One of the key economic questions facing industrialized nations such as Canada is: Can we ever sell enough to the low-income consumers of the developing world to make up for the manufacturing base that we’ve lost to them?

A recent article on Procter & Gamble (or P&G as it’s now known) at Fortune.com offers some reassuring news on this front. The Cincinnati-based consumer-products giant has launched a campaign targeting the $2-a-day consumer, and its researchers are touring the globe to find out how people in developing countries use personal-care products.

In China, for instance, three P&G executives and scientists trekked to a tiny village to watch a young potato farmer wash her long black hair – using no more than three cups of water. From the jungles of Brazil to the slums of India, the $80-billion company is now searching for new-product ideas that will help it serve 800 million new consumers by 2015.

Probably the biggest lesson the researchers have learned is that it doesn’t matter how much money they have: even the poorest consumers want to look better and feel younger. Fortune quotes Cindy Graulty, a scientist heading up P&G’s $2-a-day initiative, who maintains, “It’s a myth to say poor people only want function. They care about beauty. Just like us.”

P&G’s crusade speaks to the potential of globalization: the creation of custom consumer goods to meet the new needs of poorer people slowly clambering up the development ladder. While few Canadian companies may wish to compete in the soap, toothpaste and shampoo markets, P&G’s initiative demonstrates the numerous opportunities available from marketing to what used to be called the “third world.” Canada’s expertise in construction, design, home-building, telecom, and food production could all find new markets in these developing countries – if Canadian entrepreneurs head up similar initiatives and shoulder the same type of commitment as the makers of Head & Shoulders.

For a brave new view of the future of the global economy, read the original Fortune article at http://tinyurl.com/23q5cfx.

As business markets are becoming increasingly globalized, it is important for managers to communicate effectively with their partners from other cultures when negotiating business contracts. A new research paper from Richard Ivey School of Business helps firms to better understand their international business dealings and encourage more business worldwide.

Dina Ribbink, professor of operations management at Ivey Business School in London, Ont., cites in her research that cultural differences can affect written contracts in international business settings. For instance, international contracts tend to include more detail and clauses as cultural distance increases between the two negotiating parties. Ribbink’s findings are consistent along the cultural-distance continuum.
Although most managers generally understand the importance of cultural differences in negotiations, they are not always aware that these differences play out in contract-writing as well. “It is something that managers need to take into account when dealing internationally,” says Ribbink.

Ribbink suggests that managers should standardize their contracts within each culture to reflect distinct differences for each international firm. Using Asia as an example: “Managers shouldn’t use the same contract with a party in Asia as they would in their own country,” Ribbink says. “Because an Asian party might understand the contract differently or not understand it completely, additional clauses might be needed.”

At the same time, Ribbink points out that it is important for managers to incorporate flexibility into their international contracts. Both standardization and flexibility are tools that managers should make use of during contract negotiations with firms from other cultures.

Details of the research were released in the March edition of Impact, an online monthly publication featuring research from faculty at the Richard Ivey School of Business.

By Phil Griffiths, CIBC Global Transaction Banking

Canada is an export nation and globalization is a common word in the business community with foreign trade responsible for about 45% of Canada’s GDP. In fact, we all compete globally, knowingly or not, simply because the labour and supply markets no longer have international borders.

Becoming actively involved in international trade can help a business in many ways such as finding less expensive suppliers, increasing sales, stabilizing seasonal or cyclical market fluctuations, and/or reducing dependencies on existing markets and suppliers. However, the benefits are usually accompanied by additional costs for travel, developing new promotional materials, or adapting a product to meet the needs of a new market and shipping.

There are many things that you can do when you’re ready to start expanding globally or when you already export and are looking for support:

Familiarize yourself with the local market through personal or business visits. Be prepared to hire agents, set up join ventures with local partners or establish your own office on the ground.

Research your markets and know your plans before visiting.

Invite your foreign customers to visit Canada and view your operations here. It will go a long way toward building a strong relationship.

Communicate with International Trade Canada, Industry Canada and Export Development Canada, as well as your professional advisors: your law firm, your accounting firm and your bank.

Hire staff with local language skills. Don’t depend on translators from your customers.

Get to know the region’s many markets as they may offer varying opportunities and risks.

Be flexible – Canadian business practices or made-for-Canada products, systems or services may need to be adapted to succeed in other markets.

Adopt a long-term view – business results may take time to materialize.

To help you expand, there are also a number of export and trade resources available, including:

Export Development Canada (EDC) – Canada’s official Export Credit Agency providing trade finance and risk management services to Canadian exporters and their financial institution to support incremental export growth in markets worldwide.

Business Development Bank of Canada (BDC) – Specializing in small and medium-sized enterprises, BDC offers financing, consulting services, subordinate financing and venture capital.

Canadian Manufacturers and Exporters (CME) – With a mandate to promote the competitiveness of Canadian manufacturers and the success of Canada’s goods and services exporters in markets around the world, CME is Canada’s largest industry and trade association.

Chambers of commerce, consulates, embassies, foreign trade ministries and the World Trade Centers Association, as well as foreign and domestic industry associations are excellent sources of information for export mailing lists, trade lists, import-export statistics, and funding or insurance programs.

While the prospect of expanding to global markets can be intimidating, there are many resources available to help companies expand with confidence.

Phil Griffiths, Senior Vice-President, CIBC Global Transaction Banking

CIBC Global Transaction Banking, including both Trade Finance and Correspondent Banking services, works with companies to facilitate and grow their trade activities globally. For more information, visit our website. This article is for general information only and is not intended to provide legal, tax or investment advice; individuals should consult their own advisors concerning their particular situation. Information has been obtained from sources believed to be reliable, but the author makes no representation of accuracy or completeness.

By Phil Griffiths, CIBC Global Transaction Banking

Canada is an export nation and globalization is a common word in the business community with foreign trade responsible for about 45% of Canada’s GDP. In fact, we all compete globally, knowingly or not, simply because the labour and supply markets no longer have international borders.

Becoming actively involved in international trade can help a business in many ways such as finding less expensive suppliers, increasing sales, stabilizing seasonal or cyclical market fluctuations, and/or reducing dependencies on existing markets and suppliers. However, the benefits are usually accompanied by additional costs for travel, developing new promotional materials, or adapting a product to meet the needs of a new market and shipping.

