01 BREAKOUT NATIONS TO WATCHFour Asian countries are set to take off.

08 INDIA HAS A NEW GOVERNMENT. NOW WHAT?Social programs got India only so far. Now it’s time to spur growth.

09 HOW GE DOES BUSINESS IN CHINACEO Mark Hutchinson opens up about the promise and peril.

ASIA

Chazen Global Insights

THE BEST OF

There’s so much one could say

about Asia, in all its depth and

variety. Looking back at the

stories published in Chazen

Global Insights, the e- newsletter

of the Chazen Institute of

International Business, it was

hard to select which of our articles best represent

this diverse, chaotic region.

So we let you, our readers, choose.

What you see in this issue are the most

popular stories on Asia over the past 18 months.

Looking at the ones that made the cut, I’m struck

by the multiplicity of ways business leaders

are approaching opportunities there. Mark

Hutchinson, for example, speaks from the vantage

point of success—he’s president and CEO of GE

China—and offers advice for protecting intellec-

tual property, a prime concern for anyone entering

the market. Meanwhile, policy makers, such as

Shusong Ba, who leads the Finance Institute

at the Development Research Center of the

State Council of China, sound a cautionary note

about what this influx of new commerce means

to China’s labor force. And Columbia Business

School’s resident Nobel laureate, Joseph E. Stiglitz,

wonders whether China can get its state/market

balance right.

But there’s plenty of upside, too. Investors

looking for deals may want to look beyond the

usual suspects. How about Philippines or Sri

Lanka? Ruchir Sharma builds a compelling case

for why these unsung nations are worthy of

investment attention. Read more on the next page.

We hope you’ll consider the Chazen Institute

of International Business your gateway to the

people and ideas that transform the global

marketplace. We sponsor a robust schedule of

speakers and panels, support major research, and

play a vital role in the global education agenda at

Columbia Business School. To stay up to date on

all we do, drop us a line at chazen@columbia.edu

and ask to be added to our mailing list.

Best regards,

Wei Jiang

Director, Chazen Institute of International

Business and Arthur F. Burns Professor

of Free and Competitive Enterprise,

Columbia Business School

LETTER FROM THE DIRECTOR

01

02

0

07

08

04

10

11

Has China gone too far in its reliance on the marketplace?

Tough questions remain on how to support China’s burgeoning population while improving its insufficient infrastructure.

Spotlight on Asia’s big four emerging markets

Social programs got India only so far. Now it’s time to spur growth.

SOEs need a stronger market dose, says a food company CEO.

The head of India’s fastest growing hotel chain shares insights for retiring rich. They’re not what you think.

Breakout Nations to Watch

Asia Insights

Beyond the Usual Suspects: Where Asia Is Growing

Getting China’s State-Market Balance Right

Financing China’s Cities

India Has a New Government.

Now What?

How to Fix China’s State-Owned Firms

Lessons from an Accidental Entrepreneur

Four often-overlooked countries that are expected to grow more than 5 percent annually in the short term

12How GE Does Business in China

A CEO’s frank view of protecting intellectual capital

Surprising statistics and informed analysis with a practical bent

Seoul

Chazen Global Insights

THE BEST OF

and English-speaking. Its average annual per-person GDP income of $2,500 leaves room for growth.

SOUTH KOREA Sharma calls South Korea the gold medalist of emerging markets thanks to its “rare ability to stay at the cutting edge of fast-changing industries” such as robotics, aerospace, and biotech. Unlike Taiwan, the country has spawned genuinely global brands. As for political risk, Sharma wrote that South Korean leaders have assumed the North is doomed to failure. The government has kept debt down to just 34 percent of GDP as part of its prepa-ration to “absorb the high cost of rebuilding the North.”

SRI LANKA Even during its disastrous civil war, Sri Lanka managed an average annual growth pace of nearly 5 percent. As it rebuilds over the next decade and creates a new trade regime with neighboring countries, Sri Lanka could achieve 7–8 percent annual growth.  – Sharon Kahn

When most of us think of “breakout nations,” the BRIC juggernauts come to mind. But Ruchir Sharma, head of emerging markets for Morgan Stanley Investment, offers a more nuanced view in his book, “Breakout

Nations: In Pursuit of the Next Economic Miracles” (2012, W.W. Norton). “The biggest mistake markets make is extrapolation. We assume a trend will continue ad infinitum,” he says. Although he doesn’t predict any superpowered economy will rival the BRICs in the next three to five years, Sharma does identify four Asian countries, that will 1) grow faster than market expectations, and 2) beat their peer groups, the two conditions that he says create a breakout nation. (Other breakout nations include emerging markets of The Czech Republic, Nigeria, Poland, and Turkey. Among developed countries, he names Germany and the United States.)

INDONESIA Noting that Indonesia was the Asian country hardest hit by the crisis of 1997–1998, Sharma says it had regained its mojo by 2011, calling it “by far the best-run large commodity economy.” The world’s fourth-most populous nation has a large enough domestic market to generate demand and less of a post-crisis debt problem than any other big emerging market.

THE PHILIPPINES President Benigno “Noynoy” Aquino III was originally dismissed as the unimpressive son of a legendary father who was assassinated by Marco supporters and a mother who was once president. But he is delegating power and passing reforms. This island nation has the world’s fifth-largest share of natural resources. Half the population is under 21, and Filipinos are well educated

BREAKOUT NATIONS TO WATCHSome countries are poised to grow faster than market expectations. Four of the top 10 are in Asia.

1 Within a huge pool of competitors, only a few nations beat the game by growing faster than rivals in their own income class.

