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A cycle is coming to a close. The eighth and final year under the command of President Luiz Inácio Lula da Silva kicks off the frenetic race for his successor. And to use the cruel image about customs in Brasília at the end of terms, not even Lula’s incredible popularity shall stop the coffee being served him in 2010 from gradually getting cold over time. Meanwhile, the fawning shall increase every month for the most competitive seekers of the highest office in the nation. Nothing odd there. It is part of the nature of politics to anticipate this shift in power. What is most notable about this year, which has just begun, is the generalized perception that regardless of the voters’ choice, life in the future will be very similar to today. Contracts will be respected. The currency will be preserved. Companies will continue producing. That is the scenario ten out of ten specialists in international finance are working with. More than a mere economic bet, they believe in a qualitative leap by Brazilian society. After being able to separate the political and economic environments, Brazil became much more similar to countries at much higher stages of development. In a world still licking its wounds from the financial crisis, we offer an irresistible combination of stability with growth in an environment of full democracy.
How will Brazil’s economy evolve from now on? All projections indicate a prosperous year with strong growth, one of the most robust in recent times. Throughout 2009, companies from the most diverse sectors reduced production in an attempt to get rid of accumulated stock after eruption of the financial crisis. This cut in production had a price. The GDP fell for two consecutive quarters and will probably close the year null. The good side of this story is that domestic consumption recovered faster than many imagined and at the end 2009 finished better than expected. Thus, 2010 begins with a promising combination: low stock and much demand. That is synonymous with high production. The companies shall operate at a higher than normal pace for this time of year. And that stimulates jobs and investments.
Excitement in the business world should also increase. In that sense, creation of a retail giant encompassing Pão de Açúcar and Casas Bahia can be seen as an indication of the market’s current moment. Mergers and acquisitions, which jumped from 10 billion dollars in 2002 to 95 billion in 2008, fell off greatly in 2009. Volume from January to November was 54 billion. Expectations are now for new growth, even though it may not reach the record levels seen in 2008. Business should also resume in the capital market. IPOs and the offer of shares on the stock exchange, which totaled just over 3 billion dollars in 2004, reached 35 billion in 2007. Volume fell to nearly 20 billion dollars in 2009 and market executives are expecting growth of up to 40% in 2010. Some sectors will benefit more from the reheating of the economy, especially oil and gas. Brazil is already being included in lists of the most promising oil producing countries, to the point of joining Russia, Iraq, Nigeria and Kazakhstan in the recently created acronym Brink that gathers those countries where production is expected to increase over coming years.
Always remembering the inherently unpredictable aspect of human activities, all these projections indicate that 2010 will be a year considered already won by the main economic analysts. Indeed, risk is seen in those problems resulting from success itself. Forces stimulating the economy can be seen from every angle. The government increased spending soon after the crisis, and that spending continues to grow. Consumption by families and companies is growing fast. Investments, which fell in 2009, should at least return to pre-crisis levels. Brazilian products are still in demand around the world. If nothing is done, the country runs the risk of sliding directly into an overheated economic scenario – which leads many analysts to project higher, although moderate, interest rates in the months ahead. In a way, Brazil’s good moment should make explicit those historical problems that were never solved – low savings rates, deplorable infrastructure and lack of skilled labor to sustain growth. A new political cycle is about to begin with the exit, perhaps momentary, of President Lula. Much work will be necessary for his successor to keep the country at recently achieved levels, and we hope take it even higher.
