Morocco’s Success in the Aerospace Industry

 The Wall Street Journal ran a very interesting piece today on  Morocco’s success in developing its aerospace industry.

The story should inspire and give hope to many developing countries. It proves that advanced manufacturing is not totally out of the realm of possibilities for these countries. Manufacturing is generally not a big part of the economies of many developing countries – that tend to rely on agriculture, extraction of mineral resources, or light and basic manufacturing. Morocco is not the first developing country to foray into a sophisticated industry such as commercial aeronautics. The WSJ mentions, as prior examples, Brazil, Indonesia, Mexico and South Africa. Brazil is probably the most successful example, with its aircraft maker Embraer.

This story, as the story of Intel’s investment in Costa Rica in 1998, also shows what a powerful ‘game-changer’ foreign direct investment (FDI) can be. In the case of Morocco, there was clearly a strong resolve and policy drive by the Government, but it is FDI that helped achieve what probably appeared to many observers as a very ambitious, not to say utopic, objective a decade ago, bringing capital, technology, skills-building and market access. Over the past 10 years the country has managed to attract significant investments from aerospace leaders such as Boeing, Safran, United Technologies and Bombardier.

What is also interesting in the case of Morocco is that the success story started with a relatively modest operation. Around 1999-2001, Royal Air Maroc, the national carrier, managed to convince Boeing (a long-time supplier of RAM) to partner with it and a French electrical wiring company to start a small project preparing cables for Boeing 737 airplanes. The level of quality achieved by workers surprised everyone and…the rest is history.

The sector now employs almost 10,000 workers who earn about 15% more than the average monthly wage (which remains relatively low for Western standards at US$320/month). As the WSJ correctly points out, creating jobs is a strategic imperative for the stability of the country, in the aftermath of the Arab Spring. Morocco remains deeply affected by high unemployment, particularly in the young segments of the population.

In my line of work, I am well aware that there is much more to say in order to explain why Morocco succeded and why replicating this success story will be very difficult for many other developing economies, but as a development professional working on private sector development, I found the piece very interesting and encouraging and wanted to share it with you.

Source: Morocco’s Aviation Industry Takes Off, by Daniel Michaels, The Wall Street Journal, published in the U.S edition on 21 March 2012. Link to the WSJ article:

http://online.wsj.com/article/SB10001424052970204059804577226763868263758.html

Xavier Forneris.

Base of the Pyramid (BoP): the “must-reads”

In 2008, Stanford University’s Social Innovation Opinion Blog published a post by a Grace Augustine titled BoP 101: Essential Reading for Those Interested in the Base of the Pyramid” (Oct 07, 2008). I encourage everyone interested in this space to read this post, which can be retrieved at: http://csi.gsb.stanford.edu/bop-101-essential-reading-those-interested-base-pyramid

I’ll first summarize Augustine’s post and then complement it with some papers and books published both before and after her post. In the interest of brevity, the names of the publishers or journals where these papers appeared are omitted, but an internet search on the title and author will generally lead you to the relevant publication.

In her post Augustine does not just provide a list of “must-reads”; she offers a useful and short genesis of the BoP theory, summarizes what each of the papers added to the conversation, and also mentions key developments around the theory (e.g., UN Global Compact, Millenium Development Goals, the MNC’s quest for new markets in a slowing global economy, etc.), which provides useful context to understand why the theory emerged and gained traction.

Augustine starts, logically, with what is widely seen as the seminal piece, the first article on the BoP: ”Strategies for the Bottom of the Pyramid: Creating Sustainable Development” published in 1999 by two academics: C.K Prahalad (University of Michigan Business School) and Stuart Hart (then at the University of North Carolina’s Kenan-Flagler Business School). Prahalad and Hart are often considered the “fathers” of the BoP theory, which they viewed both as a business strategy for transnational companies and as a potential tool for poverty alleviation.

This serves as a useful reminder that the BoP theory is rooted in the premise that traditional aid has had limited impact on poverty alleviation and that the time has come for a new strategy. This argument was not totally new. The same year as Prahalad and Stuart wrote their first article on the BoP, Amartya Sen published Development as Freedom (1999). The aid indictment was subsequently reinforced by influential development scholars who challenged the traditional model of development aid (Hernando de Soto’s The Mystery of Capital, 2000; Sachs’s The End of Poverty, 2005; William Easterly’s The White Man’s Burden, 2006). So Prahalad and Hart were not the first nor the last scholars to write about the shortcomings of aid as a way to alleviate poverty but they saw the BoP theory as a new avenue for tackling the poverty challenge.

The concept was refined in a second piece, published in 2002 by A. Hammond of the World Resource Institute (WRI) and the same C.K. Prahalad in the Harvard Business Review (HBR), titled Serving the World’s Poor, Profitably.

