importantly, the risk free rate increased, whereas the returns on these private classes have went down. So it became a point where many investors, many large institutional investors, have figured out that, firstly, they are over allocated in private assets, right? They are way over allocated. That’s one. Secondly, the risk return profile just doesn’t seem to add up, right? You’d rather do something that’s a lot more liquid, something, let’s say, in the public equities or even in fixed income, right, where the yield, the risk reward is a lot more attractive than these private classes. So what has happened as a result over the past two, three years is basically a dear, absolute sort of, I wouldn’t even say decline, a crash in available funding to for the LPS have towards venture capital, especially, right? And so this has a trickle effect when LPS don’t give money to VCs, VCs don’t give money to founders, and then startups unable to grow. So I think, sort of, with this shift, with with the rate cuts, at least it gives a bit more optimism. It won’t solve the problem entirely, right, but at least it gives some optimism to money coming back in to these private asset classes.

Gene Tunny  39:12

Very good, okay? Thank you. Jay Powell, very good. And Chennai, thanks so much. This has been terrific. You’ve given us so much great information and so many amazing insights. And yeah, all the all the best with your investments in the coming years. And yeah, hopefully I’ve got a chance to catch up with you again. This has been terrific. Likewise. Thanks a lot. Jean. Okay, thanks. Janine, righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main. Ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week. You

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Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

Balancing Needs & Wants: Chris Ball, Hoxton Wealth, on Global Wealth Management in an Uncertain World – EP255

Chris Ball, CEO of Hoxton Wealth, discusses the company’s focus on wealth management for internationally mobile individuals, particularly in Dubai. Hoxton Wealth, with offices globally, offers fee-based services to high net worth and mass affluent clients, emphasizing comprehensive financial planning. Ball highlights the use of AI for administrative tasks and the challenges of property investing in the current political climate. He also addresses the debate on retirement income withdrawal rates, advocating for a balanced approach between needs and wants. Ball mentions the impact of geopolitical risks and economic trends on their business and the importance of risk-tailored investment strategies. NB This episode contains general information and should not be considered financial or investment advice. 

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps for EP255

  • Introduction (0:00)
  • Hoxton Wealth’s Services and Client Base (4:59)
  • Challenges in Property Investing and Political Climate (5:14)
  • Client Profiles and Financial Planning (5:28)
  • Investment Strategies and Risk Management (14:43)
  • Cryptocurrency and Geopolitical Risks (20:35)
  • Economic and Demographic Trends (23:59)
  • AI in Wealth Management (31:58)
  • Technology and Client Communication (34:37)
  • Final Thoughts and Contact Information (35:44)

Takeaways

  1. The complexity of Global Wealth Management: Managing assets across multiple jurisdictions requires expertise in different tax regimes and regulatory environments, especially for high-net-worth individuals and ex-pats.
  2. AI’s Role in Financial Planning: While AI may not replace human financial advisors, it helps streamline administrative tasks, reduce costs, improve efficiency, and allow advisors to serve more clients.
  3. Property Investment Challenges: Rising interest rates and increasing regulation make property investments less attractive, especially for those looking for passive income in retirement.
  4. Retirement Strategies Vary: Wealth management clients need personalized plans that balance their wants and needs for a comfortable retirement.
  5. Crypto’s Place in Wealth Management: Chris Ball believes cryptocurrencies are here to stay. However, investors need to be prepared for volatility and risk with crypto, making it unsuitable for many traditional clients.

Links relevant to the conversation

Chris’s business, Hoxton Wealth: https://hoxtonwealth.com/ 

Chris’s bio: https://hoxtoncapital.com/staff/chris-ball/ 

Chris Ball’s LinkedIn page: https://www.linkedin.com/in/chrisballhx/ 

Fundsmith Equity Fund mentioned by Chris in the episode: https://www.fundsmith.co.uk/ 

Controversy over Dave Ramsey’s retirement withdrawal rate recommendation:

https://youtu.be/Rc1nJj4vE_w?si=_7fVgjShgFKg6VX-

https://youtu.be/kghKiz1Mi_8?si=2jAP9DtWKN-LoR50

https://youtu.be/dM6Jqm7PPpg?si=pPvYh08bieusPBzO

Info on tax in UAE:

https://taxsummaries.pwc.com/united-arab-emirates/individual/taxes-on-personal-income

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee.

Website: https://www.lumocoffee.com/10EXPLORED 

Promo code: 10EXPLORED 

Transcript: Balancing Needs & Wants: Chris Ball, Hoxton Wealth, on Global Wealth Management in an Uncertain World – EP255

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Chris Ball  00:04

Crypto is here to stay number one. I don’t, I don’t really think it’s going anywhere. I think you’ve got to be quite that, have quite thick skin to invest in crypto and be comfortable with ups and downs. Probably most of these things is, as we saw, kind of pre 22 was that a lot of people don’t really understand what cryptocurrencies are and what drive them, and unfortunately, a lot of people lose a lot of money.

Gene Tunny  00:35

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. In today’s episode, we’re joined by Chris ball, CEO of Hoxton wealth, we talk about his company’s focus on wealth management for internationally mobile individuals based in Dubai. Hoxton wealth operates globally, with offices in the UK, Australia, the US and Europe. The company caters to high net worth and to mass affluent clients, offering fee based services. Chris emphasizes the importance of understanding clients’ needs versus their wants and developing comprehensive financial plans for them. In our conversation, he highlights the use of AI to streamline administrative tasks and the challenges of property investing in the current political climate with various left wing parties proposing radical policy interventions. OK, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners and details are in the show notes. Okay? Without further ado, let’s dive into the episode. I hope you enjoy it. Okay? Chris ball from Oxton wealth, the CEO and founder, thanks for appearing on the show.

Chris Ball  02:22

Thanks very much for having me appreciate it. Gene, yes,

Gene Tunny  02:26

be good to chat about wealth management and what you’re up to. So you’re based in the Middle East. Is that right? Chris,

Chris Ball  02:34

exactly, yes. I’m based in Dubai. I’ve actually been in the Middle East for 13 years now. So I moved out in 2011 in August, 31 of August. 2011 actually was in Abu Dhabi for nine years, which is the capital of the UAE. So Dubai’s more well known part of the business, well part of the country or part of the territory, but Abu Dhabi is actually the capital, and that’s where a lot of the oil wealth is in the United Arab Emirates. So yes, I’ve been based here for 13 years. Really enjoy it. We built out our business here. My kids were born here. So it’s been, it’s been quite a nice place or good it’s been a good place to me, I suppose, is the best way to put

Gene Tunny  03:18

it right. Okay, and what’s your business involved? What does Oxton wealth focus on?

Chris Ball  03:22

So we’re a wealth management business team. We focus on helping people that are internationally mobile manage their funds. And we’ve also got a UK domestic business as well, where we help people domestically in the UK with their financial planning. You know, we help with everything from helping people plan for retirement, plan for their kids’ education, funding for property purchases, tax planning, insurance planning, all of this good stuff that fits under that umbrella of financial planning. We’re a fee only or fee based service as well. So we don’t get paid commissions unless it’s for insurance related products, but all the financial planning and the investment advice that we give, we charge a fee, which makes us quite unique internationally, because a lot of people still work off the commission only model, and all day, every day, we’re helping people globally manage, manage their money in The in the most effective manner. We typically have people come to us with more complex situations, so maybe assets in Australia, but living in the UAE, or assets in the UK and living in the States. And we’ve got businesses globally. So obviously, in Dubai, where I currently am, we’re licensed and regulated. Also got offices in the UK. We’re regulated by the Financial Conduct Authority. We have offices in Australia, where we’re regulated by ASIC. In the US with the Securities and Exchange Commission sec, and in Europe, our base is in Cyprus, which gives us that global coverage and enabling people move around to, you know, to manage their. Their their money and their funds and their planning more effectively. Gotcha.

Gene Tunny  05:03

And what’s your client base look like, broadly? Is it a lot of expats? Yeah,

Chris Ball  05:09

a lot of them are gene A lot a lot of our clients are expats or internationally mobile. Funnily enough, a lot of them have gone back to their home destinations as well now. So we have quite big footprints, dostically, with domestic what you would see is domestic clients, but it’s they’ve lived internationally, and now they cut, now they’ve come back. But, yeah, we, we typically help people with more complex financial planning needs than, you know, I’ve been a plumber and have, you know, put away a bit of their retirement, and they just want someone to manage it. So typically, we’re dealing with assets in multiple countries, and helping people plan for the next generation and how to how to pass it

Gene Tunny  05:46

on, right? And you have a lot of high net worth individuals. We

Chris Ball  05:51

do, indeed, yeah. So we deal with what we call mass affluent and high net worth individuals. We don’t have too many ultra high net worth individuals that we deal with our service or how we you know, the advice that we provide is is more geared to towards mass affluent and high net worth individuals, but typically, like I said, it’s more complex planning needs. So assets spread around different tax taxation rules that you need to take into account different regulatory regimes because they’ve got assets in different places and really working with them to find the best solution for them and their families,

Gene Tunny  06:27

right? Okay, before we I want to ask you a question about that. But before we do that, can you explain what do you mean by mass affluent versus high net worth? I mean, I just use high net worth individual, I sort of had an idea in my mind of what it is, but I wasn’t thinking too specifically. And then you mentioned ultra high net worth. How do you distinguish between those categories? We typically

Chris Ball  06:51

do it in kind of investable assets. So we’d say, let’s say I don’t know, half a million, up to a million, or that’s probably more like 250,000 up to a million, of assets we would class as what we call mass affluent. So there’s, you know, a lot of those people, and they’re affluent high net worth, we typically say from one to 5 million, and then ultra high net worth would be 5 million plus.

Gene Tunny  07:15

Gotcha, okay. And you talked about how you help them manage their their affairs. What are the typically, what are the things you look at, or what are the issues you deal with? I mean, you mentioned assets in different jurisdictions and tax I suppose I’m wondering, how do you, how do you go about finding a solution for your clients? A

Chris Ball  07:36

lot of people come to us with a very you know, they typically come in with one thing that they want to get, you know, one thing they want to get sorted. So let’s say a lot of our clients, what we call us connected people. So they have assets in the US, but they no longer reside in in the United States. So we would work with them to help them manage those US assets when they no longer reside in the US. But what most people really want to know is how much and when. So how much do I need and when can I stop working if I want to? Yeah, and you know, they’re the type of questions that we ask people because it’s difficult. You have to look holistically at all of their assets. You need to understand what their objectives and what motivates them and what they want to do, how much and when is very broad. How much you need will depend whether you want to fly business class, or you know you’re happy with economy, or whether you want five holidays a year, or you just want to go on one, whether you just want to travel domestically, or whether you want to live internationally, whether you want to support your kids, all of these things. It’s about questioning and listening and trying to find out, ultimately, what’s important to the client, to help them understand how much that they will need when they want to stop working. Now, where, you know, we kind of split that into kind of two buckets, which is, you know, what do I what do I need? You know, what’s a want, what’s a need, I suppose the best way to describe it. So what do I need to survive? And what do I want on top of that? And you know that also helps us understand realistically when they can retire. So you know, if you want $200,000 a year of income, and you’ve only got half a million dollars saved up at the moment, between your assignment assets in your bank account, you’re going to need to work for a bit longer, unfortunately, and helping them understand when that, you know, is likely to be given how much they can put away. And, you know, looking at realistic returns, and also stress testing that and flexing it as well. Yeah, is important. And you know, they’re the kind of things that we do, and they’re the kind of things that we really help people with. It’s about helping them develop that plan.

Gene Tunny  09:45

Yeah, gotcha. And you do financial modeling. How do you actually come up with that advice?

Chris Ball  09:51

So we’ve got an app that we have. So the first kind, I suppose, the first kind of step is, is that we would look to help people understand where they are. Are in the journey right at the start. So, you know, it’s great knowing where you want to get to, but if you have no idea where you started from, you’re not going to know how to get there. Very simply. There can be multiple ways to get to destination. So first off, it’s really getting a, you know, building a balance sheet, building a view of your net worth, of what you currently have. So we can get a good picture of where you currently are. We then go to the next phase, once we’ve got that. And we do this all on our app, our Hoxton wealth app, it’s free to download, even for people that aren’t clients, and they can go through this same exercise. The next is understanding their objectives, what’s important to them, understanding what they want out of life. Like we just said, The next phase is the modeling gene, which is we do through Cash Flow Planning, so ultimately helping them understand how much, and then looking at when. Then it is developing out the financial plan with them, step four, and then step five, which in my view, is the most important part, is constantly reviewing that with them every, every year, every six months, to make sure it’s still in line with what they want, making sure, you know, if there’s been any life changes we’ve, we’ve been working with them to ensure that their plan still works, or in making any tweaks to it if we need to.

Gene Tunny  11:17

Yeah, okay. Oh, that’s that’s good. And Have you followed this debate in I’ve seen it on YouTube between Dave Ramsey and and other financial advisors about what percentage you can take out of your your retirement funds each year and live on without running the risk of running out of money. And so one of Dave Ramsey’s colleagues, George Carmel, I think it is He. He was saying, Oh, be really conservative. There’s a he was saying 3% I think the fire people financially independent retire early people say 4% and then Dave Ramsey goes, no, that’s just too conservative. You can take 8% out or so, yeah, it was, yeah, but no one else agreed with Dave. That’s a huge controversy on about that bit of advice. I don’t know if you had a if you came across that at all, or had any views on that, but I’ll put some links in the show notes anyway, if people are interested in in checking that out. I just thought it was interesting that there was that even with someone like Dave Ramsey, who’s a well known financial advisor, he Yeah, that advice just seemed a bit yeah. It was very contentious. So there’s still some, it’s not a, I guess there is an element of that is up for debate and some of this advice. And suppose it depends on what rates of return you’re assuming and what level of risk you’re willing to tolerate. I don’t know if you’ve got any thoughts on that at all. Chris,

Chris Ball  12:55

yeah, I think the issue with kind of operating this, kind of, what the rule of four some people call it, it’s, you know, 4% which is the fire people like you said it’s, you know, it’s kind of widely adopted, I think, by a lot of planners. I mean, really, again, what we look at is, is okay, so needs and wants, you want your needs, ideally, to be built up with some kind of fixed level of income, because you don’t want to be worrying about your needs in retirement. So far, at the moment, what an area that we’re looking at for a lot of people, is using those needs or getting those needs funded by annuities, if you can do that when interest rates are high, and lock it in now, actually, that gives you a really good base in the US. You’ve got things like social security in the UK, state pension, etc, that can go towards that. But building that solid base up can be, can be a very sensible and prudent thing to do, because then you haven’t got to worry about the needs. With the wants, you can be more flexible. And typically with the wants, you want to be more, you know, in it, and you know you’re talking about 4% but you might actually want to take out 8% in the earlier years, and then 3% later on, as life tends to slow down, and that’s what we see a lot of as well. As people get, you know, older and maybe less mobile and want to go on less holidays, then you know that what’s the point in taking out more you really want to spend more in the earlier years? Well, probably when you can enjoy it, and then less than the later years, when you know, potentially, you know, health or or, or other issues, and getting around might, might prove a problem. Um, ultimately, what you don’t do is die the richest person in the graveyard, either way. Yeah. But also, you don’t want to be having to go back to work at 75 because that’s no fun for anyone, because you’ve run out

Gene Tunny  14:39

of money. Yeah. Yeah, exactly. So that point you made about, okay, make sure they get a steady, dependable income. And you were saying, annuities. What about investment property? To what extent are you getting? Are you advising them on the types of investments to generate that steady income? Do you have thoughts on. That, Chris,

Chris Ball  15:00

I think, I think property investor. I mean, look, it depends what parts, what parts of the world you’re talking about. So property investing, for a number of years, has been in vogue. So a lot of people have really found it attractive, or wanted to be a landlord. Now, what we’re finding is, with it rising interest rates, is it’s not very attractive to be a landlord. And actually, there’s a lot of headaches that come with being a landlord. So mortgage payments have gone up, but rental increases haven’t gone up as much. There’s very there’s more, you know, there’s a lot more socialist movements in the western world as well now that are making it more difficult to become a landlord. And, you know, put pushing, uh, pushing tougher regulation and on on landlords and how they operate, and then obviously, you’ve got all the maintenance that goes along with it as well. Do you really want to be trying to arrange a plumber in your 70s when you’re enjoying your retirement because your rental property is gone? Probably not. However, some people are portfolio landlords, and they’ve got, you know, a big you know that they use it for their fixed level of income. It is a great level. It is a great way to earn an income, I believe. And it should probably, you know, you should have some property in your portfolio, the cornerstone of it. But if you want a hands off investment, and you don’t like the day to day running of it, then you know, you should almost forget it, because I think it will become more of a job in retirement. It’s like most things, you’ve got to really want to do it and enjoy it, whereas your more traditional style investments, much less hands off, much more liquid. You know, there’s no management involved really, you know, by dividend paying stock or something like that. So I feel that more people are going to creep back into that side, and property will become less in vogue as we go forward. But, yeah,

Gene Tunny  16:48

gotcha. So can I understand? I just want to understand, are you, are you advising on the specific investments they should make, where they should put their money, or you just advising on the broadly what they should be saving what the broad asset allocation should

Chris Ball  17:04

be. So we’re holistic financial planners. We do take into account people’s risk tolerances and then ultimately help them devise investment portfolios that are suited to their risk. You know, we everything we do is risk created for our clients. Ultimately, we don’t want to be putting someone in 100% equities or a single stock equity, if they are if they won’t sleep at night when the market goes down by 10% you know, it’s all about what tolerance that you have to risk and how comfortable you can get with taking on risk yourself. But you know, typically, Gene we don’t advise on individual stocks and shares, so we’re not saying, buy Apple, sell Amazon, buy Tesla, sell Nvidia. They probably don’t want to sell nervidia at the moment. But ultimately, what we’re set what we’re saying to them is, is that we are broad based, indexed investors. We have a few actively managed funds in there with active managers that we feel have a good chance of beating the market over time due to their investment philosophy, which is typically long term investing. But we are in this for the longer term. We’re not day traders, we’re not jumping in and out. We’re not jumbling around asset allocation. We’re not trying to be territory specific. It’s it’s broad based, indexed investing is what we typically do,

Gene Tunny  18:24

yeah. And so those active investors, or the fund managers, where are they based? Are you able to say anything about them? I mean, I recognize it might be confidential, but what sort of businesses are we talking about there?

Chris Ball  18:38

So one of the funds that we invest in is a fund called fund Smith. I don’t know if you’ve ever heard of them before, by a guy called Terry Smith. So he’s the UK’s answer to Warren Buffett. They run about a 50 billion US dollar equity fund. They do, you know they do really well. He’s actually in our office yesterday, talking to our team. So we invested in it, in their active fund, other funds that we’ve looked at before, Blackrock world technology, we found that’s been good fun to get technology exposure, and there’s a couple of others as well. But really what we’re looking for is long term over performance of the equity market, which, as we know, it’s very difficult for a active manager to do over a long period of time. But there are the kind of, there are the there are the individuals that can potentially do it. And ultimately, I know it’s very difficult to pick them, and statistically speaking, it’s unlikely that they will over long periods of time, but we find it just offers, you know, that kind of passive, active hybrid can be quite nice and can offer some good returns to,

Gene Tunny  19:41

okay, so, well, a combination of passive and active. Okay, gotcha, gotcha. And how did you come to pick those funds you were looking at their historical performance, or you just, I mean, I imagine they do a roadshow, they pitch to you. I mean, how do you make the decision which, uh. Which fund manager to go with. So we

Chris Ball  20:01

have a fund research team that are constantly looking at different managers and speaking to them. We have a buy list, and then from that buy list we, you know, we essentially drill down. We have investment notes on each and then we’ll drill down and pick the underlying model portfolios. So we don’t tend we tend to run model portfolios again. Our our planners are financial planners. They’re not investment advisors. They’re two separate things. So we have a set of investment advisors that construct the portfolios for the financial planners. Gotcha?

Gene Tunny  20:35

Okay, yep, yeah, that makes sense. And I should ask, because I’ve had a few guests on the show talk about crypto, and what are your thoughts about cryptocurrency?

Chris Ball  20:46

I think crypto is here to stay number one. I don’t, I don’t really think it’s going anywhere. I think you’ve got to be quite, quite thick skin to invest in crypto and be comfortable with ups and downs. Probably most of these things is that, as we saw, kind of pre 22 Hey, it was during 2021 when the market, the crypto markets, got up to their highest points, was that a lot of people don’t really understand what cryptocurrencies are and what drive them. And unfortunately, a lot of people lose a lot of money when your next door neighbor becomes a expert in something. It normally means that the market is getting pretty hot and it’s time to get out. Unfortunately, when you’ve got people shouting to the moon every five minutes, then you know it’s it can make things slightly more difficult. But I do think, if you are happy for a large risk rated return, are you happy for a very big upside, but also happy to stomach that the big downside that can go with it and the volatility, then I think crypto does present an interesting opportunity. And like I said, I think it’s here to stay, but that’s not something that we would typically advise on. That’s just kind of my personal opinion on it. But as a business, we, we aren’t regulated, to advise on crypto, right?

Gene Tunny  22:01

Okay, yep, gotcha. And how concerned are you with geopolitical risk at the moment, particularly since you’re in the Middle East, is that affecting your your advice at all? Yeah.

Chris Ball  22:15

I mean, look, we don’t advise locally in terms of our you know, we’re not investing in local assets here in the Middle East. Obviously, political tensions are rising with, you know that Hamas and Israel, and now Hezbollah and Israel, that seems to be getting stronger. Obviously, if there is an out and out war, that wouldn’t be good for the Middle East, but you would expect things like oil prices to rise pretty rapidly as a result of that, especially if it’s affecting especially for other parts of the Middle East, getting involved as well, Saudi UAE, other bigger players, that would not be good necessarily, for for the overall region, in terms of locally. Are we seeing anything on the ground? No. I mean, this business is normal. You actually hear very little about it, unless you’re reading a lot of the publications. It’s not impacting your daily life in any way. Obviously, we’re looking, from a investment, short term investment perspective, at what’s happening in the US. And you know, seeing, we’re seeing how then elections in November will play out Ultimately, though, we don’t think a lot of it will impact too much. I think you know, if Miller Harris gets in, then ultimately it will continue. How, how will what we’ve seen with Biden more the same, and then obviously, if Donald Trump gets in, you know, we know that he tries and pushes up the markets. We might seem see a bit more of a short term push in it. But really, you know, the Constitution in America is, is, is insanely well guarded, and doesn’t really allow governments to make too many horrendous decisions. You know, it has to go through. Congress has to go obviously, before it can, you know, be put into action. So it’ll be interesting to see how it goes and what happens. But I wouldn’t expect anything too drastic, right?