A zero to zero tie is not a result Brazilian fans like to celebrate. But in the field of economics, the fact Brazil went through a year of global financial turbulence without growth became a motive for celebration. After all, that performance is significantly better than what was achieved in past crises and better than many other countries, especially developed ones. Furthermore, indicators show we are on the path to an outstanding victory in 2010. In searching for the reasons for our relative success in 2009, it is curious to observe that items normally associated with the list of national problems - big government, voluntarism of official banks, high interest rates, low credit volumes, small participation by the external sector in the economy - suddenly changed columns and began to be included in the solutions. Nothing can better demonstrate the turnaround in economic ideas than the debate about the State. Today, there is a consensus that Brazil’s good results in 2009 are in part due to State actions, either directly or through its banks. The realization that Brazilians had their personal accounts in relative order was also decisive – light years away from the American sub-prime imbroglio. This equilibrium is not due to frugal habits but rather to the fact that for a long time credit in Brazil has had an exorbitant cost and is scarce. This makes consumers and companies relatively more cautious when using other people’s money. Here, contrary to more advanced countries, the preference is to invest less, but to use one’s own money. This is a strategy that restricts growth – but when the squeeze came, it became a trump card. The country’s exposure to foreign trade risk is also reduced. Since the Brazilian market is still relatively protected, the sum of exports and imports represents less than one-fifth of GDP. In countries like Korea it represents closer to 90%.
Could it be that yesterday’s problems have become today’s solution? In the midst of the euphoria of good economic news, it is best to be cautious about some tortuous or at least hurried conclusions. It is one thing to confront a crisis. And quite another to construct the foundations of a modern economy. Violating this logic leads to the conclusion that traits that became qualities during the crisis deserve to be reinforced now. Therein lies the danger. “It is obvious that the public sector helped, but that vision glorifies our problems," says Alexandre Schwartsman, head economist at Santander bank. “If we put a fat person and a thin person in a situation of starvation, there is no doubt the heavier individual will have greater chances for survival. However, no doctor would ever recommend you get fat in order to prevent death from lack of food.” If the government’s action worked in current circumstances, it is also a fact that before it was a great hindrance – and it will continue to be one in the future. Wouldn’t the country be better off if it had grown more vigorously in the past, which would have been possible if companies and workers were not so overburdened by the government's weight?
Another wrong conclusion that must be avoided is that opening the economy is bad. “A closed market is a two-edged knife,” says English economist John Williamson, creator of the term Washington Consensus for the set of stabilization measures recommended for Latin American countries. “The country is less inclined to suffer the impacts of an economic crisis, but it has a hard time taking advantage of the good times." This has already become clear with the growth capacity demonstrated by the most open Asian economies. The fact that for one or two years, they will suffer more than Brazil would not justify throwing their winning policies for decades in the trash. Having a strong domestic market – that indeed being an attribute for Brazil that made a difference and deserves being stimulated – is one thing. Turning your back on the world is a whole other ball game. In this regard, as in others, it is best to be careful to not reach wrong conclusions.
Mathematics is becoming more and more diffused in the economy. Let it be known: at the right time, between adults and when in mutual agreement, I also use mathematics. There are both good and bad reasons for using it at the service of the economy. It’s just that thus far the bad prevail. That would have much importance if policy formulators did not take the economy so seriously. Practically none of them care about the insanities of literary theory, for example. But the economy is important, and in the frontiers of the subject a subtle yet profound change is taking place. The economy is becoming more realistic, enrooted in institutions, history, the real world, and consequently more useful. Actually, that is how economics began. At the time, it was not called "economics”, but rather “political economy”, symbolizing the fact that economies do not exist independently from political systems and institutions.
Adam Smith founded the subject of economics nearly 200 years ago, all by himself, and his influence is great until today. But his seminal book, The Wealth of Nations, does not contain a single equation. Instead, Smith employs carefully constructed arguments supported by a profusion of historical evidence. English stockbroker David Ricardo, author of The Principles of Political Economy and Taxation (1817), is less known, but the standard economic theory of trade is still based on his work. More than a century later, two extreme opposites in the political spectrum made broad-reaching contributions to economics. John Maynard Keynes studied mathematics in Cambridge and then switched to economics. Friedrick Hayek, the intellectual inspiration for Thatcherism, had deep insights in psychology and economics as well. Ricardo, Keynes, Hayek and several other key figures deliberately avoided mathematics. They preferred the use of pondered arguments founded on evidence.
