The Truth About China - WSJ article April 20, 2007

The Truth About China
By GUY SORMAN
April 20, 2007; Page A15

The Western press is full of stories these days on China's arrival as a superpower. A steady stream of Western political and business delegations visit Beijing, confident of China's economy, which continues to grow rapidly. Investment pours in. Crowning China's new status, Beijing will host the 2008 Summer Olympics.

But after spending all of 2005 and some of 2006 traveling through China -- visiting not just her teeming cities but her innermost recesses, where few Westerners go, and speaking with scores of dissidents, Communist Party officials, and everyday people -- my belief that the 21st century will not belong to the Chinese has only been reinforced. True, 200 million of China's subjects, fortunate to work for an expanding global market, are increasingly enjoying a middle-class standard of living. The remaining one billion, however, are among the poorest and most exploited people in the world, lacking even minimal rights and public services. The Party, while no longer totalitarian, is still cruel and oppressive.


Its mendacity has been fully displayed in China's AIDS crisis. The problem is gravest in Henan province, where an untold number of poor peasants contracted AIDS during the 1990s from selling their blood plasma -- a process that involves having their blood drawn, pooled with other blood and then, once the plasma has been removed, put back into their bodies. China didn't conduct HIV tests and therefore ended up infecting donors by giving them back tainted blood. Victims are now reportedly dying in the hundreds of thousands.

The government's initial reaction was to deny that the problem existed, cordon off AIDS-affected areas and let the sick die (a pattern that the government tried to repeat when SARS broke out). In this case, police barred entry to villages where infected people lived (new maps of the province even appeared without the villages). Forced to acknowledge the problem after the international media began reporting on it, the Party nonetheless continues to obfuscate.

When Bill Clinton visited Henan in 2005 to distribute AIDS medicine, for example, the Party prevented him from visiting the worst-off villages. Instead, in Henan's capital city, he posed with several Party-selected AIDS orphans as the cameras clicked. It was an elaborate public-relations charade: China, with the West's help, was tackling AIDS!

Had Mr. Clinton been given a tour by Hu Jia, a human-rights activist, a far grimmer picture would have emerged. Only 30, he is a democrat and a practicing Buddhist who favors Tibetan independence. In 2004, Mr. Hu gave up studying medicine to look after Henan's sick. Months after Mr. Clinton's photo-op, Mr. Hu and I traveled to one of the villages that the former president missed: Nandawu, home to 3,500 people. It's not hard to visit -- you can get past the police checkpoint at the village's entrance by hiding under a tarpaulin on a tractor-trailer, and the police fear AIDS too much to enter the village itself.

What I saw there, however, will remain with me forever. The disease inflicts at least 80% of the families there; in every hovel we entered an invalid lay dying. Most of the sufferers had no medicine. One woman put a drip on her sick husband, a man who has been bedridden for two years and who is covered with sores. What did the bottle contain? She didn't know. Why was she doing this? "I saw in the hospital and on television that sick people had to be put on the drip."

As long as Mr. Hu worked alone to help the sick, bringing them clothes, money and food, the Party left him alone. But he has recently drawn attention to himself by urging the victims to form an organization that can demand more from the government. The Party will sometimes put up with isolated dissent, but it won't tolerate an "unauthorized" association. Several months ago, the government placed Mr. Hu under house arrest in Beijing.

But dissent cannot be stifled everywhere. There has been an explosion of revolts in the vast countryside. The government estimates the number of public clashes with the authorities (some occurring in the industrial suburbs too) at 60,000 a year. But some experts think that the true figure is upward of 150,000 and increasing. When, in late 2006, I reached one village in the heart of the Shaanxi Province after a 40-hour journey from Beijing by train, car and tractor, I saw no trace of an uprising that had taken place a month earlier. Alerted by a text message sent from the village, the Hong Kong press had reported a violent clash between the peasants and the police, leaving people injured and missing or even dead, with the authorities spiriting away the bodies.

I pieced together the reasons that had provoked the uprising. The village had a dilapidated school, without heating, chalk or a teacher. In principle, schooling is compulsory and free, but the Party secretary, the village kingpin, made parents pay for heating and chalk. Then a teacher came from the city who wanted to be paid more than his government wages. He demanded extra money from the parents. Half of the parents, members of the most prosperous clan, agreed; the other half, from the poorer clan, refused.

A skirmish erupted, and the teacher fled. The Party secretary tried to intervene and was lynched. Then the police roared in with batons and guns. The school has reopened, the teacher replaced with a villager who knows how to read and write but "nothing more than that," he admits.

The uprisings express peasants' despair over the bleak future that awaits them. Emigration from the countryside might be a way out, but it's not easy to find a permanent job in the city. All kinds of permits are necessary, and the only way to get them is to bribe bureaucrats. The lot of the migrant -- and China now has 200 million of them -- is to move from work site to work site, earning a pittance at best. The migrants usually don't receive permission to bring their families with them, and even if they could, obtaining accommodation and schooling for their children would be virtually impossible.

The fate of Chinese citizens often depends on where they are from. Someone born in Shanghai is considered an aristocrat and conferred the right to housing and schooling in Shanghai. Someone born in a village, however, can only go to the village school, until a university admits him -- a rare feat for a peasant. An American scholar, Feiling Wang, had come to China to study this system of discrimination, which few in the West know about, but the government expelled him.

Villagers often told me that it wasn't the local Party secretary whom they most hated, but rather the family-planning agents who enforce China's one-child policy, often subjecting women to horrific violence. The one-child policy is not only monstrous, it is yielding an increasingly elderly population in need of care -- a problem that a poor country like China is unprepared to handle.

Will China's surging economic growth end the rumbling discontent? Not according to the esteemed economist Mao Yushi, under house arrest for asking the government to apologize for the 1989 Tiananmen Square massacre. He doesn't trust the Party's claims of a 10% annual growth rate -- and why believe the official statistics when the Party lies so consistently about everything? Doing his own calculations, he arrives at a rate of about 8% per year, vigorous but no "miracle," as some in the West describe it.

Moreover, he believes that the current growth rate isn't sustainable: natural bottlenecks -- scarcity of energy, raw materials, and especially water -- will get in the way. Also, Mr. Mao says, the fact that investment decisions frequently obey political considerations instead of the market has helped generate an unemployment rate that is likely closer to 20% than to the officially acknowledged 3.5%.