There are many things that you can do when you’re ready to start expanding globally or when you already export and are looking for support:

Familiarize yourself with the local market through personal or business visits. Be prepared to hire agents, set up join ventures with local partners or establish your own office on the ground.

Research your markets and know your plans before visiting.

Invite your foreign customers to visit Canada and view your operations here. It will go a long way toward building a strong relationship.

Communicate with International Trade Canada, Industry Canada and Export Development Canada, as well as your professional advisors: your law firm, your accounting firm and your bank.

Hire staff with local language skills. Don’t depend on translators from your customers.

Get to know the region’s many markets as they may offer varying opportunities and risks.

Be flexible – Canadian business practices or made-for-Canada products, systems or services may need to be adapted to succeed in other markets.

Adopt a long-term view – business results may take time to materialize.

To help you expand, there are also a number of export and trade resources available, including:

Export Development Canada (EDC) – Canada’s official Export Credit Agency providing trade finance and risk management services to Canadian exporters and their financial institution to support incremental export growth in markets worldwide.

Business Development Bank of Canada (BDC) – Specializing in small and medium-sized enterprises, BDC offers financing, consulting services, subordinate financing and venture capital.

Canadian Manufacturers and Exporters (CME) – With a mandate to promote the competitiveness of Canadian manufacturers and the success of Canada’s goods and services exporters in markets around the world, CME is Canada’s largest industry and trade association.

Chambers of commerce, consulates, embassies, foreign trade ministries and the World Trade Centers Association, as well as foreign and domestic industry associations are excellent sources of information for export mailing lists, trade lists, import-export statistics, and funding or insurance programs.

While the prospect of expanding to global markets can be intimidating, there are many resources available to help companies expand with confidence.

Phil Griffiths, Senior Vice-President, CIBC Global Transaction Banking

CIBC Global Transaction Banking, including both Trade Finance and Correspondent Banking services, works with companies to facilitate and grow their trade activities globally. For more information, visit our website. This article is for general information only and is not intended to provide legal, tax or investment advice; individuals should consult their own advisors concerning their particular situation. Information has been obtained from sources believed to be reliable, but the author makes no representation of accuracy or completeness.

By Phil Griffiths, CIBC Global Transaction Banking

By the time companies have selected the market they want to enter, as a first step they should have already assessed the demographics, geographic factors, economic picture and political climate. At the same time, they should be looking at the shipping distance and distribution capabilities, communication network, convertibility of local currency, and any potential quotas or tariffs.

In addition to the various social, political and cultural factors, companies need to be familiar with the common terms of sale used in contracts that cover international trade. These could be payment terms, warranties or inspections of goods. Other considerations include protecting intellectual property rights if the company has patents, trademarks or copyrights.

Options to help mitigate risk

While expanding globally has many benefits, like any business venture there are also risks. One of the primary concerns of exporters when entering an overseas market is to be paid in full and on time. The buyer risk can be mitigated through a selection of “safer” trade instruments, such as:

Payment in advance – This is the most advantageous for an exporter and is often seen in contracts where the manufacturing process is specialized, lengthy or capital intensive and requires partial or progress payments.

Letters of Credit (LC) – A letter of credit is an internationally recognized instrument issued by a bank on behalf of its client, the purchaser. The LC represents the bank’s obligation to pay the seller, provided the conditions specified in the instrument itself are fulfilled.

Documentary Collection – Documentary collections involve the use of a draft drawn by the seller on the buyer, requiring the buyer to pay the face amount either on sight (sight draft) or on a specified date in the future (time draft). The draft is an unconditional order to make such payment in accordance with its terms which specify the documents needed before title to the goods will be passed.

Open account – While the least costly in terms of bank fees, this is the least advantageous option for exporters as it means that payment is due after the goods are manufactured and delivered.

When it comes to selecting the best suited international payment instruments and terms, there are pros and cons for each one and the choice depends on a company’s risk tolerance and overall knowledge and experience in foreign markets and with foreign buyers. In essence, while global markets present both challenges and opportunities, the benefits of global expansion are considered to be substantial.

Phil Griffiths, Senior Vice-President, CIBC Global Transaction Banking

CIBC Global Transaction Banking, including both Trade Finance and Correspondent Banking services, works with companies to facilitate and grow their trade activities globally. For more information, visit our website. This article is for general information only and is not intended to provide legal, tax or investment advice; individuals should consult their own advisors concerning their particular situation. Information has been obtained from sources believed to be reliable, but the author makes no representation of accuracy or completeness

By Ben Hirschler

LONDON – A backlash against rising inequality – evident from the Occupy movement to the Arab Spring – risks derailing the advance of globalization and represents a threat to economies worldwide, according to the World Economic Forum.

Severe income disparity and precarious government finances rank as the biggest economic threats facing the world, according to the group’s 2012 Global Risks report released on Wednesday.

The 60-page analysis of 50 risks over the next decade precedes the World Economic Forum’s (WEF) annual meeting in two weeks’ time in the Swiss ski resort of Davos, and paints a bleak picture of an increasingly uncertain world.

Over the past four decades, Davos, which brings together politicians, central bankers and business leaders, has become a byword for globalization. Now confidence about the steady gains from the onward march of the global marketplace is faltering.

Rising youth unemployment, a retirement crisis among pensioners dependent on debt-burdened states and a yawning wealth gap have sown the “seeds of dystopia,” according to the report, based on a survey of 469 experts and industry leaders.

For the first time in generations, people no longer believe their children will grow up to have a better standard of living.

“It needs immediate political attention, otherwise the political rhetoric that responds to this social unease will involve nationalism, protectionism and rolling back the globalization process,” said Lee Howell, the WEF managing director responsible for the report.

The unsustainable level of government debt in many countries had already been highlighted as a top threat in the previous two WEF risk reports but the chronic nature of fiscal deficits means the issue remains centre stage.

“We’re seeing governments kicking the can down the road and not trying to get their hands on it,” Howell said.

Since last January, the eurozone’s debt crisis has spread and deepened – toppling governments in Greece and Italy – while the United States has lost its triple-A credit rating, after failing to stabilize its debt position.

There will be a greater focus than ever in Davos this year on the failures of the modern market economy, including discussion on the uncertain future of capitalism, a subject that would have got short shrift in the years before the financial crisis.