2 For rapid growth, it is much easier to be poor. To grow 10 percent from an average annual personal income of $1,000, a nation needs to earn an extra $100 per person.

THE TAKEAWAYS

THE PHILIPPINES

2.5INDONESIA

3.5

SOUTH KOREA

23.5SRI LANKA

3.0

ASIA’S BIG FOUR BREAKOUTSPer Capita GDP (in thousands of USD)

A S I A 01

E C O N O M I C E X P E C TAT I O N SRUCHIR SHARMA is head of

emerging markets and global

macro at Morgan Stanley

Investment Management.

Asia InsightsTWO TOOLS FOR SPOTTING A BREAKOUT NATION

WHO’S CONFIDENT NOW?

Ruchir Sharma, author of “Breakout Nations: In Pursuit of the Next Economic Miracles” (see story on page 1), has some offbeat ways to predict which emerging market will succeed.

Last fall, the Chazen Institute polled 549 Columbia Business School alumni and additional business professionals on “Prospects & Challenges for Major Economies 2014.” Respondents from emerging markets of Brazil, China, and India as well as seven developed markets were asked to respond to issues surrounding their government and their nation’s growth. Some findings:

The Four Seasons Index The average cost of a night’s stay at a luxury hotel acts a proxy for gauging competitiveness. As a whole, Asia was “strikingly reasonable,” writes Sharma, especially compared with some com modity capitals.*

The Billionaires’ Index Emerging countries that share their wealth rather than consolidate it among a small number of billionaires are more apt to develop a middle class. And ideally the wealthy class “should emerge predomi-nately from productive economic sectors, not cozy relationships with politicians,” writes Sharma. Asian emerging markets generally fare well on this scale.

On a scale of 1–6, China tied with Germany as the country most confident in its own government. The United States came in at 2.7, just above France (2.6) and India (2.4), the lowest scoring national group.

China respondents expect their country to grow this year at a 6 percent annual GDP rate. However, their estimate is well below the IMF’s 8.2 percent forecast. Respondents from India were also unenthusiastic in their 4.5 percent forecast, compared with the IMF look forward of 6.2 percent.

Source: Breakout Nations; IMF World Economic Outlook, April 2011

$1,000

$0

$200

$400

$600

$800

Shanghai

Bangkok

Johannesburg

Mexico City

Buenos Aires

Dubai

Moscow

London

New York

Mumbai

Jakarta

Rate

s (U

SD)

* Rates are based on hotel websites as of July 2014. If the city has no Four Seasons, the author used a comparable hotel.

Source: Breakout Nations

40%

06%

3.9

Four out of 10 respondents from China and India named corruption as a top barrier to their country’s economic growth.

Russia 29.2

Malaysia 20.1

India 17.2

Taiwan 14.6

Brazil 6.5

Philippines 6.0

Indonesia 4.6

Korea 4.0

China 4.0

Total Net Worth of Country’s Billionaires (as % of GDP)

02 A S I A gsb.columbia.edu/chazen

T R E N D S

THE SEX RATIO MOTIVATORFor most nations, including the United States and Germany, the natural ratio of young men to young women is one to one. In a few countries—China, Singapore, Vietnam, India, Korea, and Switzerland—the young-men-to-young-women ratio is above one. China happens to have the highest ratio in the world right now—about 1.15. That means that one out of every nine young men cannot find a wife, or even a date.

Shang-Jin Wei, former director of the Jerome A. Chazen Institute of International Business and the N.T. Wang Professor of Chinese Business and Economy at Columbia Business School, argues that actions young men and their parents are willing to take to avoid involuntary bachelor-hood can contribute to higher productivity and economic growth rates.

Because relative wealth is a competitive weapon on the marriage

market, Chinese men are more willing to work hard, take risks as entrepreneurs, postpone consumption, and save and invest. In fact, Chinese provinces with worse-than-the-national- average sex ratio imbalance tend to produce more entrepreneurs. Newly incorporated privately owned firms are more numerous and grow much faster in regions where the marriage market is more competitive. Standard textbooks fail to capture this demo-graphic feature, and contribute to unfounded pessimism about China’s growth potential. Wei’s prediction:

“China’s GDP will double in size in about a decade. Many people now overly pessimistic about China will start to revise their views in the first half of the next decade.”

Chinese provinces with worse-than-the-national-average sex ratio imbalance tend to produce more entrepreneurs. Newly incorporated privately owned firms are more numerous and grow much faster in regions where the marriage market is more competitive.

TWO REASONS WHY CHINA WILL CONTINUE TO GROW

THE LATECOMER ADVANTAGEEmerging economies can achieve innovation and industrial upgrades by imitatating and importing existing technol-ogies. In contrast, developed countries, which lead the frontiers of technology, must invest in costly and risky R&D to birth these innovations in the first place.

Justin Yifu Lin, Professor and Honorary Dean of the National School of Development at Peking University and a recent speaker at the Chazen Institute’s N.T. Wang Distinguished Speaker Forum, says “the latecomer’s advantage” allows developing countries to harness cheap technology to narrow the income gap. The Growth Commission [an independent body chaired by Nobel laureate Michael Spence that brought together 22

policy-makers, academics, and business leaders] indicates 13 economies took full advantage of their latecomer status after World War II to grow at least twice as fast as developed countries for 25 years or longer. China became one of the group of 13 after 1979 when economic historian Angus Maddison estimated China’s per capita GDP at $6,725 in 1990 dollars. That was 21 percent of per capita GDP in the United States, roughly the same gap that existed between America and Japan in 1951, Singapore in 1967, Taiwan in 1975, and South Korea in 1977. Their annual growth rates averaged between 7.6 percent and 9.2 percent over the subsequent two decades. Based on advances made by that group, China still could grow faster than 7 percent each year though 2028. “To realize its potential as a latecomer,” says Lin, “China needs to deepen its market-oriented reforms, address various structural problems, and develop its economy according to its compar-ative advantages.”