The “co-fathers” of BOP, Prahalad and Hart then separately published two books on the BoP theory:

  • The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, C.K. Prahalad (2004)
  • Capitalism at the Crossroads: The Unlimited Business Opportunities in Serving the World’s Most Difficult Problems, S. Hart (2005)

Augustine described both books as must-reads while summarizing their respective themes. She then mentioned a 2006 critique of the BoP theory posted by University of Michigan professor Aneel Karnani on NextBillion.net: Fortune at the Bottom of the Pyramid: A Mirage.

Finally, Augustine mentioned a few publications on sub-topics of the BoP theory:

BoP and Innovation:

  • The Great Leap: Driving Innovation from the BoP, S. Hart & C. Christensen (2002)
  • BoP Protocol, S. Hart (second version)

BoP and Economic Development:

  • Reinventing Strategies for Emerging Markets: Beyond the Transnational Model, T. London &  S. Hart (2004)
  • A Base-of-the-pyramid Perspective on Poverty Alleviation, T. London (2007)
  • The Next 4 Billion Report, WRI/IFC (2007) [which Augustine describes as the most comprehensive document for defining and understanding the BoP market].

BoP and Finance / Impact investing:

  • Meeting Urgent Needs with Patient Capital: an article by Jacqueline Novogratz, founder and CEO of Acumen Fund, one of the pioneering organizations in this field, published in MIT’s Innovations journal.

Unfortunately, Augustine’s overview ends in 2008, at the time of her post. I hope she has done or can do an update, for it was extremely clear and useful contribution. Here are some of the post-2008 reports and publications I would like to recommend, as well as some pre-2008 ones which were not on Augustine’s list:

  • Accelerating Inclusive Business Opportunities: Business Models that Make a Difference, B. Jenkins, E. Ishikawa, A. Geaneotes, P. Baptista, amd T. Masuoka. IFC (2011)
  • Creating Shared Value, M. Porter (2011)
  • Scaling Up Inclusive Business: Advancing the Knowledge and Action Agenda, B. Jenkins & E. Ishikawa. IFC and the CSR initiative at Harvard Kennedy School (2010)
  • The Next Billions: Unleashing Business Potential in Untapped Markets. World Economic Forum (2009)
  • Creating Value for All: Strategies for Doing Business with the Poor. UNDP (2008)
  • Make Poverty Business: Increase Profits and Reduce Risk by Engaging with the Poor, C. Wilson & P. Wilson (2006)
  • Developing Native Capability: What multinational corporations can learn from the base of the pyramid, S. Hart & T. London (2005)
  • Banker to the Poor: Micro-Lending and the Battle Against World Poverty, M. Yunus (1999)
  • Unleashing Entrepreneurship: Making Business Work for the Poor, UNDP, Commission on the Private Sector and Development (2004).

The Base of the Pyramid: An Overview of the Concept

By Xavier Forneris.

Yesterday, I wrote on a competition co-sponsored by IFC and the G20 on doing business at the “Base of the Pyramid”, or BoP. Some of you may wonder what is the base of the pyramid and if my eclecticism has now led me into Egyptian archeology.

The Base of the Pyramid –some call it the “Bottom of the Pyramid” but I prefer the term ‘base’-, or BoP, is simply used to describe the very large segment of the population who lives (or survives) on a low income. If we organize the world’s population according to income levels, it takes a pyramid shape, with few people at the top of the pyramid (mostly living in developed economies) and a majority of people at its base (mostly living in developing economies), as represented here:

There is no consensus on how many people live at the BoP because economists, governments and development institutions define poverty in different ways. Depending on whether one places (rather arbitrarily) the poverty line below $1 a day, $2 a day, or $10 a day, the BoP will include more or fewer people.

A 2005 World Resources Institute (WRI)/International Finance Corporation (IFC) study estimated the BoP population at about 4 billion people by defining the BOP population segment as those with annual incomes up to $3000 per capita per year (2002 PPP).

But whether it’s 3, 4 or 5 billion people, everyone agrees that the BoP hosts a very large population, mostly residing in Africa, Asia, Eastern Europe and Latin America.

The term is not new. According to wikipedia the term was used by President Franklin Roosevelt in a 1932 radio address during which he stated:

These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power…that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.

The term resurfaced at the end of the 1990s when two professors of management and corporate strategy, the late C.K. Prahalad (Michigan’s Ross School of Business) and Stuart Hart (then with the University of North Carolina’s Kenan-Flagler Business School) published what is viewed as the first paper on the BoP: ”Strategies for the Bottom of the Pyramid: Creating Sustainable Development” (1999). Prahalad (who is known for his HBR paper on “The Core Competence of the Corporation” co-authored with Gary Hamel) and Hart are often considered the “fathers” of the BoP theory and essentially wrote about the BoP as a new strategy for multinational companies.