So then, how did mathematics become so present in the economy when so much was achieved without it? The worst reason is that the use of mathematics makes economists feel like veritable scientists. They are “jealous of physics”. Physicists use mathematics (try to do quantum physics only using words) and they are real scientists who actually explain how a number of things work. So, if we use mathematics that will make us true scientists, right? Well, the logical error in this last statement is quite obvious. But it does not impede the intimate satisfaction most economists feel when they cover the page with mathematical symbols.
There is a more serious and more harmful reason for using mathematics, at least a specific type of mathematics, in economics. It is inextricably tied to the concept of the “economic man”. Economics is basically a theory based on human behavior. And the standard story not only assumes that individuals are moved by their own interests, but that they also behave like some sort of supercomputer – always gathering every piece of information needed for a decision. These individuals then make the best decision possible based on available options. Not only a good decision, but the best one. Or, as economists like to say, optimal.
This is still the basis for teaching economics in the university. But paradoxically, it was precisely the use of mathematics in economics that undermined this vision of the world. It is also one of the reasons why the subject is advancing so dramatically. Mathematics can be very useful in economics as long as we think of it as another tool among others. It is a tool that can help us in logical thought. It is like another language – it can help us find our way.
But pioneers, like 2001 Nobel winners George Akerlof and Joseph Stiglitz, advanced the theme in the 1970s. They realized that something else was necessary, so they abandoned the idea that people have perfect information when making decisions. They developed the concept of “limited rationality”: although we may try to make the best decision, we may not be able to due to a lack of vital information. Thus, in a world of limited rationality, people who delight in unhealthy foods or who smoke heavily are not necessarily seen as making the best possible decision. Akerlof’s and Stiglitz’s work represented a huge step towards making economics more realistic.
Daniel Kahneman and Vernon Smith, 2002 Nobel winners, took even bigger steps forward. They actually entered the real world and conducted experiments to see how people truly behave. Observing and deducing like real scientists! They discovered that people normally do not behave like the economic man. In his speech at the Nobel ceremony, Kahneman affirmed: “The core characteristic of agents (people) is not that they reason poorly, but that they frequently act intuitively. And the agents’ behavior is not guided by what they are able to compute, but rather by what they see at a given moment.”
In other words, the concept of a rational, calculating, economic man is being abandoned. The theory of the economic man postulates that people have all important information for making decisions. In this new approach, people have, at best, imperfect information. They move forward, awkwardly trying to make rational decisions, successfully at times, but often failing. The new approaches that arose to replace the economic man perhaps surprisingly made economics much harder. Rather than simply manipulate a few equations, we need to think of relevant rules of behavior. And we need to recover the importance of institutions and history. In short, we need to recover the idea of political economy using a completely modern perspective. Friederick Hayek is not trusted by many, but there is a profound truth in his observation that: “An economist who is only an economist cannot be a good economist.”
All this makes economics humbler. Rather than intending to pass as a completely general theory of behavior – applicable to all people, all the time and everywhere – economics is now much less pompous. But, as a last resort, these changes will make the subject more realistic. And potentially more powerful as a force to help understand and improve the human condition.
British economist Paul Ormerod is the author of Death of Economics, among other books. Originally published by AdBusters.org
International relations scholars have already given their verdict: 2009 was definitely the year of the G20, the group that gathers the world’s rich nations and the emerging ones, like Brazil, China and India. But that does not mean it will be the configuration of global power that will remain in place in 2010 and coming years. Everything indicates that in the near future the planet's aspirations will not be under control of a group of nations, but rather of the G2: United States and China. The most recent proof of this was given at the end of 2009, during the two week UN conference on climate, held in Copenhagen. The event at the Danish capital gathered nearly 40,000 people and more than 120 heads of state and government. Despite this diversity in leadership, all eyes were on every move made by those two countries. After all, any plan to combat global warming is useless if the two biggest economies on the planet - and the two biggest emitters of greenhouse gases - do not want to participate.