HACK ATTACK

In an increasingly interconnected world, the WEF report also highlights the risks posed by cyberattacks against individuals, corporations and nations.

“The Arab Spring demonstrated the power of interconnected communications services to drive personal freedom, yet the same technology facilitated riots in London,” said Steve Wilson, chief risk officer for general insurance at Zurich Financial Services.

U.S. President Barack Obama’s defense strategy this month showed cyber warfare to be a growing focus for governments, while companies got a wake-up call last April when hackers stole Sony Playstation online data for millions of users.

“It’s completely mind-boggling how complex the world is becoming and it is hard to understand the risks that come from that,” Mr. Wilson said.

Other threats identified in the 2012 report include the risk that financial and other regulatory systems designed to safeguard the modern world may no longer be up to the job, as well as rising greenhouse gas emissions and looming water shortages.

Governments and corporations must also stay abreast of a host of “X” factors – emerging concerns with still unknown consequences – such as the risk of a volcanic winter or a major accident involving new technology, such as genetically modified organisms or nanotechnology.

© Thomson Reuters 2012

For Ottawa-based federal civil servant Edie Clark, picking assets for her RRSP is a yearly ordeal. “I want safety and I want to make some money,” she says.  “For any money that I put into my account, I spread my bets. I have used stock index funds and bond funds and I leave some of my money in cash. What I hope is that spreading my money out will give me some downside protection.”

Ms. Clark is on the right track, for diversification is the instinctive way to avoid getting injured if one company dies (think of Nortel Networks) or a whole sector flops (remember dot coms?). “It is the fundamental  way to control losses,” says Graeme Egan, a portfolio manager with KCM Wealth Management Inc. in Vancouver.  It has to be done with focus on risks to be controlled, he adds.

“Spreading risk among different asset classes, which would be bonds and stocks and real estate and commodities, is the essence of the concept,” he explains. “Diversification can also spread risk among countries. You can also use time diversification to structure fixed income assets like bonds to pay off at different moments and with different interest rates for each period of time.”

Risk spreading means that you are not trying to time any sector or even the market itself, Mr. Egan says. “Timing is one of the most difficult tasks. You can follow trends, but things change either because the trend fizzles or there are unexpected events like the tsunami that destroyed nuclear reactors in Japan and wrecked the share prices of Canadian uranium companies. The European debt crisis that has driven down the value of existing sovereign bonds in Greece, Spain, Portugal, Italy and other countries. Even if you knew about the problems in a general way, timing tidal waves or the rise and fall of investor confidence would have been impossible.” The concept of diversification is really a recognition both that one cannot predict the future and that asset classes usually do not move in perfect co-ordination. “The idea is really to march out of step most of the time. If all of your assets move up at the same time, that’s not necessarily good. It is a sign that you are not adequately diversified,” Mr. Egan notes.

In the last few years, asset classes including currencies and commodities, have become more correlated, says Nigel Roberts, a chartered financial analyst who heads Bluenose Investment Management Inc. in Oyama, B.C.

“When a country is in trouble – think of Greece – then everything goes on sale. As liquidity dries up, people are forced to sell, no matter what the asset class and no matter how good the asset.”

Country diversification does not work as well as it used to because major world markets tend to follow each other, says Sal Pellettieri, a former hedge fund manager and now private investor in Winnipeg.

“Globalization has welded markets together. It is easy for money to flow from one market to another, so that investors can take a rising trend on the New York Stock Exchange and play it in London.”

In place of geographic diversification, said Mr. Pellettieri, investors can spread their money among sectors or even small cap vs. large cap stocks in the expectation that different characteristics of stocks and balance sheets can allow stocks to move out of synch.

That’s why, in seeking diversification, markets have to be seen in broad terms. Not just conventional financial assets like cash, stocks and bonds, but cash and real assets like property and agricultural futures and even ephemeral assets like collectibles. The test has to be one’s knowledge and comfort level with the asset class and the ability to buy and manage assets in each class economically and effectively.

It is impossible to be expert in every market and asset class. But RRSP-eligible investments make it relatively easy. For example, one can buy a selection of dozens of world stock markets in several global ETFs that track the Morgan Stanley Capital International Index. In Canada, balanced funds combine stocks and bonds, allowing managers to juggle their mixes – usually 30% to 40% bonds and 60% to 70% stocks.  An investor can do the same thing by paring a stock ETF with a bond ETF in a 60/40 ratio that will tend to have fees an eighth to a tenth of those of the managed balanced fund.

In RRSPs, which are by definition homes for money for periods of a few years to a few decades, investors need to take a long view. The concept is to spread money with an acceptable cost of managing oneself or of having others manage assets and a bearable level of volatility in each asset class. Mutual funds and most exchange traded funds spread the risks of picking stocks, bonds, commodities and even real estate. Multinational mutual funds and ETFs spread country risk. Bond funds and ETFs spread bond time and default risk.

Time is the critical issue for RRSPs. The investor committed to diversification has to use patience, or increase cash in accounts so that effect of downturns in other asset classes wreak less havoc. The problem is that, if the investor chooses to have a very high level of cash, say anything over 40% to 50%, he is moving away from diversification into commitment to one asset class, cash in this case. Diversification in the end is a philosophy. Deviation from it can only add to the risk one seeks to avoid.

When it comes to monopolistic protection, no one does it better than the legal profession.

As businesses expand internationally, so also does the demand for transnational legal services. However, although there is a lot of talk of business globalization, law societies are less fervent about importing foreign lawyers on to their turf. Their reluctance is premised on the theory that legal fees are a zero sum game and that monopolies create larger incomes.

On the supply side, the accreditation of foreign trained lawyers to practice is a patchwork of nationalist, monopolistic and regulatory rules. To be sure, regulatory bodies that admit lawyers to practice must protect consumers of legal services. In doing so, however, they should not create artificially high barriers to entry under the guise of “public interest.”

There are essentially four basic forms of accreditation systems: statutory regimes; country of origin systems; court controlled admission standards; and competence-based assessments.

Statutory systems are simplest and usually exclusionary. India and Brazil, for example, effectively exclude all foreign lawyers from practicing law in their jurisdictions. Section 24 of the Indian Advocates Act requires lawyers who wish to be enrolled at the bar to be Indian citizens and have a law degree from an Indian law school.