2028

China still has the potential to grow more than 7 percent each year through

07%

“The latecomer’s advantage” allows developing countries to harness cheap technology to narrow the income gap.

A S I A 03

CHINA

MONGOLIA

MYANMAR

JAPANSOUTH KOREA

TAIWAN

SINGAPORE

INDIA

INDONESIA

THAILAND

MALAYSIA

BANGLADESH

BHUTAN

BRUNEI DARUSSALAM

PHILIPPINESCAMBODIA

FIJI

SAMOA

TONGA

MARSHALL ISLANDS

KIRIBATI

MICRONESIA

PALAU

PAPUA NEW GUINEA

SOLOMON ISLANDS

TIMOR-LESTE

LAO P.D.R.

MALDIVES

SRI LANKA

NEPAL

VIETNAM

VANUATU

TUVALU

BEYOND THE USUAL SUSPECTS: WHERE ASIA IS GROWING

Learn More: To download the IMF’s “Regional Economic Outlook: Asia & Pacific” report,

click on this link or go to www.imf.org/external/pubs/ft/reo/2014/apd/eng/areo0414.htm.

China SlowdownChina’s double-digit growth rate has given way to a 7.4 percent target this year—and the contagion affect means the rest of Asia could catch the flu. The correlation between the Chinese economy and greater Asia is decidedly growing as China becomes less an assembly hub and more an importer, trading especially with its neighbors. The IMF calculated that the spillover effect of every 1 percent reduction in GDP Chinese growth translates to a 0.3 percent decline in the rest of Asia. But wait. The IMF is applauding China’s slower-growth policies, indicating that a 10 percent growth rate is not sustainable. What’s more, such a sizzling pace requires government stimulus and a debt buildup. The upshot: It’s not the rate of growth but the quality.

India’s New ApproachAlthough India’s economy doesn’t overly influ-ence nearby countries, the IMF is optimistic that new Prime Minister Narendra Modi’s policies will help point that country toward stronger growth.

The Impact of the U.S. and Other Developed NationsThe challenge here is twofold: Investors who once chased emerging market returns could rotate into (presumably safer) developed country debt once it pays higher yields. And, for Asia’s sovereigns, corporations, and house-holds, more-expensive borrowing—triggered by rising interest rates—could jack up debt/equity ratios. However, orderly tapering in conjunction with developed market growth will likely have a positive effect, causing the United States and Europe to import more Asian goods. As far as borrowing goes, corporate leverage has remained stable throughout Asia in recent years, putting the region in better shape than some other parts of the world. Still, the IMF estimates that about 20 percent of corporates shoulder much of Asia’s borrowing burden. Should interest rates rise by a basis point, the IMF calculated, 10 percent of corpo-rate borrowers would see their debt/equity ratio balloon to 40 percent. Household debt could also increase, particularly when it comes to home prices.

Myanmar Growth PromisesThe new darling among investors, Myanmar has a positive outlook—but buffers are thin, the IMF warns. Reforms need to stay on track, the revenue base needs to broaden, and the country needs to reduce reliance on natural resources.

South Korea on an Even KeelManaging just a 2.8 percent GDP growth increase in 2013, South Korea has not shone as brightly as it did early in the 2000s. The country faces rising household and corporate debt, income inequality, and an aging population. Still, the IMF predicts increasing exports and prudent management will keep Korea on the path to 3.7 percent growth this year, followed by several years of 3.8 percent GDP increases.

1.0-1.9

2.0-2.9

3.0-3.9

4.0-4.9

5.0-5.9

6.0-6.9

7.0-7.9

KEY: % GDP GROWTH

Note: Map data based on 2015 projections.

gsb.columbia.edu/chazen04 A S I A

A S I A O V E R V I E W

CHINA

MONGOLIA

MYANMAR

JAPANSOUTH KOREA

TAIWAN

SINGAPORE

INDIA

INDONESIA

THAILAND

MALAYSIA

BANGLADESH

BHUTAN

BRUNEI DARUSSALAM

PHILIPPINESCAMBODIA

FIJI

SAMOA

TONGA

MARSHALL ISLANDS

KIRIBATI

MICRONESIA

PALAU

PAPUA NEW GUINEA

SOLOMON ISLANDS

TIMOR-LESTE

LAO P.D.R.

MALDIVES

SRI LANKA

NEPAL

VIETNAM

VANUATU

TUVALU

BEYOND THE USUAL SUSPECTS: WHERE ASIA IS GROWING

Asia is revving its engines again. Look for better than 5 percent growth in Indonesia, Malaysia, and the Philippines—as well as frontier economies such as Vietnam and Myanmar. Even taking China and India out of the equation, “Asia will remain the world’s most dynamic region,” said Changyong Rhee, director of the International Monetary Fund’s Asia and Pacific Development department. Introducing this year’s “Regional Overview and Frontier Perspectives” report at a recent Chazen Institute talk, Rhee cited GDP growth forecasts for the region of above 5 percent for the next few years, and emerging Asia besting 6 percent. Still, Rhee warned, “now is not the time to be complacent,” indicating specific risks that could derail Asia’s momentum. “Macro-prudential policies should be part of the tool kit to deal with risks and external shocks,” he said. Overall, he suggested, Asian countries should maintain a relatively accom-modative monetary policy stance, although China needs to rein in credit expansion.  – Sharon Kahn

Frontier Economies: Red HotChallenges faced by Mongolia, Lao PDR, Cambodia, Sri Lanka, Bangladesh, and Vietnam are to avoid overheating and curb imbalances.