Many in the West think that Chinese growth has created an independent middle class that will push for greater political freedom. But what exists in China, Mr. Mao argues, is not a traditional middle class but a class of parvenus, newcomers who work in the military, public administration, state enterprises or for firms ostensibly private but in fact Party-owned.

The Party picks up most of the tab for their mobile phones, restaurant bills, "study" trips abroad, imported luxury cars and lavish spending at Las Vegas casinos. And it can withdraw these advantages at any time. In March, China announced that it would introduce individual property rights for the parvenus (though not for the peasants). They will now be able to pass on to their children what they have acquired -- another reason that they aren't likely to push for the democratization of the regime that secures their status.

Because China's economy desperately needs Western consumers and investors, China's propagandists do all they can to woo foreign critics. "Do you dare deny China's success story, her social stability, economic growth, cultural renaissance and international restraint?" one Party-sponsored scholar asks me in Paris. I respond that political and religious oppression, censorship, entrenched rural poverty, family-planning excesses and rampant corruption are just as real as economic growth in today's China. "What you are saying is true, but affects only a minority yet to benefit from reforms," he asserts.

Yet nothing guarantees that this so-called minority -- one billion people! -- will integrate with modern China. It is just as possible that it will remain poor, since it has no say in determining its fate, even as Party members get richer. The scholar underscores my fundamental assumption: "You don't have any confidence in the Party's ability to resolve the pertinent issues you have raised."

That's true. I don't.

Mr. Sorman is the author of "The Year of the Rooster," Fayard (2006). This article was adapted from the spring issue of the Manhattan Institute's City Journal.

Lure of Great Wealth Affects Career Choices - NYT article

November 27, 2006
Gilded Paychecks
Lure of Great Wealth Affects Career Choices
New York Times
By LOUIS UCHITELLE
A decade into the practice of medicine, still striving to become “a well regarded physician-scientist,” Robert H. Glassman concluded that he was not making enough money. So he answered an ad in the New England Journal of Medicine from a business consulting firm hiring doctors.

And today, after moving on to Wall Street as an adviser on medical investments, he is a multimillionaire.

Such routes to great wealth were just opening up to physicians when Dr. Glassman was in school, graduating from Harvard College in 1983 and Harvard Medical School four years later. Hoping to achieve breakthroughs in curing cancer, his specialty, he plunged into research, even dreaming of a Nobel Prize, until Wall Street reordered his life.

Just how far he had come from a doctor’s traditional upper-middle-class expectations struck home at the 20th reunion of his college class. By then he was working for Merrill Lynch and soon would become a managing director of health care investment banking.

“There were doctors at the reunion — very, very smart people,” Dr. Glassman recalled in a recent interview. “They went to the top programs, they remained true to their ethics and really had very pure goals. And then they went to the 20th-year reunion and saw that somebody else who was 10 times less smart was making much more money.”

The opportunity to become abundantly rich is a recent phenomenon not only in medicine, but in a growing number of other professions and occupations. In each case, the great majority still earn fairly uniform six-figure incomes, usually less than $400,000 a year, government data show. But starting in the 1990s, a significant number began to earn much more, creating a two-tier income stratum within such occupations.

The divide has emerged as people like Dr. Glassman, who is 45, latched onto opportunities within their fields that offered significantly higher incomes. Some lawyers and bankers, for example, collect much larger fees than others in their fields for their work on business deals and cases.

Others have moved to different, higher-paying fields — from academia to Wall Street, for example — and a growing number of entrepreneurs have seen windfalls tied largely to expanding financial markets, which draw on capital from around the world. The latter phenomenon has allowed, say, the owner of a small mail-order business to sell his enterprise for tens of millions instead of the hundreds of thousands that such a sale might have brought 15 years ago.

Three decades ago, compensation among occupations differed far less than it does today. That growing difference is diverting people from some critical fields, experts say. The American Bar Foundation, a research group, has found in its surveys, for instance, that fewer law school graduates are going into public-interest law or government jobs and filling all the openings is becoming harder.

Something similar is happening in academia, where newly minted Ph.D.’s migrate from teaching or research to more lucrative fields. Similarly, many business school graduates shun careers as experts in, say, manufacturing or consumer products for much higher pay on Wall Street.

And in medicine, where some specialties now pay far more than others, young doctors often bypass the lower-paying fields. The Medical Group Management Association, for example, says the nation lacks enough doctors in family practice, where the median income last year was $161,000.

“The bigger the prize, the greater the effort that people are making to get it,” said Edward N. Wolff, a New York University economist who studies income and wealth. “That effort is draining people away from more useful work.”

What kind of work is most useful is a matter of opinion, of course, but there is no doubt that a new group of the very rich have risen today far above their merely affluent colleagues.

Turning to Philanthropy

One in every 825 households earned at least $2 million last year, nearly double the percentage in 1989, adjusted for inflation, Mr. Wolff found in an analysis of government data. When it comes to wealth, one in every 325 households had a net worth of $10 million or more in 2004, the latest year for which data is available, more than four times as many as in 1989.

As some have grown enormously rich, they are turning to philanthropy in a competition that is well beyond the means of their less wealthy peers. “The ones with $100 million are setting the standard for their own circles, but no longer for me,” said Robert Frank, a Cornell University economist who described the early stages of the phenomenon in a 1995 book, “The Winner-Take-All Society,” which he co-authored.

Fighting AIDS and poverty in Africa are favorite causes, and so is financing education, particularly at one’s alma mater.

“It is astonishing how many gifts of $100 million have been made in the last year,” said Inge Reichenbach, vice president for development at Yale University, which like other schools tracks the net worth of its alumni and assiduously pursues the richest among them.

Dr. Glassman hopes to enter this circle someday. At 35, he was making $150,000 in 1996 (about $190,000 in today’s dollars) as a hematology-oncology specialist. That’s when, recently married and with virtually no savings, he made the switch that brought him to management consulting.

He won’t say just how much he earns now on Wall Street or his current net worth. But compensation experts, among them Johnson Associates, say the annual income of those in his position is easily in the seven figures and net worth often rises to more than $20 million.