Gene Tunny  24:07

Okay, okay, fair enough. And I’d like to ask about the economic and demographic trends and how they’ve affected your business and what you see happening over, say, the next decade or two. I mean, are you seeing changes in the demographics of your client base? Are you seeing more of the high net worth individuals due to I don’t know to what extent you’d you’d see it, but there are concerns expressed by some about growing inequality globally, the rich getting richer, the poor getting poorer, so to speak. Do you see that those impacts in what’s happened with your business, the growth of your business, the composition of your client base?

Chris Ball  24:53

Yeah, I think yes, and no, I suppose that there is obviously that worry that the rich are getting richer and the. Were getting poorer, that that equality gap, I think what we’ve seen more of is the flights of wealthy people to places like the Middle East, or places with lower taxes, as we’ve seen Taxes increase. And obviously, you know, that was bound to happen with the amount of money that they were spending during covid and, you know, trying to push the push through more money into the economies that’s got to be paid back for from somewhere. And I think it’s kind of like payback time now, especially in the UK, we’ve got a Labor government in now, and Keir Starmer came out and said, those with the broadest shoulders would bear the cost of it. You know, for everyone, basically, you know, if you’re rich, you’re rich, you’re going to get taxed more than anyone else, so that obviously, what concerns a lot of more wealthy people, I think that you’ve got the one end of the spectrum, which is the ultra high net worths that it doesn’t really matter, and they will go wherever they need to, and obviously they can pay for the advice. It’s more that kind of mass affluent ultra high net worth that it will really pinch the can’t move as easily. And, you know, we’ll, we’ll get caught up other things that we’ve seen, obviously inflation and rising interest rates. You know, that’s that’s been interesting, because we’ve obviously seen money come out of equity markets and go into things like money market instruments. So, you know, there was an insane amount last year in money market instruments, because interest rates were so high and the risk rated return meant that you could keep it there, and you were getting over 5% return. I mean, you know, why would you be investing in equity markets that had the potential to go down quite a lot? You know, technological advancements, we’ve obviously seen things like aI really driving the markets this year as well, and that’s had a big impact whether that kind of shine wears off, and what happens over the longer run is this, is there a lot of hype with looking at some of the PE ratios of some of the S, p5, 100. I mean the top seven, all of them are over 30. I think bar meta, which was at 29 that’s a lot. I mean, I think it was something like Tesla, yeah, he was paying, I think it was nearly double check, but I’m pretty sure it was like 74 I suppose. I mean, how can a car manufacturer be beat that? I know they’re trying to build themselves as more as a technological business, but crazy. So a lot of things like that are driving our business as well, because ultimately, it’s driving more wealth to people that hold that and have back technology. Shift to ESG, another one you know that we’ve had, we before, covid, if you remember, everyone was on this call, whole kind of environmental, social and governance piece. It seems a little bit less in your face now, but I think we’ll get back to that as as things, as things die down a bit more. Maybe not with a Republican, with a with a Republican Congress or republican president, but we shall, we shall see how that plays out. There’s so much that goes on that that impacts how we operate, but it’s really just trying to put your finger on it, isn’t it, and see which things really move the move the dial.

Gene Tunny  28:09

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  28:43

Now back to the show. You remind me about the tax settings in the Middle East. Said is, am I right in remembering they don’t have an income tax is that right? Some

Chris Ball  28:57

countries do, but ultimately, where I’m currently based now, the United Arab Emirates, doesn’t they recently introduced corporation tax, but there’s no income tax on individuals. Saudi Arabia, no income tax. QA no income tax. Qatar, no income tax. Bahrain, no income tax as well. So the GCC zero income tax for individuals,

Gene Tunny  29:22

right? And, I mean, Saudi’s got, I guess, does UAE get oil income too, like the Saudis do from their their state owned oil company, yeah, and have a soft and wealth fund. Okay, I’ll have to, I’ll look a bit more into it, but yeah, it might put some links in the show notes. So it’s interesting, isn’t it? That’s one of the reasons people are attracted to to Dubai, for example. And you get a lot of really good people go to Dubai. But then there’s also concerns about money laundering. I’ve seen that there’s concerns about Australian outlaw motorcycle gangs, their members. Buying up luxury apartments in Dubai high rises. There was a 60 minute story about that couple of months ago. So yeah, Dubai is very attractive to people with money from all sorts of different places in the world, all sorts of

Chris Ball  30:16

backgrounds, exactly. I mean, Dubai was on the gray list for money laundering, until recently, where it’s come off. So I think that was the kind of jolt that was needed locally. And they take it very, very seriously. So the banks over here, you know, probably more so than you get in Australia and in the UK, constantly asking you, where’s the money come from? You’ve sent money. Can you prove where it’s come from? Like, there is a there is a high area of transparency that’s needed with the banks. You can’t operate in this opaque nature anymore. You know, cash transactions for properties, they’re trying to wean out and things like that. So they are making it more and more difficult and trying to take it seriously, as you would expect from an economy that is developing and wants to be developed, and is doing, you know, all the good things that they’re doing it, it would be a shame to get tarnished with that, with that brush, but, yeah, I mean, look locally the wealth is earned from, you know, the locally Abu Dhabi, the wealth is earned from will that is then, you know, that has been their main source of income. They’ve developed the Abu Dhabi Investment Authority, and then various subsidiaries around that as well, which is their sovereign wealth fund, which ultimately they go out and invest in other businesses as well to try and buy returns. So when the oil does run out, they can continue to support the country as well. And obviously, very similar to what they do in likes and Norway Saudi Arabia’s got there, I think it’s the the PIF, the public investment fund as well. So, yeah. So, you know, it seems like a lot of these Gulf states, that’s how they want to go and do things, which is obviously great, because if that keeps income taxes down, then then that’s obviously good for them to attract wealth as well, which will ultimately be spent indirectly in their economy as well,

Gene Tunny  32:00

yeah, yeah, okay, and that’s, that’s good, Chris, it was a good overview of different, different factors, different trends. What ask about AI. You mentioned AI and you were talking about, you know, what that meant for the market, for investment opportunities, what does it mean for you? What does it mean for wealth management? Are you taking advantage of it?

Chris Ball  32:22

Yeah, definitely. I think that AI will not replace advice, because advice is about questioning and trying to work with you to get answers. But where, I think you know, ultimately, people want to see the whites of people’s eyes when they when they invest. It’s it’s nice to deal with a person. And I don’t think you’ll replace that in the in the near future. Anyway, I think ultimately, AI, what we’re using it for, is to try and limit the amount of repetitive tasks that we have to do, trying to take, you know, trying to improve our administration, processes, data entry, processes, all of these things by using AI, which ultimately, hopefully drives down costs, increases profit margins within the business, and means that ultimately we can try and help a wider range of people that need our services. Because, again, you were talking before about that equality in terms of net worth that exists in wealth management as well. I mean, you know, there’s a subset of people that could probably really do with advice, but don’t get it because it’s not profitable for firms to be able to service them. They can’t do it. They can’t run it at a loss. So yeah, so it’s we all. I think we’ll see more AI tools come in to offer simplified advice to that subset of people, and then as their wealth accumulates, then they’ll be able to deal with maybe more face to face advisors, where, when it becomes a, you know, feasible for them and for the company?

Gene Tunny  33:51

Yeah, yeah. So there’s talk about robo advisors. So is that that’s what you’re thinking about. For the people with the smaller amounts of of funds they there’d be automated advice.

Chris Ball  34:03

Or, yeah, I think, I think Robo advice is an interesting one. I don’t think a good financial planner has ever lost a client to a robo advisor. Okay, robo advisors more. I’ve got $100,000 or $50,000 I don’t want to use an advisor. I just want someone to place the funds for me. So it’s more. I think it Okay. Probably replace investment advice, but the financial planning aspect is much more personal.

Gene Tunny  34:25

Yeah, gotcha, because you have to take into account the personal circumstances figure out what Yeah. The thing I liked how you were, you were talking about needs versus wants and the standard of living that they want in retirement. I thought that was, they were good points, right? Oh, okay. And how, finally, how are you using technology to interact and communicate with your clients? So, how does so, do you have an app or a portal that they Yep, okay,

Chris Ball  34:56

so we’ve got the Hoxton wealth app gene, which is our client portal. So they can, like I said, they can see their overall net worth, their plans, their policies, they can upload their documents. We communicate through push message out to them and things like that. And we’re really developing that out to become our one stop shop to communicate with clients. We have our back end, which is our operating system, effectively, which is called matrix. And that is how we, how we, you know, do fact finds, how we manage our client relationships, how we help the advisors manage more clients efficiently, rather than through paper based things, losing data, you know, data security, data integrity, is super important to us, and also, you know, it’s, it’s, you know, worth a lot to a business in terms of management information and the like. To, yeah,

Gene Tunny  35:46

absolutely okay. And Chris, what, what? Where can we find more about you? Do you have a podcast? Do you have a newsletter that people can can subscribe to? Yep,

Chris Ball  35:57

so I feature regularly on a podcast called financial planner life. But the best place to find out more about me is through my LinkedIn profile, which is Chris Paul. If you just type Chris Paul Hoxton into the search bar, it will come up and then also, obviously our company website, http://www.hoxtonwealth.com, you’ll be able to see more on you know what we’re about and what we’re doing and how everything’s going.

Gene Tunny  36:23

Okay? Well, I’ll put links in the show notes to those, to your LinkedIn, for sure, and to your to your website. Found this really informative. And, yeah, good discussion, Chris, I like the point you made about, yeah, the risk to investment properties. We’re seeing that here within Australia, because we’re having a, you know, major housing crisis, and I guess, yeah, big increase in homelessness. That was a sharp increase in rents about a year or maybe a year or so ago, and now you’ve got a political party, which was the Greens political party, and it’s morphing into a party of renters, and they’re getting a lot of traction because there are a lot of disaffected, you know, people out there who, who are, you know, not happy with the housing situation. And so, yeah, the great, but the so I understand where they’re coming from. The issue is that the policies that The Greens are advocating for are not actually correct the problem, and could actually make it worse with their the idea of red freezes and caps and things so that all sorts of silly, you know, really bad economic policy. But yeah, I thought your point was well made, and it did it. So, yeah, yeah, absolutely, that’s a really good point. Any, any final thoughts before we wrap up?

Chris Ball  37:47

No, that’s it for me, really, unless you’ve got anything. But thanks very much for having me on. Really appreciate if your if your listeners want to download our app, the Hoxton wealth app, type it into the app store, they can download it for free. Yeah. And if you ever need anything, let me know. Will

Gene Tunny  38:04

do okay? Chris ball from oxen wealth, thanks so much for joining me.

Chris Ball  38:08

We appreciate gene thanks very much.

Gene Tunny  38:11

Righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics, explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a writing. Thanks for listening. I hope you can join me again next week.

Obsidian  38:58

Thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

Efficiency and Externalities: A Q&A on Market Failures – EP254

Show host Gene Tunny responds to listener feedback about the private versus public sector’s role in wealth creation, particularly addressing externalities like environmental harm and whether governments should fund facilities like Men’s Sheds. He also explores the efficiency of the private sector compared to government spending, weighing the evidence on both sides.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps for EP254

  • Introduction (0:00)
  • Externalities and Market Efficiency (4:47)
  • Government’s Role in Addressing Externalities (11:30)
  • Coase Theorem and Market Failures (19:43)
  • Government Spending and Efficiency (26:31)
  • Men’s Sheds and Government Support (32:51)
  • Scott Prasser’s Critique of Government Spending (39:43)
  • Balancing Government and Private Sector Roles (45:49)

Takeaways

  1. Externalities in Wealth Creation: Private markets can overlook externalities such as pollution or public health impacts, justifying government intervention in some cases.
  2. Incentives for Efficiency: Due to market competition, the private sector generally has stronger incentives for efficiency, while government projects may lack the same discipline.
  3. Government Spending Criticism: Many government projects, particularly those done for political reasons, are inefficient and do not consistently deliver expected benefits.
  4. Cost-Benefit Analysis is Crucial: Government spending should be evaluated through thorough cost-benefit analysis to avoid wasting public funds.
  5. Coase Theorem and Market Solutions: While private negotiation can theoretically resolve externalities (as per the Coase Theorem), it typically does not work in practice due to high transaction costs and imperfect information.

Links relevant to the conversation

Relevant previous episodes:

Government vs Private Sector in Wealth Creation:

https://economicsexplored.com/2024/07/05/government-vs-private-sector-who-generates-wealth-ep247/

White Elephant Stampede:

https://economicsexplored.com/2022/10/17/white-elephant-stampede-w-scott-prasser-ep161/

Coase theorem paper – “Does the Coase theorem hold in real markets? An application to the negotiations between waterworks and farmers in Denmark”

https://www.sciencedirect.com/science/article/pii/S0301479711003331

Urbis review of Men’s Sheds:

https://www.health.gov.au/sites/default/files/documents/2022/01/review-of-support-for-the-men-s-shed-movement-current-state-report_0.pdf

Beyond Blue Report on Men’s Sheds:

https://mensshed.org/wp-content/uploads/2022/05/Ultrafeed-beyondblue-Mens-Shed-in-Australia-Final-Executive-Report-2013.pdf

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Transcript: Efficiency and Externalities: A Q&A on Market Failures – EP254

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Scott Prasser  00:03

The governments love to, love to announce iconic projects. When I hear the word iconic, I run a mile. Okay, this is Danger, danger, or this is going to be a landmark, or they want to have a vision. I don’t want governments and visions. Thank you very much. It’s usually the wrong ones, and so it’s this thing of meeting the electoral demand to be doing something, instead of saying nothing can be done. Okay, that in some cases it’s not government’s responsibility to do it, and if we do anything, it doesn’t, doesn’t have any effect.

Gene Tunny  00:40

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show this episode. I want to respond to a question from a listener about a recent episode, government versus the private sector who generates wealth. And then I also want to respond to some feedback from another listener about a previous episode. So I really value getting your feedback and your questions. It all helps me think about what I should cover on the show and the types of guests you want to hear from so please keep it coming. You can get in touch with me via the contact details in the show notes. So yep, I’d love to hear from you before we get into it. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, the first thing I want to do is to cover a great question that came from a listener named Mark. I’ll read out the email that I received from Mark. I’m a non economist in the Queensland public service, and as such, very much. Enjoyed your recent ish episode, government versus private sector who generates wealth? One of the arguments in the podcast was that consumers demonstrate how much they value goods and services produced by the private sector in their purchasing decisions, and that these purchases are evidence that the sector is generating value for the public sector, though it was pointed out that government spending is often inefficient and can even create a net loss, for example, because of poor discipline on business cases or spending. And Mark goes on to note, this seems to be comparing the Theory of Value slash wealth creation in the private sector with the practical realities of it in the public sector, and it ignores the externalities in private markets. Is it fair to say that, in practice, the private sector can produce profits and services that create harm to society, ultra processed food, tobacco products that cause environmental harm, etc, and this needs to be factored into an evaluation of its ability to generate wealth. And Mark goes on, this is a bit of a long winded way of raising an old argument. I guess. The response is, these harms are a result only of market design, and companies are merely following the incentives placed upon them. I’d be interested in your views, including, how do you think government should respond to the issue? So that’s a very good question. And I thought, yep, I should respond to this in the podcast. So my my quick answer to Mark’s question is yes, it is fair to say that the private sector can produce products with harmful effects. And Mark indeed gave some examples there, and he he mentioned the important concept of externalities. So these are external costs on to others other than the parties to the transaction so things like pollution, etc, or it could be cost to the public health system. So people, you know, if they smoke too much or they drink too much, then that will end up costing not only the individual who makes the choice to do those things, but others in. The society. I’ve covered externalities in previous episodes, but I probably should have mentioned them in the government versus the private sector episode, because, yep, they are an important qualification to the presumed efficiency of market outcomes. That’s absolutely correct. What I might do is I might play the segment from the episode that Mark has asked about, just so we can, I can think about exactly what I said, and we can talk about that, and can provide some more more commentary on in response to Mark’s observations and his questions. Okay, so let me play the relevant clip now. But generally speaking, and this is the point I will often make when I’m thinking about, well, when I’m talking about these issues, the incentives for efficiency are better in the private sector, and I think there’s a lot of evidence for that that came out of when governments were reforming public enterprises in the 80s and 90s, we learned about the significant efficiency gains that can come from that when governments outsource more of activity, outsourced more activities from the public sector. Clearly, there are failures. I’m not going to deny there have been challenges. There have I mean, there have been those botched privatizations in the UK, for example, particularly in rail and it looks like water, so I’m not going to be too I’m not going to be unrealistic or just assume, Oh yes, the market is always going to do things better. But I think generally the evidence is that the private sector is going to be more well, it’s got greater incentives for efficiency, because if you’re not efficient, you go out of business, whereas governments could, you know, governments keep going, and we tend to see that well, I mean public sector unions, for example, or construction unions, which where they Have a lot of members working on government projects, they can be very, very influential and affect the efficiency, affect the costs and the efficiency of government programs and spending. I think that is something that is worth thinking about here. I should make the standard point that economists always make, that it’s important to crunch the numbers. So we always should be doing cost benefit analysis of programs and projects. In some cases, we want to do a comprehensive cost benefit analysis. In other cases, it’s maybe it’s a much smaller amount of money, and it’s more of a it’s not the full blown let’s, let’s do a comprehensive economic study where we’re trying to estimate all of the relevant costs and benefits. It might be more of a desktop exercise. A simpler type of analysis, but we should be thinking whenever we’re spending money on on government goods as government purchases of goods and services. We should be thinking about the costs and benefits, the pros and cons, and to the extent that we’re not getting that those net benefits, to the extent that we’re not getting to benefit to cost ratio above one, a return on investment, we’re effectively burning money the government is then detracting from the wealth of the community, in my view, because that money would probably would have been Better if that activity was not done if it was, if it if some other activity occurred, possibly in the private sector. And I mean, the last governments have funded many poor projects. They continue to do so, whether because of politics or they they think that there’s some social benefit that mean, or equity benefit that means that the project should go ahead. Okay, so that was a clip from my government versus the private sector episode, and that’s what Mark was was asking about. Now, even though I didn’t explicitly mention the concept of externalities, they may have been in the back of my mind when I was when I was talking there, particularly when I was talking about the need to consider all relevant costs and benefits. I’ll note that I did try. Talk about the externality, or I’ve talked about externalities, and specifically the externality relating to greenhouse gas emissions in another recent Tish episode. So episode 243, the revival of industrial policy. Should governments pick winners. So what I might do is I’ll play a clip from that episode, because I think it, it does help provide that fuller picture when we’re thinking about government versus the private sector. So I mean my presumption, and this goes back to Adam Smith, right? I mean that if you’ve got two parties engaged in in trade or in exchange, you assume it’s mutually beneficial and that it adds to the well being of the community. Now, of course, if there are third parties that are affected, then that presumption is won’t be won’t be realized. I mean, we have to think about how these the actions, how the trade, how the exchange, could affect third parties, and particularly if there’s no scope for them to negotiate, for the third party to come into the negotiation, whether because of, well, there’s a lack of knowledge or there’s transaction costs involved. So what I’m alluding to there is the Coase theorem, which I might talk about after I play this clip. Now, what government should be doing is, to the extent that there is this externality from greenhouse gas emissions, we should put a price on that externality, which is the idea of a carbon price. And you know, you can do that in various Well, a couple two main ways. You can have an emissions trading scheme. You can, you can create a market, and then you have a carbon price that falls out of that. Or you can have a carbon tax. And those are alternative ways of of putting a price on carbon dioxide emissions, or and CO two equivalent emissions. Now you know that most economists would say that is the best way to do it if you’re going to do something about it. And you know that’s sending the signal to the market that there’s a cost to the environment of of this pollution. And you know, you leave it up to the industry to sort out the most cost effective way to reduce those emissions. You don’t go and, you know, actively promote particular solutions and and in Australia, there’s a there’s a growing concern that maybe we’ve been pushing too hard on renewables policy measures and subsidies, etc, have favored renewables, and we had, we’ve had too fast a pace of development, and that’s creating issues for the reliability of the electricity grid. Okay, so I was using a carbon price as an illustration of one way that governments can address externalities, and that is through corrective taxation. That’s that’s one way the the carbon tax, or it could be setting up a market based mechanism, such as an emissions trading scheme, which would impose, and you’d have a carbon price drop out of that. And there’s a debate about, you know, which is, which is the better mechanism, but both sort of pretty much get you to the same outcome. We won’t go into the into the specifics of that debate there, but the idea is to have the the cost of the externality internalized, to bring it into the decision making of the firms and the households in the economy. So that’s, that’s the idea. And I mean, climate change is one obvious example. I know there’s a controversy about, you know exactly how we should respond, how we the pace at which we respond. I was just using that as I recognize that controversy. I’m just using it as an example. And you can think of various other examples. There’s a debate about whether we should impose a specific junk food tax, so a tax on sugary drinks, and, you know, other items of junk food to help prevent or to reduce the incidence of overweight and obesity, diabetes, etc. And that can be viewed as a. Corrective tax, of course, you might have to think about any equity issues there, particularly if poorer households are more likely to consume those those products that have been taxed then richer households. But the idea is that a corrective tax might make sense there and correct the well, the the outcome, the sub optimal outcome that comes from private decision making. On the other hand, you could think of, or you could think of some activities that would be under supplied by the market naturally, and that there could be a case for governments to promote so that’s the other side, or the other possibility, that there could be a case for a subsidy of some kind to subsidize activities that are that are considered beneficial. Now, I think this is, you know, this can be problematic because I think often subsidies come about because of lobbying. So there’s political considerations. I think the case for subsidies can often be weak. Some people, maybe some people, argue that the EV subsidies are justifiable from an efficiency point of view. Maybe they argue, or they possibly do argue that, because there’s such a well you need a critical mass of EV users, so electric vehicles to support the all the charging infrastructure, maybe there’s a case to subsidize the purchases of Ev. So you’ll find at different times various various people in the policy debate making an argument on efficiency grounds for subsidies, and that’s that comes out of that same framework of of market failure that the externalities are part of. You can think of like, typically we talk about negative externalities, such as pollution, but you can also think of positive externalities, so I might have to have another episode where I go into some examples of of that. The key point is that, yep, Mark is correct. I agree with him that the the existence of these externalities is an important qualification on the efficiency of market outcomes. One example of a positive externality that has just occurred to me is the so called Knowledge spillover. So there’s recognition that the knowledge generated by businesses, the R and D that they undertake, that can spill over to other businesses, and you know that’s that’s beneficial to society, and hence that can justify subsidies or favorable tax treatment for research and development expenses. And you do find that in various countries. So, I mean, if we think about the or the development of, you know, various products, there’s R and D that that goes into them, and the whole community ends up benefiting from that, because not everything can be patented, not everything can be protected. I mean the idea of the smartphone, for example, that that Apple invented with the iPhone, while it can protect its own proprietary technology, the the fundamental idea of, or the concept of having, of having a smartphone, of demonstrating that that is indeed possible, that has provided benefits to to other businesses, to the community, because we end up with with competitors copying that concept. So there are these, these external benefits as well. And I think we might come back to this issue of externalities in a in another episode, because there are some really juicy issues to cover. And I’d like to give some really well thought out examples there. The other thing it would be good to talk about in a in a future episode is this concept of the Coase theorem that comes from Ronald Coase, who’s a Nobel Laureate, who was a British economist, but ended up, you know, spending most of his working life in the. The US. I’ve previously done an episode on Coase regarding his theory of the firm, but he’s famous for another theory which is received the name of the Coase theorem. And what that theorem tells us is that in certain circumstances, the private sector agents that are affected by an externality can actually negotiate and reach a an optimal solution, and that optimal solution doesn’t in any way depend on the allocation of property rights, whether it doesn’t depend on whether a particular party has has a right to pollute or a right to to be able to extract A resource free of pollution. So it’s quite a powerful fear, and this idea that you may not need government to impose corrective taxation or a subsidy or regulation, you can have private sector actors figure this out for themselves, and that it doesn’t actually matter who, what the allocation of property rights is. It’s a very powerful concept, and it’s it’s very much consistent with the Chicago School view. So if you’re regular listener, or you study economics, you know there’s this thing called the Chicago school, people like Milton Friedman, George Stigler, which is associated with very pro market or laissez faire thinking, and the Coase theorem fits rather, you know, it’s compatible with that. And indeed, Ronald Coase was a professor of economics at the University of Chicago Law School. So he’s definitely part of that, that Chicago school so very powerful fear, and we might cover this in another episode. I mean, the challenge with it is that, I mean, it’s very elegant, it’s a great theory. It’d be extraordinary if, if it really did work out, it’d solve a lot of our a lot of our problems. But I guess the general consensus among economists is that while you you can see some examples of this happening in practice, and you can see these negotiations, they’re not necessarily widespread. This is not a general solution. This is not a reason. We should just say, oh, let’s leave everything to the market, because the conditions for the Coase theorem are very stringent, so they’re very tough conditions. And there’s a paper that I’ll link to in the show notes. It’s a 2012 paper from the Journal of Environmental Management. Does the coast theorem hold in real markets an application to the negotiations between water works and farmers in Denmark. So the water works are the the businesses or the utilities that are providing water to the town, and the farmers will there. They’re doing things on their farm that can affect the quality of the water through the use of pesticides and and fertilizers. And so there’s a an externality there. And so what this study looks at in Denmark is to what extent private negotiations between the water works and the farmers can help resolve the the externality can can lead to what you’d say is an efficient outcome, and what it concludes Is that okay, so it considers the results of Danish Water Works attempts to establish voluntary cultivation agreements with Danish farmers. A survey of these negotiations, I’m reading from the abstract of the paper, a survey of these negotiations show that the Coase theorem is not robust in the presence of imperfect information, non maximizing behavior and transaction costs. Thus negotiations between Danish water works and farmers may not be a suitable mechanism to achieve efficiency in the protection of groundwater quality due to violations of the assumptions of the Coase theorem, the use of standard schemes or government intervention, eg, expropriation May, under some conditions, be a more effective and cost efficient approach for the protection of vulnerable groundwater resources in Denmark, right. Oh, okay, so, yeah. That’s a that’s a bit of a negative finding about the Coase theorem. I mean, it’s incredibly elegant, and I think it’s an important concept to learn as an economist, but in practice, it, it doesn’t really seem to to help us out a lot. But let me come back to that in a future episode. I think it probably does warrant a whole episode on its own. And yeah, that’s something you want to hear, hear about, or if you’ve got any views on the Coase theorem, or if you know of any, any studies or examples that you know show the a better result for the Coase theorem, then, then let me know. I’d love to I’d love to hear them, and I’d love to hear from you. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  26:20