COUNTRY 2013 2014 2015

ASIA 5.2 5.4 5.6

ADVANCED COUNTRIES

2.1 2.3 2.2

Japan 1.5 1.4 1.0

Singapore 4.1 3.6 3.6

Korea 2.8 3.7 3.8

Taiwan 2.1 3.1 3.9

EMERGING ECONOMIES

6.5 6.7 6.8

Thailand 2.9 2.5 3.8

Malaysia 4.7 5.2 5.0

Vietnam 5.4 5.6 5.7

Indonesia 5.8 5.4 5.8

India 4.4 5.4 6.4

Philippines 7.2 6.5 6.5

China 7.7 7.5 7.3

OTHER NATIONS*

6.5 6.7 6.8

Note: 2014 and 2015 data are projected.

* Bangladesh, Bhutan, Brunei Darussalam, Cambodia, Fiji, Kiribati, Lao P.D.R., Maldives, Marshall Islands, Micronesia, Mongolia, Myanmar, Nepal, Palau, Papua New Guinea, Samoa, Solomon Islands, Sri Lanka, Timor-Leste, Tonga, Tuvalu, and Vanuatu

Source: IMF

Japan: The Waning of AbenomicsBy most accounts, the economic policies of Shinzō Abe have reignited internal investment in Japan. The IMF forecasts a respectable 1.4 percent GDP growth for 2014. But, as the major stimulus wanes, Japan faces the prospect of falling back into barely perceptible growth and deflation. That stuck-in-the-mire outcome is less crucial to the rest of Asia than it was not too long ago, though. As China’s influence grows, Japan’s is fading.

% GDP GROWTH IN ASIA

ASEAN TrajectoryThe Association of Southeast Asian Nations (Indonesia, Malaysia, Philippines, Singapore, and Thailand) represents “a new growth pole,” achieving a stable 5 percent growth in 2014, the IMF forecasts. The trajectory would be even higher if Thailand were out of the mix. That country’s political tension is dragging growth down to near zero, although Thai potential is in line with the rest of the ASEAN bloc.

A S I A 05

and does so in most market economies, for good reason.America’s privately based healthcare system is expen-sive, inefficient, and achieves far worse outcomes than those in European countries, which spend far less. A more market-based system is not the direction in which China should be going. In recent years, the government has made important strides in providing basic health care, especially in rural areas, and some have likened China’s approach to that of the United Kingdom, where private provision is layered atop a public base. Given the relatively small role of private healthcare provision in the UK, the country has what is essentially a public system. Likewise, although China has already made progress in moving away from manufacturing toward a service-based economy (the GDP share of services exceeded that of manufacturing for the first time in 2013), it still has a long way to go. Already, many indus-tries are suffering from overcapacity, and an efficient and smooth restructuring will not be easy without government help. China is restructuring in another way: rapid urban-ization. Ensuring that cities are livable and environmen-tally sustainable will require strong government action to provide sufficient public transport, public schools, public hospitals, parks, and effective zoning, among other public services. Continued on page 13 p

GETTING CHINA’S STATE-MARKET BALANCE RIGHT

When China began its reforms more than three decades ago, the direction was clear:

the market needed to play a far greater role in resource allocation. Today, many of China’s problems stem from too much market and too little government. Or, to put it another way, while the government is clearly doing some things that it should not, it is also not doing some things that it should. Worsening environmental pollution, for example, threatens living standards, while inequality of income and wealth now rivals that of the United States. Corruption, meanwhile, pervades public institutions and the private sector alike. All of this undermines trust within society and in government—a trend that is particularly obvious with respect to, say, food safety.

Such problems could worsen as China restructures its economy away from export-led growth toward services and household consump-tion. Clearly, there is room for growth in private consumption; but embracing America’s profligate materialist

lifestyle would be a disaster for China and the planet. Air quality in China is already putting peoples’ lives at risk; global warming from even higher Chinese carbon emissions would threaten the entire world.

A BETTER BALANCEThere is a better strategy. For starters, Chinese living standards could increase if more resources were allo-cated to redress large deficiencies in health care and education. Here, government should play a leading role,

Has China gone too far in its reliance on the marketplace?

“Embracing America’s profligate materialist lifestyle would be a disaster for China and the planet.” - JOSEPH E. STIGLITZ

1 Many of China’s problems today stem from too much market and too little government.

2 Chinese living standards could increase if more resources addressed large deficiencies in health care, education, and urbanization.

3 To pay for its growth, the government should impose taxes on the environment, income, and property.

THE TAKEAWAYS

06 A S I A gsb.columbia.edu/chazen

G L O B A L G O V E R N A N C E JOSEPH E. STIGLITZ, a Nobel laureate in economics,

is University Professor at Columbia University. His

most recent book is “The Price of Inequality: How

Today’s Divided Society Endangers Our Future.”

Total Population(in billions)

Urban Population(in billions)

1.5

0.9

0.6

0.3

1.2

2000 2005 2010 2015* 2020* 2025* 2030* 2035* 2040* 2045* 2050*

Then China must redefine the roles of the central and local governments in delivering services. A more centralized system will allow workers to move more freely within the country without losing access to critical services.