“He is on his way,” said Alan Johnson, managing director of the firm, speaking of people on career tracks similar to Dr. Glassman’s. “He is destined to riches.”

Indeed, doctors have become so interested in the business side of medicine that more than 40 medical schools have added, over the last 20 years, an optional fifth year of schooling for those who want to earn an M.B.A. degree as well as an M.D. Some go directly to Wall Street or into health care management without ever practicing medicine.

“It was not our goal to create masters of the universe,” said James Aisner, a spokesman for Harvard Business School, whose joint program with the medical school started last year. “It was to train people to do useful work.”

Dr. Glassman still makes hospital rounds two or three days a month, usually on free weekends. Treating patients, he said, is “a wonderful feeling.” But he sees his present work as also a valuable aspect of medicine.

One of his tasks is to evaluate the numerous drugs that start-up companies, particularly in biotechnology, are developing. These companies often turn to firms like Merrill Lynch for an investment or to sponsor an initial public stock offering. Dr. Glassman is a critical gatekeeper in this process, evaluating, among other things, whether promising drugs live up to their claims.

What Dr. Glassman represents, along with other very rich people interviewed for this article, is the growing number of Americans who acknowledge that they have accumulated, or soon will, more than enough money to live comfortably, even luxuriously, and also enough so that their children, as adults, will then be free to pursue careers “they have a hunger for,” as Dr. Glassman put it, “and not feel a need to do something just to pay the bills.”

In an earlier Gilded Age, Andrew Carnegie argued that talented managers who accumulate great wealth were morally obligated to redistribute their wealth through philanthropy. The estate tax and the progressive income tax later took over most of that function — imposing tax rates of more than 70 percent as recently as 1980 on incomes above a certain level.

Now, with this marginal rate at half that much and the estate tax fading in importance, many of the new rich engage in the conspicuous consumption that their wealth allows. Others, while certainly not stinting on comfort, are embracing philanthropy as an alternative to a life of professional accomplishment.

Bill Gates and Warren Buffett are held up as models, certainly by Dr. Glassman. “They are going to make much greater contributions by having made money and then giving it away than most, almost all, scientists,” he said, adding that he is drawn to philanthropy as a means of achieving a meaningful legacy.

“It has to be easier than the chance of becoming a Nobel Prize winner,” he said, explaining his decision to give up research, “and I think that goes through the minds of highly educated, high performing individuals.”

As Bush administration officials see it — and conservative economists often agree — philanthropy is a better means of redistributing the nation’s wealth than higher taxes on the rich. They argue that higher marginal tax rates would discourage entrepreneurship and risk-taking. But some among the newly rich have misgivings.

Mark M. Zandi is one. He was a founder of Economy.com, a forecasting and data gathering service in West Chester, Pa. His net worth vaulted into eight figures with the company’s sale last year to Moody’s Investor Service.

“Our tax policies should be redesigned through the prism that wealth is being increasingly skewed,” Mr. Zandi said, arguing that higher taxes on the rich could help restore a sense of fairness to the system and blunt a backlash from a middle class that feels increasingly squeezed by the costs of health care, higher education, and a secure retirement. The Federal Reserve’s Survey of Consumer Finances, a principal government source of income and wealth data, does not single out the occupations and professions generating so much wealth today. But Forbes magazine offers a rough idea in its annual surveys of the richest Americans, those approaching and crossing the billion dollar mark.

Some routes are of long standing. Inheritance plays a role. So do the earnings of Wall Street investment bankers and the super incomes of sports stars and celebrities. All of these routes swell the ranks of the very rich, as they did in 1989.

But among new occupations, the winners include numerous partners in recently formed hedge funds and private equity firms that invest or acquire companies. Real estate developers and lawyers are more in evidence today among the very rich. So are dot-com entrepreneurs as well as scientists who start a company to market an invention or discovery, soon selling it for many millions. And from corporate America come many more chief executives than in the past.

Seventy-five percent of the chief executives in a sample of 100 publicly traded companies had a net worth in 2004 of more than $25 million mainly from stock and options in the companies they ran, according to a study by Carola Frydman, a finance professor at the Massachusetts Institute of Technology’s Sloan School of Management. That was up from 31 percent for the same sample in 1989, adjusted for inflation.

Chief executives were not alone among corporate executives in rising to great wealth. There were similar or even greater increases in the percentage of lower-ranking executives — presidents, executive vice presidents, chief financial officers — also advancing into the $25 million-plus category.

The growing use of options as a form of pay helps to explain the sharp rise in the number of very wealthy households. But so does the gradual dismantling of the progressive income tax, Ms. Frydman concluded in a recent study.

“Our simulation results suggest that, had taxes been at their low 2000 level throughout the past 60 years, chief executive compensation would have been 35 percent higher during the 1950s and 1960s,” she wrote.

Trying Not to Live Ostentatiously

Finally, the owners of a variety of ordinary businesses — a small chain of coffee shops or temporary help agencies, for example — manage to expand these family operations with the help of venture capital and private equity firms, eventually selling them or taking them public in a marketplace that rewards them with huge sums.

John J. Moon, a managing director of Metalmark Capital, a private equity firm, explains how this process works.

“Let’s say we buy a small pizza parlor chain from an entrepreneur for $10 million,” said Mr. Moon, who at 39, is already among the very rich. “We make it more efficient, we build it from 10 stores to 100 and we sell it to Domino’s for $50 million.”

As a result, not only the entrepreneur gets rich; so do Mr. Moon and his colleagues, who make money from putting together such deals and from managing the money they raise from wealthy investors who provide much of the capital.

By his own account, Mr. Moon, like Dr. Glassman, came reluctantly to the accumulation of wealth. Having earned a Ph.D. in business economics from Harvard in 1994, he set out to be a professor of finance, landing a job at Dartmouth’s Tuck Graduate School of Business, with a starting salary in the low six figures.

To this day, teaching tugs at Mr. Moon, whose parents immigrated to the United States from South Korea. He steals enough time from Metalmark Capital to teach one course in finance each semester at Columbia University’s business school. “If Wall Street was not there as an alternative,” Mr. Moon said, “I would have gone into academia.”

Academia, of course, turned out to be no match for the job offers that came Mr. Moon’s way from several Wall Street firms. He joined Goldman Sachs, moved on to Morgan Stanley’s private equity operation in 1998 and stayed on when the unit separated from Morgan Stanley in 2004 and became Metalmark Capital.