now back to the show. Okay, so talked about externalities before we go on to the the other part of this episode, I want to go back to this point about there being this presumption that the the private sector will be more likely to be efficient and to provide what people want than the government. I guess I’m a little bit biased. I think that is true, and partly this goes back to, you know, when I first started learning about economics and studying economics. It must have been when I was in high school, and I remember my mother picked up a copy of Milton Friedman’s Free to Choose at a flea market somewhere. I think it was. And I remember reading that and just being struck by the incredible logic that that Milton and Rose Friedman advanced in that. And there’s a, there’s a great quote from Friedman. I found this on the net. I’m not sure whether this one was in free to choose, but something very similar would have been, and that this, certainly this concept is, is in Free To Choose. And Friedman’s other books, like tyranny, the status quo, and this concept, or this, this quote, which I think you know very much, summarized very well, summarizes his thinking, if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government, okay, so he’s talking about spending other people’s money on other people. And that’s the, that’s the situation where the people doing the spending have probably take the least care. Okay, so we’re, we’re going to be most careful and make the best decisions where we’re spending our own money on ourselves. So in the case that that Friedman’s talking about, there’s little incentive to economize or control costs, to ensure the money spent effectively, to maximize the value for for the recipients. I mean, I guess there is some, there is some pressure, because governments, they do have to, ultimately, there is a budget constraint, so they have to, I suppose they have some concern about the effectiveness of the spending, but it’s not as great as it would be if you’re spending your own money on yourself. I think that that’s fairly intuitive, so what we end up with is that we just end up with, you know, quite a significant amount of of wasteful, inefficient spending, spending that’s done for political reasons to get a political win for the government. I think we all can concede or accept that that is that something that happens. Okay? And then I’m just thinking you might if you think about that as a quadrant, so you’re either or a matrix, and you think of the different quadrants in the matrix, there are four different possibilities. You’re spending your own money on yourself, where you’ve got the most care and concern. You’re spending other people’s money on other people where you’re you’ve got the least concern or care. And then there are situations where you’re spending other people’s money on yourself. So if there’s a gift that someone will gives you money, say at Christmas, and then, therefore. I mean, I guess you do try and maximize your well being, but maybe you’re not as careful with your spending decisions. Maybe you see psychologically, even though this is not economically rational, maybe you see it as, Oh well, it’s a gift. It’s free money in a way, and I can afford to splurge, or I might buy something that I wouldn’t if it were my own, you know, if I had to work to to get the money. I mean, I certainly know that when I get gifts of gift cards for for books, I’m possibly more willing to experiment and buy a book that I I wouldn’t normally do, or I’ll just buy more books than I would when I go into the bookstore at one time rather than save that up for another time. So perhaps I am less discerning or less careful, but I’m still not completely careless. And then the other quadrant, there’s the quadrant of when you’re spending your own money on other people, so you’re giving a donation, or you’re, you’re, you’re engaging in some charitable activity, and sure, I guess you want to, you do want To make sure that you’re not wasting the money, but perhaps you’re not as careful as you would be if you had to spend it on yourself. You might, you might think, Oh, well, this, this will do. This is enough for I’ll make the judgment as to what’s best for the people. I’m, I’m, you know, buying this, this item for these clothes for, you know, maybe, oh yeah, they’ll, they’ll be happy with the socks I get them for Christmas. Yeah. I mean, I think we can all think of examples of where we we spend money on, on other people, and maybe, maybe we don’t put the time or attention into it that we’d put into it, we’d put into the decision if we if we were spending the money on ourselves. So I think, I mean, that’s going to differ for different people, of course, and maybe I’m over generalizing, but I do think that Friedman’s way of of thinking about it is useful, and I certainly agree with him about how I think we spend our own money on ourselves with much more care than the government spends other people’s money on other people, right? Oh, okay, well, that was, yeah, that was actually, there’s quite a lot to think about with, with Mark’s comment and his his questions. So Mark, thanks for that. Please continue listening, and please write in with with future comments. And indeed, if you have any reactions to what I’ve what I said today, I’d love to hear them. I’ll go on now to some feedback from another regular listener, John. I mean, John provided me with a heap of comments, and unfortunately, I don’t have time to cover them all in this episode, particularly since I spent so long talking about what Mark what he commented on. So sorry, John, but I will, I will respond to one of your specific comments, and John is, John’s pushing back or on some of the more free market or more libertarian guests and views that, that that I’ve had on the show. And this is, I think this is an interesting comment, and yeah, I’ve got some thoughts on it, so I want to read it out. I’ll read out the comment first, and then I’ll play the audio that that John’s responding to. One of the bits of audio John wrote, government does not necessarily mean centralized. There’s the Men’s Shed, which is a counterpoint to the criticism your co host on the ATA. So that’s the Australian taxpayers Alliance podcast made. I can’t remember who that was. It would have been John Humphries or Saxon Davidson, I imagine, but I’ll I couldn’t find the bits of audio that John was talking about. But anyway, I can imagine that’s that’s the sort of thing they would have would have said. And John goes on some central money, but also real dispersion of decision making and autonomy. Equally, your guest on the white elephant stampede episode. So he’s talking about Scott prasser there. So equally, your guest on another podcast criticize the Men’s Shed. Now, if there’s a credible cost benefit analysis that said that says the Men’s Shed is not useful, well, fair enough, but I’d be really surprised. The Men’s Shed supports a local repair. FA I’m involved with and maybe you’ve seen their things around made for the community. John concludes, while we’ve while we have personal freedom, the government has a legitimate role in helping us make better decisions. I understand we have lower rates of skin cancer from the slip slop slap campaign and a lower road toll resulting from government initiatives over drink driving and seat belts. Yes, I think that’s a fair points from John. That’s that’s absolutely, absolutely correct, and definitely the data supports that. I’m just thinking of an example in my state, in Queensland and Australia, there was a lot of controversy, gee, maybe it was in the 70s or the the 80s, about the introduction of making a compulsory for people to wear seat belts. And, you know, people had could rationalize not wearing seat belts in all sorts of ways. Oh, that, you know, cost us a lot of time, or it’s a distraction and it’s or won’t help us, because if you’re in a crash, then you’re actually better off being thrown out of the car. I mean, all sorts of odd rationalizations for not wanting to wear a seatbelt. And there was a there was a famous study, I’m pretty sure it was by Alan Layton. Yeah, Alan Layton was one of the authors a famous study on the effectiveness of seat belt legislation on the Queensland road toll. And this was an Australian case study in intervention analysis. So this is a paper that was published in 1979 in the Journal of the American Statistical Association. Alan Leighton was one of the co authors. He was at University of Queensland at the time. He went on to have a distinguished career as an econometrician, a great guy and what they did was that they found so they used some time clever time series analytical techniques. I’ll put a link in the show notes to this paper. It’s it’s a great bit of work. They showed that the long run legislative effect was quantified at a specific level of the explanatory variable to be a 46% reduction in deaths. Okay, so the seat belt legislation did have a significant impact, and it resulted in a major reduction in fatalities. And I think you’d be I think that’s probably a case where some type of government paternalism is is justifiable. So look, if you’re a regular listener of the show, you probably figured out I’m not an extreme libertarian or anarcho capitalist. I would describe myself as a classical liberal. I do believe in in liberalism and freedom, but I do accept that in some cases, there could be a role for some paternalistic policy measures. And I think John is is on the right track there regarding Men’s Sheds, I must say, I forgot that the Men’s Shed came up in in one of my podcast episodes. So, I mean, they seem reasonable to me. I have a couple of friends who are involved with Men’s Sheds. So the idea is that men generally of a certain age, I think it tends to be mature age, and senior men, they may have had some issues in their lives, and they get together, and they will do all sorts of, you know, manual, manual work. They’ll do some gardening, or they’ll do some woodwork or some metal shop, and it seems to be something that really helps them out with their mental health. And, you know, men need friends, and I think there’s a concern that just with developments in society, that men don’t have the traditional networks or support that they once did, and particularly with the rise in divorce so so many men, their social life is essentially organized by their wives, and so if they have a divorce, then they’re in all sorts of trouble. They lose their network, their their social support. So look, there could certainly be a case for the Men’s Sheds. What I might do now just go back to the the bit of the episode that John’s reacted to, so I can understand his feedback more fully and also understand what what Scott said in that episode. Now, Scott’s a great guy. He’s a former academic. He’s a former ministerial advisor. He’s. And he’s one of the editors of the 2022, book from Connor court, titled white elephant stampede case studies in policy and project management failures. And we talked about all sorts of big projects that turned out to be white elephants, like desalination plants, etc. I forgot he mentioned Men’s Shed. So let’s, let’s go back to that, and I’ll offer some thoughts after I play the clip.

Scott Prasser  40:27

Government is involved in too many areas. Okay, the government tries to do too much, yeah, and the government is seen as the savior of so many things. So if government could not be involved in so many things and just focus on it, on the core business, what should be, you know, good infrastructure, good roads. And what sort of thing so government is, is often called upon to be doing things now, politicians reaction to that is, something’s got to be done. This is something we can do, right, okay? And they have no concept of of financial limitations. So governments often, we saw that during the covid thing, where governments were running around doing all sorts of things. Sorts of things which were completely against the evidence. Just remember, in Queensland, we were formed by the Chief Health Officer. We and it was mandated we should wear a mask in our car. Just think about this. And we should wear a mask walking around a park. Just think about this. Now, I didn’t do that. I refuse to follow the law. So that’s an example where governments have got to ratchet up activities, to do things. Also, governments love to love to announce iconic projects. When I hear the word iconic, I run a mile. Okay, this is Danger, danger, or this is going to be a landmark, or they want to have a vision. I don’t want government visions. Thank you very much. It’s usually the wrong ones. And so it’s this thing of meeting the electoral demand to be doing something instead of saying nothing can be done. Okay, that’s, in some cases it’s not government’s responsibility to do it. And if we do anything, it doesn’t, it doesn’t have any effect. So, you know, it’s like, you know, why does the Commonwealth government spend $5 million on men’s work sheds? I mean, what has that got to do with the Commonwealth Government? There’s like, a little mini, a mini white elephant, because they want to be seen to be giving out money for some minority group calls or something. So it’s politics. It’s politics. The other factor is that all the organizational things inside organizations, group think happens, yeah, okay. Now, if you worked in the public bureaucracy like me, it’s sometimes very hard if you if you want to be the lone person that says, I think that’s a dumb idea. Yes, right? Yeah, it doesn’t go well with the rest of the team and the hierarchy, which so you’ve got to have in the bureaucracy someone willing to say no. Right now, our public services have become politicized. That is, people are on short term contracts. They give the government what they want, not what they need. So this sort of Once Upon a Time, treasuries would have said, and that’s why, under Joe, we had permanent public servants. Okay? Job Peterson, Premier, there were permanent public servants. Queensland didn’t have a zoo. Queensland didn’t own a bank. Okay? Queensland didn’t do all the crazy things that Joe won’t do, because the treasurer Leo hilcher and crowd will say, No, Joe, you’re not going to have it right now. I don’t think that happens anymore, because all the senior public servants are on five year contracts. They want to get their contract. We knew they will give in to the political will all the time. So that’s one of the one of the issues that helps help throughout, why we’re getting more of these things, and why Frank and fearless advice is no longer being given. I don’t want to sound too precious, but it is. It is very hard in the bureaucracy. If you’re in the hierarchy and you want to get a promotion in the future and you write a memo to the premier. This is a really dumb idea, and I have done this myself, and I have saved the taxpayer money, I can tell you right here, and that’s because I had a very good director general in the Premier’s department. But it’s hard all those organizational factors, the political factors and government and all the interest group pressures now, interest group pressures on wanting to get something from government. Australia has always looked more to government than other countries. You know, we’ve always we founded by government. Australia was founded by, you know, sending out convicts. Here it was a government, yeah, thing in America. America was founded by people trying to get away from government. They want a religious freedom. Okay? So there’s a difference, yeah, sort of context. So all those factors have driving that. Plus, I think economic theory, more, you know, modern monetary theory, so it says, oh, spend as much as you want. It doesn’t matter. It’s all right. You know, there’s no, there’s no limitation on what government. Can spend. So the idea of balanced budgets, being careful and frugal, has sort of gone by the by, if you like. So all those factors, to me, are contributing to this sort of galloping syndrome of white elephants.

Gene Tunny  45:17

Okay, so I think Scott made a lot of a lot of very great points there. And I think that observation he makes about the differences between Australia and the United States and how they were they were founded, I think that’s, that’s rather that’s rather clever. That’s a really good insight there. And perhaps that does explain some of the reasons for differences in in policy choices. Who knows? I’m not a political scientist, but I thought that was a rather. There was a there were a lot of insightful things that that Scott said there regarding Men’s Sheds. Look, I honestly don’t know whether it makes sense for government to to to subsidize them or not, or to provide funding to them. I mean, my my bias, would be to say, Well, look, this government really doesn’t have a role here. I mean, if men want to get together and have Men’s Sheds, then then fair enough go for it. Does the government need to provide some support? Well, look, I mean, there could be a case. I wouldn’t rule it out completely, but you would need to have a it’d be good to see a cost benefit analysis of subcard. Does it make sense to provide funding for the Men’s Shed? Does this help improve mental health outcomes so much or sufficiently that it justifies the government chipping in some money? Look, it’s possible. Maybe it does. Maybe it improves well being. It avoids health costs in some way, it prevents suicides, it it prevents alcoholism, which leads to all sorts of problems. Who knows it? They could have some positive outcomes. And it looks like there have been, there has been a little bit of of research, but that’s not, it’s not no comprehensive studies, or CBAS, from cost benefit analysis studies, from what I can see, I’ll link to a couple of those in the show notes. I think there’s definitely a rationale for the Men’s Shed in how they address social isolation and help improve men’s health by getting them working together, collaborating on woodworking, metalworking, gardening, community projects, etc. So I think they’ll provide some benefits, and I’ll link to some studies that I’ve found. So there’s a report that was prepared for Beyond Blue back in 2013 and what that shows, or what that finds, is that there are clear health benefits associated with Men’s Sheds, Particularly when compared with less socially active men and they have some some data here. So it looks like it’s it’s from a survey shows that the shed members scored significantly higher physical functioning, physical roles, general health, vitality and mental health in non shed members, as measured by this, this survey instrument, it looks like that they use. So there’s some, some evidence looks like it has a, yeah, I mean, they may well be statistically significant. I’d have to think about the the sampling error around the reported stats. But I’ll put a link in the show notes there. You can check that out. There’s that you know that would be of interest. If this is a report by there’s another report by Urbis review of support for the Men’s Shed movement, current state report. And, yeah, generally, it reports on how well it argues that these Men’s Sheds are valuable spaces for men to get together, reducing socialized isolation, improving well being. They have the men the Shedders, so that’s what they call the people who go to the Men’s Shed. They have increased engagement with and across communities, and they recognize that the shed, the Men’s Shed, as a social amenity available to the whole community, thereby increasing social capital within communities. Okay, so some benefits, but these are things that are, you know, could be a bit they are intangible in a way. They’re difficult to measure, but I’ll put a link to this day. Be in the show notes as well. And yeah, thanks John for your comments. And yeah, if you want to, I’m willing to have a chat about Men’s Shed sometime in the future and all of the issues around them. It’s interesting. Yeah, I’d never thought there’d be a big controversy about Men’s Sheds. But yes, I guess it’s a it’s something that government has been contributing a little bit of funding to. It doesn’t look like it’s a huge amount. And yep, as with all government spending, we should be thinking about whether that is a good use of public funds or not. And there can be legitimate debates about what we’re spending money on, and whether that money should be spent on something else, or indeed return to taxpayers. Because, I mean, the the tax burden is seems to be ever increasing, and we have to think about whether spending by governments is is essential for the community. Well being Righto, thanks to Mark and to John for their comments, for their questions. Really appreciate them listening. If you’re listening, you have your own thoughts on either the episodes I talked about today or other episodes. Please get in touch. I’d love to hear from you. Love to reflect on your feedback and to help clarify concepts, provide examples. So yes, please do get in touch. You can find my details in the show notes. Okay, I’ll wrap it up there, and I’ll talk to you next week. Thank you, righto. Thanks for listening to this episode of economics explored if you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week. You

Obsidian  52:20

you. Thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

China’s Economic Future Under Xi & the Australia-China Relationship w/ Emmanuel Daniel – EP253

Show host Gene Tunny talks with Emmanuel Daniel, founder of The Asian Banker, about China’s evolving economic policies under Xi Jinping. They explore China’s state intervention, the country’s property sector, and the global implications of Xi’s economic vision. Emmanuel also shares insights into Southeast Asia’s rise, focusing on Indonesia’s growth prospects. The conversation concludes with a discussion of Australia’s role in the region, its economic ties with China, and its alliance with the US and UK.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

What’s covered in EP253

  • Introduction (0:00)
  • China’s Property Sector and Economic Challenges (6:32)
  • State’s Role in Economic Development and Social Infrastructure (15:20)
  • China’s Economic Growth and Productivity (29:15)
  • China’s Geopolitical Challenges and US Relations (35:58)
  • Southeast Asia and the Rise of the Rest (44:50)
  • Australia’s Role in the Region and Economic Ties with China (53:38)
  • Final Thoughts and Future Directions (56:07)

Takeaways

  1. China’s State Activism: The Chinese state has reasserted itself in the economy, implementing policies restricting private sector growth with the objective of promoting long-term social stability.
  2. Challenges of State-Led Development: There are limitations to what the state can achieve compared to the dynamism of private markets, especially in frontier technologies.
  3. The Socialist-Capitalist Tension: China’s current policies reflect a unique blend of socialism and capitalism (aka socialism with Chinese characteristics), with the state playing a more prominent role than in Western economies.
  4. Global Implications: China’s economic trajectory under Xi Jinping will profoundly affect global markets, particularly as the state asserts more control over private companies.
  5. Rise of Southeast Asia: Countries like Indonesia are emerging as economic powerhouses, with domestic consumption and political stability driving their growth.