WHO PAYS FOR URBANIZATION?Providing public services is only half of the equation, though. Financial reform must also address funding the country’s expanding infrastructure needs. Historically, local governments have depended on land sales for most of their revenue. However, this source of income is declining from a peak of 7.5 percent of China’s gross domestic product in 2010 (almost equal to the rest of all other income for local governments) to just 1.2 percent of GDP by 2012. Unfortunately, China’s current system bans local governments from issuing bonds, even to finance capital expenditures. Continued on page 13 p

FINANCING CHINA’S CITIES

Increased urbaniza-tion is the central tenet of China’s long-term economic plan. The strategy addresses income inequality while boosting domestic demand for Chinese goods and services, thereby reducing the country’s dependence on

exports. Meeting this objective, though, will require implementing a basket of political and economic reforms aimed at helping local governments deliver the infrastructure and public services that a growing urban population will demand.

A COUNTRY OF CITIESBetween 1978 and 2012, China’s urban population grew from 18 percent to 52.7 percent of its citizens. By 2030, an estimated 65 percent to 70 percent of the country’s population, or nearly 1 billion people, will be living in cities, all of which will need massive infrastructure and social services. Key is erasing inequalities between long-time city residents and newcomers. In China’s current two- tiered society, hundreds of millions of people moving into the cities are not allowed to share in the same public services, such as education and health care, that the cities’ native residents enjoy. Fortunately, policymakers have determined that all citizens should receive equal access to social services. The first step is to de-link public services from a person’s hukou, or household registration, which grants services only to residents from the states in which they are registered. Regional governments shy from registering new migrants because they don’t want to add to their financial loads, and migrants often aren’t ready to give up ties to their home states.

As China moves to an urban landscape, central questions remain regarding how to provide social services for all and how to pay for infrastructure.

MORE PEOPLE IN CHINESE CITIES

*Estimate | Source: The World Bank

A S I A 07

I N F R A S T R U C T U R ESHUSONG BA is a 2014 Lulu Chow Wang Senior Visiting Scholar at Columbia Business

School. He is the deputy director-general of the Financial Research Institute at the

Development Research Center of the State Council. Dr. Ba is also chief economist of the

China Banking Association and deputy secretary of the China Institute of Macroeconomics.

the proportion of its citizens who live below the poverty line from more than half of the population in the late 1970s to roughly one-fifth today, the country’s growth rate has stalled in recent years. If their ideas sound familiar, there’s a reason: they contain echoes of trickle-down economics as popularized by Margaret Thatcher and Ronald Reagan. But Bhagwati and Panagariya note the issues in India are vastly different from those of more developed countries.

THE HOT ISSUESThe authors comment on items certain to be on Modi’s agenda:

Labor LawsRestrictive labor policies have severely handicapped India’s competitiveness in global markets, say the authors. For example, it is “impossible for an indus-trial establishment with 100 or more workers to lay off or retrench workers even if it is unprofitable and is therefore forced to close the unit,” the book states. The writers continue: “The burdensome labor laws explain why entrepreneurs in sectors such as apparel, in which labor costs account for more than 80 percent of total costs, choose to stay tiny.” For the same reason, foreign investors tend to take their business to less expensive emerging markets.

InfrastructureModi has indicated willingness to redirect government money spent on social programs to infrastructure such as roads, airports, and especially electricity generation.

On the eve of the May landslide electing Narendra Modi as India’s new prime minister, two Columbia University economists received accolades of a different sort: Jagdish Bhagwati, professor of economics, law and international affairs, and Arvind Panagariya, professor of economics, shared the prestigious George S. Eccles Prize for Excellence in Economic Writing for their book, “Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries” (2103, PublicAffairs). The book challenges notions of protectionism and wealth redistribution that have been India’s guiding forces. Although India has been able to cut

INDIA HAS A NEW GOVERNMENT. NOW WHAT?Social programs got India only so far. Now it’s time to spur growth.

4 STEPS TO UNDERSTANDING WHY GROWTH MATTERS

1 Governments need revenues to support infrastructure and social programs.

2 Since the poor can’t afford these programs, and since raising taxes is not popular, the economy needs to generate wealth that can, in turn, grow businesses and throw off rupees.

3 A rising economy means more and better paying jobs and a larger pie to share with the government even when the tax rate stays the same.

4 Eventually taxes can be directed to alleviate poverty.

08 A S I A gsb.columbia.edu/chazen

G R O W T H ARVIND PANAGARIYA is the Jagdish

Bhagwati Professor of Indian Political

Economy, International and Public Affairs,

and Economics at Columbia University’s

School of International and Public Affairs.

JAGDISH BHAGWATI, University Professor

at Columbia University, is a fellow at the

Council on Foreign Relations in the United

States. He is widely recognized as the

intellectual pioneer of India’s reforms.

Indeed, as chief minister of Gujarat, he routinely found a way around political and regulatory barriers to grow the state’s economy at 10 percent a year over the past decade, often double that of India as a whole.

CorruptionThe other priority on Modi’s agenda must be attacking corruption with institutional reforms and enforcement. Noting that business reforms may take a while to work their magic, Bhagwati says corruption must be dealt with immediately. “For India to deliver growth, this is an issue that can’t wait 25 years.”

Still, the prospect of Modi’s election makes the co- authors of “Why Growth Matters” optimistic. “If GDP growth could reach 10 percent on a consistent basis, India could become the third largest economy in the world in 15 or 20 years,” says Panagaiya. In fact,

“since India has more people, it’s entirely possible that India could exceed China.”  – Sharon Kahn

“The inefficiencies caused by pre-reform policies hurt not the rich, but the poor and the lower middle class...because the rich manage to insulate themselves against the inefficiencies.” - JAGDISH BHAGWATI AND ARVIND PANGARIYA,

IN WHY GROWTH MATTERS

0%

60%

20%

40%

1977–78 1983 1987–88 1993–94 2004–05 2009–10

INDIA’S POVERTY RATIO

City of Gangtok in Sikkim, India

Source : Authors’ construction based on estimates in Mukim and Panagariya

Maternal Mortality†

(per 100,000 live births)

230 vs 38

Infant Mortality*(per 1,000 live births)

Death from Malaria†

(per 100,000 population)

Life Expectancy at Birth*

Per Capita Income*(in thousands of USD)

50 vs 17

1.9 vs 0

65 vs 74

$1.2 vs $3.7

INDIA vS CHINAWHICH IS HEALTHIER?