As his income and net worth grew, the Harvard alumni association made contact and he started to give money, not just to Harvard, but to various causes. His growing charitable activities have brought him a leadership role in Harvard alumni activities, including a seat on the graduate school alumni council.

Still, Mr. Moon tries to live unostentatiously. “The trick is not to want more as your income and wealth grow,” he said. “You fly coach and then you fly first class and then it is fractional ownership of a jet and then owning a jet. I still struggle with first class. My partners make fun of me.”

His reluctance to show his wealth has a basis in his religion. “My wife and I are committed Presbyterians,” he said. “I would like to think that my faith informs my career decisions even more than financial considerations. That is not always easy because money is not unimportant.”

It has a momentum of its own. Mr. Moon and his wife, Hee-Jung, who gave up law to raise their two sons, are renovating a newly purchased Park Avenue co-op. “On an absolute scale it is lavish,” he said, “but on a relative scale, relative to my peers, it is small.”

Behavior is gradually changing in the Glassman household, too. Not that the doctor and his wife, Denise, 41, seem to crave change. Nothing in his off-the-rack suits, or the cafes and nondescript restaurants that he prefers for interviews, or the family’s comparatively modest four-bedroom home in suburban Short Hills, N.J., or their two cars (an Acura S.U.V. and a Honda Accord) suggests that wealth has altered the way the family lives.

But it is opening up “choices,” as Mrs. Glassman put it. They enjoy annual ski vacations in Utah now. The Glassmans are shopping for a larger house — not as large as the family could afford, Mrs. Glassman said, but large enough to accommodate a wood-paneled study where her husband could put all his books and his diplomas and “feel that it is his own.” Right now, a glassed-in porch, without book shelves, serves as a workplace for both of them.

Starting out, Dr. Glassman’s $150,000 a year was a bit less than that of his wife, then a marketing executive with an M.B.A. from Northwestern. Their plan was for her to stop working once they had children. To build up their income, she encouraged him to set up or join a medical practice to treat patients. Dr. Glassman initially balked, but he was coming to realize that his devotion to research would not necessarily deliver a big scientific payoff.

“I wasn’t sure that I was willing to take the risk of spending many years applying for grants and working long hours for the very slim chance of winning at the roulette table and making a significant contribution to the scientific literature,” he said.

In this mood, he was drawn to the ad that McKinsey & Company, the giant consulting firm, had placed in the New England Journal of Medicine. McKinsey was increasingly working among biomedical and pharmaceutical companies and it needed more physicians on staff as consultants. Dr. Glassman, absorbed in the world of medicine, did not know what McKinsey was. His wife enlightened him. “The way she explained it, McKinsey was like a Massachusetts General Hospital for M.B.A.’s,” he said. “It was really prestigious, which I liked, and I heard that it was very intellectually charged.”

He soon joined as a consultant, earning a starting salary that was roughly the same as he was earning as a researcher — and soon $100,000 more. He stayed four years, traveling constantly and during that time the family made the move to Short Hills from rented quarters in Manhattan.

Dr. Glassman migrated to Merrill Lynch in 2001, first in private equity, which he found to be more at the forefront of innovation than consulting at McKinsey, and then gradually to investment banking, going full time there in 2004.

Linking Security to Income

Casey McCullar hopes to follow a similar circuit. Now 29, he joined the Marconi Corporation, a big telecommunications company, in 1999 right out of the University of Texas in Dallas, his hometown. Over the next six years he worked up to project manager at $42,000 a year, becoming quite skilled in electronic mapmaking.

A trip to India for his company introduced him to the wonders of outsourcing and the money he might make as an entrepreneur facilitating the process. As a first step, he applied to the Tuck business school at Dartmouth, got in and quit his Texas job, despite his mother’s concern that he was giving up future promotions and very good health insurance, particularly Marconi’s dental plan.

His life at Tuck soon sent him in still another direction. When he graduates next June he will probably go to work for Mercer Management Consulting, he says. Mercer recruited him at a starting salary of $150,000, including bonus. “If you had told me a couple of years ago that I would be making three times my Marconi salary, I would not have believed you,” Mr. McCullar said.

Nearly 70 percent of Tuck’s graduates go directly to consulting firms or Wall Street investment houses. He may pursue finance later, Mr. McCullar says, always keeping in mind an entrepreneurial venture that could really leverage his talent.

“When my mom talks of Marconi’s dental plan and a safe retirement,” he said, “she really means lifestyle security based on job security.”

But “for my generation,” Mr. McCullar said, “lifestyle security comes from financial independence. I’m doing what I want to do and it just so happens that is where the money is.”

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Some facts and predictions to make you think

Some facts and predictions to make you think
McKinsey Quarterly - January 2006

Total world cross-border trade as a percentage of global GDP
1990: 18%
2015 (estimated): 30%

Number of regional trade agreements
1990: 50
2005: 250

Change in Germany's population over the age of 75 from 2005 to 2015: 33%

Increase in tax burden needed to maintain current benefit levels for Germany's future generation: 90%

Change in Japan's population over the age of 75 from 2005 to 2015: 36%

Change in Japan's population under the age of 5 from 2005 to 2015: -13%

Increase in tax burden needed to maintain current benefit levels for Japan's future generation: 175%

Computational capability of an Intel processor, as measured in instructions per second
1971: 60,000
2005: 10,800,000,000

Multiple by which e-mail traffic has grown from 1997 to 2005: 215

Number of US tax returns prepared in India
2003: 25,000
2005: 400,000

Combined market cap of top 150 mega-institutions
1994: $4 trillion
2004: $11 trillion

Total capital under management by private equity firms in 2003 in the United States and Europe: $1 trillion

Market cap of the NYSE in 2003: $11 trillion

Growth rate of the total wealth controlled by millionaires in China from 1986 to 2001: 600%

Estimated number of Chinese households to achieve European income levels by 2020 (assuming real income grows at 8 percent annually): 100 million

Total number of workers in China: 750 million

Number employed in China's state-owned companies: 375 million

Year when the income gap in the United States between the wealthiest 5% and the bottom 10% was the widest ever recorded: 2004