Links relevant to the conversation

About this episode’s guest Emmanuel Daniel:

https://www.emmanueldaniel.com/biography-and-contact/

Economics Explored ep171 on the Enterprise China model:

https://economicsexplored.com/2022/12/26/enterprise-china-what-western-businesses-need-to-know-w-prof-allen-morrison-ep171/

Reuters report “Indonesia minister says Musk to consider offer to build EV battery plant in country”:

https://www.reuters.com/business/autos-transportation/indonesia-minister-says-musk-consider-building-ev-battery-plant-country-2024-05-20

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Transcript: From Academia to Impact: TFranchising Fitness: Lessons from the Expansion of Spartans Boxing Clubs w/ Russell Harrison, CEO – EP252

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Emmanuel Daniel  00:03

So the funny thing is that China, the state has become increasingly competent, and therefore became a lot more activist in the way in which the private sector is structured and the role it plays in the economy. I gene,

Gene Tunny  00:27

welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene, Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show us to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. In this episode, we’re taking a close look at what’s happening in China and Southeast Asia with Emmanuel Daniel, founder of the Asian banker. Emmanuel is very well informed about the region. He’s got some interesting perspectives that have really given me something to think about. Among other things, we talk about the direction of economic policy in China under Xi Jinping. Emmanuel alerted me to the fact that the Chinese Communist Party recently had a very significant policy meeting. In the communique from that meeting, they affirmed their support for fully implementing Xi Jinping thought on socialism with Chinese characteristics for a new era. What on earth does that mean? After talking to Emmanuel, I have a much better idea of what the Chinese administration has in mind. I think it’s worth hearing from him what he has to say. Okay, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, without further ado, let’s dive into the episode. I hope you enjoy it. Emmanuel, Daniel, welcome to the program.

Emmanuel Daniel  02:10

Thanks for having me on, Jim. Looking forward to this conversation, and good morning, by the way. Oh

Gene Tunny  02:15

yes, yes. It’s 8am here in Brisbane, and you’re Are you in Singapore or Beijing or somewhere? Well,

Emmanuel Daniel  02:22

today I’m in Beijing, and it’s, you know, it’s 6am I think, so, you know. So I got up for this call, and I’m looking forward to this conversation.

Gene Tunny  02:33

Very good. Yes. So, I mean, you’re someone who has a having a close look at the global economy, and in particular the East Asia, Southeast Asia, and I’m keen to talk to you today about what’s going on there. It seems that there’s been some big news out of China recently regarding their approach to economic development that you alerted me to. Would you be able to tell us what’s going on their place. Emmanuel, well,

Emmanuel Daniel  03:01

you know, I’ve been in China, by the way, since 2000 as in, my first time visiting China was 1994 and then I started a business called the Asian banker. It’s a research publishing business and so on. And so I’ve had a very close view of developments in China, especially the economic, banking sector. And, you know, I’ve seen China make very important decisions that were, you know, like not taken seriously. You know, in the West, I guess, and I’ve seen them benefit from it, you know, like good things happen, you know, after, after a while, and you you see how it all comes together. And I guess that right now, they’re in the process of making yet another very important decision, and I’m now putting together all the elements that you know, will give me a very clear, a much clearer picture of where they’re taking this, you know. So you know, just to give you a background, like in the early 2000s 2001 was when China joined the WTO, you know. And I remember a conversation in 2003 in Washington, DC, where I was with a senator and a lobbyist, and they were saying that, you know, the US could afford a billion dollars a month, you know, to pursue the Iraq war, but that they were very concerned about the non performing loans of The Chinese banks. And I said, Okay, I put it at the back of my mind, and then 20 years later, you see which country actually had economic you know, or a banking crisis, or several banking crises, and which country kept growing quite strongly, you know. And then I look back and say. What were the elements that enabled China to grow strongly from, you know, about 2001 and it grew, you know, unabated until about 2014 you know, and then it started on to a decline. So right now, I think we all are, all of us are familiar with the fact that the party in China has come in and put lots of curbs on the private sector, you know, and and then we see that on from the surface, it looks reactionary, but when we look at the decisions that they made at the Third Plenum of the 20th Party Congress just a few weeks ago. It looks very deliberate, very well thought through and, you know, and very structured. So the one thing that I’ve come to realize about China is that whenever I say this, my my friends in the West, you know, like, like, raise eyebrows, which is that China is actually very transparent in its policies, at least in its economic policies. So it bears well to read what the decisions that have made and so on. So the third premium, they added more structure to where they want to take this economy. I think, about four years ago, the leader, you know, Xi Jinping, made this comment that houses are meant for living. And, you know, and there are three red lines that we cannot cross in terms of the property sector and so on. And at that time, even within China, the property developers thought that, you know, it was just wishful thinking on the part of the state. But as you can see, they have, you know, been very recorded in terms of the way in which they dealt with the property sector, you know. And then you’d think that, like in most countries, they would be more concerned about revitalizing economic growth and so on, but they were not in any hurry. And that’s that was the actual that was actually the feedback that lots of economists and analysts had outside of China to the decisions made in the third plenum that was just helped, which is that, hey, I thought that you’d be serious about revitalizing economic growth and so on. You know, I spend lots of time in China. I’m a friend of a number of the economists who actually contribute to national thought and, you know, to the State Council. They, you know, present papers and so on. And there are many different, you know, opinions floating around in the marketplace, but the state has taken the view that it has the resources to, you know, to take a socialist approach to creating an equitable society, you know, and it’s paying the price for it right now. And I think that for the rest of us, it bears to take a look at the decisions that they’ve made and, you know, the options that they have given themselves and what they’ve not given themselves, and see how far they can go with it. You know, I think that what they’re really trying to deal with is that blatant capitalism is not good for China. You know, that’s that’s a policy decision that the politicians have made. In fact, a couple of the economists have told me that there’s a big difference between what the economist think about, you know, spurring growth and creating a sustainable society and all that should, how that should work out, and what the politicians think. And it’s a there’s a big divide between the two. So the big question that we need to set for ourselves now is, will the politicians be able to afford the kind of economic system that they, you know, that they’re working on, you know? And you know, what will work and what will not work going forward,

Gene Tunny  09:13

right? Okay, look, there’s a lot to a lot to talk about there. Manuel, I think that’s, yeah, that’s a terrific setup for this conversation about China. A few things just to just so we establish the facts. First, you mentioned there were, was it three red lines for property, for construction, or did I miss

Emmanuel Daniel  09:40

it ago? Now, like you know that, that I forget what they are now, but one of it was that, you know, the property sector cannot borrow extensively from the banking sector and, and I can’t remember the other two. But so basically, you know, the state put out. Uh, guidelines in terms of what the property sector needed to do. The interesting thing with the property sector is that it was, until recently, the, the only, or the most important source of revenue for the provincial governments. So China operates, you know, in a centralized economy, but with a federated system, where the central government expects the, you know, the provincial government to generate their own sources of income. And so when the property sector just grew out of air, meaning, you know, it borrowed extensively from the from the banking sector, there was oversupply in some places, and property prices went up because property was basically the only asset class that most Chinese could invest in. China’s financial sector is not as broad based and as liberal as much of the rest of the world. So all these factors contributed to overheating in the property sector. And when the state put curbs on it, they did it did not give the provincial government, you know, much other options in terms of new sources of income. And so what you see now happening in China is that a number of the provincial governments have problems raising revenue and and then in turn, you know, has an effect on state owned enterprises, jobs and stuff like that right now. Gotcha.

Gene Tunny  11:38

Okay? And and, so what, what did the state do? So, you mentioned they put curbs on it, and what was going on with the property sector? I mean, we saw that there were, there was a whole bunch of development. I mean, you had ever grand, and it looked like there were, there were cities being developed, that were ghost cities, that, at least, that was the, you know, what was being talked about over here. I mean, what actually, what actually happened was it just a mania, a construction building boom. Was the state behind it? What was actually driving it? And then, how did they, how did they curb it? Well,

Emmanuel Daniel  12:14

they basically went after the biggest property developers and and curb, you know, the ability to borrow from the from the banking system, because they were very clear that if this, you know, if this sector overheats, it will have a reproduction on the banking system. But as I said, the real issue in the property sector was that property was basically the most important source of revenue for Provincial Government. So what they do, what they did was, you know, acquire land and hand it over to the developers, who then borrowed money from the banks to develop that and resold that, and that became a source of revenue for the provincial government, you know. And the thing is that you know this narrative alone, the idea that you know there were ghost cities and so on, belies the fact that there were good things that were achieved, you know, in the property sector. China today has easily 20 to 30 a grade cities, you know, relative to the rest of the world. I mean, in that it built very, very good cities in as many ghost cities that you find that were created in provinces that were either underdeveloped or, you know, where sources of income and jobs were not as well developed as the property. That’s where, you know. And then, because of rural urban migration, the concentration of population moved to the a great cities, and then leaving these other small towns emptied out. And I think that’s actually what happened. But if you look at the overall figure, the urban population of China is actually still underdeveloped relative to what you see in the West, in the US, I think in the US, I think about 80% of the population lives in urban centers. In China, it’s still about 60 something percent. So it’s still got a way to go. It’s just not well distributed, you know, and they are capable of working it through over time, you know, if this was the US, what we will be seeing is widespread bankruptcies, and you know, fallout from the from the parts of the country which economically not viable, in favor of the part of the country that where the concentration of jobs and in. Streets are so I think so it’s in my view, because I live here, I spend time here. That’s the redistribution. That’s what’s happening in China on the property front.

Gene Tunny  15:12

Gotcha, okay, can I ask about this, this new Well, what the Chinese administration is what it’s saying about economic development. It’s saying blatant. Well, this might have been the president blatant. Capitalism is not good for China. So to what extent is that? I mean, that’s self serving rhetoric in favor of the existing party, or is it? I mean, what’s the basis for that statement? Do they have any factual basis for it? I mean, capitalism, to the extent that they’ve embraced the market, hasn’t that been behind their economic development? Could you just tell us a bit more about what their what their justification for that statement is? Please. Emmanuel, the

Emmanuel Daniel  15:55

single most important justification is that the Gini Coefficient of China is almost the same as that of the US, so the rich getting richer and the poor being left behind is as much a phenomenon in China. In other words, it’s just as capitalist as the US, and they’re trying to reverse that and make it more equitable. But the way in which they’re doing it is that the state has become a much more, you know, dominant, capable force. And here’s, you know, here’s my structure by which I think through what the state wants to achieve and where it is in that evolution, you know, between 2001 and 2014 the state was putting in place very interesting policies that facilitated private sector growth. And you know, by the time you get to 2004 after China joined the WTO Goldman Sachs started to put out reports saying that, you know, the future is China. Is the future is the large populations the world, and then they come into China. And at that time, the platform players like Alibaba were just coming on on stream, and the Western, you know, capital markets funded these platform players dramatically, you know, and from the time that Goldman Sachs and Masayoshi Son, you know, the private equity the venture capitalists came in and took, You know, stock of potential winners in China. They led some of these to incredible growth. So at the height of its being listed in the US company like Alibaba, was able to be the capitalization was like $830 billion and when you’re capitalized to that extent, you visit a city like Hangzhou in Zhejiang province in China. And the, I call it the cascading effect of capital, the capital comes back into the city, and Alibaba invests in, you know, second tier startups which were, you know, which were the size of a few billion dollars, and those invested down the downstream to other startups. And you have a whole ecosystem of very good players. Now today, Alibaba is about 150 160 100 and $70 billion dollars in market cap and and that shows up in Hangzhou. Again. You go to Hangzhou today, there is widespread joblessness, and you know, and it’s very difficult to pick and choose which frontier technologies that they want to invest in and so on. And the state is saying that that’s okay, because not to worry. We will, we will fund you. We will, you know, guide you. And we will, you know, we will lead the economic growth. And there’s this huge debate whether you know how much of the next phase of economic growth in China should be led by the state, and which phase should be led by the private sector now, so between about 2001 and 2014 the state was happy with The role of facilitating some structure so that the capital markets, and especially the foreign capital markets, can, you know, can create winners out of the private sector companies like Alibaba. And after 2014 the the state started to become, I call it competent, uh. You know, the funny thing is that, and I think this phenomenon, by the way, is repeated in every other country in the world, including highly capitalized, capitalistic countries like the US. When the state becomes confident it creates gets a handle on how to manage, you know, huge infrastructure companies like Amazon and so on. It becomes intrusive. It becomes important, you know, it becomes involved in the in the structure that it’s creating. So between after 2014 the state put in place laws like, you know, data privacy rules, and then also took assertive influence in terms of where these companies go out to raise capital and so on. So the funny thing is that China, the state has become increasingly competent, and therefore became a lot more activist in the way in which the private sector is structured and the role it plays in the economy. Now the status other two other functions to play. One is to provide the social infrastructure, the, you know, the education, the healthcare and all of that. And it does that really very well, you know. And we shouldn’t undermine what China has achieved on that front. In fact, if you come visit China, you’d be, you know, you’d be very impressed with the quality of life in China. And then the second pillar, as I think, as I think about it, is the way in which the state funds or subsidizes frontier technology. So this is not the US capital market. Is the Chinese state looking out for, you know, next generation technologies and and infrastructure that it needs to invest in. And there it had. It had invested in a number of areas. So 5g for example, you know, China is one of the first, was one of the first countries that went veg. The state invested in it. But today I’m actually hearing a few speeches given by former ministers in China saying that, you know, we hurried up and built all this infrastructure for G but there are no applications, and a veg base station cost three times more to run than a base station, and if the applications can’t come on stream as quickly as they should, you know, the telcos don’t benefit from it. And, you know, the investment is way ahead of its time, you know, and and so the thing is that, when, when China, then, you know, says that, look, our EV car business is doing very well. It was the result of the state subsidizing 1000s of EV car initiatives in multiple cities. And then, you know, and that becoming affiliate, you know, a it takes up momentum, and it becomes takes a life of its own. So you can point to a few things where the subsidies have generated new technologies and new industries that didn’t exist before and become world players on top of it. But you can also point to industries that floundered and, you know, being left behind or being quiet. So now the state wants to be the, you know, most important investor in AI technology, you know. But the thing is that on the AI front, the capital that does the Chinese state can put into it, it pales in comparison to what the US is doing. So if you look at the top six AI players in the US, the capital that they are able to garner is about ten trillion I think, and that’s the entire capital market of China. So there is a limit to what the state, any state, can do. It’s not just China, but even the US is not able to fund its own frontier technologies. Is the, it’s the US capital market, which is the giant in this, in this, in this area. And then comes the role of the private sector. No, why can’t the private sector go out and raise its own capital and all of that? So that’s the lay of the land. That’s the, you know, the issues that China is facing. And the big question I’m asking myself, as I put all this together, is, will the state be able to afford the kind of economic structure that is trying to build?

Gene Tunny  24:59

Yeah. Yeah, okay, so I just want to, you know, talk a bit more about, you know, the nature of the Chinese economy. Because the just sort of, I guess I’ve reacted a bit to this statement, blatant capitalism is not good for China. I’m not sure to what extent they’ve had blatant capitalism. Because, I mean, my understanding of China, I mean, this may be wrong, but it’s, you know, it’s state directed capitalism or or it’s socialism with Chinese characteristics, as Deng Xiaoping described it, you know, many years ago. So, I mean, the state’s been heavily involved, and that brings all sorts of complications. You’ve got all these SOEs, state owned enterprises. There’s this enterprise China model that one of my guests was talking about a couple of years ago when I had him on. I’ll have to link in the show notes to that, the idea that, you know, once you get to a certain size that there’s a party official, you have to have someone on your your staff, who’s, you know, connected to the party. I mean, it just seems that the state is already very heavily involved in in business in China, and the idea that it could be getting more involved, I’m not sure that’s the that’s the recipe for for economic success, but that that’s just my my view, just That’s my reaction to that statement. So just interested in any reflections on that, or we could move on, please, up to you. Emmanuel,

Emmanuel Daniel  26:28

yeah. I mean, you know, thing is that the idea of the state becoming competent enough so that it has the confidence to involve itself in the private sector. That’s where China is today. For large state owned enterprises, they’ve always had a Communist Party official in there. The whole picture is one of the competency of the socialist state. And for the longest time, we’ve never had that, you know, the during the Cold War, the socialist state wasn’t competent. It wasn’t a good allocator of capital. You know, it didn’t motivate individuals to to be self reliant and you know, and generate capital, you know, and there, you know. It was just an inferior form of creating economics relative to patent capitalism. But when we put it alongside each other today, patent capitalism did has is destroying the US right now. You know, it’s, you know, it causes this great divergence in terms of the ability to, you know, even look after yourself. You know, the the rise of homelessness in the US and all of that, and the divergence in salaries. I mean, you got CEOs who earn hundreds of millions of dollars in salary for the same 24 hour work that that the last worker gets paid. So you get all these, you know, these courts in in capitalism, which is what China is trying to deal with, but you have a state that has come to a level of competence, that it thinks that it can pull this through. So, you know? So now I’d say we take a wait and see attitude. Now, what I say to myself is I missed the big picture in about 2003 2004 when I doubted China’s ability to generate economic growth given the non performing loans that set in the banking system. But they averted that by by hiving out all the bad, bad debt and putting it into two huge asset management companies. And as the economy grew, they were able to deal with that NPL situation. So now, with the slowing economy and geopolitics up against them, some of those options are not available anymore, so we will have to see. But however, given the fact that China has now come to about $12 trillion in GDP. It has sufficient internal momentum to keep growing, you know, but not in with the at the rate at which it was growing when it was, you know, much it was benefiting a lot from the global capital markets.

Gene Tunny  29:40

Yeah, and was the Chinese economic development story. Was a lot of it the migration of people from rural areas into the cities. I mean, it’s the old Arthur Lewis economic development story. You’ve got people underutilized or, you know, not very productive on the land. They move to the cities. You get a big bump up. Productivity is that, is that still occurring? That migration? Yes,

Emmanuel Daniel  30:03

well, the migration was a reallocation of human resources, you know. And China invested in 40,000 kilometers worth of high speed railway, you know. And and China Railway cooperation, and its, you know, related organizations about $800 billion in debt right now, but it’s a debt that they are able to absorb, because as long as the economy keeps growing, you know, it will be able to ameliorate the debt over a period of time and but as an infrastructure, it’s amazing. It’s going to stay for a long time to come, you know, but all of that did not really result in higher productivity gains, and China is the one economy that grew dramatically without a commensurate growth in productivity, and that’s interesting part of the story that it’s not very talked talked about. So, so now you have wages rising, you know, well beyond sustainable levels. And the state has come in and said, No, we can slow down a bit now, so that, you know, we spread out the wages to the rest of the economy, and bring up agriculture, for example, and revitalize the small towns this urban, rural urban migration was necessary at a time when, you know, China’s urban population was not developed enough to, you know, to take advantage of a lot of the export led, you know, industries. So they needed to create jobs in the big cities. But right now, they want to spread it out a bit more. And the cities that benefited were, you know, were not, were not universal. It wasn’t all cities that benefited, and that’s why we see the ghost towns. The there are many cities that try to become more urbanized, more industrialized, but just didn’t have the means to

Gene Tunny  32:16

so what is the Chinese economic growth story? Is it? I mean, is it foreign investment, or is it, it’s domestic investment in a supposing capital? What is it? What’s the story? So,

Emmanuel Daniel  32:31

exactly as I indicated earlier in this conversation, which is, there are three pillars of economics, okay, one is the state spending and building infrastructure. The second is the state subsidizing industries, and the third is foreign capital. And so what has drawn back now is the access to foreign capital, and the state thinks that it’s able to make up for that by, you know, by supporting private sector companies, which, as you indicated just now, have got Communist Party officials sitting in the company, you know, and second guessing the decisions that need to be made. You know, it’s this is as far as socialism has come as being a viable alternative to capitalism, you know, and they’ve taken it very far, you know, it’s a working system. It’s just that they now have the confidence to think that they can take it further. So like in the main cities, for example, in Beijing, in Shanghai, investment bankers used to be paid the same as investment bankers in the West, which is you try and second guess how much capital you’re able to raise for your client’s company, and you get paid on a success basis, and on a success basis, they paid incredible amounts of bonuses. And now the state has come in to say that investment bankers cannot be paid as they used to be, that those bonuses are illegal under, you know, Chinese style socialism and the capital market here is reverberate, reverberating from those decisions. Saying, Wow, okay, let’s see where you going to take us now. So it’s it’s work in progress, and when you look at states that eventually centralize the economy, a lot everything from Germany before World War Two to Japan in the last 30 years, the capacity of the state to to hold an economy together, especially a large state, can go a long way. You know, it won’t be the same as a, you know, a openly capitalist country, but, but it still can. Um, you know, this story can go go on for another 10 to 15 years.

Gene Tunny  35:05

Okay, what about this socialist approach to creating an equitable society? What types of measures do you think they they have in mind?

Emmanuel Daniel  35:15

It’s every facet of society, everything from the time in which they they banned, you know, educational institutions outside of this, you know, formal school structure, there were online learning systems that, you know, that were making lots of money. You know, people generally spend a lot of money on on things that they’re afraid of, healthcare, you know, education and so on. And you had this, this making, you know, a lot of money from parents, you know, fearing for the future of their kids and so on, you know. So it’s in every facet of society, the building of affordable housing, you know, access to health care. You know, China has got one of the best public sector health care system in the world, you know, and it’s, it’s getting better, Social Security, putting that into place, and ensuring that that, you know, people have income for the rest of their life, which is not pension, you know, in the like in the old days and so on. So I think that just touching on every facet of society, you know, right down to how much time a kid can should spend on on gaming, online gaming, you know? So, so then for the rest of us, looking in, we’ll think that, well, that’s a bit intrusive. And the state making lots of decisions for everyday life, which is, which is what it’s doing right now. So you know how far they’re able to take. That will remain to be seen.