Country of origin systems can be facilitative or restrictive. The United Kingdom uses the country of origin approach for European Union lawyers and allows them to practise in England and Wales under certain conditions. This seemingly liberal approach was not designed by the legal regulator, but imposed on it as an unintended consequence of the Treaty, which provides for the mobility of all services – from waitressing to hairdressing – within the EU.

The Law Society of England and Wales admits non-EU “foreign” lawyers to practice if they successfully complete a number of examinations. The number of exams depends upon the foreign lawyer’s country of origin. For example, an Ontario lawyer can be admitted as a solicitor in England by writing a test in Professional Conduct and Accounts. This is in marked contrast to the admission of U.K. solicitors into Canada, who must write five or more examinations.

Prior to 1977, Canadian provinces used country of origin and citizenship rules to admit lawyers. Lawyers from the white Commonwealth – United Kingdom, South Africa, Australia and New Zealand – could transfer easily into the law societies of most Canadian provinces, except Quebec. Lawyers from other countries faced significant barriers to admission.

Some jurisdictions – for example, New York – control rights of legal practice through their courts. New York requires a degree from an approved American Bar Association (or other approved) law school and successful completion of the state bar examinations. The New York model does not distinguish applicants by their county of origin or citizenship.

It is not entirely coincidental that the most restrictive admission policies for foreign lawyers are in the world’s largest and fastest-growing BRIC economies – Brazil, Russia, India and China. China is expected to overtake the United States as the world’s largest national economy by 2030. India is expected to replace Japan in third place. Both are magnets for legal services.

Some lawyers overcome the international restrictions by practicing on a “fly in, fly out” – or FIFO – basis. Others set up shop in the foreign country in collaboration with local counsel. However, India prohibits foreign lawyers from setting up shop in the country and it is unclear whether they can operate even on a FIFO basis. Thus, foreign lawyers conduct business in India through their offices in Singapore and Dubai.

A “competence assessment” model evaluates foreign law qualifications to determine whether the person is competent in the laws of the host country. The regulatory body establishes an academic or examination regime to facilitate the requisite transfer of skills in areas of deficiency.

Canada uses a competence-based system to evaluate foreign law degrees and rights of practice. The Federation of Law Societies of Canada (FLSC) evaluates each applicant’s foreign legal credentials against the norms of approved Canadian law degrees to determine what further work is required to demonstrate competence in Canadian law.

To be sure, knowledge of the fundamental principles of Canadian law is a reasonable requirement for all foreign trained lawyers seeking to serve the public. Under the guise of public interest, however, the requirements of Canadian law have been set at artificially high levels that create financial and other barriers to entry. For example, in a recent decision, FLSC refused to grant an English law graduate with a first-class law degree (ranking in the top 2%) any credit for her Masters of Law degree from the University of Toronto law school.

Ironically, there appears to be more collaboration amongst legal academics than there is among members of the practicing bar. Cornell Law School, for example, has signed an Agreement of Cooperation and Memorandum of Understanding with Jindal Global Law School (an Indian national law school) committing the two institutions to promoting collaborative initiatives – such as, faculty and student exchanges, and joint teaching and research initiatives. Other U.S. Ivy League schools are racing to sign agreements with the national law schools in India.

The animosity toward foreign lawyers may be cultural, historical or simply money-related protectionism. Regulatory bodies rarely lead innovation, but must have it foisted upon them. As trade expands and multinational corporations demand international legal services, regulators should recognize that opening legal markets to foreign lawyers is not a zero sum game, but good for business, society, the public interest and lawyers incomes.

— Vern Krishna is tax counsel with Borden Ladner Gervais LLP and executive director of the CGA Tax Research Centre at the University of Ottawa.

vkrishna@blg.com

When TIME Magazine announced that its “person of the year” for 2011 would be “the protester,” many were left scratching their heads. The Occupy movement had offered much fodder for television camera crews but little feasible suggestion of how to improve the relationships between America’s corporate leaders and the so-called 99%. Moreover, the demonstrators seemed to have little definitive direction with respect to their demands or needs. But in retrospect, TIME may have had it right.

Those who camped out on street corners and sidewalks to protest everything from child labour and poor working conditions in the far east to the income gap in America and the desecration of the Brazilian rain forest did, in fact, have one unifying commonality – their actions and their messages were entirely volatile.

Loosely defined, volatility is the ever-present possibility that something could change suddenly and drastically at any given moment. Looking back at the past few years or even the past 12 months, volatility lies at the heart of every major event in the world.
Business leaders like to speak of volatility in the context of financial markets.

Ask any investment analyst how things are, and he or she will likely respond: “volatile”. What’s often overlooked is that market volatility is usually directly correlated to external volatility, which has now spread like an infectious disease into every realm of every corner of the world. 2012 saw the overthrow of several Middle Eastern despots, the collapse of traditionally strong European economies, the protest of a key employment-generating oil pipeline by jobless Americans, the destruction of a Japanese nuclear reactor, the construction of an Iranian one, and the not-so-gradual collapse of one the world’s largest tech companies.

Each of these events (and the many more that weren’t mentioned) had a significant impact on business. They altered the price of oil, generated market speculation, interrupted supply chains and shifted traditional export targets. Many forced immediate and dramatic change to be implemented or contingency plans to be drawn for the next ‘what if’ scenario. The questions remains though: How do you anticipate the un-anticipatory?

As anyone who has undergone stress therapy will tell you, instead of fretting over the unforeseeable, focus on what is within your grasp to change. It is within this context that a discussion of the foreseeable risks in business and how to pre-empt or mitigate them is necessary. Unfortunately, many companies that invest in risk assessment and/or management – and many still don’t invest in them at all – do so periodically and with little consideration of the changes taking place outside their immediate industrial environments.

Beginning today, FP Executive will launch a weekly series of articles discussing what are perceived by many to be the foreseeable risks of 2012, offering insight on their prevalence and potential impact, as well as suggestions on how to pre-empt them and/or mitigate their damage. Areas of focus will include: intellectual property theft and piracy; the real and overblown risks of cloud computing; the predictable risks of off-shoring (moving processes and services overseas to realize operational cost savings); the vulnerability to brand damage in the social media sphere; the internal threat of employee-generated fraud; the opportunities to use energy-price spikes as a competitive advantage; and, much more.