During the two weeks of the COP15, the United States and China were at the center of discussions the whole time, as expected. But the firm attitude by Chinese negotiators is what left many of the meeting’s participants and observers surprised. China, which in 2010 should become the second biggest economy in the world (and which is already the biggest emitter of CO2 on the planet in absolute terms), decided to assume its role as a leading player in international politics. This became very clear at the start of the conference. From the outset, the Chinese delegation presented itself as the voice for the G77, the group of almost 150 poor and emerging countries. The country’s negotiators showed conviction in adopting a discourse in defense of the weak and oppressed. The Chinese made it clear that the price to combat global warming cannot mean the creation of obstacles to the economic development of these countries.
It was also not possible to dissuade the country from opposing a global system for verifying compliance with goals, one of the key demands made by American president, Barack Obama, during his visit on the last day of the conference. The American discourse was based on a rendering of accounts. But specialists made a different reading. The United States is not concerned about what Brazilians, Indonesians or Indians will do. “China is the big concern,” says Nathan E. Hultman, professor of the School of Public Policies at the University of Maryland and member of the Brookings Institution, a renowned American research institute. “Obama must be able to tell the citizens of the United States that the Chinese economy is also making sacrifices. Otherwise, no deal.” This arm wrestling match observed by the entire world, the reason many believe to be one of the main motives for failing to reach the agreement expected in Copenhagen, leaves no doubt as to the new balance of power at the beginning of this millennium.
Well-founded justifications for this American fear are not new. No other country has such a strong desire to grow as China. The country has 650 million cell phone handsets, more than twice the entire American population. It has passed the United States in the market that for more than a century was synonymous with its dynamism: the automobile. The Chinese export machine permitted an accumulation of more than 2 trillion dollars in foreign reserves. Today, the Asian dictatorship is the main creditor of the United States. Now, in face of the world’s need to convert to a low carbon economy, there are signs it may be China’s turn to take the forefront. The country not only decided to create a green energy grid – which is still powered by coal, and thus predominantly dirty - but it will also become the world’s largest exporter of clean technologies. In most countries, there tends to be a reasonable period between making a decision and its execution. In communist China, this interval is much shorter. Five years ago, 80% of all wind turbines installed in the country were produced abroad. Today, domestic manufacturers account for 75% of this demand.
At least publicly, the United States, and most especially China, rejects the idea of a world governed by the G2. The Chinese affirm they do not intend to reform the world or stick their noses in others' business. However, the Chinese do not deny that all their actions are guided by a single principle: grow their GDP. And the nature of this pragmatism is enough to make the solution of any global dilemma from now on, as occurred in Copenhagen, go through this delicate ballet between these two countries.
The web celebrated its 20th anniversary in 2009, and during its first years of life we saw a web that was the product of human beings. Personal pages, e-commerce stores, company and government sites, social networks. Over the next 20 years, the human being will be left behind on the Internet. But we are not talking about a somber future, of human submission to the machine. Quite the contrary. It is a statement: sensors are growing in number all around us. They are in new electric energy infrastructures (smart grids), in sensors installed in industrial equipment and in telecommunications networks. And they are not only chips: cameras film streets and roads 24 hours per day, security systems monitor homes and companies. Many are already connected and many others are going to plug into the web creating a new and extremely valuable collection of information that will merge with the Internet we know and transform it forever. “The web’s opportunity is no longer growing arithmetically. It is growing exponentially,” wrote John Batelle and Tim O’Reilly, gurus of Silicon Valley, who coined the term web 2.0 in a recent article. “The match was scratched between 1999 and 2004. The fuse was lit between 2005 and 2009. In 2010, we will have the explosion.”