Gene Tunny  37:01

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  37:35

now. Back to the show. I’m sorry to keep talking so much about China, it’s just that it is so. I mean, it’s such a pivotal part of the global economy now, and that it’s it’s hard to talk about anything else so, and I have so many questions. I mean, I like, I agree with you. I mean, it’s been an incredible success story. I mean, it’s within our lifetimes that, I mean the predominant, like when we were young. I mean, they’ll, you know, the predominant mode of transport in China would have been bicycle, wouldn’t it? I mean, like, the amount of economic progress that they’ve had, particularly since, you know, Deng Xiaoping opened up, start open up progressively from the late 70s and the 80s is just absolutely extraordinary. So, yeah, just just incredible progress. What I want to ask is about the, you know, I have, I’ve had a few guests on my show, or maybe two, or maybe a couple, who are very concerned about, you know, the whole China, Taiwan. They’re concerned about China being aggressive militarily, and it looks like there are some very hawkish there’s a very hawkish pivot, or a tilt in the US State Department towards China. There’s more, rather than seeing, you know, 20 years ago, we had this view of cooperation, or, you know, the gains from trade and all of that. Now there’s a lot of concern about national security. Do you have any thoughts on that? I mean, how is, how do you see that as playing out over the next decade or so?

Emmanuel Daniel  39:09

You know, from about 2010 I guess I started coming across commentators who were, you know, putting China on and making it believe that it will become the next leading nation of the world, and all of that since Xiaoping’s economic direction and economic model did not include grandstanding and did not include trying to project itself as as a world power and all of that. In fact, there was a lot of work to be done in China. Was very happy to be, you know, a work in progress. In fact, one of the reasons I am in China is because they invited people who are experts in all kinds of different growth of the country. Three but after 2010 there was this growing assertiveness, and I guess the Americans reacted to that right and and China’s economic growth would not have been possible if the US didn’t allow China to join the WTO in 2001 and that that entry process itself was a long iteration before that. So you get a situation where, you know, the country that used to, you know, just provide the rest of the world with manufactured goods and so on, is asserting itself as a world power. The thing is that China is dialed back a little bit on that, on that narrative, because, from a business point of view, why would you, you know, get on the heckles of your most important client. You know, the business that China does with the US is larger than the business than that China does with any other country in the world, almost put together, right? So, so China has to figure out, you know, how to continue doing business and selling to the US. In fact, you now start hearing that there’s an effort to, you know, to soften that relationship with the US. But at the same time, there’s this thing called Xi Jinping thought which he’s promoting kids in school right up to presidents or banks have to study it, and the way in which it’s been put together is that he’s firing on all cylinders. He’s he’s working on all objectives at the same time, you know, so you get situations where he’s trying to promote regional trade and, you know, forming trade associations and trade alliances, while at the same time having border problems with, you know, all 14 of its of the of the countries on China’s borders. So you know, how will he, or how he will be able to, you know, build a sustainable narrative from, from, you know, pursuing all objectives at the same time will remain to be seen. I think that he will achieve a few of his objectives well, and some will have to, you know, he needs to stand down on them if he’s going to get any good will out of not just the US, but, you know, any of the other countries, with the Philippines, with Vietnam, with India, you know, and so on. So. So I think that he’s being incredibly ambitious. And I anyone in his shoes, will say that, yeah, we will not be able to achieve all our objectives, you know, and and some will have to go by the wayside. The thing about Taiwan is that when China sets itself up as a as Taiwan being a non negotiable, you know, item, it also sets itself up to be ridiculed by countries that want to find the soft spot of China. So, so it’s not, not surprising that the US would use Taiwan as a, you know, as a sore point that on which it could raise the heckles of China. So, you know, and by the way, don’t sell, sorry. Xi Jinping has has has given a mandate that by 2049 which is the 100 years you know of 2049 that that that that should be re reunification, so, so by giving himself a deadline, he reduces the number of options available to, you know, to make this possible. So, you know, I think that some form of military, militaristic approach is inevitable just by reducing the options given to themselves. So it’s, I’m not a, I’m not a, you know, military person, so I wouldn’t comment on how exactly that’s going to be carried out, but it’s the rhetoric that gets them there. Yeah,

Gene Tunny  44:30

yeah. I mean, it’s, it is a great concern. I mean, that certainly could be a, you know, huge Flashpoint globally. But yeah, I mean, yeah, I’ve had, had a few conversations about about Taiwan and the issues there. It’s all fascinating. Emmanuel, that’s been great on China. I really appreciate your insights. I think we’ve got a little bit more time. I’d like to ask you about the, what you call the rise of the rest. I mean. One country I’ve had a bit to do with is Indonesia. I’ve done, done courses for finance ministry officials there and for their economic development agency, I think Baba NAS, if I remember correctly, what’s happening there. At the moment, we’ve got riots. I mean, there’s a whole bunch of instability. What’s the outlook for Indonesia?

Emmanuel Daniel  45:21

I mean, Indonesia has been a success story for Southeast Asia. It’s a $1.3 trillion economy, so it brings it up to the level of the large countries in the world. But even as we spend time thinking about US China relations and the US, China, dynamics, and the rest of the world. I think what we’re seeing now is the rise of the rest, and not just in Southeast Asia, in different parts of the world, in in the Balkans, I see Serbia coming up pretty strongly in, you know, Latin America, you have Brazil, and these are what I call the middle income, the middle power countries, you know, not, not the the, you know, the Cold War belligerents, but the the second tier players. And Indonesia also has had the most successful, you know, move into a sustainable, democratic, you know, structure since the 1997 1997 Asian financial crisis, 1998 Asian financial crisis. It’s come a very long way, except that it’s now, you know, solidifying into a political structure which is sustainable now in the US, outside of the Democratic and Republican parties, there is no chance for independents to come on and and provide a different political agenda. You know, there’s no platform that makes any independent or a third party viable, despite many attempts to build that. And I think that all that is happening in Indonesia right now is that the incumbents who have become successful in, you know, in building their own political asset are now trying to, you know, centralize the assets and and to become, you know, the deterministic force in Indonesia, and this, essentially is Widodo political party and his family and his friends and the people that he wants to work with. So the as even as the new president is taking over, in fact, the in the best indicator of a very successful political process is one where you don’t remember the last six presidents. You know, in other words, the transitions have been going very well, but I think that there’s enough political assets that have been created where the political players want to solidify it by putting in place laws that that favor them. And people are going out on the streets and saying, No, we won’t let you do that, because we want to have a political system where new players can come on stream and challenge you if they wanted to. So I think that in some ways, it’s a natural evolution of stable political system, but on another level, it’s it threatens democracy because it reduces the number of players and entries into the democratic process. But at the same time, economically, Indonesia is doing profoundly Well, I think that we forget that it’s got a viable domestic consumption market, in fact, much more successful than China. And because of that, there is a desire for foreign investors to be invested directly in Indonesia. The Indonesian stock market is now bigger than that of Singapore, which is a regional finance supposed to be a regional financial center, and is, and just by the sheer size of the economy, is the most attractive economy in that part of the world, and so and in the same way, when we look at countries where populations on the increase, like like Vietnam, Philippines, Thailand, they GDP growth is being driven not by productivity gains or shifts in industries and so on. It’s just by the sheer size of the growth in the population. And as they do that, they need the political system to hold you know, the kind. Country together. So, so each of these countries have different problems that they’re facing and and they’re finding their way. And, you know, so it’s a work in progress, as it were, now. The The upshot of all of that is that some of the older developed countries in the region, Singapore, being one of them, are floundering because they are losing the role that they used to play, which is the regional, regional financial center, and they have to reinvent themselves to to be relevant to the rest of the region.

Gene Tunny  50:34

Okay, okay, yeah, that’s, yeah, that is a bit of a concern, like what you’re saying about Singapore, because it has had that reputation and, but, I mean, now it’s got a flourishing tourism sector, hasn’t it? I mean, it’s got a lot of advantages to it. And I guess there’s a domestic, you know, the services economy there. I mean, what are the prospects for Singapore and, and, I mean, other other countries in the region,

Emmanuel Daniel  51:01

it used to be the, you know, the financial center in which you raise capital, and today it’s got a capital market that’s smaller than, you know, several of its neighbors, smaller than Indonesia, smaller than Thailand, and less active than even Malaysia, which has had political problems. So what’s interesting is to see, you know, countries where the politics is unstable, but the economics is pretty good, and the economics is, you know, growing from strength to strength. And when I look at the numbers, and I try to figure out what the drivers are, on the onset, the most important driver, really is population growth, and then comes everything else. So if you’re going to be invested in Indonesia, you should be invested directly in Indonesia, and not, you know, come to use Singapore as a regional center and then get into Indonesia. So that’s where industries are right now, and everyone from Elon Musk to, you know, fund managers are directly invested in the countries that they are interested in. And so to that, Singapore has to reinvent itself. And you know, there are industries where by just being marginally better than the rest of the region, like ports, for example, or airports. It has the up effect that is, you know, you land in Singapore before you go to go off to any of the cities. But as the cities themselves improve their infrastructure, they become direct destinations themselves. So Singapore is, you know, has to work very hard to figure out its relevance. Now, having said that, it doesn’t mean that Singapore is going to be left behind. I think a rising tide, you know, raises all boats. So Singapore’s own GDP continues to grow, but not on the same elements that gave it the growth 10 years ago. You know, it just needs to be more relevant and more plugged in with to the rest of the region. Yeah,

Gene Tunny  53:09

yeah. I just pulled up of that’s an interesting point you mentioned about Elon Musk. So I’ve just noticed Musk to consider opening battery plant in Indonesia. So it looks like there’d be some deal done with the the administration, and probably some subsidy of some kind, so that, yeah, that’s interesting. I’ll put a link to that in the show notes. Okay. I mean, you’re, I think this has been terrific. I’m going to have to have you on again. I think, I mean, there’s so much to talk about, and you’re such a wealth of, wealth of knowledge and insights into the region. So I think we’ll have to wrap up for now. But any final words before we we do wrap up, and hopefully I can chat with you sometime in the future.

Emmanuel Daniel  53:49

Yeah. I mean, I’m very interested in how the world looks like from Australia looking out, you know, and Australia’s own, you know, role in the rest of the world. I think that Australia is a, you know, the largest exporter of commodities to China, and now that the relationship has been, you know, put on a more even footing, we find Australian wines back in the stores in Beijing, you know. So Australia is the middle tower, which has a very different dynamics from, you know, from the Geo, geographically centric model, which is, you know, if you are in Southeast Asia, it’s Indonesia. If you’re in the Balkans, in Serbia, if you’re in North Africa, it’s Morocco. But Australia sits outside of the of the ring of influence that it wants to play in. So, so that’s, that’s another conversation, and another day, yeah,

Gene Tunny  54:51

I think so. I mean, you’re right. I mean, we are so like, yeah, we’re such a big commodity exporter, and now our economy is so. Are tied to China’s at the moment, and, you know, it affects the the iron ore price and the coal price. It is extraordinary how connected we are and and yet, that’s why we’re having a big debate at the moment about, you know, they’re the orcas deal. Maybe we should talk about that another time. But there’s a big debate about whether us aligning so closely with the Americans and the British in this aukus nuclear submarine deal, possibly antagonizing China. Actually, I think we are antagonizing China doing that. What are the implications of that? We’ve, we’ve had a, I mean, while, I mean, I think there’s a lot of sympathy for the Americans. I mean, we’re, we have a very, very strong links with the United States, particularly because of the wartime relationship. I mean, I’m in Brisbane, here where we had Douglas MacArthur based, okay, and so we’re very grateful for for the Americans. But, yeah, at the same time, we’ve got a prime minister, Paul Keating, who was very, you know, very strongly, fervently nationalist Australian, very, and he was, he’s become very critical of that orca steel. So I think it is something to that we need to talk about some more in in this country, that’s more of a, more of a comment from me. Any any reactions to that before we close. Yeah,

Emmanuel Daniel  56:21

so it comes back to my the first point I was trying to make in this conversation was that if we take the labels off and, you know, and not deal with the desire of countries to build working economic systems and not call it, you know, capitalistic or socialist, we were able to evaluate them much more equitably and then understand the baselines from which they work. So China’s baseline is that it’s, you know, it’s the momentum that’s created for itself in the economy. It can go for a while yet, you know, despite, you know it being, you know the areas in which it’s made some mistakes, or it’s slowing down or or de prioritizing at the moment. So so let’s see where they go with that.

Gene Tunny  57:13

Very good Absolutely. Manuel, Daniel, thanks so much for the conversation. I found it really informative, and yeah, love your insights. Certainly want to chat with you some more. And yeah, keep up the great work. So thanks again for coming on the show.

Emmanuel Daniel  57:28

Thanks gene for having me on. And great conversation,

Gene Tunny  57:33

righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics, explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a writing. Thanks for listening. I hope you can join me again next week.

Obsidian  58:20

Thank you for listening. We hope you enjoyed the episode. For more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Podcast episode

Franchising Fitness: Lessons from the Expansion of Spartans Boxing Clubs w/ Russell Harrison, CEO – EP252

Show host Gene Tunny interviews Russell Harrison, CEO of Spartans Boxing Club. They discuss the rise of boutique boxing gyms, the benefits of boxing for fitness and mental health, and the challenges of expanding a fitness franchise globally. Russell describes how Spartans uses technology to enhance the member experience and how boxing training can benefit corporate executives and employees. Hear from Russell about Spartans’ “White Collar Boxing” events, where high-performing corporate executives and professionals undergo 12 weeks of boxing training, culminating in a black-tie gala event. 

If you have any questions, comments, or suggestions, please email us at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

What’s covered in EP252

  • Introduction (0:00)
  • Ensuring Safety in Boxing (3:13)
  • Fitness Benefits of Boxing (6:01)
  • Training and Techniques at Spartans Boxing Clubs (8:32)
  • Expansion into the Australian Market (10:20)
  • Boutique Fitness Market and Franchise Model (13:43)
  • Gender Balance and Market Demographics (35:03)
  • Corporate Wellness and Holistic Health (35:20)
  • White Collar Boxing (43:10)
  • Final Thoughts and Future Plans (45:16)

Takeaways

  1. Community-Driven Gyms: Spartans Boxing Club focuses on creating accessible, community-oriented gyms that cater to a wide demographic, including families and professionals.
  2. Franchise Success: Spartans Boxing’s franchise model is designed to be mutually beneficial, with a focus on providing value and support to franchisees.
  3. Holistic Wellness: Beyond physical fitness, Spartans Boxing integrates mental health programs, showing the importance of a holistic approach to well-being.
  4. Global Expansion: Spartans Boxing has successfully expanded into multiple countries by adapting its business model to local markets and regulations.
  5. Boutique Fitness Trends: The rise of boutique gyms like Spartans Boxing reflects a shift towards more personalised, community-focused fitness experiences.

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee.

Website: https://www.lumocoffee.com/10EXPLORED 

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Links relevant to the conversation

Spartans Boxing Club:

https://spartansboxing.com

A study reporting “Boxing appears to be an effective treatment for persons with Parkinson’s disease”:

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9837687

Transcript: From Academia to Impact: TFranchising Fitness: Lessons from the Expansion of Spartans Boxing Clubs w/ Russell Harrison, CEO – EP252

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:05

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host. Gene Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Russell Harrison, CEO of Spartans Boxing Club. Welcome to the program.

Russell Harrison  00:38

Gene. Thanks for having me. Much appreciated.

Gene Tunny  00:41

Very good. It’s good to have you on Russ. You’re joining us from Singapore. So you’ve, you’ve started a network of Boxing Clubs. So can you tell us about this, please? What is it? What’s Spartans Boxing Club about? And, yeah, what’s the story so far? Please.

Russell Harrison  00:59

Yeah, thanks, Jean. And yeah, from, from sunny Singapore. So I’m originally from Melbourne, but glad to be away from Melbourne as we go through winters. But yeah, Spartans Boxing Clubs. That’s that’s what I do. We started the first club back in 2015 and the concept with Spartans was, was really simple. It was to create community boxing gyms in the community, for the community, and to make boxing accessible to people that may never have thought about boxing before. So typically, you know, if you think about boxing gyms, the typical image that people conjure up is, you know, big, tough guys punching each other in the face. And realistically, when you get into what makes the sport of boxing, one of the really unique things is it’s really great for its fitness benefits. It’s really great for mental health benefits and things like that. So what we were able to do with Spartans Boxing Clubs is we set up gyms that were a safe, inclusive environment. We started teaching boxing to kids as young as four years old. We did boxing classes for women, children, families, and a huge part of our demographic is, you know, working professionals. So, you know, not the typical people that would walk into a spit and sawdust kind of boxing gym. And so, you know, we’ve got lawyers and doctors and CEOs and, you know, all types of people that come into the gym, and they’re just really all about experiencing, you know, the benefits and the community that comes along with with Boxing Clubs. And so we did that well in Singapore, and we turned it into a franchise. And so now we’re sort of spread out right across Singapore. We’re now into we’re in Dubai, we’re in Cambodia, Philippines and in Australia as well. Now we launched our first gym down in Melbourne a few months ago, and so, yeah, we’re just sort of spreading that. We do some events and Academy stuff as well. But really the premise is to just make boxing accessible for everybody and let people experience the community of boxing.

Gene Tunny  03:03

Yeah, gotcha. You mentioned you’re trying to make it safe. Can I ask you about that? Because there are obviously a lot of concerns about boxing, and concerns about, I mean, boxers getting brain injuries, having long term conditions because of boxing, how do you ensure the safety of people who participate?

Russell Harrison  03:26

Yeah, look really great question, and that’s probably one of the the main ones that we get, especially with kids. You know, when parents put their kids into boxing, the first question that they ask us, is my kid going to end up with some sort of brain damage? Yeah. Now it’s really important to distinguish between, you know, boxing as the sport you know, so the, you know, the typical sort of famous faces that you see, the Mike Tyson’s, and you know, any professional boxers compared to, say, somebody that is taking part in boxing training for fitness benefits. And so, you know, one of the key things with that is that, you know, most of our members who join and come and box, they never compete, they never spar. And, you know, they’re not getting into the ring and getting punched in the face, so to speak. They’re learning technique. They’re learning how to box. They’re getting all of the fitness benefits, but they’re not necessarily getting in there and, you know, getting punched. And I think that’s another important sort of distinction, is, when we look at sort of, you know, the negative press, like you see boxes that have acquired brain injuries and those sorts of things, you know, it’s really, it’s a high level of boxing with, you know, really big punches, guys that are really strong and professional at what they do, hitting each Other repetitively over a long period of time. Yeah. And so, you know, people that are doing it for fitness, that are coming into the gym to experience it for fitness, they’re just not doing that stuff. They’re just not they’re just not getting hit like that. And so that’s really the important distinction. And then, of course, if you do go into that avenue of, okay, look, I do want to do sparring or. You know, I do want to compete, then obviously, there’s ways in which you can try and make sure that that’s that’s done safely, yeah, and so, you know, if we take kids, or if we take, you know, our lawyers, who may think that they want a box when they do their sparring, you know, they’re using headgear, they’re using the right type of safety equipment, you supervise. And so you make sure that it’s done in a way that people aren’t just getting, you know, bashed up.

Gene Tunny  05:23

Yeah, yeah, good point. And you’ve had a professional or semi professional boxing career yourself, have you? Yeah,

Russell Harrison  05:31

you’d call it semi professional, you know, I’ve had a handful of fights over the years. And, you know, I started boxing when I was a kid. I got put in boxing gyms when I was really young. I’ve been in and around boxing and martial arts since I was about eight years old. So I’ve competed in martial arts and boxing ever since I was young. But yeah, I’m just too old now, right?

Gene Tunny  05:55

Well, yeah, happens to us all, doesn’t it? And what do you see as a fitness benefits? What, what’s so good about boxing relative to, say, doing CrossFit or, I mean, all the other things, aerobics or whatever else you could do in the gym?

Russell Harrison  06:13

Look, I think there’s a huge amount of benefits. I mean, if you just want to compare, say, the standard fitness benefits that people want to look at. So if you do a one hour boxing session, you can easily burn 800 or 1000 calories. So if you were to just take, you know, the part that most people are interested in when they talk about fitness, you know, you’re absolutely torching calories. I think for me, and you know, I’m obviously an advocate and a lover of boxing, but I think one of the things that makes boxing really unique is that there is, there’s still a mastery of the sport, right? And so it is a martial art. And so, you know, unlike you may go into CrossFit, and by the way, nothing wrong with our CrossFit buddies around, but you may go into a CrossFit gym and you do a series of movements, and kind of, once you’ve learned it, well, you can get fitter, or you can burn more calories, or you can get a little bit stronger, but there’s not necessarily the art to it, the martial art to it. And so one of the beautiful things about boxing is, you know, you’re forever learning. And I think probably one of the other things that we talk a lot about within our business, we have a section of our business called Spartans mind, and this is where we’ve linked boxing programs to mental health programs, one of the first types of programs that’s been done around the world. And you know what we, a lot of people, talk about these days is, you know, terms like mindfulness. And you know, boxing is the ultimate form of mindfulness. When you’re there and you’ve got somebody in front of you and you’ve got, you know, punches coming towards you, you really have to be in that moment. So being locked in and having that level of concentration, there’s really huge benefits as well, with regards to your sort of mental, mental proficiency and this sort of stuff. So the other part as well, and this leads on to a complete different demographic. There is a fair body of research around boxing and the benefits with Parkinson’s. So for the elderly and people that have experienced issues with Parkinson’s, there is a body of research that talks around the benefits of boxing for that too. So the overall health and fitness benefits are really wide and varied, which stick to both physical and mental health, right? Okay,

Gene Tunny  08:23

interested in if you’ve got any links, please shoot them through. That sounds interesting. I mean, them doing the training, not necessarily hopping in the ring and sparring with someone, just doing the training and precisely. And what does it look like? Russ? I mean, there’s the work you do in the gym, there’s the, you know, hitting the punching bag, there’s the Speedball, or whatever it is. I mean, what do you what sort of training is it? And jog? I mean, running. What are you doing? What are you doing? All of the

Russell Harrison  08:49

all of the above, yeah. And, okay, you know, that’s one of the really interesting things about people that are training for boxing. It’s a really, there’s some statistics that float around. I’ll send you some of these links in terms of difficulty of sport, boxing is ranked as one of the top three most difficult sports to not just master, but to do. Because, as you’d mentioned before, you know, there’s all different types of things that you will use, and there’s all different types of fitness that you need. So you know, there’s cardio fitness, there’s Strength Fitness, there’s all of the mastery as well, which I’d mentioned before, yeah, but just to sort of paint the picture for someone that’s not come into the gym, you know, we work on things like agility and stretching. So again, you know, if we go into demographics of, you know, the elderly or senior folks, a lot of that agility and stretching type stuff is very, very helpful. You know, there’s jumping, skipping, Skip rope, so that, you know, that’s sort of the old, you know, stereotypical boxing thing. But, you know, skipping rope is synonymous with boxing gyms. There’s shadow boxing, so actually learning the technique. There’s pad work, there’s bag work. The Speedball is a sexy one. Yeah, everybody. Know, if you can master the Speedball, that looks great. Most people, they can’t get it that well. And then, of course, there’s, you know, all of the partner drills and sparring and all that sort of stuff. So it’s, it’s really wide and varied,

Gene Tunny  10:13

yeah, gotcha. Gotcha, okay. And I’m interested in, you know the fact that you’ve started in Singapore, and then you you’ve gone to Dubai and to Cambodia? Is it Cambodia?