This week, we begin with debate over intellectual property protection and the PIPA panic.

When it comes to luxury brands, you expect to pay a high price!

In fact, some would say that the higher the price, the better the product and that is what makes it exclusive!

Tom Ford, the consummate commentator on fashion, clearly agrees: “The ‘democratization of luxury’ promoted by the large luxury brand conglomerates is without doubt the main force behind the vulgarization of most traditional luxury fashion brands,” he says.

Let’s face it; the only thing that stands between most consumers and the luxury brand is price. People want them but they just can’t afford them!

But, if a consumer is shopping for an exclusive brand (think Hermes, Louis Vuitton, Gucci), and likes the idea of buying smart, then many would conclude they can save some money by buying online from a country that sells it cheaper. However, the truth is that they probably won’t succeed; at least not online.

Why? First, the presence of truly international e-commerce sites are rare, particularly among fashion companies. Second, to protect prices in different markets, companies have made sure that the comparison of prices is not easy. Some of the “price fences” used to discriminate prices, include: language exclusivity; limited country selection within a site; cookies to automatically send you to your originally selected country of choice; different products names across geographies; and, variations in specifications.

These differences help protect brands from being gray marketed and from having their sales cannibalized from high priced markets in lower priced markets – sound strategies from a business perspective.

How consumers fight back will depend on the industry. In the electronics world, consumers tend to be quite powerful and apply pressure on technology companies through user groups leading to a change in the company’s behaviour. But in the world of fashion it’s a different story. There is virtually no resistance against online price differentials for fashion products.

Although the Internet has facilitated the comparison of prices, it has not driven price harmonization. For example, when Chanel raised the retail price in Korea for some of its bags in July, sales should have dipped, according to the economic rules of supply and demand – but instead they increased.

In essence the luxury brands are pricing for value. In some markets the value is high and in others it is lower, hence the resulting price differentials.

Some price harmonization occurs among markets in close proximity to one another because there tends to frequent travel across borders and multilingualism is more common.

If you want a good deal on your next Gucci bag, surprisingly the good old USA is typically the best place to buy.

Those living outside the U.S. will have to plan that purchase for their next visit there. The reality is that as much as the web mimics a global environment, online retailing doesn’t follow when it comes to fashion.

Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Paul publishes a weekly pricing column in the FP Executive. He also writes for the Pricing Solutions Club.

BloombergTD's chief economist Craig Alexander explains how Canada must step up its game.

The global economy is going through tectonic changes. Twenty years ago, industrialized nations represented two-thirds of global output, while developing nations were one-third. Two decades from now, the ratios will have reversed. This changing landscape reflects rapid productivity growth, and often strong population growth, in emerging economies. Concurrently, advanced countries are mired with sustained slow growth, as they struggle with the long-lasting legacies from the recent financial crisis, unsustainable fiscal balances and aging populations.

A key risk is that governments could resist globalization through protectionist policies. Fortunately, today’s leaders are not headed in this direction. The government of Canada is striving to create additional opportunities to make Canada a bigger player in a globalized world, which includes seeking out free trade agreements, such as the Trans-Pacific Partnership. However, this raises the questions of whether Canadian businesses are well positioned to take advantage of the possibilities for increased trade and investment and whether they can cope with ever-rising foreign competitive pressures. Canada’s track record is not encouraging.

The value of Canadian exports during the pre-recession period of 2000 to 2008 rose by a modest 2% per annum, but the volume of exports was flat. Imports grew during the period at a rate of close to 5% annually; but imports appear to have been fuelled by domestic consumption, rather than used to bolster export capacity. This occurred at a time when world demand was growing strongly and global trade flows were ballooning.

During the economic recovery, exports have rebounded; but, exports as a share of the economy have fallen to 34%, down from 37% before the recession and 41% in 2002. Moreover, the volume of exports is still 3% below the pre-recession levels, with non-energy exports down 5%. Imports are now above their pre-recession levels, suggesting Canadian businesses are facing increased foreign competition in domestic markets.

Of course, businesses can tap markets abroad without trade, such as setting up plants in foreign locations. In the pre-recession period, Canadian foreign investment did increase, but it was dominated by just two sectors: energy and financial services.

The poor trade and investment performance reflects several factors, including the dramatic appreciation in the Canadian dollar since 2002 that has fuelled talk of a Canadian-style Dutch Disease. The resulting policy debate has been misguided. The choice between growing Canada’s resource sector or growing its non-resource sectors is a false one. Canada must develop its commodity resources in the most sustainable way possible for the benefit of the nation and the world, while non-resource sectors have to find ways to be profitable with a strong currency. Rather, emphasis should be placed on the need for Canadian businesses to be more productive and innovative to succeed in a globally integrated economy. This is true for exporters and domestic-oriented firms that compete with foreign rivals. Sadly, Canada has a productivity problem today.

Canadian productivity has been rising at an average annual pace of close to 1% over the past decade. This is one of the slowest rates in the industrialized world. In ranking, it puts Canada modestly above Italy and below Spain — not good company. Moreover, foreign-owned enterprises operating in Canada have recorded significantly stronger productivity growth than domestic-owned firms.

Canada would benefit from greater investment in capital and better matching of labour skills to the needs of business, but the quality of capital or labour does not appear to be the main problem. The single-greatest contributor to Canada’s plight appears to be weak innovation, which economists refer to as multi-factor productivity. Businesses are simply not being creative enough with the capital and labour they have. One contributing factor could be that Canadian business leaders are more risk averse than their international counterparts. Canada also does less research and development and it takes longer for innovations to be commercialized.

Canada needs to step up its game. Over the next two decades, Canada’s share of the world economy will fall by a third to a mere 1%. Businesses must look globally for growth and must increase competitiveness.

The best role that the government can play is to provide sound and stable macroeconomic policy — low and stable inflation, competitive tax rates, good infrastructure, limited barriers to entrepreneurship, reduced barriers to trade and investment and support for human capital through access to education and good health care.

Beyond that, businesses have to step up to the plate. This means being more innovative. There are huge benefits from becoming plugged into a global supply chain. Canadian firms cannot compete on the basis of lower costs, so they must compete through better quality or being a niche player that fills a global or domestic need. One of the core challenges is that in this ever-changing global economy, any competitive advantage will be lost within a short period of time. Businesses need to be nimble, constantly looking for ways to improve production or performance. It is only through greater innovation that Canada can be competitive and raise the standard of living for its citizens.