*2009 †2008

Source: “Why Growth Matters”

A S I A 09

companies in strategic sectors, including power, trans-portation, telecom, banking, and, to a large degree, food. Answers, Ning said, may lie in additional reforms, increased incentives to managers, and more privatiza-tions in sectors deemed less key to national security.

SOME PRACTICAL STEPS Ning’s own company, which reported $1.6 billion net profits in 2013 on revenues of $35 billion, seems to have found some answers to the state-ownership dilemma. Since its founding in 1952, COFCO has transitioned from a small trading firm to a conglomerate controlling all aspects of the (literal) food chain, from growing crops and raising animals to processing, transportation, and even operation of port facilities for export. COFCO, an acronym for China National Cereals, Oils and Foodstuffs Corp., has also expanded into real estate, developing residential properties, shopping centers, and hotels within China. Along the way, the company has adopted efficiency and innovation measures as well as management carrots and sticks. Although COFCO isn’t publicly traded, seven of its subsidiaries are. It spent some $3 billion on R&D last year, hiring 400 PhDs. Recently COFCO began a Gross Profit Sharing (GPS) bonus program for all employees. Managers get incentives but are also held accountable through its Replacement on Evaluation (ROE) plan. “Every year,” said Ning, “the lowest scoring 5 percent of our top 100 managers must be replaced.” The effect “is like 100 people running from a tiger. Nobody wants to be caught.” COFCO is scouring the globe to increase the food supply for a China that’s increasingly interested in nutrition and taste as well as food safety issues. Ning expects to tap foreign sources through import agree-ments, but COFCO will also explore M&A. Last year, for example, the company acquired 51 percent of Chinese yogurt operations from the French Danone Group. “We’ve improved a great deal over the years,” Ning said. But, like China’s managed economy model, COFCO

“is not finished yet.” – Sharon Kahn

HOW TO FIX CHINA’S STATE-OWNED FIRMS

Many of China’s state-owned enterprises (SOEs) “have lost direction,” said Frank Gaoning Ning, chairman of COFCO Corp., China’s largest food processor and

one of its largest SOEs. “Many are losing money, are not competitive, and have been slow to embrace environ-mental change.” Numerous industries, including his own, have too much capacity: “In the food sector, we have too many soybeans, too much corn processing, too many plants making aluminum cans for packaging.” Last year, at a talk given at the China Business Initiative under the auspices of the Chazen Institute, Ning acknowledged two significant problems with managed economics. First, state control is not condu-cive to innovation. Recognizing this, the current Chinese government has instituted reforms to entice creativity. “We’re waiting to see if they will be effective,” said Ning.

SLOW-COOKED GROWTH The second big problem is right in Ning’s wheelhouse. A managed economy meant to provide jobs “creates size, not productivity in the SOEs,” he said. The so- called Beijing Consensus acknowledged this issue some 20 years ago and instituted often-extreme

efficiency measures, including closing outmoded operations and laying off thousands of redundant employees.

That painful era paved the way for privatization of about 95 percent of SOEs. By listing in Hong Kong, New York, and London, and answering to shareholders, the

state-owned enterprises have the incentive and means to adopt market standards and strategies. Of course, the government still owns major positions in most former SOEs, so China’s transforma-tion to a market economy is hardly complete. And the state maintains 100 percent ownership of about 50

SOEs need a stronger market dose, says a top China executive.

“The effect is like 100 people running from a tiger. Nobody wants to be caught.” - FRANK GAONING NING

CO

FCO

pro

duct

10 A S I A gsb.columbia.edu/chazen

C O R P O R AT I O N S FRANK GAONING NING is chairman of COFCO Corp., China’s

largest food conglomerate. He has been recognized five

times as one of the 25 Most Influential Leaders by Chinese

Entrepreneur Magazine.

3. Balance risks and rewards. “There’s no reward for independent thinking in most organiza-tions,” he learned. “If you make $10 million for a big company, you may get a $10,000 bonus. As an entrepreneur, you may make $20 million for that big idea” (by selling the company or going public). A corollary: “Business is always about mitigating risk. So learn to enjoy risk.”

4. Never compete on an even playing field. Land and debt are so costly in India that building a luxury

hotel is only marginally more expensive than constructing a cheap one. But going up against the

big guys seemed pointless, so Keswani devised his big idea: a midmarket hotel.

He scraped together enough capital to fund that first hotel and had every inten-

tion of becoming rich, then retiring. “But the team said ‘build a second hotel!’” he recalls. After three hotels, Keswani was approached by a private equity firm. Which led, of course, to more lessons.

5. Don’t lowball. By 2006, Keswani had invested about

$3 million in his company, “so I said we were valued at $200 million.” To his amazement, the

venture capitalist said, “Okay, we’ll buy you!”But the day before the deal was to close, the

representative called to renegotiate price. “I said, ‘I don’t want to work with you!’” says Keswani. Soon, investors more to his liking appeared, allowing Lemon Tree’s growth to continue.