Russell Harrison  10:27

Yeah, Cambodia, Philippines, Australia as well, and now

Gene Tunny  10:31

you come into Australia. So I’m just wondering now, I mean, you probably, I’m sure you’ve worked it all out, but are you concerned about the higher cost of doing business in Australia, regulatory issues. I mean, there’s, yeah, we’ve, we’ve had this pickup in insolvencies. I don’t know if you’ve seen the the statistics. There’s a lot of concern about all the economy slowing down and and I know you’re looking more long term, but like, how do you feel expanding into the Australian market? Are you are you hesitant? Or are you excited? What? How are you how are you thinking about that?

Russell Harrison  11:05

Yeah, great question. Again, probably all of the above. We’re excited. We tried to get into Australia for quite some time. And I think one of the really nice things about the Australian market so we are in the fitness franchising space. And so, you know, franchising laws in Australia are some of the most stringent in the world. Yep, you know, you’ve sort of got the US and Australia, which are really sort of the high benchmarks. And I think that’s great, because obviously that makes barriers to entry much higher. So it took us some time to enter the Australian market. I think when we compare markets that we’re used to, so if you look at or not that we’re used to, but where we started, if you look at Singapore and Dubai, you know, costs are doing business, their rents are incredibly high. Yeah. So you know, in comparison, the rents in Australia are much more reasonable. But of course, staffing models need to change in Australia, because cost of staffing is much higher in Australia. So there’s little tweaks that we need to make to our financial model to make sure that our franchises are feasible. And you know, that’s sort of, I guess, one of the key things that we’ve done when we come into the market now, I think what is very interesting in compared to the markets that we’ve been in fitness franchising. In Australia, there’s a huge array of brands that have been incredibly successful, developing great franchise businesses. And the space that we operate in is the boutique fitness space. And so there’s, there’s a bunch of brands that have done really well there, and brands definitely scale in Australia. So I think that’s an exciting thing for us. And if you get into boxing specific as a modality, Australia really is still operating gyms that we consider to be, you know, old school boxing gyms, yeah, the first few boxing gyms that I was in a kid as a kid were, you know, an old Scout hall with a few bags and an ex boxer trainer. And, you know, they’re really sort of your old spit and sorter salt of the earth kind of boxing gyms, but they’re not necessarily accessible to everybody. And so the opportunity for us coming into the Australia market is that we see a real gap there, in the niche that we operate in, which is community driven boxing gyms, making accessible for everybody, but also authentic. And so for us, that’s the reason that it’s quite exciting. And even with the, you know, the sort of broader economic conditions, and I think that’s globally. You know, markets are tough everywhere, and key cost drivers are changing at a rate of knots. I think there’s tweaks that you make to the model in each of those markets, which makes the model definitely one that’s workable.

Gene Tunny  13:52

Okay, that’s good. You mentioned the boutique fitness space in Australia, and that there are some successful brands, just so I understand what exactly you mean by boutique fitness space. Could you just give me some examples, please? Russ,

Russell Harrison  14:06

yeah, sure. So the boutique fitness space is typically categorized by small footprint gyms and class based training. Okay, so if you give me an idea that the the fitness or gym model that most of us grew up on is the big box model. So you know, 10,000 20,000 square foot gym where you know the model is, you have to sign up 1000s of members, and maybe they come or maybe they don’t. That doesn’t really matter, right? And that’s sort of that model that we grew up on, the big box model boutique fitness is characterized by something which is almost the opposite of that. So small footprint gyms, so typically 150 to 200 square meter footprint class based training. So people training together, and it’s typically around different fit. Modalities. And so the most popular modalities in boutique are yoga, pilates, functional fitness, boxing now. So boxing now sits between the third to fifth most book boxing modality in the world for fitness. And so that’s sort of the boutique market that we talk about. And I think the key characteristic with Boutique is it’s all about building communities in and around those those clubs, yeah. And so it’s the real, if you think about it in Australia terms, it’s the real sports club mentality, you know, where the footy club or the cricket club becomes a real feature of that local community. And so you’re trying to do that with different fitness modalities, yeah,

Gene Tunny  15:40

gotcha, okay, I’ve got a couple of questions about your customer base. What’s the gender balance? I mean, is it mostly guys or girls too? I mean, what’s the gender balance?

Russell Harrison  15:52

Really, really great, great question. And I think that’s one of the things that has really allowed us to sort of scale and grow. You know, we’re now about 65% men, right? So that’s a pretty surprising gender split for most people when they hear boxing, I think the you know, if we talk about women’s boxing as a sport globally, there’s a lot going on there. It’s a really, really exciting time. So we are seeing women taking part in perhaps these non traditional female sports, such as boxing or weightlifting as well. So you know, that’s been really interesting for us. And I think probably one of the other things that has driven that gender split for us is we talk a lot about, you bring we do boxing classes for kids. And so one of the things that we talk a lot about is kids bring families, and families build communities. And so we put a huge focus on bringing the kids in, because we want the family to come. And so, you know, a good result for us is kids join dad joins, mum joins, not particularly in that order, but you get the whole family there and they train together.

Gene Tunny  17:02

Gotcha. Okay, that sounds good. I like that. Now you’ve you’ve got your boutique gyms or your Boxing Clubs in Singapore, Dubai and Cambodia. What’s the market like? There? Is it mainly expats in those places, or is it, do you have locals come to the gyms? What’s the market like

Russell Harrison  17:28

in Singapore? It’s heavily local, with some expats. And you know, that’s also got a lot to do with it. We’ve been in operation in Singapore now for nine years, and a lot’s changed. Singapore itself used to be heavily expat, and it’s not so much anymore, right, so, but we’ve always had a heavy skew towards locals in Singapore. In Dubai, it’s pretty much the opposite. And again, that’s based on, you know, Dubai in general, almost everyone in Dubai is an expat. I think it’s about 70 or 80% of the population there is expat. Developing markets is a little bit more interesting, and it really depends on your locations in developing markets. For our concept, we’ve only got one in Cambodia. The concept there is, we’re in a luxury hotel. So there’s a boxing club inside the luxury hotel. So we’re pretty much the mercy of the type of guests that go through the hotel itself. In the Philippines, you’d be surprised, but we’re heavily local. And I think one of the interesting things in developing markets, so whether we talk about the Philippines or Vietnam or Indonesia, or any of these others, is that there is a huge growing middle class in these developing countries. And so bringing in international brands such as ours is really attractive to, you know, those middle class locals, and that’s typically the demographic that we attract in those markets. Yeah.

Gene Tunny  19:01

Gotcha. Okay, that sounds good. Back to the some of the business issues. I’m interested in the fact that, I mean, this is a so it’s a franchise arrangement. You mentioned the regulations around franchises, and I mean, they’re there for a reason, and they’ve been concerns about exploitation of people. Actually should know this. Who’s is it the franchisee who buys the the franchise, or are you the franchisor? You’d wear the franchisor. You’re the franchisor. Okay, yeah. How do you get that win? Win for you and the franchisee, what does it look like? Because, I mean, I mean, I know. I don’t expect you’re doing this. I’m trust you’re not. But there’s all of those. They’re all those concerns that there are some dodgy, it looks like there were some dodgy operators, particularly in the food space there, where they’re selling product. To the franchisees, and they have to buy it, but the quality has declined over time. And, you know, there’s just really awful stories. How do you get that win win for you and the franchisees? Yeah.

Russell Harrison  20:11

So look, I think if you talk about Australia, I think the you know, the legislation, the franchising laws in Australia, are very, very clear in terms of how that has to happen. Now, obviously that doesn’t negate everything, but I think probably for us, if we back step from Australia, we set our franchise model up in Singapore, and there’s no franchising laws in Singapore whatsoever. It’s just common law. And so I think one of the key things for us, or the principle that we’ve built our franchise model on, is that we always have to be providing value to the franchisees. So we see our role as innovator and adding value. So when you grow up in a market like Singapore, you just have to provide that value. There’s no legislation or mechanism to protect anybody. So the fact that we grew up in that type of an environment, we really leaned into the fact that what we’re doing has to be advantageous to our franchisees. Now there’s a few things that you can set up commercially that make sure that it’s a win win for everybody. So for instance, the royalties that we charge, we charge percentage of revenue that the franchisees do. We don’t charge flat fees, so there’s a share of success in the commercial model. Yeah. And I think that’s really important one as well. And I think again, if we sort of jump back to Australia, I think one of the things that you have to do is with all of your non disclosure documents and these sorts of things. You can’t mandate a franchisee using a certain supplier. They’re able to go out and source their suppliers as long as they can, you know, do things according to spec, yeah. So as the part of the franchise model, of course, you will provide options. And I think, you know you need to, you need to outline who the suppliers are and what the relationships are. So that’s all done really clearly in Australia. But that is one of the things in franchising that we’ve always got to make sure that we’re aware of, because there are plenty of cautionary tales around of, you know, franchisees getting the raw end of the stick. Yeah,

Gene Tunny  22:18

gotcha. And how do you like do you vet the people who get the franchise? I mean, what’s the what’s the process like, if say, I want to set up a boxing gym or Spartans Boxing Club, do I make an application and you you’ve interviewed me? Or what’s the process look like? Russ,

Russell Harrison  22:35

yeah. So look, it’s a pretty extensive process. You know, other than sort of buying a house. This is typically the largest purchase that a lot of people will make. Yeah, you know, we’re typically talking to franchisees anywhere from three to 12 months before they actually bite the bullet and decide that they’re going to do it. The process itself usually involves about six to eight rounds of calls and interviews, then there’s KYC, there’s application forms and all of that that goes along with it. And you know, I guess my background before running the boxing gyms, I was a 15 year recruitment guy, so you know, we’ve built in some pretty robust recruitment processes and procedures as well throughout that process, but it’s pretty extensive. There’s a lot that goes into it. You know, quite often we want someone, they might not necessarily want us, and vice versa, yeah.

Gene Tunny  23:36

And so you’ll have, you’ll have an operation here in Australia. So you’ve got to set up a company in Australia or a subsidiary in Australia, and you will have people, will you, and you will be checking that the quality is at the right level. They’re delivering what they need to do as franchisees,

Russell Harrison  23:54

correct, correct. So, if you like the so in terms of the corporate structure, so we’ve got a an Australian company which is 100% owned subsidiary of our HQ from here in Singapore, yeah, so, and that’s very important, because obviously, with the franchising laws and that sort of thing is all relevant to that business, the backbone of, you know, quality standards, audits, process, procedures, and all of that sort of stuff is built around our digitized franchise management system. So everything that the franchisee needs to do, from onboarding to training to audit to dashboards, analytics to time, sheeting, inventory, all of that is built around the technology. So we can basically see how that business is being run from anywhere in the world, gotcha. But then at the same time, obviously we need to, you know, we have to go into the gyms themselves, make sure that they look and feel how they’re supposed to feel. And I think one of the key things to highlight with our business, because it is sports and. Fitness coaching is a huge part of that quality and standards process, and so we have something called Spartans Boxing Academy, and that’s where we’ve basically set up our own accreditation courses to make sure that all of our boxing coaches go through a process to be able to safe and properly coach boxing the way that we want that rolled out, and so we roll that Academy out globally, so any coaches that coach in our gyms have to meet certain quality standards.

Gene Tunny  25:32

Gotcha. Okay. Okay. That makes sense. That makes sense. So you mentioned KYC before, know your customer. That makes sense, that you’ve got to do that. Can I ask you what what happened with F 45 I mean, I’ve seen all this news about F 45 Jim’s collapsing. Are you worried about that sort of thing? Do you know what the story is there?

Russell Harrison  25:52

Yeah, I know it very well, very well. I mean, F 45 for anybody in my line of work, was the North Star for a long time, right? Fantastic business, an amazing concept. And you know, the growth trajectory of that business was nothing short of amazing. I’ll be careful how I answer this. Okay, they went for IPO, and they listed the business on the NASDAQ, and to get it to that IPO, they obviously, they grew that. They grew it hard, right? And so, at least from afar, you know, they had X number of units sold globally, which were obviously on the books but weren’t yet opened and delivered. And they had a huge backlog in terms of opening and stuff like that. And so I think that’s where they started to encounter some, some issues. Long story short, they got delisted a little while after, and that’s sort of when it really hit the, you know, hit the press and that sort of thing. I think I don’t know what their failure rates are in F 40 fives now, and I think that’s a one of the key metrics that franchises are measured on three year ROI, as well as failure rates. Yeah, I don’t know whether or not they had higher failure rates or not, but I do know that the winners were winners in F 40 fives and the others weren’t so much. But also, covid happened to those guys. So, you know, there’s a lot. Yeah,

Gene Tunny  27:24

I just saw all the media about it. I thought, oh, that doesn’t look good. And I just wonder if that’s something that makes you hesitant about gyms. And, yeah, I mean, I mean, it’s a big risk opening a business, as you know. And, yeah, I mean, good, good luck. I mean, I hope, hope it works out. And I mean, it sounds like you got to, got it worked out. You got a good system. You’ve, you’ve tested it in these other markets. And I must say, I do, I do like the concept. I like, I like the idea. So it’s, it’s definitely good in that regard. So, yeah,

Russell Harrison  27:56

I think just on, you know, on that sort of, you know, the F 45 or even any fitness franchise globally. You know, we pay a lot of attention to the North Stars. There’s some amazing brands. A lot of them have come out of Australia, yeah, and not necessarily the global giants. You know, some of the sort of mid tier fitness franchise brands that have come out of Australia are amazing. So I think for us, we do sort of two things. We look at the North Stars, and we keep a close eye on those guys, and then we probably keep a closer eye on the cautionary tales. Yeah, and, you know, we try and make sure that we act accordingly.

Gene Tunny  28:34

Yeah, what are some of the mid you mentioned, mid tier fitness groups or companies that have come out of Australia. Are there any that really excite you? Mean, what are some that you would you would say are worth looking at?

Russell Harrison  28:50

Yeah, absolutely. I think probably the most successful one out of odd reason oz recently is BFT so body fit training, yep, yep. So they’ve done incredibly well. They’re in a functional fitness space. There’s a few others in that space as well. Fitstop, out of Australia, has done incredibly well. Yeah, they’ve expanded into the US markets. If you go further down and into a different modality, you’ve got Pilates cakes, pilates, who were out of Queensland originally. I believe they’ve done really, really well in the boxing fitness space. Danny Green’s business, ubX, they’ve done a really good job at Circuit style boxing training. So quite different to what we do. They’re out of Oz as well. So, you know, there’s, if you look at the Asia Pacific region, when you go along to sort of, you know, any conferences and that sort of thing, there’s heaps of brands out of Australia that are really well looked up to,

Gene Tunny  29:54

right? So we’re punching above our weight, so to speak. So that’s so to speak.

Russell Harrison  29:58

No pun intended. And very good on the functional

Gene Tunny  30:02

fitness, just so I understand it. This is where you got the is this kettlebells, and this is the sled you’re pushing. The sled loaded with weights, that sort of thing, battle ropes, or whatever they are, yeah, that

Russell Harrison  30:15

sort of stuff, you know, body weight exercises, you know, pull ups, you know, all that kind of stuff. So look really simple modalities, but just engaging for people. And I think one of the what all of the really great brands have done, and again, talking about North Stars, this is something that we do. They’ve harnessed technology in really simple concepts. And so for the average punter off the street, what you’re able to do is you’re able to show progress. Essentially, what members buy from any fitness business is accountability and motivation, right? And the best way to do that is to be able to track progress. And so technology plays a huge part. So when we look at functional fitness, the best brands have done a really great job at gamifying that and, you know, bringing technology to the fore. You know, that’s what we’ve done in the boxing space. If you go into a Spartans boxing gym, on the punching bags, there’s a sensor, so when you you hit the bag, it tells you how many times you’ve hit it, it tells you how hard you’ve hit it, and it keeps a score up on the screen. And so you can compete against your friends. You and I not, might not want to punch each other in the face gene, but it’s still nice to have that competition. So you know, we both see a score up on the board, yeah, creates that friendly competition, and then people get sent those scores as well. So I think all of the good boutique fitness brands have done that well

Gene Tunny  31:40

now that you mentioned that, I mean, that raises the possibility of extended reality, virtual reality, doesn’t it? Is that something you’re looking at?

Russell Harrison  31:48

Absolutely? Yeah, absolutely. And so to give you an idea, the technology that we use coming up, try not to make this session time sensitive. But so coming up next month, we’re doing a global competition against all of our gyms, where the gyms can compete to who gets, you know, who racks up the top scores for this punching technology. You can do it by gym. You can do it by individual. And so we’re rolling that out as a global competition. And again, that’s just a tool for members to be able to engage, be able to see progress, and you want people coming back. And if you link that to what I was saying before, in terms of the big box model, one of the key features to Boutique is you may only have a few 100 members in your gym, but you want them in there, 345, times a week. And that is how you create communities, and that’s how they become really sticky,

Gene Tunny  32:52

yeah, gotcha Okay, right? And in terms of the like it is boutique, you got fewer members in the big box gyms now they’ve got they’ve got a bigger floor area, they’ve got more gear. I’m just thinking, how does the price, or the cost per member compare with the big box gyms?

Russell Harrison  33:13

Yeah, so cost per member, we’re typically a premium so Boutique is premium price, okay, right? And so that’s how the sort of economics of it works. But again, if you look at just sort of a, you know, gym level economics, and this is one of the benefits to our franchisees, yeah, the break even number of members on a boutique gym is much lower than, say, a big box, yeah, you know. So typically in our gyms, you’re looking at 120 to 140 members to break even. Yeah, right. And so that’s one of the real attractive things for our franchisees. They can get to their OPEX break even by launch or within the first few months of running the gym, and they’re typically profitable from year one. So you know, if you look at that as an investment in comparison to, say, doing big box, where you need 1000s of members to break even, and your ROI is typically, you know, beyond seven to 10 years on big box. You know, within boutique, it’s much shorter, right? Your ROI in boutique can be anywhere from three to seven years. Gotcha

Gene Tunny  34:17

buy a premium price. What do you mean? You mean 20% 50% 100%

Russell Harrison  34:25

it depends. It depends because, so if you use Australia as an example, yeah, the industry is quite fragmented. So you know, you can walk into a gym down in a local neighborhood, and you know, it might cost you five bucks an entry, whereas, you know, if you go and do another gym, similar concept, that might cost you 120 bucks a month. So, but to give you an idea, in Australia, a boutique fitness membership is typically going to cost you around 220 to 280 bucks a month. Okay? Boutique, yeah, right, yeah, some of them will probably. Maybe premium out over that, whereas, if you take a big box type membership, they could be anywhere from, you know, 80 to 120 bucks a month. Yeah,

Gene Tunny  35:09

yeah, gotcha. Okay, yeah, that makes sense, right? Okay. Well, before we wrap up, I’m keen to ask you about the corporate side of things. And you mentioned you have lawyers and professionals that are coming to your to your gyms. I mean, what do you see as the benefits for them? I mean, it’s about fitness, which is a good thing in itself. But do you see that this translates into higher productivity? You know, healthier people, less absenteeism. I mean, this is one of the things I’ve been interested in, is there an ROI from doing this training, which might make it beneficial for companies to invest in this sort of thing? Are you able to talk about that? Please? Russ,

Russell Harrison  35:51

so I can’t talk about it from an ROI point of view for companies. I’m not sort of, you know, the corporate wellness guy within a corporate but what I can talk about is that, you know, all companies these days have got, you know, well structured corporate wellness programs, as we know, you know, they can go anywhere from EAP all the way through to really simple stuff, like, you know, bulk Purchase of jib memberships. Yeah, I think probably post covid, one of the things that both corporates and businesses like mine have really leaned into is this whole concept of holistic wellness, yeah, and so, you know, the doctor or lawyer who comes into a Spartans boxing gym, and, you know, punches the bag three or four times a week. Yeah, sure, he might torch some calories, but in terms of the benefits for him, in terms of stress relief, in terms of, you know, mental health, you know, in fact, I mentioned this before, but we’d set up this arm of our business a few years ago. There’s a guy that works within Spartans by the name of Dr Paul Englert. So he’s a PhD. He specializes in a few different things around corporate leadership and stuff like that. Yeah, that’s his wheelhouse. Yeah. He’s his PhD thesis was on something called future selves, which is sort of a segment set of cognitive ideas around, you know, how people create a version of themselves across different areas of their their lives. Yeah, and so through all of that thinking and boxing programs and stuff like that, we created this concept of Spartans mind. And Spartans mind is the part of our business which focuses on holistic health. So it’s not just telling the doctors and lawyers, Hey, come on in because you want to punch something and you know, you’ll lose a little bit of weight. It’s the whole thing. It’s stress relief, it’s being able to tap into mental health services. So we link up with psychologists and psychotherapists, where, if they’re giving somebody type of therapy, and it may not be some serious pathology, it could be something like, Hey, I need help with stress or anxiety or whatever else. They will plug their patients into our programs. And so I think the general consensus, even just anecdotally, is that this idea of holistic hellness, holistic wellness is, you know, that’s the way the world is most definitely going,

Gene Tunny  38:22

Yeah, absolutely. And Spartans or Spartans minds or Spartan mines, is that part of your core offering, or is that an extra? That’s something extra you have to pay for?

