In Conversation with Christian Ketels

In Conversation with Christian Ketels In an interaction with Christian Ketels, member of the Harvard Business School faculty at Professor Michael E. Porter’s Institute for Strategy and Competitiveness, he shares his views on the future of capitalism and some key ingredients needed for its evolution both in the developing and developed world. "People are looking for ways in which to organize markets so that they exhibit a fundamental sense of fairness." "A social market economy cannot fix all the problems. If we want to raise the prosperity of societies we need to upgrade competitiveness." How is capitalism going to get redefined in the next 10- 20 years? I think it is going to be more of an evolutionary process. One of the key trends you see in public discussion is that there is a sense of disconnect between the pure economic model and the markets that drive our economy. The needs of societies in emerging and advanced economies are going in different directions. In emerging economies most of the middle class is clamoring for different things, not just jobs/GDP growth, which continue to be important, but they also want to see other things. In advanced economies there are concerns that the value being created in our societies is not equally shared and that there is lack of opportunity. Hard work and initiative are not getting the right kind of returns any more. My observation is that the most interesting stuff happens when people think of how they can use the market as a tool/ instrument. The market is a powerful tool that we have for organizing a society and when we think about allocating resources and so on. But then we have to see it as a tool and not as an objective in itself. Societies have their own objectives and they have to do with prosperity/freedom/development much more broadly defined, than just GDP terms, and we have to think about how we can connect these things. How do you think crony capitalism is going to get resolved? In countries like India and Brazil, the biggest issue today is accumulation of wealth in a few hands. I don’t have the answer. We are in the midst of figuring this out. The problem is getting much more visible. It is prevalent in many different societies where the top 1% or 0.1% are controlling the wealth. People are looking for ways in which to organize markets so that they exhibit a fundamental sense of fairness. As a German, it reminds me of a model that came up after the war in Germany which will scroll up the social market economy. I don’t think that’s the solution but I think some of the philosophical ideas from that approach, which of course came after disastrous experiences in many dimensions, are quite relevant in this discussion. Basically, the idea for the social market economy is that the market is a very powerful instrument to lead to a fair and equitable distribution of opportunities and also outcomes. It does not mean that everybody receives the same but basically people have a chance and an opportunity to achieve that. People have to have the ability to compete effectively in this type of economy so they become strong against market dominance and market power. In the run up to the war we had these industrial conglomerates in Germany who became very powerful. There was not a market economy but a market economy with a few people who had all the opportunities and the rest did not. Market economy can work effectively for society if there are certain rules in place so that the market process can really work out. Freedom and choice are key ideas for social market economy. The problem with planned economy is that it is not only much less efficient economically, but it inevitably gives some people politically a lot of power. And it really reins in the freedom of many others. Something else is happening in Europe—countries like Spain, France are facing a very dramatic issue and have also been market driven economies. They have looked at social welfare in a strong way but they are actually in the doldrums. Secondly, when you say markets would provide a level playing field that they would create true competition—the internet was supposed to do that. Is that happening through the internet? You suddenly see behemoths like Google, Facebook who are coming in and causing a lot of anxiety. Let’s start with the European situation. There is no easy solution. A social market economy cannot fix all the problems. If we want to raise the prosperity of societies we need to upgrade competitiveness. We need to build the ability of people to be productive. And if we want people to have share of that then we want to create a market system that really gives returns to high productivity rather than to powerful positions. I think Germany has been better able to upgrade its competitiveness and the productivity of its companies, employees and also of the social systems than some of the other European countries. Both things need to happen—having an effective market that really allows people to be productive players in the system is one part and the other part is that you build their ability to be productive. So, you need to invest in skill development and create the right kind of underlying fundamentals. Otherwise if you have an effective market but people don’t have the ability to compete globally, they are still going to be poor. That’s the kind of fear in the global economy and global economy is harsher than it was before. The issue with Google and new technologies is one that I am less sure about. I mean I think you are entirely right that there are new technologies that seem to have huge advantages of scale and so on and one has to think very carefully about this. That being said, that the large companies seem to have a lot of dominance in their individual markets, it is also quite interesting to see how they respond to constant threat and challenge from new entrants. For instance, why Facebook is paying such an enormous amount to Whatsapp—a small start-up, is that they feel threatened. They really think that some entrant like that can erode their position. We as consumers of these new technologies are fickle and we move to new platforms. It’s not quite clear as yet whether these big companies are the monopolies of the future or they are actually contested market leaders. They have to be on their toes all the time because there are new technologies being offered by new entrants, giving more options, challenging larger companies constantly. There are 2 distinct sets of countries. One is the US and countries in Europe and then the rest