Before them, many development economists focused on the same socio-economic segment, without using the term BoP. For instance, when Hernando de Soto, the famous Peruvian economist (not to be confused with the Spanish conquistador!), wrote about “dead capital”, i.e., the $10 trillion in informal assets that are in the hands of the world’s poor (e.g., land without legal property titles) but cannot be mobilized to borrow money from financial institutions, he was concerned with the lowest echelon of the global socio-economic pyramid. And when Muhammad Yunus pioneered micro-credit with Grameen Bank in Bangladesh around 1983, what was he trying to do if not expand access to credit for people at the base of the pyramid?

As a concept, the BoP has gained traction with both the business and development communities over the past decade.

Multinational corporations which for a long time have been focusing on the middle and the top of the pyramid, i.e., people who could afford buying their products and services, are seeking new markets in a context of global economic crisis and this quest led them to pay attention to the BoP. What is interesting is that they are not only looking at the BoP as a source of new customers but also as a source of supply, partnership, and innovation. This is part of the notion of “inclusive business” (IB) which I will address in a forthcoming post.

And development economists and institutions whose primary concern is poverty alleviation are also very interested in the BoP approach for they have been looking for ways to offer targeted support to those at the base of the pyramid, the ‘poorest of the poor’.

The BoP as a framework thus offers a unique opportunity for these two worlds (the private sector, on the one hand, and development institutions, on the other) to collaborate and search for solutions to their respective challenges.

When I was introduced to the BoP concept in 2009 during a seminar given to our MBA class at UNC by prof. Ted London (University of Michigan’s Ross Business School), I was struck by how he summarized the key challenge for he private sector and development instiutions in one sentence:

How can business motivations for growth and profits be aligned with the development’s community’s effort to alleviate poverty?

I let you reflect on this question. In addition to further explaining the concept of Inclusive Business, I’ll prepare a list of ‘must-reads’ for those of you who are interested in further exploring the concept of BoP.

Sources:

Chindia : The Dragon vs. the Tiger, or the rise of two giants

By Xavier Forneris.

Among the “BRICS” – a group of leading emerging economies comprised of Brazil, Russia, India, China, and South Africa – two countries stand out for their large population (of well over 1 billion each), rising economic clout and rapid growth: India and China, or Chindia, as the pair is now known. An Indian politician, Jairam Ramesh, Minister of State for Commerce, Government of India, claims to have coined the term Chindia in 2005 to evoke the simultaneous rise of China and India and their fierce competition for global economic dominance. Yet, the countries could not be more different. Even their focus seems to be placed on different objectives. While India’s energy appears concentrated on outpacing China’s rate of growth, China seems intent on capturing the title of “top global economic power” from the U.S.

At this stage, I have to put a few numbers on the table, just give a sense of the relative size of Chindia’s economies to the rest of the world. Please don’t sue me over these numbers. Depending on the source and method used to compute GDP, the numbers and relative positions in the ranking can vary. This particular dataset is from the World Factbook.

We’re a culture fascinated with ranking and benchmarking, so let me indulge by giving you the “Top 10”, ie., the 10 largest economies in 2011 (by Purchasing Power Parity – or PPP- GDP): 

Rank Country Population GDP/PPP
1 United States  312 million $14.66 trillion
2 China   1.34 billion $10.09 trillion
3 Japan  128 million $  4.31 trillion
4 India    1.21 billion $  4.06 trillion
5 Germany    82 million $  2.94 trillion
6 Russia  143 million $  2.22 trillion
7 U.K.    62 million $  2.173 trillion
8 Brazil  192 million $  2.172 trillion
9 France    66 million $  2.145 trillion
10 Italy    61 million

$  1.774 trillion

We can see that China’s economy is not very far behind the US, and that India’s economy is already larger than Germany’s or Russia’s, but still less than half the size of China’s.

Several economic projections I saw suggest that India and China are likely to become the two largest economies by 2050 and that China should seize the top spot (overpassing the US) around 2017-2020.

I thought it would be interesting to compare the two giant countries, India and China, in an effort to determine whether one is best positioned than the other for future global leadership. But I will not compare their growth rates. Like Amartya Sen, the Indian Nobel Prize in Economics, I find the debate on which of the two countries has the higher growth rate a little silly. Both countries still face many challenges incluing access to education and health, infrastructure, and inequality.

Commonalities

The size of the domestic market and the relatively low-cost labor  are well known commonalities. A more strategic one is their thirst for resources. Both India and China will require enormous resources to fuel their growth and feed their enormous population. The demand for natural resources (such as as oil, gas, coal, copper, bauxite, aluminum, iron and steel) but also for industrial equipment and food products will be here for a long time; and they also create opportunities for developing countries that produce these resources. Africa, for instance, has become a more important source of natural resources for China. As the global resource pool is finite, this thirst from resources will inevitably create tensions with Europe and the U.S. A second less discussed commonality is the emergence of Chinese and Indian MNC’s as global players and even global leaders. From FDI-importing countries (China more than India), the two nations have become sources of FDI.