Craig Alexander is senior vice-president and chief economist for TD Bank Group

With the global economy in a slump, it is more crucial than ever for Canada to optimize productivity. Visit financialpost.com/productive-conversations Tuesdays for more insight from some of Canada’s leading business minds on how our country can overcome its competitive challenges and take advantage of new opportunities. Or, visit our LinnkedIn discussion page to offer your own suggestions and perspectives on this important topic.

Canadian companies have a natural advantage when it comes to doing business globally, said Dani Reiss, president and chief executive of Canada Goose Inc., which in a little more than 10 years has successfully expanded into more than 40 countries.

“There are differences between cultures and how business is conducted in different countries, but because Canada is so multicultural, I don’t think Canadians experience much culture shock when they go into a foreign market,” Mr. Reiss said.

That said, many companies trying to expand into emerging markets might not be effectively capitalizing on this advantage. An Ernst & Young 2012 survey shows only 20% of executives believe their company manages talent effectively across all markets, and less than one-third agree their top management team has an international outlook on decision-making.

“The two main knowledge gaps on management teams in companies that are in emerging markets and wanting to go global is awareness of the local cultures as well as a bigger picture understanding of the global market,” said Jeff Charriere, Ernst & Young’s Canadian managing partner for accounts and markets.

However, he said, the time to start building a management team that includes the diverse skills needed — from people with knowledge of local markets to others with experience and knowledge of the intricacies and challenges of doing business internationally — is several years before any expansion takes place. In other words, the expertise and insights should be part of the strategic process leading to the expansion.

“In practice, in my experience, only when they are really doing global expansion and finding that they need those global skills, do most entrepreneurial companies start to think about it, not before,” said Ana Azevedo, assistant professor in Entrepreneurship at the Faculty of Business, Athabasca University.

“Just as technology has to be part of the strategic process from the start, so does globalization. IT and globalization are the two most powerful forces we can talk about when we talk about changes organizations need to respond to. But people often don’t think about it until they’re facing the circumstances. Then they realize they need to start looking at skills, background and experience. They need people who have had extensive international experience, including travel, the ability to speak different languages, and have worked and studied abroad.”

A management team with a global perspective was important to Canada Goose’s success in the early 2000s when it began conquering foreign markets, Mr. Reiss said. “The team we had at the time was definitely globally minded. We employ people in other countries as well, and certainly when you’re employing Europeans who have to work with a Canadian company, it’s important to hire people who have experience dealing with North American companies because there are different norms. The differences are subtle, but subtleties are important,” he said.

Most experts agree that diversity is key to a management team that can succeed in expanding into foreign markets. Although people with international business experience are high in demand, and smaller entrepreneurial companies might find it challenging to compete for them, there also is a large untapped immigrant population in Canada that might have that background and experience.

“I think it is important to create diversity and yes, we create diversity at Canada Goose because it’s a strength,” Mr. Reiss said. “The more ways you can see single things from different points of views, the greater the chance you’ll be able to make a better decision.”

Study after study supports Mr. Reiss’s view on diversity — but it has its challenges, Ms. Azevedo said. “A diverse team is a more creative team. The cost of that is that the potential for conflict or misunderstanding and miscommunication is greater so you have to have an environment that embraces differences. The benefits are clear, though. Diversity increases the capacity for global expansion and innovation.”

To create such an environment, Mr. Charriere said, companies would be wise to consider offering diverse incentive options to both attract and retain management talent with diverse backgrounds.

“To enhance their engagement, you have to align their goals with those of the company and you need to create an inclusive environment. You can offer a variety of rewards. Some will be what inspires some of the folk, and other rewards will inspire others. Give them options to choose which rewards speak to them.”

In a recently released report, Don Wilkinson, Deloitte Canada’s vice-chair and leader of its Director Series’ program, argues it’s high time Canadian businesses take the new global economy reality by the horns and rediscover some of the risk tolerance that was once so prevalent before the 2008 market crash. Mr. Wilkinson recently spoke with the Financial Post’s Dan Ovsey about Canadian risk aversion, the opportunities for Canadian investors and the importance of approaching growth strategically. Following is an edited transcript of their conversation.

Q: What do you see as the causes to our risk aversion? Is it just a cultural thing?
A: I would say the boards have a role in this. Right after the financial crisis, we talked to some very experienced board members within Canada and asked them whether they thought board members contribute to pro-cyclicality. In other words, before the crash things were good; there was irrational exuberance; there was no such thing as a Black Swan. People were getting rich, and, as the old saying goes: You’ve got to dance while the music’s still playing.
People say in that case, boards were there, but they were like cheer leaders. Then all of a sudden you go to the other side and you’ve got real concern about taking any level of risk out there. Somebody told me we get grumpy boards. If you’ve got a grumpy board… and that filters down to management then you get this issue of less risk taking going on.

Q: What makes the boards grumpy?
A: On the upside they were too exuberant, and then they say ‘we let management go to far on this. There was too much excess risk taking’. It’s like with anything else. It’s like when new regulation comes in; you kind of hit it with a sledgehammer. There’s an issue of over-rotation particularly for the companies that came through in pretty good shape. In Canada, we came through in pretty good shape, so there were opportunities if you would seize them. But you have to have the will and support of the boards to say ‘okay to hit the growth and return, we actually need to take some risks’.

We survived, but is there enough competitive zeal in the marketplace to be truly competitive in the global space?

Q: Do you find that risk aversion is more pronounced here in Canada relative to other industrialized nations?
A: When you talk to the U.S. executives about how much tolerance they want to take and you talk to Canadian executives about the same thing, the answers are about the same. But when you actually say, okay let’s talk about actions, in the U.S. there’s that entrepreneurial spirit and risk taking that doesn’t happen in Canada. I do think that in Canada it’s kind of slow and steady, which got us through the downturn; but does slow and steady really win the race? Are we going to own the podium in the end? We survived, but is there enough competitive zeal in the marketplace to be truly competitive in the global space?