This “Internet of things” is not in the distant future and proof of this is probably in your pocket right now. Smartphones, cell phones with the technological sophistication of desk-top computers of five years ago, are the most visible face of this coming revolution. Many of the new handsets have built-in GPS chips. They can transmit the owner’s location to friends and family in real time, all the time. They can also add precise location information to photos taken with the handset. These georeferencing coordinates also work in the inverse direction. Those who use the Google application on their iPhone, for example, can opt to receive the most appropriate search results for their location. Do you want to know where the nearest Italian restaurant is? The answer will be given by the Internet giant’s database - with the help of your Smartphone’s GPS. Do you want to know more about a bottle of wine on the supermarket shelf? Simply take a picture of the label and send it to a web service. The answer will have opinions from other oenophiles, as well as a price comparison: a store two blocks away has the same bottle, but 20% cheaper.
Machines will also start talking to each other – and, with the help of large computer systems, information from that dialogue will be processed and translated into benefits for humans. The first big step will be taken with electric smart grids, one of the main investments in 2010. Old analogic meters will be gradually replaced with digital systems, connected by Internet with the power supplier. On one hand, this will permit more control by power companies. Today, they depend on customer complaints to learn when supply has been interrupted on a street. With smart grids, this warning will be triggered automatically. For the consumer, the initial benefit will be seen in the bills. With more precise information about consumption peak periods, power companies can offer differentiated prices according to the time of day. Household appliances with chips represent a second phase. Processor and wireless communication radio prices will fall sharply. An estimate projects that before the end of the next decade there will be one thousand objects equipped with chips and wireless communication systems for each person on the planet. The electric bill will probably cease to exist. There will be a control panel in its place, available in real time on the web, showing which devices consume the most electricity and the most convenient time – that is, the cheapest time – to turn on the dishwasher, for example.
The Internet of things could also improve traffic. There are already car navigation systems that transmit information in real time concerning traffic. They give a trustworthy indication of traffic conditions on a map. Health is getting ready for a revolution. Remote monitoring systems of patients will transmit data in real time. We are just beginning to glimpse the benefits of having the world of humans - and of things – connected by the web.
More than 40 years ago, when computers were only seen in universities and large companies, Gordon Moore, president of Intel, a little known company at the time, made a prediction for the technology sector. He said the processing capacity of chips would double every 18 months, more or less. From time to time, this would permit creating equipment that was twice as powerful for the same price. This theory became known as Moore’s Law and its consequences can be seen everywhere today. There are now billions of PCs and cell phones. The omnipresence of today’s computer power touches almost every aspect of our lives. However, there is a notable exception: health care. The expectation is for Moore’s Law to finally begin to change medicine in 2010. The combination of cheaper and ever more powerful chips, circuits, equipment and software will revolutionize diagnostics, exams and treatments, bringing medicine into the true digital era.
The first evidence of these technological transformations appeared in 2009 with preventive medicine, especially in genetic research. American startup, Complete Genomics was able to reach the lowest price in history for complete sequencing of human DNA: 4,400 dollars. In 2003, when such sequencing began, it cost hundreds of millions of dollars. Knowing the genetic composition of an individual is especially important because it permits identifying the predisposition to certain diseases with greater precision and it generates information for creating new medication. “This drop in prices was possible thanks to a combination of chemical reagents with software capable of analyzing more information in less time,” says Clifford Reid, president of the company. Complete Genomics was founded just three years ago and its main clients include pharmaceutical laboratories, universities and research centers. In 2010, the company expects to examine 10,000 DNA samples. “New technologies and scale will reduce the exam’s price every year. A complete genomic evaluation of an individual will soon be as common as a blood test,” says Reid.
Use of technology in medicine is not new as seen in the advances of image diagnostics, for example. The frontier that still needs to be conquered is the mass creation of effective and low cost treatments thanks to evolving and cheaper technology. Numbers reveal that this is a real need. It is estimated that today 70 billion dollars are spent every year in the United States on hospital stays or treatments that have no effect. This contributes to the increase in annual spending by Americans on health care to 2.2 trillion dollars. “No one ever questioned the cost of procedures because they are hidden in the generic information of health plans. The time has come to ask why technology does not lead to better, faster and cheaper treatment," said Andy Grove, one of Intel’s founders and today, at 73, coordinator of the recently created bioengineering program at University of California, in Berkeley. The course projects preparing engineers to understand medical issues, such as anatomy and cell biology, and training doctors in project management, process engineering and even patent legislation. Grove believes the task of truly taking the benefits of technology to medicine is in the hands of these professionals.