of the world. They are at different evolutionary phases of development. The struggle with countries like India, Brazil, and China is going on at a more fundamental level. So, where do you think countries like these would have to start? If you look at India and Brazil as examples, the 2 issues that I mentioned, one is the productivity and on the other hand the kind of effective market system that allows productivity to rule – to me it seems that both are very connected. In India and Brazil, the issues of corruption and bureaucracy exist. Strong, entrenched powerful groups are a burden on competitiveness. They lower the productivity of societies. At the same time, they also create market systems where the returns on a given level of productivity of the economy, are not distributed fairly in terms of productivity driven. They are captured by interest groups. And so in that sense the institutional issue is very critical in trying to address this. We are far beyond the answer but are starting to better understand how this happens. The old answer was to say that okay we do see in a country like India the market system does not provide returns that we think are in line with our social objectives and the way we think the societies should look like. So, let’s rein into the market process. The problem is it further erodes your underlying competitiveness and productivity so the cake gets so much smaller and that’s a problem. I would like to bring in the ideas of Hernando de Soto here. Somewhere there is a lot of juxtaposition between your ideas and those of Hernando de Soto who said at one point that it’s about resource allocation, land rights, and so on in terms of how markets are going to be more effective in terms of distribution of resources and creating competition. I think that there is a lot of alignment in both our outlooks. I had the opportunity to meet him in Peru some years back and we had a long dialogue about his model and how it could be scaled and so on. I think he has a great insight and has eluded people from advance economies like myself, simply because we just don’t know about the realities of the emerging and developing economies. I think he pointed out that just because property rights are not formalized in the sense that you know them in the western system of US and Europe does not mean they don’t exist. There are informal property rights in emerging economies and there is informal property actually. The poor do have some assets that are effectively under the economy’s control and if we are able to mobilize that and support these structures that have been created we can do much more. I think an important insight was that you knew better than to substitute the market by government intervention and social policy. We need to bring these people in to the market system and give them a good shot at competing effectively. And that they have property rights are an important element. So, I think you made a huge contribution to the debate and also kind of really changing the self perspective of many people in poor and emerging economies. I think it really points out that you can do it. You are already finding a lot of great solutions to these real problems that you are facing. Where I am a bit more skeptical is whether the focus on property rights is sufficient. Property rights are extremely important but so are many other things like skills, access to capitalism, infrastructure, and so on. There are a lot of things that have to fall in place. We think about this as more of a puzzle and it is true that at different points in the economic development there are certain pieces of the puzzle that are really critical for you to make the next step. But which pieces of the puzzle these are is very context dependent. Do you think it is a smart idea to have certain percentage of your profits go for welfare or towards CSR or has it got to be done in some other way? I am skeptical and my thinking has been hugely influenced by Michael Porter and what I have heard from him. Sometimes people forget about what Porter pointed out about the scalability of these efforts. The problem with efforts that suggest that profit is bad and we should think about social responsibility and feel obligated towards investing in CSR is that they are essentially not scalable. If we want to make a dent into the economic issue of development and address the many social issues that we face in all of our societies we need to find profitable ways to address those. Only then we can come up with enough scalability and I think there are some things basically that government needs to do for public good and we need to look at them differently but for many things we can use market forces. The idea of competitiveness is built on the idea of shared value or social progress. It falls into place if we do it right, but is it going to resolve all the issues that the world faces with regards to prosperity, distribution of wealth etc? Competitiveness is the foundation that really sets the level of value we as a society can generate and is driven by skills, infrastructure and rules and regulations. There is a market system on top that basically sets the context in which people and the companies make the choices and how they leverage those opportunities for productive activity. Shared value – let’s think about how we can make sure that lot of economic activity is serving needs of our society. That goes back to Adam Smith. There are a lot of old patterns at play that most money is for the richest people and that’s where the highest opportunities are. That also requires rethinking in terms of the companies. Companies are profit maximizing machines in the long run, but they don’t always get it right in the short term and that’s where it is becomes very important to have that debate within the business community—to understand the opportunity for shared value and the business case for that as well. Anything else you think we may have missed in this conversation? We need to be careful with terms like capitalism. We should accept that we are starting to understand the problem and can frame it much better today than we could 10 years ago. I am not sure whether we have the solution. In fact a lot of policy changes you see are dominated by the short term macroeconomics problems. This is what people basically are busy dealing with rather than thinking of how the structural things can be put more into shape. We need to accept the scenario more as a challenge rather than a solution that we are touting.

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