Q: Should risk be something that all industries approach the same way? Are there certain industries for which risk tolerance and/or risk aversion may play higher on the radar than in others?
A: It varies. You look at the housing industry right now, in terms of pricing. In the energy industry it’s how do I get my product to market and how do I deal with the environmental side of things. That’s a big issue they need to deal with. In the financial services sector, there’s regulation and this thing with low interest rates and how to make money off it. In manufacturing, there’s the high dollar.
At the end of the day it’s about growth. You need to identify that there are specific risks and what you’re going to do to develop a return. I think the biggest risk is to do nothing, the status quo. If you look at what’s happening with globalization and regulation changes, and you take a look at competition… If I’m in the retail industry, I’m watching Target and Nordstrom come in. I actually think we didn’t do too bad on those. The Canadians saw that coming with Walmart, so they put investment into technology to deal with it. But the point is that status quo is a dangerous thing. Competition and change is coming at you so you have to move and I think that’s a board responsibility.

Q: What’s your counsel to risk-averse businesses that are looking for a healthy balance between growth and conservativism?
A: The mining industry is pretty good at risk taking and have done recently well on some of the far-flung places. They make fairly significantly bets, so there are probably some interesting lessons to learn for other industries. You have to work through the balancing act. Quite frankly, if you don’t deliver — and we’ve seen that — if you don’t have strategy for growth and the management team lined up against it, you’re going to have visits from the institutional investors in Canada, and that’s probably a gentle visit. Then there are the cases where you get more active, even confrontational visits. So, you can’t sit still. You do need to be making progress. If you’re not, people are going to come after you. So, yes you have to balance, but if you’re not moving on that front, you’re probably in trouble.

Figuring out how to commercialize our R&D and patents and become more innovative is going to become an important part of how we spend money

Q: If you were to roll the dice on a new growth opportunity, what would it be?
A: If you’re a manufacturer, with a high Canadian dollar, presumably you can buy some equipment. The other thing is the innovation game. I think Canada comes up with lots of R&D and lots of patents. What we’re not good at is commercializing it. Figuring out how to commercialize it and become more innovative is going to become an important part of how we spend money.
Then there are other markets. There’s no doubt there’s a lot of risk. It’s comfortable in NAFTA. Moving beyond that gets a bit trickier. If you’re taking a look at where the opportunities are, I’ll tell you that organic growth in Canada at least in the short to mid term is going to be very tough. I think you need to be thinking about those other markets.

Q: I’m going to be a cynical journalist for a moment and suggest that we’re unlikely to see stability in the global economy for a number of years still. We’ve got at least two or three years before the U.S. sees significant improvement within its economy. The EU could possibly be even longer, and we just don’t know what’s going to happen with exchange rates in Asia. So, “stability” is kind of pie in the sky. How long can we wait for something that is clearly not imminent?
A: That’s not cynical. In fact, that really ties to what we’re saying, which is: this is the “new normal”. It is going to continue like this for quite some time, so you need to be able to figure out where you want to go in terms of your strategy. You need to take some risks; not get over-emphasized on the down side, but you need to take some bets out in this environment.
I actually think one of the key things you need to think about is the leadership. If I was sitting on a board, the question I would be asking is: Do I have the right leadership in the context of what I want to do with my strategy. If I really want to go into international markets, do I have the executive leadership group there to make that happen? Do I have the talent down below? The CEO timeframe is about five to seven years. The board needs to think in long term. I think that goes to the people.

Comment

Contrary to what environmentalists, anti-globalisation campaigners and other economic curmudgeons like to think, the world is not going to hell in a handbasket.

Immense problems remain, of course, from Europe’s youth unemployment crisis to atrocious cases of extreme child poverty around the globe, and it is the duty of all of us to highlight and address them.

But humanity as a whole is doing better than it ever has: the world is becoming more prosperous, cleaner, increasingly peaceful and healthier. We are living longer, better lives. Virtually all of our existing problems are less bad than at any previous time in history.

In How Much Have Global Problems Cost the World, Danish political scientist Bjorn Lomborg documents how on almost all important metrics, the human condition is improving at a dramatic rate; his thesis is backed up by oodles of other data and research.

Take war, the worst possible affliction that can befall a society. It is often wrongly argued that armed conflicts are the handmaiden of capitalism; in reality, they are the worst thing that can happen to a liberal economy, destroying lives, families and capital and triggering state control, militarism and deglobalisation.

Tragically, there are still far too many conflicts costing far too many lives but overall we live in extraordinarily peaceful times by historical standards.

Genghis Khan’s mad conquests in the 13th century killed 11% of the global population at the time, making it the worst conflict the world has ever had the misfortune of enduring; the Second World War, which cost more lives than any other, was the sixth worst on that measure, killing 2.6% of the world’s population.

There has been immense progress since then, especially following the end of the Cold War.

The Peace Research Institute Oslo calculates that there were fewer battle deaths (including of civilians) in the first decade of the 21st century than at any time since the Second World War.

Uppsala University’s Conflict Data Program found 32 active armed conflicts in 2012, a reduction of five compared with the previous year.

The bad news is that the number of deaths shot up again last year as a result of the horrendously bloody Syrian conflict. But that outbreak of barbarism shouldn’t detract from the otherwise dramatically improving trend, which is perhaps the single most important fact about the world today.

Instead of fighting, we now trade, communicate, travel and invest; while there is still a long way to go in tearing down protectionist barriers, international economic integration is the great driving force of progress.

We are also far less likely to die from the side-effects of economic development and the burning of cooking and heating fuels. In 1900, one person in 550 globally would die from air pollution every year, an annual risk of dying of 0.18%. Today, that risk has fallen to 0.04 %, or one in 2,500; by 2050, it is expected to have collapsed to 0.02%, or one in 5,000. Many other kinds of pollution are also in decline, of course, but this shift is the most powerful.

In fact, we are living healthier and longer lives all round, thanks primarily to the remarkable progress made by medicine.

Average life expectancy at birth in Africa has jumped from 50 years in 2000 to 56 in 2011; for the world as a whole, it has increased from 64 to 70, according to the World Health Organisation.

While people in rich countries can now expect to reach 80, the gap is narrowing and emerging economies are catching up; in India, for example, life expectancy has been increasing by 4.5 years per decade since the 1960s.

Medical advances have improved life measurably for any given stage of economic development. Childhood mortality in Sub-Saharan Africa remains far too high, but in 2008 it had fallen to just a third of that in Liverpool in 1870, even though real per capita incomes in that part of the world remain just over half that of Liverpudlians in the 19th century.

