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Economic
Value Added
By Michael Alan Hamlin
June 28, 1999
“All
the books on economic value added are sold out at the bookstores,”
a senior executive in one of the Philippines top five firms told
me this week. “Check it out,” he said. “I’ve
talked to a number of executives recently and that’s what they
are thinking about.” That interest is yet another good sign
that the issues that concern top management in the Philippines are
increasingly strategic and focused.
You’ll recall that economic
value added — disguised as total factor productivity —
was the issue that so rattled Singapore Senior Minister Lee Kuan
Yew back in 1996 that MIT economist and reincarnated pundit Paul
Krugman became his number one whipping boy. Mr. Krugman is the author
of an infamous Foreign Affairs article, “The Myth of Asia’s
Miracle,” that suggested rapid growth in Asia’s then-tiger
economies was the product of labor mobilization and use of physical
resources — and little else. That article was the starting
gun for the debate on the vulnerability of Asia’s economies.
What steamed Mr. Lee was Mr. Krugman’s
comparison of Russia’s economy to Singapore’s. Labor mobilization
and natural resource exploitation could build a mighty Soviet armed
force, Mr. Krugman argued, but the cost was economic prosperity,
and ultimately national insolvency. In Singapore’s case, it
built a strong economy reliant on huge, prosperous government-linked
corporations vulnerable to competition as pressure for liberalization
set in.
The principal problem with both economies
was that they were based on sucking up resources, not creating new
value. U.S. Federal Reserve Chairman Alan Greenspan recently described
why value generation is so critical to sustained economic prosperity.
He noted that for the past 50 years, the U.S. economy has grown
at an annual average of three percent, but very little of that growth
was reflected in increased physical bulk. Rather, growth was generated
by developing creative ways to rearrange physical bulk. In other
words, greater resourcefulness and the effective application of
intellectual capital.
MIT Media Lab chief Nicholas Negroponte
argues that this resourcefulness is turning the economy digital
because of the enhanced efficiency, productivity, and opportunity
generation potential it provides. Continual development of new technologies
— and improvement of existing technology — routinely accelerates
the creation of value, or the rearranging of physical resources.
Recent studies of the determinedly
robust U.S. economy in fact suggest that growth is entirely the
product of new digital advances that are dramatically changing the
way people live and work. And there is little evidence that this
dependence on technology as the source of value generation will
change — ever. For national economies, this means prosperity
is dependent on the capacity for technology-based value generation.
Harvard economist Jeffrey Sachs,
Mr. Greenspan, and author and consultant Peter S. Cohan argue that
the capacity for value generation is closely tied to the quality
of education, willingness of the private enterprise to underwrite
academic research, and the availability of capital, especially venture
capital and access to equity markets.
What does all this suggest for senior
managers in Philippine corporations thinking about economic value
added?
Well, it means several things. The
first is that companies need to make strategic capital investments
in technology that will increase the efficiency and productivity
of their operations. Increasing efficiency and productivity generally
means reengineering and integrating business processes. It also
requires an investment in business-to-business Internet commerce,
which we’ve talked quite a lot about recently (See “You
Can’t Be In Business Without the Internet” in the June
21 issue.).
Second, it will involve fierce competition
for the best, most creative people and the patience to manage them.
One hugely successful garment manufacturer and retailer recently
told me that he had 50 maniacs working for him. “It takes a
lot of patience to manage them,” he said, but the company’s
continued success in anticipating and reading market shifts in consumer
preferences is dependent on keeping the maniacs happy — and
productive.
However, the source of creative maniacs
is limited, and competition for them is increasing as foreign investors
as well as new Philippine enterprises seek to capitalize on the
Philippines’ creative talent bank. The only way to sustain
supply is to increase output capacity. And there is only one way
that can be done strategically and most effectively.
Which brings us to the third thing
senior managers thinking about economic value added must be concerned
about. And that is the quality of the output source: educational
institutions. Despite years of financial neglect, indifference,
and corruption, the Philippines’ educational infrastructure
continues to produce impressive output, especially at the undergraduate
level.
The realization that education is
a basic strategic component of sustained economic development in
Asia is fairly new. After all — sorry, I can’t help myself
— we had Asian values. But now that Mr. Lee has acknowledged
that Mr. Krugman was probably on to something — he peppers
his own talks with “Krugmanisms” these days — and
Mr. Krugman is a regular invited guest in Singapore, investment
in education has jumped, especially in Singapore, Hong Kong, and
China.
On top of that new investment —
Singapore is building a new U.S.-style business school, education
is the fastest growing industry in Malaysia, and multinationals
are eagerly funding professorial chairs in new business schools
in China — U.S. schools are setting up campuses in mostly Singapore
and Hong Kong. MIT is in a joint venture with the Nanyang Institute
of Technology. Wharton is working with the new Singapore Management
University, and the University of Chicago is setting up its own
independent campus, for example.
While all these schools are marketing
their programs in the Philippines, not many Filipinos will be able
to afford the tuition and expense of living and in some instances
traveling extensively overseas. Meanwhile, neglect — and exploitation
by the dregs of the bureaucracy and textbook publishers — of
Philippine educational infrastructure continues, well, unabated.
It comes down to this. To prepare
for strategy-driven growth Philippine enterprise can invest in the
technology it needs to operate at world-class levels. And it can
find a lot of talent in the market, although it’s increasingly
scarce.
But to realize sustained value added,
it will have to invest in education.
Copyright © 1999 The Events
& Awards Managers of Asia and
Hamlin-Iturralde Corporation. All rights reserved.
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