The expectation is for patients to soon begin to see many of the projects born in universities and research centers at doctors’ offices, laboratories and hospitals – although it is improbable that the adoption of new technologies will occur simultaneously in every region of the world. Some innovations include a chip that diagnoses diseases in just 15 minutes by analyzing a single drop of blood. Another innovation, developed at Harvard University, identifies sick cells by chemical processes, waiving the use of microscopes or laser systems. These first assays, which are gradually spreading beyond academia, will also dictate the paths of telemedicine with the growing use of exam analysis by specialists in another city (or even another country) and the use of sensors to collect patients’ vital signs and permit detailed and remote monitoring by doctors. For example, it will become more and more common to have tests run in the United States being evaluated by medical teams in India. “Medical sciences and technological advances are converging towards a growing emphasis on health, well-being and prevention," said David Levy, leader of the health area at PricewaterhouseCoopers recently. Answers as to when advanced and cheap techniques will become commonplace are yet to come. But as occurred in the computer market, medicine will have a hard time maintaining its traditional format. For the good of all.
DNA: The price of genetic sequencing is falling fast
The decade coming to a close was devastating for the recording industry: digital piracy in rich countries, and physical piracy in emerging ones, has transformed one of the biggest businesses of the 20th Century into an omen of the inevitable tragedy that would afflict movie studios, publishing houses and newspapers. Here is the far from subtle message behind the revolution of digital music: if your product is essentially made of ideas materialized on rolls of film, plastic, silver disks or sheets of paper, the Internet shall devour you. However, at the threshold to 2010, the storyline is getting a little clearer – and a little less bloody. It is true that information will be increasingly more digitalized and the best way to deliver these bits is the Internet. This dematerialization is already a reality for companies that produce content. But the new fact is technology is finally beginning to be understood and sustainable business models are appearing here and there.
One of the biggest symbols of this second wave of digital content is the electronic book. Others came before it, but Kindle, recently launched by retail giant Amazon two years ago, was the first to offer the complete package: a screen with good legibility and a large collection of titles that can be bought directly from the device without using a computer. Kindle is the most sold product among Amazon’s tens of thousands of offers, and its success led to the appearance of a series of competitors. Some publishing houses are reticent; after all, electronic versions are cheaper. Some plan on only launching novelties in digital versions a few months after release of the paper editions. But it be will difficult to ignore an estimated base of 10 million units already in 2010, which, it must be pointed out, will be comprised of the publishing houses most loyal consumers. Newspapers, especially in the United States, most hit by the decline in readers and revenues, recently announced a consortium to create an integrated system (reader and sales) for both newspapers and magazines.
Signs are also encouraging in the area of digital music. Record sales are still far from the golden 1990s and they will probably never go back up again. But if records are almost dead, making money with music seems to be feasible again. Apple, with its virtual iTunes store, is the biggest seller of MP3 in the world. But attention is now being directed to a new business model. Hard disks and iPods full of files could soon see the same destination as CDs and vinyl records. Services that offer songs through streaming, that is, without the need for downloading, are gaining popularity. On sites like Pandora, Spotify, Mog and Sonora (Terra portal), a huge selection of songs can be enjoyed. Advertisers foot the bill and a share is passed on to owners of original recordings and artists. The biggest unknown currently seems to be what the large movie studios are going to do. Sales of movies in Blue-Ray format are growing, but the promise of offering a library with tens of thousands of titles through an immediately accessible online service seems much more promising. The Internet tsunami may have shaken the walls and torn off the roof of content producing companies - but reconstruction has already begun.
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