Russell Harrison  38:33

No, so it’s you’d have to pay for it. So just to give you a real quick sort of, the main three pillars of our business are gyms, events and the Academy, okay, the three main pillars of the business and Spartans mind underpins all of that. So it’s like an enabler of our business. Within Spartans mind, we’ve got different programs. So we have a program where we help help youth at risk and ex offenders. So there’s programs built around getting those groups into into boxing programs, as well as counseling programs. We have another program which helps people to optimize so, you know, the everyday person off the street to make sure that they’re getting the best out of themselves. And the other program is the one that I’d mentioned before, which is repair, so we partner up with psychologists and where people are getting help with therapy, the psychologists plug them into our boxing programs. So it’s not an additional charge. It’s part of the DNA of what we do. We just were able to put a bit of a brand across it. Yeah,

Gene Tunny  39:36

yeah. I imagine that’s difficult. I mean, it’s good. You’re doing it, but working with ex offenders, because they face all sorts of challenges reintegrating into the community, and if they don’t reintegrate, then they’re more likely to reoffend and go back to prison. So it’s good that you’re you’re doing that. That’s more of a comment. No need to respond. I have to ask you. Mentioned before you talked about bulk purchase of gym memberships, there was a term. You used EAP,

Russell Harrison  40:01

yeah, yep. So the employee assistance programs, you know, companies have been, yep, doing those for years. And I think, you know, again, I when I was jumping on this to talk about the sort of corporate wellness stuff, I wanted to make sure that I didn’t sort of step outside of my my wheelhouse, there’s, there’s some really sophisticated models for the way that corporates now buy, you know, the total wellness package, and that could be anything from what we do fitness. And there’s some people who are much, much smarter than me, who design those overall programs and also sell those programs on the fitness side, yeah. But I’ve, you know, from where we sit as the, let’s call us the vendor as the operator. You know, we’ve seen amazing things, not just in in Singapore, but in Dubai as well. You know, I’ll just give you a sort of, maybe a couple of examples of

Gene Tunny  40:58

fuel that is

Russell Harrison  41:01

probably the one of the better ones that I’ve seen here in Singapore is done through one of the international schools here, and they have somebody that runs their sort of entire PE and wellness program. What this guy does? He basically brings in faculty, students, PTA the entire school community, and taps them into not just fitness programs, but wellness events. Wellness could be anything from, you know, fitness all the way through to, you know, mental health and wellness, you know, retreats, all of that sort of stuff. But they basically build this into the fabric of the entire school community. And so, you know, they have people participating in triathlons, they do bodybuilding competitions, they come along to the boxing gym. But I think the beauty of what they do, and the reason that I see that as a real best in class, is because they really get the school community behind it, everybody. So that’s a really great example. I think a couple of the big banks in Singapore do varying things, from health and wellness events through to team building events. You know, we constantly have groups of bankers coming through boxing and, you know, they usually want to hit each other, but trying to avoid them from doing that. And then, you know, one of the other things that I I see, which is really unique, you know, I’ve got a recruitment business here. We do something that’s called boxing and beers. And so, you know, Friday afternoon, we get a bunch of clients all come along. They all train together. Most of them have never boxed, trained together, sweat together, and after that, there’s a networking event with beers. Now, obviously that’s not corporate wellness event. That’s not corporate wellness per se, but it most definitely talks to that corporate audience.

Gene Tunny  42:51

Yeah, yeah. Okay, that’s it. All sounds all. Sounds good. Russ, this has been terrific. I’ve really enjoyed learning about what you’re up to with your your Boxing Clubs there with Spartans Boxing Club, it’s been, been a really. It’s great what you’re doing, and I hope it does go well in Australia. Anything else before we wrap up? Anything you would like to have covered, anything you think’s important for for us to know at the moment about what you’re up to with Spartans.

Russell Harrison  43:26

No, I appreciate you saying that gene. One thing that I will mention because it’s, again, it’s relevant to corporates. With our events business, we have a concept called White Collar boxing, and this is, as the name suggests, you know, some people, high performing individuals, want to run marathons, and some people want to climb climb Everest. We’ve got a crazy bunch of people that decide they want to have a boxing fight. And so, you know, the demographic that we attract is typically, you know, CEOs, MDS, founders of companies, entrepreneurs, bankers, etc. And through this process, they sign themselves up for a 12 week training camp. They come in, they train and act like fighters for 12 weeks. And at the end of it, it culminates in a black tie event, a huge gala event at a five star hotel, all the food, all the booze, and we put on a huge gala event for them. And, you know, it’s surprising the number of CEOs that you see that go through this event and their WhatsApp picture after that is them at their, you know, their boxing thing. So, you know, that’s the only other thing that I’d say that’s really geared towards corporates. That’s the demographic there. So we bring people’s networks together through these events, and they’re an incredible spectacle. So we’ll do those in Oz next year. We’ve got two in Dubai, one in Singapore this year, but we’ll launch those in Australia as well. And. Oh, good. 2025

Gene Tunny  45:00

I expect they’ll be, they’ll be popular. It’s like Fight Club, but classier. So I think it’ll

Russell Harrison  45:06

be, you hit the nail right on the head Fight Club, but classier. Very

Gene Tunny  45:10

good. Okay. Ross Harrison from Spartans Boxing Clubs, this has been terrific. I’ve really enjoyed the conversation. So all the best with it, and I’ll I’ll keep informed about what you’re up to, and yeah, hope to chat with you again someday. So thanks again.

Russell Harrison  45:28

Thanks gene, thanks for your time. Bye.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

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Podcast episode

From Academia to Impact: Transforming Workplaces w/ Achyuta Adhvaryu, Good Business Lab – EP251

This episode delves into the work of Good Business Lab (GBL), co-founded by Professor Achyuta Adhvaryu. GBL focuses on innovative workplace interventions to improve worker well-being and firm productivity, and it typically evaluates these interventions using Randomized Controlled Trials (RCTs). Show host Gene Tunny and Ach discuss the effectiveness of soft skills training programs and the importance of worker voice in creating a more engaged and productive workforce. They discuss methodological issues regarding RCTs and whether the Hawthorne effect is a concern. Ach is Tata Chancellor’s Professor of Economics and Director of the 21st Century India Center at UC San Diego.

If you have any questions, comments, or suggestions, please email us at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About this episode’s guest: Professor Achyuta Adhvaryu

Achyuta Adhvaryu is the Tata Chancellor’s Professor of Economics at the School of Global Policy and Strategy and is the inaugural director of the 21st Century India Center at UC San Diego. Adhvaryu’s research interests are in development economics, organizational economics and health economics, and his experience in organizational development make him well-suited to lead our new center. Prior to this role, Adhvaryu was a professor at the University of Michigan and an assistant professor at the Yale School of Public Health.

https://gps.ucsd.edu/faculty-directory/achyuta-adhvaryu.html

What’s covered in EP251

  • Introduction. (0:00)
  • Achyuta’s Early Career and Research in East Africa (1:53)
  • Historical Examples of Private Sector Impact (17:03)
  • Good Business Lab’s Approach and Findings (21:45)
  • Methodology and Measurement of Impact (37:56)
  • Hawthorne Effect and Replication of Findings (43:33)
  • Economic Development and Convergence (49:44)

Takeaways

  1. Soft skills training can significantly improve productivity, even in blue-collar settings.
  2. Worker voice, when effectively harnessed, can reduce turnover and absenteeism while boosting productivity.
  3. Good Business Lab demonstrates the practical value of academic research when applied to real-world business challenges.
  4. A growing body of evidence supports the integration of worker wellbeing initiatives into business strategies globally.

Links relevant to the conversation

Good Business Lab:

https://goodbusinesslab.org/

UC San Diego 21st Century India Center that Ach directs:

https://india.ucsd.edu

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Transcript: From Academia to Impact: Transforming Workplaces w/ Achyuta Adhvaryu, Good Business Lab – EP251

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Achyuta Adhvaryu  00:03

You know, Morton Salt did this purely through competitive forces. They wanted to stay in business again. They said, Hey, we better get on board with this thing. And it turns out, you know, they were able to solve a huge public health issue.

Gene Tunny  00:22

Welcome, to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. This episode features a conversation with Professor Arch advaio from University of California San Diego arch is the co founder of good business lab, a non profit dedicated to improving worker welfare and firm productivity through innovative interventions. According to the lab’s website, worker well being is good business. We believe that building the business case to support better conditions for workers is the most sustainable way to transform labor markets and enable everyone to reach their economic potential and live a dignified life. Hutch shares his fascinating journey from his early work in East Africa studying healthcare delivery to his current focus on leveraging the private sector to drive positive change. He discusses the lab’s groundbreaking findings, such as the significant productivity gains from soft skills training for garment workers and the importance of empowering workers through improving worker voice, the ability of workers to communicate issues and concerns to management. This conversation offers valuable insights at an intersection of academic research, business practices and economic development. Join us as we explore how arch and his team are bridging the gap between theory and practice to create meaningful impact. One of the highlights for me in this conversation was how arch explained how his interest in economic development was stimulated by his work in East Africa, and that came about because he followed his girlfriend, who later became his wife, to the region. It’s a story that appeals to the romantic in all of us. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes, as always, I’d be interested in your thoughts on this episode or others, and any ideas you have for future guests or how I can improve the show. My contact details are in the show notes. Okay, without further ado, let’s dive into the episode. I hope you enjoy it. Arch Welcome to the program.

Achyuta Adhvaryu  03:00

Nice to be here. Thanks for having me on

Gene Tunny  03:03

terrific I’m keen to learn about all the good work that you’re doing with good business lab. Before that, I’m interested in what’s your story in terms of getting to setting up the good business lab with your with your co founders, you did a PhD in Economics from Yale. Could you tell us a bit about what you studied and what led you to this work you’re doing with the good business lab, please?

Achyuta Adhvaryu  03:32

Yeah, sure, that’d be great. So I’m an economist. You know, I have never had a real job in my life. I think been, you know, college student, I went straight to grad school. They went straight to faculty jobs and and, you know, part of that pathway has always been, you know, yearning on my end to not only have impact in the academic sphere and generating knowledge and, you know, producing things that are consumed by the academic, you know, world, but also, kind of having some of my work influence policy making, influence or decisions on the ground and influence people’s lives. That was always the goal, getting into the PhD. And I realized pretty early on, when I was in graduate school and as a junior faculty as an economist, that while we often research things that are, you know, very adjacent to the real world, the sort of esoteric nature of academia and the kind of, you know, way that the knowledge production industry is structured, we’re almost encouraged not to be, you know, get our hands too dirty in the real world. Yeah. So I’ve had. You know, mentors and professors tell me, you know, don’t bother with all this policy stuff. You know, I think if your stuff gets picked up by the policy making world, that’s great, but if not, you know, that’s not what you’re here to do. We’re very strictly sort of trying to push out the knowledge frontier. And I sort of didn’t agree with that notion. And I think actually, I’m, you know, I’m not the only one who felt this way. And one kind of academic generation before me, you know, folks like Esther Duflo and Abhijit Banerjee and Michael Kramer and several others were were kind of forging this path of having one foot in academia and doing really rigorous work that’s informed by the kind of cutting edge, you know, of academic work, but also having a foot in the policy world and dedicating a lot of time and resources towards advancing, you know, policy goals. And in this case, I came to economics with a with a deep desire to impact the lives of of low income populations around the world, much like I think Esther and Abhijit and others. And I think that that journey began actually in East Africa, and a lot of my early work was around healthcare delivery to poor populations. Like, how do you sort of make that more efficient and more universally accessible, especially in kind of remote rural areas where there’s not very much healthcare access. So I was working in that space in Tanzania and Kenya and Uganda and a few other places for the first part of my career. But I think I always acknowledged that at the core of a lot of the stuff that we do as economists, there is a private sector role. So it’s not just about government delivery of policy, of policy, you know, and resources to the poor, while that is a big part of, you know, the safety net and always will be, I felt that there was an under emphasis on understanding the role of the private sector. How could the private sector be involved in delivering, you know, welfare enhancing interventions to poor populations and make their lives better. There are some great examples historically of how this has, you know, been possible, but there wasn’t kind of a clear business rationale for a lot of this, and, you know, lots of things I saw early on in the healthcare space around, you know, trying to distribute medicines to rural, remote populations through these agents who were then kind of paid, you know, and so that you might consider that a private sector framework, a lot of that kind of fell short of what I was really hoping for in academia and in the policy world, which was, can you actually generate a business case for intervening amongst poor populations? And I think that the sort of easiest way you might be able to do that is within large firms that are very labor intensive. So, you know, take your average, you know, manufacturing sector, firm, big place, employees, 1000s of people, all working back jobs, most of them being, you know, low income individuals. Maybe there’s a vested interest there for that business to take care of its workers, and maybe that can actually generate, you know, improvements in their lives that are compatible with the business, uh, functioning as well. So that’s the sort of hypothesis that I felt was under explored, both in academia and kind of in the real world, where you’re seeing more and more sort of conflict between, you know, workers and management and kind of dividing up this fixed pie, or fighting over wages, fighting over benefits and training and all that kind of stuff. You’re seeing strikes all over the world related to this that we’re sort of missing the thread a little bit on maybe there’s an area of common ground where we can all function, and what does that area look like? What are the kinds of interventions that might work? What are the kinds of interventions that have gained traction but don’t actually work? And those are the kinds of questions that I sort of becoming interested in from an academic perspective. And then to your question about good business lab, we realized very quickly, my co founders and I, who started working in this space, in a large garment firm in India, that just publishing academic work was. Just not going to do it. It wasn’t enough to actually move the needle and change the minds and the actions of decision makers who could actually generate impact. So, you know, in addition, the fact that nobody, nobody reads the work that we do, it makes up for a sort of select, you know, group of academic elite, or something like that. It’s also the case that it’s often hard to translate what we’re doing in academia and the questions we’re asking into real world, practical knowledge that can be applied, that can be used to change a policy in a firm, etc. So that’s why we set up Good Business Lab, along with another huja. And we thought, hey, you know, we’re generating some interesting insights here, but they’re going to sort of echo in the in the ether, so to speak, if we don’t really kind of devote serious resources and time and attention towards actually generating some change in people’s thinking. And so that’s sort of how we came up with the concept for the for the NGO, and it’s just grown from

Gene Tunny  11:12

there, right? Okay, geez, a lot to talk about there arch That’s fascinating. A few things I’d like to follow up on, so you ended up working in East Africa. Was that part of a research project? Was that, after you did your PhD, how did you, how did you end up in East Africa?

Achyuta Adhvaryu  11:30

Yeah, that was actually during my PhD, after, after my first year in the it was, to be honest, a little random, I knew I wanted to work in the sort of development economic space, basically the areas of poverty alleviation. I was interested. I was drawn to health care access. And I was, I was dating my wife at the time, who was just starting out, or she was doing her senior thesis in college, and she was going to do it in Tanzania. And I said, Hey, I like this girl. I’m gonna go Tanzania too. So I started blindly emailing my professors and saying, hey, I want to go to Tanzania and look at something related to health and development. What do you think? And I, you know, was fortunate enough, through a chain of emails to be connected to the Centers for Disease Control and Prevention The CDC mission in Tanzania. And the head of that mission was a extremely nice man who kind of said, Hey, sure, why don’t you come over and help us with the survey we’re doing, and you know, we’ll see where it goes from there. So I said, Great, this sounds like a wonderful summer, and I get to be, you know, with this girl that I was, you know, head over heels for. So I was excited to do it. That’s the really kind of serendipitous start to the My Work in East Africa. But, you know, I grew to love it. And I think there’s, of course, so many really interesting and meaningful questions to tackle in that space around health and development, I worked in the delivery of a new malaria therapy, because malaria is obviously a huge problem in parts of Sub Saharan Africa, you know, one of the leading killers of kids Around the world. And you know, it’s entirely treatable with therapies that you know you just have to get access to them. So it’s one of these problems of last mile delivery that are both incredibly important, literally life and death questions, and also really interesting from the kind of program delivery and academic perspective of, how do you kind of ensure that all potential beneficiaries receive access? Yeah,

Gene Tunny  13:49

and what did you conclude in that project into because you mentioned before that there are issues with efficiency and accessibility. How did That’s right, yeah, What? What? What type of findings did you end up making?

Achyuta Adhvaryu  14:01

I think there are two broad learnings, one of which was kind of specific to the work that I was doing. And I was around how people learned about new therapy and choose to try it out. Because, you know, the easiest thing to do is kind of default to what you already know. And so if your kid is sick, you say, Okay, I’m gonna go to the drugstore and pick up Chloroquine, or, you know, one of these therapies that has existed for 50 years, but it’s not very anymore. But then you gotta, you know, in the case where that doesn’t work, you might take a gamble and say, hey, the, you know, government clinics got this new artemisinin based combination therapy. Why don’t I give this a shot and see how this works for my child? But kind of taking that leap of faith is costly, because government clinics are very far away from these remote, rural populations. So you know, this meant probably losing out on a couple days of work. And, you know. Walking all the way to the clinic and all that kind of stuff. So my research really was about sort of how people learn, as they kind of experiment with these new therapies, how you might learn about the effectiveness of new therapy, and in a environment where misdiagnosis of malaria was extremely prevalent. So you know, often you just say, I think you have a fever, you should go have some malaria medication. But, you know, half the time it’s not malaria. And so, you know, if you actually had good diagnosis, then you’d get much more effective adoption of treatment, which is the kind of, kind of 10,000 foot takeaway from my dissertation work. But the other thing it taught me was, again, the role that the private sector plays, inevitably, because in all of these villages, there was at least one, what they called Duka, which is like a little shop that sold medicines and is usually staffed by someone who, literally, you know, has no medical experience, no training, etc. It’s just a person who, you know, could get their hands on some meds. And maybe, you know, in a lucky case, it was a, it was a nurse or something, but usually it was somebody who just, you know, my uncle, you know, can get me these medicines. And so I’m going to sell them in the village. And they have no idea about how to diagnose kids with these kind of life threatening diseases, etc, so, you know, but they’re nevertheless that that’s the sort of like first line of defense against malaria and other important diseases, right? Because everybody’s using these guys. So how do you guys started thinking, you know, we can’t just focus on the government clinics, because those are useful, but they’re really far away. Nobody from until they’re really forced to. We really should be focusing a lot on, how do we strengthen the capacity of these guys, who are these shopkeepers and owners? Maybe make them a little bit more in tune with what works and what does and what are the newest therapies, maybe connect them to supply chains, et cetera. So that’s when the wheels started turning. The private sector being an important

Gene Tunny  17:04

player, right? Okay, okay, that’s, that’s all fascinating. And you mentioned, historically, there have been some good examples of private sector doing, you know, positive things for I’m trying to remember what, what exactly you you were saying, but I guess you, I imagine, are you talking about things, organizations like friendly societies. What type of organizations are you? Do you have in mind? Well, you

Achyuta Adhvaryu  17:28

can just, sometimes the the private sector, just doing its thing, just, you know, out there to make a profit, still, kind of tax society. So one great example that I love giving. I’ve done some work on this in an academic paper, is the story of Morton salts, the, you know, big salt company in the US. And, you know, I’m sure you’ve seen that you can, when you go to the grocery store, you can buy salt that’s iodized, which has iodine added and salt as and, you know, we’re all instructed to to buy the iodized kind because it, you know, prevents goiter and, you know, cognitive deficiency. It’s particularly valuable as micronutrient for pregnant moms, etc. So iodine is kind of a really critical to, you know, all kinds of cognitive and brain development. Turns out that most countries in the world, including the US, before the 1920s had just rampant iodine deficiency disorder and depended on where you were. So if you’re near the coast and or, you know, these iodine kind of reserves around the country, then you were okay, because a lot of the sort of plants you ate and the meat that you ate had iodine in there. But if you didn’t, for example, you didn’t eat fish, which is a great source of iodine, or you lived inland or lived in a mountainous region, Switzerland was particularly bad with iodine deficiency then, then you were just not getting enough. And so this actually prompted the government to work with, you know, a bunch of physicians and researchers who had kind of discovered this link between iodine deficiency and cognitive disorder to try to figure out, how are we going to get iodine into the population? And they concluded that one easy way was to add it to salt. It was a very simple process that you could fortify the salt with iodine. And Morton Salt was the largest salt distributor in the country at that time. And you know, the the there’s a doctor at the University of Michigan who actually convinced some local producers in Michigan to say, hey, you know, you guys have a big problem with iodine deficiency. I think it might be a competitive edge for you if you’re competing with this big name Wharton salt, if you just, you know, put iodine in your salt, and you kind of advertise the benefits of that. And. They ended up, you know, being convinced. And they went ahead and did that. And so Morton Salt had to compete with this, you know, new newfangled salt that had iodine. And so they said, Well, you know what, instead of just changing what we’re doing in Michigan, why don’t we offer I iodized salt across the country, and we’ll make it exactly the same price. It was 10 cents at the time for a canister of salt. So we, they said, you know, we’ll have the regular canister and we’ll have the iodine fortified canister, and we’ll, you know, they’re going to be on the shelf, and they’re both going to be 10 cents, and people can do what they want. And of course, it turned out, you know, through good, good messaging and marketing, they made people aware that this was actually a problem, and people chose to go with the iodized salt. It’s so cheap to fortify iodized salt that this sort of really made Morton Salt corner the market, and within a matter of basically 10 years, 15 years, iodine deficiency disorder was erased in the US, except for very remote communities. So that was just like a really wonderful story. You know, Morton Salt did this purely through competitive forces. They wanted to stay in business again. They said, Hey, we better get on board with this thing. And it turns out, you know, they were able to solve a huge public health issue that had massive implications for cognitive ability, and, you know, rates of goiter medical condition in the US.

Gene Tunny  21:29

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  21:35

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Gene Tunny  22:04

Now. Back to the show, arch. Can I ask about now Good Business Lab, so we’re up to, would be good to talk about that? So you mentioned you were studying development economics, and there was a view among some academics, or don’t get your hands dirty, but you saw that there are a lot of good insights from development economics that could be applied in the real world or some of the research that was occurring. You mentioned colleagues of yours, the flow and and Banerjee, is it? Yep, and you’ve got your your good business lab, you’ve set up this NGO or this nonprofit, and you’re looking at your, you mentioned, large firms, labor intensive, and potentially, there’s some interventions that can be undertaken to to get better outcomes. Can you tell us about some of the the work you’ve been doing with good business lab and how you’re trying to get those better outcomes in business, please.