Part of national GDP spent on the public sector in the United Kingdom in 2004: 20%
UK public-sector spending as a ratio of GDP when transfer payments (for example, pensions) are included: 40%

Proportion of Latin Americans who would prefer a dictator to democracy if he improved their living conditions: 50%

Muslims as a percentage of the global population2000: 19%2025 (estimated): 30%

Number of major violent conflicts1991: 582005: 22

Number of coal-fired power plants China plans to build by 2012: 562

Estimated year China will overtake the United States as the number-one carbon emitter: 2025

Estimated year CO2 levels will hit 500 parts per million: 2050

Years since CO2 levels last hit 500 parts per million: 50 million

Average years it takes a CO2 molecule, once produced, to degrade: 100

Global CEOs who think overregulation is a threat to growth: 61%

Probability that a company in an industry's top revenue quartile will not be there in five years: 30 percent

McKinsey - Ten trends to watch in 2006

Ten trends to watch in 2006
Macroeconomic factors, environmental and social issues, and business and industry developments will all profoundly shape the corporate landscape in the coming years.

Ian Davis and Elizabeth Stephenson
Web exclusive, January 2006

Those who say that business success is all about execution are wrong. The right product markets, technology, and geography are critical components of long-term economic performance. Bad industries usually trump good management, however: in sectors such as banking, telecommunications, and technology, almost two-thirds of the organic growth of listed Western companies can be attributed to being in the right markets and geographies. Companies that ride the currents succeed; those that swim against them usually struggle. Identifying these currents and developing strategies to navigate them are vital to corporate success.

What are the currents that will make the world of 2015 a very different place to do business from the world of today? Predicting short-term changes or shocks is often a fool's errand. But forecasting long-term directional change is possible by identifying trends through an analysis of deep history rather than of the shallow past. Even the Internet took more than 30 years to become an overnight phenomenon.

Macroeconomic trends
We would highlight ten trends that will change the business landscape. First, we have identified three macroeconomic trends that will deeply transform the underlying global economy.

1. Centers of economic activity will shift profoundly, not just globally, but also regionally. As a consequence of economic liberalization, technological advances, capital market developments, and demographic shifts, the world has embarked on a massive realignment of economic activity. Although there will undoubtedly be shocks and setbacks, this realignment will persist. Today, Asia (excluding Japan) accounts for 13 percent of world GDP, while Western Europe accounts for more than 30 percent. Within the next 20 years the two will nearly converge. Some industries and functions—manufacturing and IT services, for example—will shift even more dramatically. The story is not simply the march to Asia. Shifts within regions are as significant as those occurring across regions. The United States will still account for the largest share of absolute economic growth in the next two decades.

Further reading:China and India: The race to growthMapping the global capital markets

2. Public-sector activities will balloon, making productivity gains essential. The unprecedented aging of populations across the developed world will call for new levels of efficiency and creativity from the public sector. Without clear productivity gains, the pension and health care burden will drive taxes to stifling proportions.
Nor is the problem confined to the developed economies. Many emerging-market governments will have to decide what level of social services to provide to citizens who increasingly demand state-provided protections such as health care and retirement security. The adoption of proven private-sector approaches will likely become pervasive in the provision of social services in both the developed and the developing worlds.

Further reading:The demographic deficit: How aging will reduce global wealth Boosting government productivity

3. The consumer landscape will change and expand significantly. Almost a billion new consumers will enter the global marketplace in the next decade as economic growth in emerging markets pushes them beyond the threshold level of $5,000 in annual household income—a point when people generally begin to spend on discretionary goods. From now to 2015, the consumer's spending power in emerging economies will increase from $4 trillion to more than $9 trillion—nearly the current spending power of Western Europe.

Shifts within consumer segments in developed economies will also be profound. Populations are not only aging, of course, but changing in other ways too: for example, by 2015 the Hispanic population in the United States will have spending power equivalent to that of 60 percent of all Chinese consumers. And consumers, wherever they live, will increasingly have information about and access to the same products and brands.

Further reading:Premium marketing to the masses: An interview with LG Electronics India's managing directorNew strategies for consumer goods

Social and environmental trends
Next, we have identified four social and environmental trends. Although they are less predictable and their impact on the business world is less certain, they will fundamentally change how we live and work.

4. Technological connectivity will transform the way people live and interact. The technology revolution has been just that. Yet we are at the early, not mature, stage of this revolution. Individuals, public sectors, and businesses are learning how to make the best use of IT in designing processes and in developing and accessing knowledge. New developments in fields such as biotechnology, laser technology, and nanotechnology are moving well beyond the realm of products and services.
More transformational than technology itself is the shift in behavior that it enables. We work not just globally but also instantaneously. We are forming communities and relationships in new ways (indeed, 12 percent of US newlyweds last year met online). More than two billion people now use cell phones. We send nine trillion e-mails a year. We do a billion Google searches a day, more than half in languages other than English. For perhaps the first time in history, geography is not the primary constraint on the limits of social and economic organization.

Further reading:The next revolution in interactionsThe McKinsey Global Survey of Business Executives, July 2005

5. The battlefield for talent will shift. Ongoing shifts in labor and talent will be far more profound than the widely observed migration of jobs to low-wage countries. The shift to knowledge-intensive industries highlights the importance and scarcity of well-trained talent. The increasing integration of global labor markets, however, is opening up vast new talent sources. The 33 million university-educated young professionals in developing countries is more than double the number in developed ones. For many companies and governments, global labor and talent strategies will become as important as global sourcing and manufacturing strategies.

Further reading:China's looming talent shortageSizing the emerging global labor market

6. The role and behavior of big business will come under increasingly sharp scrutiny. As businesses expand their global reach, and as the economic demands on the environment intensify, the level of societal suspicion about big business is likely to increase. The tenets of current global business ideology—for example, shareholder value, free trade, intellectual-property rights, and profit repatriation—are not understood, let alone accepted, in many parts of the world. Scandals and environmental mishaps seem as inevitable as the likelihood that these incidents will be subsequently blown out of proportion, thereby fueling resentment and creating a political and regulatory backlash. This trend is not just of the past 5 years but of the past 250 years. The increasing pace and extent of global business, and the emergence of truly giant global corporations, will exacerbate the pressures over the next 10 years.
Business, particularly big business, will never be loved. It can, however, be more appreciated. Business leaders need to argue and demonstrate more forcefully the intellectual, social, and economic case for business in society and the massive contributions business makes to social welfare.