6. Execute brand excellently. According to the company website, “Like the fruit [the hotels] are named for, Lemon Tree Hotels are fresh, cool, and sparkling with zest.” Continued on page 13 p

LESSONS FROM AN ACCIDENTAL ENTREPRENEUR

He calls himself an accidental entrepreneur, but Patanjali (Patu) Keswani, chairman of Lemon Tree Hotels, is being modest. In fewer than a dozen years, he’s built India’s fastest-growing hotel chain. Keswani shares lessons he’s learned along the way.

1. Inspiration = Leadership. After getting his MBA, Keswani joined Tata Administrative Service, aiming to “get lost in the massive conglomerate and live comfortably.” Instead he was named executive assistant to CEO Russi Mody, who became a role model. “The man hardly worked,” Keswani recalls, “but he knew how to inspire,” beginning with knowing the names and birthdays of all his employees.

2. You’re never too important to pick up the trash. As a 26-year-old manager at Taj Group of Hotels, Keswani met Ronnie Lobo, vice president of operations, who taught him that the top guy is responsible for the details. As they strolled through a sprawling hotel complex, “his eyes were on the ground, and he picked up anything he found on the floor,” Keswani recalls.

“The hotel was cleaner than a hospital.” At the end of the 1990s, Keswani was approaching age 40 and figured he needed $2 million to retire rich. His first attempt involved losing $370,000 in the futures market in seven days. Keswani regrouped and decided to become an entrepre-neur. The reason dealt with… another lesson:

The head of India’s fastest-growing hotel chain shares insights for retiring rich. They’re not what you think.

Stained glass window of Lemon Tree Premier’s logo

A S I A 11

L E A D E R S H I PAfter earning degrees in electrical engineering and an MBA,

PATU KESWANI worked with Tata Administrative Service before

launching Lemon Tree Hotels in 2002. Today the chain operates

25 hotels in 15 cities in India, employing about 3,000 people.

Has being both a competitor and partner with state-owned enterprises been difficult?

“We don’t joint-venture our core technology— our engines or healthcare devices. Instead we think about where we want access in China and where we can team up with a Chinese company that can contribute to global markets. We have some 27 joint ventures with state-owned enter-prises. Take avionics, where a local partner gives us access to the Chinese market and, since GE is not number one or two globally, enables us to go global together. “Creating joint ventures in China hasn’t been without pain and agony. But we’ve gotten to the point where we’re comfortable with our partners. Joint ventures are hard because you bring two majorly different cultures together, especially when you might have alignment at a senior, state level, but dealing with the day-to-day stuff is a different animal. “Aggressive competition happens if there’s a commodity aspect of the business, which is why we push joint ventures where we can contribute high-end, value-added technology. An example is wind. We compete heavily with local wind producers. But they do the lower- end commodity products and we do the more technically advanced turbines.”

How do China’s growth plans fit with GE’s focus?

“The government’s five-year plan that came out in 2012 focused very much on clean energy, universal health care, and universal transporta-tion. Those three themes are kind of what we do, between our work on renewable energy equipment, healthcare devices, and engines. The economy in China is slowing down, but the three areas that we are in mean we’ll grow 20 percent this year.”. – Sharon Kahn

HOW GE DOES BUSINESS IN CHINA

Mark Hutchinson, president and CEO of GE China, doesn’t sugarcoat the challenges that China faces—or the difficulties his company continues to slam up against. But, when Chazen Global Insights spoke to him in 2013, he was counting on doubling GE China’s revenues over the next three years.

What advice would you give about how to do business in China?

“When one of our customers thinks about coming to the Chinese market, I say, look, don’t do it alone. Talk to people who have been here a while. It could be the US Embassy, it could be agencies like the Export-Import Bank, it could be us or other multinationals. We’ll give you some ideas of who you should be partnering with or where you might locate. “Also, send someone for a year to get a feel for the place, and maybe not to Shanghai or Beijing but to other cities undergoing major growth. GE has been in China 100 years but we’ve become more of a local company in the last 10 years. Of our 20,000 employees, 99 percent are local.”

How have you approached R&D in China?

“It is important to innovate with Chinese needs in mind. Much of our focus is on making products more affordable. Rather than strip down high-end machines and get rid of the bells and whistles, we’re designing from the ground up. For example, in healthcare devices, we have worked with local doctors to make a CT scanner smaller in size so that it can fit into the rural hospital room and be a lot more cost effective. To extract shale gas, the technology used in the United States doesn’t work with the Chinese geology, so we’re working quite hard on designing equipment appropriate for here. “Innovations we make here eventually will creep into GE products in the United States and Europe.”

Straight talk from a CEO who oversees 27 joint ventures in this challenging market

12 A S I A gsb.columbia.edu/chazen

J O I N T V E N T U R E S MARK HUTCHINSON, president and CEO of

GE China since 2011, is a British native who

graduated from the University of Queensland

in Brisbane, Australia.

One major lesson that should have been learned from the post-2008 global economic crisis is that markets are not self- regulating. They are prone to asset and credit bubbles, which inevitably collapse, imposing massive social costs. China, one hopes, will not take the deregulation route that America followed. Liberalization of deposit rates led to America’s savings and loan crisis in the 1980s. Liberalization of lending rates encouraged predatory behavior that exploited poor consumers. Bank deregulation led not to more growth, but simply to more risk. The issue is not just the pacing and sequencing of liberaliza-tion, as some suggest; the end result also matters. The challenge for China’s leaders is to devise effective regulatory regimes that are appropriate for its stage of development.

HOW TO RAISE MONEYThat will require the government to raise more money. Local governments’ current reliance on land sales is a source of many of China’s economic distortions and much of its corruption.