Differences

India is a democracy, perhaps not a Jeffersonian one, but a democracy nevertheless. China is generally considered as less advanced and open politically than India. There are, however, clear advantages to the discipline that China can impose to its population and bureaucracy. Implementing deep policy reforms or massive infrastructure projects is easier in an autocratic regime than in a Western-style democracy where all sorts of resistance may impede the process. But it would be a mistake to think that everything gets decided in Beijing by a handful of leaders.There is in China an increasing involvement and participation of local levels of government in decision-making, which explain why the Chinese political system is often described as one of “pluralism within a single party system”.

The economic models are also very different. India’s model relies on the private enterprise whereas China practices a form of “State Capitalism”, with strong government backing of large state-owned enterprises (SOEs). At some point in their development, companies such as Haier, Lenovo, China Development Bank, China Mobil, Petro China, among others have all benefited from this strong government backing. Even a fully private company such as the telecom infrastructure giant Huawei – which I had the opportunity to visit in Shenzhen – seems to have benefited greatly from its close ties to the Chinese government. And its ownership structure remains quite opaque.

China has significantly better Infrastructure and logistics than India and has made a very smart use of the “Special Economic Zones” (SEZ) to develop certain provinces or districts and test economic reforms before extending them to the entire nation. Shenzen is one example of such utilization of SEZ status.

China’s economic growth is largely driven by FDI, exports, and manufacturing; whereas India’s growth seems driven by domestic consumption, capital markets, and IT/Services. I often hear that “if China is the world’s workshop; India is its back-office”. As convenient as this statement is, it is a bit of an over-simplification. The services sector is rapidly developing in China and, conversely, India’s economy can not be reduced to outsourcing.

Demography, on the other hand, is an area where India seems to have a significant advantage over China. China’s population is rapidly aging. This could cause its impressive rate of economic growth to reach a plateau, as has happened in Japan and several European nations. Although China’s fertility rate has been below replacement level for almost 20 years the “One Child policy” is still in place. But this might be changing; I was told that the Shanghai province would have renounced this policy and would already be encouraging couples to have more than one child. Yet, some demographic studies suggest that China’s work force will peak in absolute terms in only 4 years before dropping. In contrast India is a much younger nation. According to demographic studies cited in a JP Morgan Chase study (2007), 58% of the Indian population will be under 29 years old by 2015 vs. only 33-35% in China. This is a significant difference and, again, this one seems to favour India.

Finally, the integration of local firms into the “global business world” should also occur very differently. It is reasonable to assume that India’s businesses will be more easily integrated in the global economy, through large acquisitions of eminent “Western” companies with the technology, the manufacturing capability, and the other assets that Indian companies need. Suffice to cite the acquisition of Arcelor by Mittal Steel or of Corus Steel by the Tata group, among many other large-scale acquisitions of Western firms by Indian companies. In contrast, Chinese companies are facing more obstacles in in their attemps to acquire foreign companies, particularly in the U.S and when technology or intellectual property rights are involved. Several attempted Chinese acquisitions failed because of strong political resistance. Two examples are Haier’s attempt over Maytag and CNOOC’s plan to acquire Unocal. This last argument is not without flaws: a case in point being Lenovo’s success in acquiring IBM’s PC division. But a commonly held view among many observers of Asian business is that growth for Chinese companies will be more organic and will come less from international acquisitions than would be the case for Indian companies.

Conclusion

Given the two countries’ impressive growth and enormous markets, there is little doubt in my view that Chindia will play a central, expanding and perhaps or probably dominating role in the global economy. But I will not go as far as some who declare that “The West is finished”, a form of “neo-Spenglerism” thinking. And I also think that the focus on growth rates in the two countries is excessive and probably misplaced. Economic history shows that growth can not last for ever and, as the adage goes: “The bigger the booms; the more spectacular the bubbles and devastating the busts”. Also, both countries would be wise to pay more attention to the quality of the growth, how to reduce the inequality gap, and how to improve access to education and health, transparency, and the environment. All these things are needed for sustainable growth. 

Read More:

Amartya Sen’s sentiment about the excessive focus on growth rate was well summarized in a recent FT article: Is India growing faster than China? Financial Times, April 18, 2011. See:  http://blogs.ft.com/beyond-brics/2011/04/18/is-india-growing-faster-than-china/

Jairam Ramesh, “Making Sense of Chindia: Reflections on China and India” (India Research Press, New Delhi; May 2005)

On Spengler: http://en.wikipedia.org/wiki/Oswald_Spengler