Further reading:What is the business of business?The role of regulation in strategy

7. Demand for natural resources will grow, as will the strain on the environment. As economic growth accelerates—particularly in emerging markets—we are using natural resources at unprecedented rates. Oil demand is projected to grow by 50 percent in the next two decades, and without large new discoveries or radical innovations supply is unlikely to keep up. We are seeing similar surges in demand across a broad range of commodities. In China, for example, demand for copper, steel, and aluminum has nearly tripled in the past decade.

The world's resources are increasingly constrained. Water shortages will be the key constraint to growth in many countries. And one of our scarcest natural resources—the atmosphere—will require dramatic shifts in human behavior to keep it from being depleted further. Innovation in technology, regulation, and the use of resources will be central to creating a world that can both drive robust economic growth and sustain environmental demands.

Further reading:Preparing for a low-carbon futureWhat's next for Big Oil?

Business and industry trends
Finally, we have identified a third set of trends: business and industry trends, which are driving change at the company level.

8. New global industry structures are emerging. In response to changing market regulation and the advent of new technologies, nontraditional business models are flourishing, often coexisting in the same market and sector space.

In many industries, a barbell-like structure is appearing, with a few giants on top, a narrow middle, and then a flourish of smaller, fast-moving players on the bottom. Similarly, corporate borders are becoming blurrier as interlinked "ecosystems" of suppliers, producers, and customers emerge. Even basic structural assumptions are being upended: for example, the emergence of robust private equity financing is changing corporate ownership, life cycles, and performance expectations. Winning companies, using efficiencies gained by new structural possibilities, will capitalize on these transformations.

Further reading:Strategy in an era of global giantsLoosening up: How process networks unlock the power of specialization

9. Management will go from art to science. Bigger, more complex companies demand new tools to run and manage them. Indeed, improved technology and statistical-control tools have given rise to new management approaches that make even mega-institutions viable.

Long gone is the day of the "gut instinct" management style. Today's business leaders are adopting algorithmic decision-making techniques and using highly sophisticated software to run their organizations. Scientific management is moving from a skill that creates competitive advantage to an ante that gives companies the right to play the game.

Further reading:Do you know who your experts are?Matching people and jobs

10. Ubiquitous access to information is changing the economics of knowledge. Knowledge is increasingly available and, at the same time, increasingly specialized. The most obvious manifestation of this trend is the rise of search engines (such as Google), which make an almost infinite amount of information available instantaneously. Access to knowledge has become almost universal. Yet the transformation is much more profound than simply broad access.
New models of knowledge production, access, distribution, and ownership are emerging. We are seeing the rise of open-source approaches to knowledge development as communities, not individuals, become responsible for innovations. Knowledge production itself is growing: worldwide patent applications, for example, rose from 1990 to 2004 at a rate of 20 percent annually. Companies will need to learn how to leverage this new knowledge universe—or risk drowning in a flood of too much information.

Further reading:The 21st-century organizationMaking a market in knowledge

Companies need to understand the implications of these trends alongside customer needs and competitive developments. Executives who align their company's strategy with these factors will be the best placed to succeed. Reflecting on these trends will be time well spent.

About the Authors
Ian Davis is worldwide managing director of McKinsey & Company and Elizabeth Stephenson is a consultant in McKinsey's San Francisco office. A shorter version of this article was published in the Financial Times on January 13, 2006.

How Should Companies Deal With Life After BPO?

How Should Companies Deal With Life After BPO?
Knowledge @ work - a Wharton school newsletter

So you finally signed that deal to send your accounts payable tasks to an outsourcer in India. Time to take a breather? Hardly. When it comes to business process outsourcing (BPO) arrangements, there is plenty to do after the ink is dry to make sure that your outsourcing partner holds up its end of the bargain and that your company makes a smooth transition.
Consider the case of a U.S.-based financial services company that outsourced back-office and customer service tasks to a leading Indian BPO provider about two years ago. The company's CEO, who agreed to speak on condition of anonymity, has had his hands full ever since. Overall, the executive is pleased with the agreement, which has saved the company from 15% to 40% of costs depending on the process. But he has had to wrestle with uneven worker quality in India thanks to high turnover there. He has also had to cut back on sending abroad more complex processes that involve making judgments about U.S. borrowers. And the CEO has had to work with his own managers to help them more effectively supervise tasks being completed half a world away.

"You just don't say, 'Just because I've outsourced this function, I'm no longer responsible for it,'" the CEO says. "Outsourcing doesn't mean exiting an activity."

More and more executives are likely to face the challenges of what might be termed "life after BPO." The BPO market is expected to grow from about $405 billion last year to $682.5 billion in 2008, according to research firm IDC.

BPO refers to companies farming out tasks that can range from employee benefits management to insurance claims processing to call center work to complex research projects. Companies have been "doing BPO" for many years when you consider activities such as hiring outside legal counsel or having paychecks cut by a provider such as Automatic Data Processing. But in the past several years, amid continued evolution of the Internet and growing corporate experience with technology outsourcing deals, expanded outsourcing options have emerged. These include shipping back-office work to lower-wage nations such as India, Singapore, the Philippines, and so on.

In principle, BPO arrangements allow companies to cut costs and focus on their core activities. But the deals can be less than ideal. A report last year from Forrester Research found that 20% of a group of North American executives currently using or investigating BPO said their lack of proper performance metrics was a major challenge in working with BPO firms. Some 9% cited overstated supplier expertise as a major challenge, and 19% indicated that savings from BPO was less than expected or had not materialized at all.

Another challenge associated with offshore BPO projects is political. Although some analysts view shifting work overseas as ultimately healthy for the U.S. economy, critics say "offshoring" hurts U.S. workers and threatens the country's long-term prospects. In this climate, critics argue that sending work abroad can damage a corporation's reputation.

Internal and External Challenges

Other difficulties surrounding BPO deals break down roughly into two categories: issues involving internal operations and risks related to working with an external partner. Those partner risks can be divided further into what might be termed strategic risks and operational risks, according to Wharton's Ravi Aron, a professor of operations and information management. Strategic risks stem from "opportunistic behavior" where the outsourcer may deliberately undercut the client company. Possible examples, Aron says, include intellectual property theft as well as intentional underperformance. "You're cutting costs, and the client pays for it," Aron says. Operational hazards, he adds, refer to problems that may arise despite the best efforts of the outsourcer, and can include poor quality of transaction processing.