Instead, the authorities should boost revenue by imposing envi-ronmental taxes (including a carbon tax), a more comprehensive progressive income tax (including capital gains), and a property tax. Moreover, the state should appropriate, through dividends, a larger share of the value of State Owned Enterprises, some of which might be at the expense of these firms’ managers. The question is whether China can maintain rapid growth—though somewhat slower than its recent breakneck pace—even as it reins in credit expansion, confronts weak global demand, restructures its economy, and fights corruption. In other countries, such daunting challenges have led to paralysis, not progress. The economics of success is clear: higher spending on urban-ization, health care, and education, funded by increases in taxes, could simultaneously sustain growth, improve the environment, and reduce inequality. If China’s politicians can manage the implementation of this agenda, China and the entire world will be better off.

Continued from page 06 • Getting China’s State-Market Balance Right

Continued from page 11 • Lessons from an Accidental Entrepreneur

In keeping with its hip culture, the company hangs framed jokes in unexpected locations around the hotels. And although each hotel is different, all have a crisp, modern feel. Meanwhile, Keswani tinkered with the mid-market concept to create Lemon Tree Premier (which he describes as a four-star hotel with five-star service) and Red Fox, a step down from the original model.

7. Pursue the triple bottom line: profits, people, and the planet. In 2007, Keswani learned that, on average, people with disabil-ities live 20 fewer years than the general population, and most live in poverty. “Once they get a job, those disadvantages disap-pear,” he says. Today, about 5 percent of Lemon Tree’s 300,000 employees are speech and hearing impaired, a figure Keswani expects to reach 40 percent by 2020.

8. Hire for the future, not the present. “Business models and capital can be commoditized,” says Keswani, who says employees make the difference. He points to three kinds of employees: those who wonder what happened, those who watch things happen, and those who make things happen. Lemon Tree trains staff to embody the friendly brand. “We need to move the first group toward the third group,“ he says. The lessons, in turn, have led to three new business opportuni-ties that capitalize on India’s growing middle class. Based on experience raising and spending capital, Keswani is setting up an asset management company. He is also establishing a vocational training service. Finally, he is translating the Lemon Tree model to affordable urban housing. Oh, and he also plans to take Lemon Tree public. Stay tuned for more lessons. – Sharon Kahn

Continued from page 07 • Financing China’s Cities

Under a pilot program introduced in 2011, four Chinese provinces—Shanghai, Guangdong, Zhejiang and Shenzhen—issued a limited number of short-term bonds. Expanding this program would not only open up a critical revenue source for all regional governments, it also would create an important market for private investors.

CREATING EQUALITY AND EFFICIENCYSome reforms should be easier to implement, such as creating a bond market for local governments. Other reforms, such as shifting some tax collection authority from the central govern-ment to local jurisdictions and the introduction of a property tax, will take longer.

In the end, though, an effective solution would include equal access to public services across all of society, which would promote migration and help workers integrate more fully into urban life. The move-ment of labor, enterprise and capital would become more effi-cient as they flow to the places and industries with the highest rates of return.

Downtown district over-looking the Huangpu River in Shanghai

© Project Syndicate, 2014.

© Project Syndicate, 2014.

A S I A 13

PROMOTING THOUGHT LEADERSHIP

TRAINING THE NEXT GENERATION OF GLOBAL LEADERS

SUPPORTING MAJOR RESEARCH

The Chazen Institute sponsors a robust schedule of speakers and panels, including the Sir Gordon Wu Distinguished Speaker Forum, which focuses on China’s economy and business practices, and the Nand and Jeet Khemka Distinguished Speaker Forum, which offers perspectives on India. www.gsb.columbia.edu/chazen/events

The Global Immersion Program links classroom learning with real-world challenges. Classes meet for half a term in New York prior to a one-week visit to the country of focus. www.gsb.columbia.edu/chazen/immersion

Chazen Study Tours, organized by students, are 7- to 10-day tours to such countries as India, Japan, Korea, and

The Chazen Institute awards annual grants to faculty members and PhD students who conduct research with significant cross-border implications. Recent projects include a study of how entrepreneurs manage financial risk, and development of an index that measures an organization’s social capital. www.gsb.columbia.edu/chazen/research/grants

The Jerome A. Chazen Institute of International Business | Columbia Business School | Uris Hall | 3022 Broadway, 2M2 | New York, NY 10027-6902T. 212-854-4750 | F. 212-851-9509 | www.gsb.columbia.edu/chazen

About the Chazen Institute

Chazen Global Insights, the institute’s signature e-newsletter, features interviews with newsmakers and policy leaders and presents new thinking on international markets, economic policy, and cross-border strategy. www.gsb.columbia.edu/chazen/globalinsights

The Entrepreneurship and Competitiveness in Latin America Program is a yearlong course of study for entrepreneurs in Latin America. Each participant develops and implements a project to improve his or her company. www.gsb.columbia.edu/chazen/ecla

the United Arab Emirates that acquaint participants with other cultures and economies and lay the groundwork for internships and international careers. www.gsb.columbia.edu/chazen/ studytours

The Chazen MBA Exchange Program sends students to one of 25 partner universities including London Business

School and Hong Kong University of Science and Technology. www.gsb.columbia.edu/chazen/exchange

The Chazen Language Program offers noncredit, eight-week language courses for the Columbia Business School community. www.gsb.columbia.edu/ chazen/language

Access to Columbia’s resources is offered to international scholars, doctoral candidates, and leading business practitioners for their research. www. gsb.columbia.edu/chazen/scholars

The Lulu Chow Wang Senior Visiting Scholar Program brings senior Chinese academics, business executives, and government officials to Columbia Business School to foster dialogue and scholarly exchange. www.gsb.columbia.edu/chazen/wangscholars