Achyuta Adhvaryu  23:03

Yeah, sure. So that’s, you know, it’s a, it’s a big blank slate when we started out in terms of what might work, right? So I think there’s lots out there that people, you know, with reasonable amount of common sense might think, okay, if your workers are really poor and unhealthy, for example, then improving their health a little bit in the workplace might actually generate some, some gains, you know, for them, and also kind of be useful for the firm. They might they might be more productive at that work. They might be able to do more. They might be absent less. They might stick around longer. Same thing with skills, you know, it’s another big bucket. Lots of firms provide skills to workers, and the idea is that, you know, well, if you, if you make the worker more productive by providing the skills on the job, then they might generate more productivity for you, and also kind of stick around longer, etc, but a lot of these theories were kind of untested, right? So there was a lot of kind of going with your gut here in terms of what firms were doing and also what academics were advocating for, right? And the NGO sector was advocating for so we came into the space and said, Look, some of these things may actually work, and they might actually be great. Some of them may not, and might actually generate, you know, either nothing for workers or may not actually feed back into any kind of productivity or profit for the firm, in which case, let’s not spend resources on that stuff. So can we actually generate a menu of things that firms can look at and say, I want to invest in my workers in a way that benefits them, and also then in some way? Comes back to me some and affects my bottom line that we can generate. What does it look like? What are the types of interventions? So we went in on on some of the most obvious ones first. So the first kind of set of studies we did were around skilling inside the firm, and in particular, we focused on soft skills, which is actually, you know, a little counterintuitive for most people, when you’re thinking about a blue collar workforce, right? Like imagine a factory worker on a production line. What good is, you know, leadership and communication and teamwork skills and conscientiousness and all this kind of stuff that you usually think about when you are thinking about soft skills. What good is it for that worker? Right? We usually think that those are skills that white collar workers might use, that you know, a good CEO should have, etc. Turns out that, according to our research, those skills actually end up being incredibly important, even for frontline workers. And start, you know, digging a little past the surface, you sort of start to understand why. It’s because the production line is really just a large team, right? And you’ve got 50 other team members on that line, or 70 other team members. You’ve got a boss you’re communicating with. There’s lots of stuff that you need to do on that line that has nothing to do with the technical skills, like, you know, putting a car part on a car, or, you know, stitching together the sleeves of a T shirt or whatever, right? All this stuff that you know you’re doing on the on the factory floor is also related to how you know, skilled you are at communicating with your team members, right? So, if there’s a, if there’s a, you know, a block in, in the line that’s kind of slowing you down. You have to look back and say, Hey, can I help what’s the problem? How do we, you know, how do we speed things up? If there’s, you know, a problem with your machine, you have to raise your hand and talk to your boss and say, Hey, there’s, there’s something that’s stuck here. I need some help fixing this. If I’m not feeling well, I might need to raise my hand and say I need some help today. Or if I have a friend who’s not feeling well, I might tell my boss, maybe we should help out. You know my friend over there, because, you know, Gene’s not feeling well today, and he’s he’s likely to be unproductive. All of those things are soft skills. And you know that seems easy enough to do, you know if, if you went to good schools, had a good education, you know, grew up in a good community that sort of fostered those kinds of communication and teamwork and leadership skills and patience, etc, then those things are sort of ingrained in you already, but for people from low income backgrounds, that’s often not the case, right? That you know, they went to a school that didn’t teach any of that they might have. You know, not grown up in a family that encourages people to speak up and say what they’re feeling. So you know, for a variety of reasons, they’re coming into the workplace with low levels of these skills, and so just improving those fundamental skills and connecting them to the kinds of activities that that workers do in the workplace generates both kind of increases in the skills that those people have, but also feeds back into productivity. So in one program we evaluated, which is called the PACE program, which is essentially the flagship CSR corporate sustainability program for gap, the clothing company, which was kind of trying to, you know, proliferate across its supplier network all across the world, that program, which is a soft skills training program for female garment workers, generated an 18% improvement in productivity and a net rate of return because of that huge increase In productivity of about 250% after 18 months. So it was a huge, huge, you know, hugely beneficial program, both to workers who really, really thrived after taking the program and to management, because productivity went up substantially. So that was our first kind of foray into the soft skills space, and since then, we’ve run several other trials that have basically confirmed the importance of soft skills in the workplace. So we did this at a higher up level, which I can talk about more if you’d like, but that was a managerial training program we evaluated, which we developed ourselves based. On firsthand, on managers in these garment firms that we’re working in, and that also generated six or 7% increases in productivity. And given that it wasn’t very expensive, a program to implement, the rate of return was was astronomical. So the program, you know, returns about 50 or 60x in the two year period. Kind of following programs implementation to the firm, which is kind of about as good a rate of return as you’ll ever get on any intervention. So I think, through a variety of work, you know, I’m convinced, in general, that soft skills at all levels are incredibly important for workers. The other kind of bin that we’ve been working for quite some time in is around worker voice. And so this is the basic idea workers when they don’t feel heard, when they feel like I have a grievance or a concern, and I keep telling my boss about it, but he’s not listening. He’s not changing anything. Or I can’t even speak up to tell my boss about it because I’m fearing repercussions, etc. They feel disempowered, and at the best, you know, they’ll quit and, you know, move on to another firm. But at worst, you know, we see some of the worst examples of this playing out in the strikes and protests sometimes that turn violent all over the world, where workers don’t feel heard enough, and that feeling kind of just boils over and results in a lot of strife. So we kind of have been interested in this space for a long time, especially in environments where you know the union for workers is really supposed to be the megaphone, right for concern, for airing out your grievances for negotiating, you know, with with management on important things like wages and benefits. But in a lot of parts of the world, unions either don’t exist or are extremely weak. You know, they have very low membership for a variety of reasons. You know regulation, you know the court cases against them, you know the sabotage on the part of firms. You know there’s, there’s lots of, lots of, you know, bad stories about this, but basically in a lot of places, you know, you rarely see workers as part of a union. This is true in India, where I work a lot. So, you know, we started thinking about it. You know, in short of that kind of best case scenario of having a union rep that can really advocate for you. How do you kind of air out grievances in a way that kind of results in something changing about your situation. And so we did a series of trials, basically to enhance worker voice through technology. And you know, this could be as simple as just asking you how you’re feeling through a satisfaction survey, or, you know, custom a worker pulse sort of check, or it could be sort of more involved, or, you know, use more technology. For example, there are a lot of apps out there now that that help workers, you know, anonymously convey their messages to HR. So we basically tested all the above, and through a series of trials, we concluded that worker voice is incredibly important. It actually generates a lot of turnover amongst workers when you don’t have appropriate voice for your concerns, and when you provide technology or an intervention that enables people to air out their concerns, if they have them, they leave at lesser rates. They’re less likely to be absent. And in the best case scenarios, especially when you get HR really into it and incentivized to do a good job with these complaints, you can actually increase productivity as well. So you know that work has kind of taught me broadly that worker voices matters a lot, and simple interventions that encourage the voice of workers and encourage HR to respond appropriately in a timely manner can make a big difference for workers and also for the bottom line. Rod,

Gene Tunny  34:55

okay, that’s fascinating. I’ve got a couple of few follow up questions. It’s first on that worker voice one. So is it the fact that you mentioned there’s improved productivity? Is it? Do you know what the mechanism is? Is it the fact that HR resolves whatever dispute there was, or is it just the fact that the worker feels better, they’re less likely to slack off, or that, or they’ll work a lot harder, like, because you’ve got some choice into the level of work effort you put in any job, okay,

Achyuta Adhvaryu  35:28

yeah, yeah. So I think it’s a combination of those. So, you know, part of, part of the, the mechanism here is that I’m kind of more likely to reciprocate, you know, the effort that I’m you know, in terms of the sort of effort that I perceive is given to me, right? So, yeah, if I’m over here being like, Hey guys, my supervisor is, like, really yelling at me. He’s not behaving nicely. It’s not that I’ve done anything wrong, and he treats me really badly every day when I come to work and I keep telling HR this, and they don’t do anything. Ultimately, I’m, you know, kind of convinced, like nobody’s paying attention, or if they are, they just don’t care. And that’s potentially going to make me also do the same thing, like, Hey, I’m not going to, you know, put out for like, a, you know, somebody who doesn’t care, care about me, and I’m not going to sort of break my back over, over, you know, creating, you know, more production for these folks who are just not, you know, listening. And I think that that’s what generates absenteeism and turnover and that kind of feeling of not being valued. But there’s also kind of a instrumental feature of voice that I think resembles the Kaizen system, if you’ve heard of that in Toyota, sort of famous management system that Toyota uses to be so efficient in their workplaces. That’s something that you that’s a central tenet of the Kaizen system, is constant feedback and revision of processes. So there’s a constant, you know, we have an open channel from workers to say, do you guys are the ones on the ground. Sometimes we’re not gonna be able to see what the problems are and how they arise and all that. You know, you have a new model of a car in there, you’re gonna have to figure out, you know, how to attach all the parts together. And sometimes they don’t go together exactly how they should, and we have to modify things. The workers are the ones who are gonna be kind of coming up with those ideas first, and if they feed those up, you know, to management, then you can kind of change that process and become more efficient. So having that open channel, in addition to sort of just, you know, allowing workers to air out their grievances and have them be addressed, is also a method of communication within the hierarchy that allows workers to suggest things that might be beneficial or useful, and for those things to then filter up and change processes change the way that production is

Gene Tunny  38:09

done. Yeah. Okay, I’d like to ask about the you mentioned gap clothing company before the female garment workers that had a 18% improvement in productivity. PACE program, right? Yeah, PACE program, right. How do you measure this? How do you set up the like, how do you set up the study? Is it a randomized control trial? Or can you tell us a bit about the methodology please?

Achyuta Adhvaryu  38:35

Yeah, sure. So. I mean, when possible, we use the sort of gold standard for impact measurement, which is a randomized control trial. And, you know, we’re used to this in the post covid world, where we all hearing about the trials that were done on the various covid vaccines and all that, but they’re, you know, it’s pretty simple in the sort of medical setting you usually have, you know, a treatment group that’s randomly selected from a population. And given the, you know, the treatment, or the vaccine or whatever it is, we’re trying to test the impact up, and then we test that against the control group who’s randomly selected and receives the placebo. You know, in most medical cases, or, you know, something similar, that that that might generate placebo effects, but doesn’t actually like convey the the medication or the or the or the vaccine. So same thing happens when you do trials in social science research. You essentially have, you know, a treatment group who gets an intervention and a randomly chosen control group who doesn’t. And depending on the type of intervention it is, you know, you might get a placebo or not have placebo. You might have a blinded trial or not. It also depends on the setting. In our settings, you know. Being these kind of large workplace environments, we often use a method of randomization that essentially amounts to a lottery, because we’re introducing these new programs, these new benefits, and we want to test their effects. And so we often kind of say, hey, we come into these factory settings, and say we’re trying, trying this new program out. If it works, then, you know, there’s a possibility that everybody will get it. But right now, there’s not enough resources to give this, you know, intervention to everybody, so we’re going to try it out on a subset of the folks who are interested. And just to be fair, we’re going to do this totally randomly through a lottery, and so we have everybody sign up to see if they’re interested. When the people that sign up, we run a lottery, and we pick out people will be part of the treatment group, and the, you know, remainder will serve as part of the control. So that’s the sort of basic methodology we use. And it ends up, you know, being quite palatable in a lot of workplace environments, because think a lot of people buy into the idea that there’s something fair about random allocation, right, that, you know, there’s nothing that’s making, you know, you more likely to get it than I am, and that sort of thing. We’re just, there’s a limited resource, and we’re, you know, allocating it in the sort of most fair way possible that allows us to really measure impacts by controlling by tracking the outcomes of the treatment and the control groups over time, and we can figure out what sorts of impacts the program had on workplace, things like productivity and retention and things like that, as as well as you know, survey outcomes like you know or or outcomes that are relevant to workers, like their health or, you know, mental well being or satisfaction. So that’s the sort of methodology that we use. And, you know, in terms of in terms of measurement of productivity, that I think, is actually a really critical innovation that that I’m proud to say we spend a lot of time on, because we work, we tend to specifically, kind of like, focus on industries where we have labor intensive, you know, production, but, but also we can, in Some way, measure productivity really well, you know? So that sometimes is pretty easy because the firm’s already measuring it like, you know, we work a lot with the retail industry, and there’s really good measures of the items that come through a cash register. So know who’s standing at that cash register, right? Who’s working there, you can track their productivity really, really well. And sometimes it’s a little harder, like, you know, when you’re working on a production line, often the firm doesn’t really care what each particular worker is doing. They just care what the whole line is doing, right? How many T shirts came off this line? How many cars came off this line today, that sort of thing. So there is a little harder and we have to go in and do our own measurements. So we’ve installed all kinds of fancy devices to do that, including tablets and push buttons and, you know, RFIDs on and tags and all kinds of stuff. But we, you know, you know, with the end goal being, what firms really care about is productivity. So if we’re measuring productivity, we’re missing out on a big part of the story. And so that’s what we’ve devoted a lot of, you know, blood, sweat and tears to in our research. Yeah,

Gene Tunny  43:33

okay, that’s it all. Sounds great. Just wondering. Have you given any thought to this? There’s this concept of the Hawthorne effect, that people change their behavior in response to being monitored or taking part in that in a program, and that’s why, you know, it’s good to have some sort of, you know, might be good to have some sort of placebo involved, but in social science research that could be very difficult to do, how do you think about the Hawthorne effect, and how Does it affect your interpretation of your results? Is it something you’re concerned about at all?

Achyuta Adhvaryu  44:04

Yeah, that’s a great question, and we’re definitely concerned about it in most of the trials we do, and something that our academic reviewers are often concerned about when we when we are publishing the work and having it reviewed in academic journal. Because, actually, it turns out, you know, that the Hawthorne effect itself was in a factory, I think, in Hawthorne, Ohio, or something like that, right? Like it was, it was a, is a factory, you know, here in the US, where those original trials were done, and it was actually related to, like, light on the factory floors and things like that, but, but, you know, it’s a very important concept, and I think the you know, short answer is, for some outcomes, you can actually, you. You know, test for Hawthorne effects in a reasonable way. So, for example, if you’ve got a treatment group and a control group, and you know, they’re selected into this experiment, and we, you know, we ran this sign up first, and then we ran a lottery, and we are surveying everybody, you might think that even the control group is kind of changing their behavior, right? Because they’re being monitored, they’re being asked questions, etc. But we usually have that’s usually a sort of a minority of the participants of the workers in any particular factory that we’re working in, right? So doing a trial, it might be several 100 workers in the trial, not the like three or 4000 that are in the factory. So there’s lots of other workers in the factory who we are also passively seeing the outcomes for for certain things like retention, absenteeism, productivity, you know, salary, all these kind of kind of workplace stuff. And so, you know, we can actually look at them and compare them to the treatment group and the control group. To see, are our treatment control groups looking very, very different once, once we start the experiment, start measuring them. The answer, you know, across most of our trials for those kinds of set of outcomes is no, there’s, there’s really no difference in how, in the behavior of, you know, people who are not in the trial versus people who are in the trial, but in the control group or treatment group. So you know, so I think that on those outcomes, sorry, the control group, the treatment group, we hopefully see an effect over time. So those kinds of outcomes, we don’t see big evidence of Hawthorne effects, certain outcomes we can’t really test. Like, for example, if we, if we surveyed everybody in the treatment group and control group, then that might change their behavior. But we’re not surveying people outside of the two groups. So, you know, can’t really tell whether, whether that’s going to sort of like, affect things. Then sometimes there are these, like questions that you you know, survey methodology, questions that that that sort of reveal that some people, some respondents, are actually more likely to be swayed by being observed. And if you can measure that then you can look for whether the treatment effects were bigger or smaller in that group. And so, so we do that sometimes too.

Gene Tunny  47:29

Oh, good. Okay, I have to look at some of your your your papers. That sounds yeah, there’s all of these, all of these tricky methodological issues. I’m sure you’d have clever reviewers, peer reviewers, asking about a couple more questions just before we wrap up. Because this is fascinating. Oh, actually, might be three more questions. What’s the level of replication of these type of findings? Do you see other researchers replicating findings like this? Yeah,

Achyuta Adhvaryu  47:57

yeah, absolutely. So for some of the work that we’ve done, you know, the two examples I’ve mentioned, there’s been really great work that’s come out of the World Bank that followed up on our study and tried to, you know, Institute similar programs around soft skills in, for example, in factories in East Africa, because East Africa has these big manufacturing hubs as well. And similarly, actually, there’s been some work kind of in parallel to ours that looked at soft skills interventions in I believe it was German firms, German retail firms, if I’m not mistaken, and they’re also working with frontline workers. They also found, you know, pretty substantial impacts of soft skills training. There’s another really interesting trial in Togo that a bunch of World Bank researchers did on something called personal initiative training, which essentially involves a lot of soft skills. Then this was for sort of micro enterprise owners. So basically, people who are, like, selling, you know, stuff on in their carts or on the street, or, you know, in these very, very small businesses, I just usually have, you know, the owners, the the only employee, and there too, this kind of soft skills training resulted in huge gains in profit for those micro enterprises. In fact, that trial ran a horse race between soft skills training and the World Bank’s flagship business training program, and that then and beat the pants off the business training program. So that was really interesting trial, too. So in general, I think soft skills, we have really seen a huge growth in in trials and evidence on this that really complements the stuff, most of which was in the US, you know, like Jim Heckman and folks have been thinking about this for a long time in the US. Labor. Market, but hadn’t, kind of made it outside of the US. And then same thing for worker voice, tons of research has emerged right around the same time that we’ve been writing ours trials as well as kind of observational stuff in very varied contexts. There’s a great trial in Chinese auto firms that that looks at improving worker voice and finds big impacts on productivity and retention there. And then there’s a, there’s a great study on improvements in worker voice from kind of white collar firms in Denmark, and that also finds it back. So, you know, I would say in some Scandinavian country, I can’t remember, but, you know, you find very kind of ubiquitous impacts of voice as well. So some of these things I find, you know, it’s nice to see that sometimes, you know, if you do one trial, that’s sort of like it gives you sort of one data point. But then, you know, is that echoed around the world. And can you really say something more general about this? And I think that’s at least in these two domains, we’re seeing very similar findings emerging all around the world.

Gene Tunny  51:13

Yeah, I think I’ve seen that study. Yeah, maybe I can’t remember the country. It may have been Denmark, but yeah, I’m pretty sure I talked about that on a previous podcast episode to dig that out that that’s good. Yeah, yeah. So that’s that’s great. And the final question is, how do you see this as part of the whole convergence, or whole economic development catch up story? Is this a big part of it? How does it compare with other other factors, you know, technological transfer, that sort of thing, how big a part of it is?

Achyuta Adhvaryu  51:50

It was to say two things on that front. I mean, first, I actually think that, you know, a lot of the things we do are, I think, relevant, not only for, you know, workers in low income country contexts, but also low income workers, or workers that are sort of resource poor in in even in high income context. So like, you know, your average and we’ve been starting this work across, across these various contexts, Good Business Lab has an office in Colombia that has been doing a lot of work with firms across Latin America and the Caribbean, and we’re finding exactly the same issues, even though it’s a very different context, generally higher income levels than India and South Asia and East Africa. So, you know, I think you see these issues cropping up with sort of frontline workforces all over the world in terms of convergence. It’s a great question, and I don’t have a numerical answer for you, but I think my intuition is that it does play, you know, a substantial role in some of these interventions kind of do play a substantial role in the kind of, at least, when you’re thinking about productivity differences that we see across countries. Because, you know, there’s some really great work that you know, Shay and kleenow and Chad Severson and other folks have done the macro setting, looking at productivity across countries and finding these astonishing numbers like, you know, the US is something like, you know, 10 times as productive as the worker in India, okay? And even if you control for the kinds of technology that people use, and the industry and a bunch of other things, that even that residual productivity difference is like 4x the average one in India is four times less productive than in the US. And that gap is even bigger if you look at Sub Saharan Africa. So you know, then the real, sort of motivating question behind a lot of my work is what the heck is going on there? That’s crazy, right? That that, you know, even if you take away all these kind of, you know, industry specific, technology specific, capital specific differences, you still get this really low productivity. And my answer to this has been to look at the kinds of inputs that workers are getting, and managerial and organizational inputs that the firm is getting. So on both those fronts, I think that there’s kind of a dearth of for example, like the average worker in the US is going to have slightly more soft skills at baseline than the average worker in India, just because the educational system, the average manager in the US is going to have more managerial skill in the than the average manager in India. So, you know, those kinds of differences, I think, do play a big role in that convergence. If you’ve seen the work by Nick bloom and John Van Reenen. Look a lot of cross country productivity differences, and can attribute a substantial portion of them, you know, I don’t want to quote a number without looking it up, but, you know, it’s a sizable fraction can be attributed to managerial quality differences. So, and I see that as a form of skill as well for workers. So I think, you know, without getting too specific, I do think that this has to play a role. And the more we can, kind of, I think our point is that, in our work, is that sometimes you can, you know, a lot of people think, Well, look, there’s a fixed pie here. The more we give to workers that’s going to make them better off, but it’s going to leave less profit for us, right? And I don’t think that’s necessarily the case. And we’re trying to find counter examples to that intuition such that that common ground can be large enough that firms can feel comfortable living in it.

Gene Tunny  55:57

Yeah, that’s terrific. It’s good work. I’ll put a link in the show notes to Good Business Lab. Is there anything else I should link to? Any anywhere else we can find what you’re up to?

Achyuta Adhvaryu  56:10

Oh sure. Well, if you if you just link to india.ucsd.edu, it’ll take you to the other hat that I wear is that I direct, the 21st century India Center at UC San Diego, which is kind of a policy center related to economics, political science and science and technology policy on India and US India relations. So, you know, we deal with a lot of the same ideas we’ve been kind of talking about in this podcast. But broader than that, there’s lots of fantastic faculty at UC San Diego. It’s really sort of a one of a kind place when it comes to, you know, economics in India. And you can find out much more at that website, but encourage folks to to go check it out, in addition to GBL work.

Gene Tunny  57:02

Oh, terrific. Okay, I’ll have to check that out. Might have to chat sometime in the future about that work. But actually, has been terrific. I really enjoyed this conversation. Yeah, I think it’s, it’s, it’s great that you’re, you’re seeing these positive results and from programs such as worker voice and the the also the soft skills, I think, yeah, that that makes sense intuitively to me. And yeah, I’ll, I’ll make sure that I keep up to date with with what you’re up to. And yeah,

Achyuta Adhvaryu  57:36

that sounds great. Yeah, I appreciate being on and, you know, I will say I was unable, probably did not do justice to the to the breadth of the menu that we’ve been able to create. So I would check out the GBL website if you’d like you know more information, or if you’re interested in getting, you know, involved in what we’re doing. So thanks a lot for highlighting that.

Gene Tunny  57:59

Yeah, no problem. And absolutely. I mean, that’s, yeah, that’s the that’s the challenge with this sort of thing. When you when you’re doing so much good work, how do we cover it in an hour? But yeah, we might have to. I’ll have another look at it, and might have to connect with you again in the future. All the best with the work, and hopefully I’ll connect with you again soon. Thank you. Cheers, righto. Thanks for listening to this episode of economics explored if you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

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