Avoiding such potential pitfalls begins with client companies having a clear sense of what their business methods are before outsourcing and what they envision in the future, suggests Janice Co, a principal consultant with management consulting firm A.T. Kearney. Without a good grasp of existing operations and what's generating costs, "there's potential for high buyer's remorse," Co says.

Another key to BPO partner relations is a good contract. Aron recommends that companies sending out the work not only specify measurements to be used to hold the provider accountable, but also employ different forms of pricing. For example, he says, basic transactions that are easy to quantify could be paid for by unit of work - say a payment for a processed insurance claim. But for work that is not readily measurable - for instance legal research support - a better method is "fixed cost" pricing, where the client pays a certain amount for a given number of workers. "The really well-written contracts consist of a hybrid pricing scheme that includes more than one form of pricing, well-specified incentives and penalties ... and tight metrics," Aron says.

Forrester Research notes that ongoing negotiations should be part of the document as well. "...[T]here should be SLA (service level agreement)/cost renegotiations built into the contract at 12- to 24-month intervals," Forrester wrote in a report last year. Forrester also urged companies to get an early start describing whatever function is going to be sent out: "The process documentation and vendor training needs to start in conjunction with contract discussions in order not to delay implementation." Apart from documenting processes to be outsourced, effective monitoring and management of the provider are important, analysts suggest.

Monitoring BPO contracts well can be challenging, says Peter Cappelli, director of Wharton's Center for Human Resources. The responsibility for managing vendors at many companies falls to one specialist, but "they're often quite removed from the function that's being taken over," he says. That centralized approach to vendor management works better for the outsourcing of relatively simple, "commodity" tasks such as check processing, Cappelli says. It may not work so well for farming out more nuanced work like product design.

It's harder to monitor the work of an offshore vendor, Cappelli argues, adding that it can be useful to meet the workers dedicated to a company's account, whether the encounter takes place in the U.S. or abroad. A simple tour of the outsourcer's facilities, though, may not be of much use, he says. "I'm not sure you could kick the tires in any real way."

Sound management of the outsourcing relationship requires a great deal of interaction, according to Jeff Michel, president of Premier BPO, a Tennessee-based company offering a variety of back-office services provided from Pakistan and India. "You communicate, communicate, communicate," he says.

Premier BPO establishes official weekly "operational review" calls between the client company and a Premier account manager overseas. These can take place during regular U.S. business hours and Premier covers the long-distance phone charges. In addition, Premier sets up monthly review sessions to consider larger trends, and it strongly suggests "strategic business review meetings" once a quarter for both sides to talk about the overall direction of the company. That's a time that Premier may offer suggestions for improving the company's methods, Michel said. "If the relationship is working right, you become an extension of the (client)."

Forrester recommends a similar communications plan, and suggests companies take a collaborative approach with their outsourcer. "Given the integration of the process with your business and the need to drive costs down over the life of the contract, the relationship needs to be a partnership - the arm's length confrontation stance of many IT deals will not work," Forrester said in a report last year.

The CEO who has been outsourcing back-office tasks to India agreed that BPO deals are best done when the provider is viewed as a partner rather than a mere vendor on contract. The benefit of this approach became clear to him as the provider weathered an unexpected development: high employee turnover, which has affected the BPO industry in India more broadly. Turnover was roughly 30% on the CEO's account, and was hurting quality. The CEO spoke with his provider and it agreed to create a "cushion" of 33% more employees than are directly working on the account tasks.

This step added to the providers' costs but was not required by the contract. Instead, the move resulted from the ethical culture of the provider, the CEO said. "You have to do business with companies that are high-character. You need to look at it as a long-term relationship."
For sophisticated, high-value work, such as cash flow forecasting and financial statement analysis, Aron argues in favor of detailed, hands-on management of the offshore provider. This sort of practice is in place in some of the deals involving BPO company Office Tiger, he says. Office Tiger, which is based in New York City and has operations in India, allows its financial services firm clients to give very specific instructions about how to do such things as provide research support and present the findings, Aron says. Directions by managers of the client firm in the United States can be incorporated by workers in India within an hour.

In a paper ("Business Process Outsourcing: A Model of The Extended Organizational Form and Survey Findings") by Aron and Ying Liu, this new corporate governance structure is termed the "extended organizational form." To Aron, it is a way of combining the best feature of doing work in-house - strong managerial control - with the best part of getting an outsourcing partner - the way those external firms constantly improve their efficiency to remain competitive with peers. "It's a very interesting way of bringing together the strengths of the market and the organization," he says.

The View from InsideApart from focusing on partner challenges, companies that have launched BPO projects also have to attend to their internal affairs. BPO contracts require a focus on metrics - the numbers that show things such as claims-processing accuracy or call center response times or customer satisfaction - and that means making sure managers are numbers people, Aron says. "Managing by metrics," he notes, takes "people who know what is to be monitored, what is to be measured."

Strong communications skills also are needed by managers. Those are required partly to bridge the cultural gap between the United States and India, according to the CEO who spoke anonymously. Indians are less likely to express disagreement, so managers have to check in multiple times to make sure a directive has been accepted, he said. He's had to train and ultimately fire some managers who had a more tight-lipped style. "You have to be more actively engaged in management."

BPO arrangements in theory can free up a company's managers to focus on forward-looking activities, such as a human resources executive concentrating on grooming new leaders rather than wrestling with multiple payroll systems. But Bart Kocha, a vice president at A.T. Kearney, warns that here, too, the proper talents may be missing: "You find out the remaining organization doesn't have the skills to be that strategic partner."

Another possible problem when it comes to internal employees relates to how well a company has prepared its staff for an outsourcing deal, Kocha says. When a function changes - say, employee benefits that once were administered by live humans requiring self-service over the Web - dissatisfaction can follow if the shift hasn't been explained and justified, he suggests.
There's also the danger of losing unspoken employee know-how that has been vital to the operation of finance or customer-service departments. In the past, many outsourcing arrangements have retained this wisdom because the outsourcer absorbed a company's employees. In offshore outsourcing deals, though, employees of a back-office are generally let go, Cappelli says. "The risks are much greater. The tacit knowledge is something you're likely going to lose." A tactic here is to keep some would-be redundant workers on as employees or set up consulting arrangements, he adds.

Aron has not seen client-company layoffs in his study of the high-level work outsourced to Office Tiger. Financial firms using the service provider tend to have other work requiring industry expertise and critical judgment. On the other hand, he says, permanent lay-offs are likely to result from the outsourcing of simpler tasks such as basic technical support, account resolution and credit card inquiries.

In either event, he recommends that companies be very clear with employees about their outsourcing plans - including any layoffs. Advance notice and honesty can create good will and help a company rehire a good worker later on, Aron suggests.

Cappelli agrees that transparent communication with internal employees is a key in making a BPO contract work smoothly. If there's a lay-off related to the BPO arrangement, companies should explain what the long-term plans are to the remaining workers. Otherwise, he says, those "survivors" could fear for their own jobs, resulting in lower work performance or attempts to abandon the firm. "If they feel that they survived because of dumb luck, then they are inclined to think their job could be next," he says.

The CEO who spoke anonymously said he laid out his company's BPO plans clearly to workers. And he has been able to redeploy hundreds of employees whose jobs were outsourced to India, thanks to growth in the business. Just a handful of workers have been fired related to the outsourcing, which the CEO attributes to their inability to adapt to a changing business landscape. His business, which frequently introduces new financial services products to the market, is all about change, he says. And in his view a mindset open to change is all but necessary while working with an India-based partner. "It's very hard to forecast five years in the U.S.," he notes. "Forecasting five years in India is impossible."

In other words, life after BPO may be better for a company. But it isn't necessarily going to be calmer.

Published: January 14, 2005

How U.S. Immigration Evolved As the Nation Grew and Changed

How U.S. Immigration Evolved As the Nation Grew and Changed
January 9, 2006;
Wall Street Journal Page B1
Cynthia Crossen

In the beginning, America -- vast, raw and sparsely populated -- needed every immigrant it could get.

When King George III tried to stem an exodus of his subjects to the New World in the 18th century, the colonists furiously accused him of trying to "prevent the population of these states."

At the 1787 Constitutional Convention, James Madison declared, "That part of America that has encouraged [immigrants] has advanced most rapidly in population, agriculture and the arts." Well into the 19th century, American employers paid the passage of Europeans who were willing to come to America to work.

Not until 1882, more than two centuries after the first European immigrants set foot in America, did the federal government take immigration policy away from individual states, passing a general law to filter the nation's borders. Even then, only a few classes of "undesirables" were excluded: lunatics, convicts and idiots.

But in the early 20th century, when hundreds of thousands of people were immigrating each year (in the peak year of 1914, 1.2 million immigrants sought admittance), the nation stopped seeming quite so roomy. Cities were overflowing with poor, unskilled refugees whose cheap labor was believed to be undercutting wages for everyone else. Many Americans, known as nativists, decided the rising tide of immigration must be slowed, if not stopped.

"The myth of the melting pot has been discredited," declared Albert Johnson, a Republican representative from Washington State who led the fight in Congress to close America's borders. "The day of unalloyed welcome to all peoples, the day of indiscriminate acceptance of all races, has definitely ended."

In 1917 Congress overrode President Woodrow Wilson's veto and decreed that prospective immigrants would have to pass a literacy test. When that test barred fewer than 1,600 people from entering the U.S. the following year, legislators began considering other ways to discourage immigration.

Their solution was two pronged: They would drastically lower the ceiling on total immigration, to about 180,000 a year. And the available slots would be allocated by a quota system based on a single fact: Where had each aspiring immigrant been born?

Under the so-called national origins system, created first on an "emergency" basis in 1921 and renewed in a more restrictive form in 1924, the U.S. census would count the number of foreign-born immigrants already in the U.S. and determine how many came from each country.

Thereafter, 2% of the total of each nationality would be admitted annually. (The 1924 law fixed no quotas for immigrants from New World countries, including Canada and Mexico, whose seasonal laborers were crucial to the nation's farmers.)

To compute the number of people of each nationality living in the U.S., however, Congress used a little sleight of hand. Instead of utilizing the 1920, 1910 or 1900 censuses, it reached all the way back to the 1890 census to create its quota baselines.

Why turn the clock back more than 30 years to establish current policy? Because before 1890, most immigrants came from northern and western Europe, including Britain, Scandinavia and Germany. Between 1890 and 1920, many more immigrants sailed from southern and eastern European countries like Italy, Poland and Greece. And in 1924, wrote Roger Daniels in his 1990 history of immigration, "Coming to America," the U.S. was deeply split between "an old-stock, Protestant, small-town and rural America and an immigrant-stock, Catholic and big-city America."

Harvard University Prof. Robert DeCourcy Ward described the nativist position in a 1922 article in Scientific Monthly magazine: "If we want the American race to continue to be predominantly Anglo-Saxon-Germanic, of the same stock as that which originally settled the United States…; if we want our future immigration to be chiefly of more kindred peoples… easily assimilable, literate, of a high-grade intelligence, then the simplest way to accomplish this purpose is to base the percentage limitation upon an earlier census than that of 1910… before southern and eastern Europe had become the controlling element in our immigration."

In 1921, about 220,000 Italian-born men, women and children immigrated to the U.S.; in 1925, about 6,000 were allowed to enter the country. In 1921, some 33,000 people came to the U.S. from eastern Europe (Romania, Bulgaria and Turkey); in 1925, fewer than 1,600 were admitted. The law had achieved exactly what it had set out to do: "America would be a nation ethnically frozen in time," as Ellis Cose wrote in his 1992 book, "A Nation of Strangers." National origin quotas would govern immigration policy for four decades before being abolished in 1965.

Immigration remains a contentious issue in the U.S. today, as people from every part of the globe try to enter the country, legally and illegally, to enjoy America's opportunities and freedoms. When Chicago Mayor William Thompson was challenged in a 1931 election by a second-generation Czech immigrant, he called his opponent, Anton Cermak, a "pushcart Tony." "It's true I didn't come over on the Mayflower," Mr. Cermak replied, "but I came over as soon as I could."

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