The probability of a newborn dying before their fifth birthday has dropped from a world average of 23% in the 1950s to 6% in the current decade. That’s still nothing to be happy about, of course, but the progress has been remarkable. Child mortality is set to fall from 7.7% in 2000 to 3.1% in 2050.

One reason is better nutrition. The best proxy for that is height: Latin Americans have been growing taller for years, and since the late 20th century so have young people in Asia, with increased prosperity allowing parents to feed their children more and better food.

Better sanitation is also helping: deaths caused by a lack of access to clean water have tumbled from 1.5 per 1,000 people in developing countries in 1950 to 0.4 today and are due to halve again by 2050.

Education is another area which has seen huge improvement globally. The UK is a scandalous outlier here, with a recent OECD analysis showing that we are the only rich country where 55 to 65-year-olds are more proficient in literacy and numeracy than 16 to 24-year-olds, a catastrophic regression.

But our educational suicide is unique, and emerging markets have seen revolutionary improvements in recent decades, enhancing educational opportunities for hundreds of millions of young people. Progress has been especially strong from around 1970.

While 23.6% of the world’s population remains illiterate, that is down from 70% in 1900 and is the lowest it has ever been. The costs of illiteracy have fallen steadily from 12.3% of global GDP at the start of last century and are set to be just 3.8% by 2050.

Gender equality is also improving. In 1900, women made up only 15% of the global workforce. By 2012, it reached around 40% and is expected to hit 45% by mid-century.

Even climate change may have had a much more balanced effect than is usually understood. One of the contributors to Lomborg’s book, Richard Tol, estimates that global warming has so far been beneficial, on balance, to the world – some countries have lost out, but more have gained – but will turn into a net negative later this century, when costs will increasingly outweigh benefits.

Tol’s analysis includes agriculture and forestry, sea levels, energy consumption, health and much else besides. This area is contentious and hard to measure.

Predictions are exceptionally difficult; as Lomborg himself has argued elsewhere, so far warming has been below what almost all models had been predicting. We shall see.

The only important metric that is unambiguously deteriorating is biodiversity, which declined by 21% in the 20th century and is continuing to fall.

On balance, however, the world is easily in the best place it’s ever been, despite the financial crisis and the threat of terrorism. Thanks to capitalism, globalisation, technology and a reduced tolerance for violence, humanity has never had it so good.

The Daily Telegraph

When global supply chains fall victim to political events, the right question to ask is not if risk has gone up, says Walid Hejazi, associate professor, University of Toronto’s Rotman School of Management. “[With Crimea and Ukraine], clearly it has. But has it gone up enough to scare investors away?”

The unsettling events in Ukraine have turned what was once a relatively stable global supply chain into a quagmire that could have far-reaching effects. “The big question forward for Ukraine and nearby countries is the uncertainness of their future,” he notes. “When a trust has been violated, uncertainty follows. And businesses don’t like uncertainty.”

When a trust has been violated, uncertainty follows. And businesses don’t like uncertainty

On the export side, Eastern Europe may not be a leading market for Canadian businesses, but is a fairly important one to such sectors as agriculture, building materials, pork and seafood and aerospace, says Stuart Bergman, assistant chief economist and director of the EDC Economic and Political Intelligence Centre in Ottawa. He reports that in 2013, domestic exports reached $1.4 billion to Russia, down from 2012. “We expected a rebound in 2014, but now you can’t disregard the events of the last few weeks.”

But the fallout has less to do with the adverse impact on export activity to Ukraine or Russia. Rather, it’s the instability that will spread into other jurisdictions that could ultimately affect Canadian businesses. As it currently stands, 26% of Canadian outward investment is in Europe, says Mr. Hejazi.

“With Canada in the midst of an EU Free Trade agreement, this kind of uncertainty [in Eastern Europe] will have an impact. The question is how dramatic will that be on the strategies being deployed by Canadian companies focused on European markets. Will they have to reconsider involvement with Eastern European countries bordering Ukraine?”

Businesses are becoming exceedingly cautious to avoid situations such as Libya, where assets of companies such as Suncor and SNC Lavalin were in peril, he adds. “One thing strategists have to look at is the long term stability of such assets. It would be interesting to see to what extent this will factor into those strategies.”

The looming sanctions especially will play a critical role in business decisions moving forward, although the extent and outcome is yet to be determined. To date, the sanctions against specific individuals have not meant much to Canadian businesses, says Peter Dent, national leader of Deloitte Forensic.

“But if things continue to escalate and additional sanctions are levied, it will affect how Canadians do business in Europe and Russia, because it will become increasingly difficult to navigate where and with whom they can conduct business.”

He notes companies are showing “an abundance of caution” in their planning and reconsidering their strategies, particularly where they have large exposure to Russia either directly or indirectly. The challenge, however, is that many businesses may not be used to navigating the world of sanctions.

“All this is new to many operations,” Mr. Dent says. “It’s not about paying attention to a list provided by the Canadian government of individuals or organizations, there may be other levels involved.”

The possibility exists the UN may impose sanctions. The U.S. government could also impose sanctions that Canadian companies that are publicly traded or have operations in the U.S. will need to take into account, he adds. “If Europe does the same, you will have to pay attention to those connections, because not all lists will be the same.”

While banks are used to the process and use sophisticated transaction-monitoring systems to manage compliance with sanction rules, other sectors such as oil and gas, mining and manufacturing may not be as adept, Mr. Dent says. “Some could have a significant part of their business at risk because they might have operations in the US or Europe that trade with Russia.”

Canadian companies also have to consider their exposure in European countries that depend on Russian resources such as natural gas. Ivan Katchanovski, a professor at the School of Political Studies at the University of Ottawa points out a key economic and business challenge is the possibility of disruption in natural gas supplies from Russia to Europe.

If Russia makes sanctions more extensive it will affect a much wider number of people and businesses

“Any conflict in Ukraine will lead to disruption to many European countries as natural gas prices increase as it is a major area for transporting natural gas and oil to Europe,” he says. “If Russia makes sanctions more extensive it will affect a much wider number of people and businesses.”

Should natural costs rise as predicted, it would inevitably increase the cost of doing business and ultimately profitability, Mr. Dent notes. “The global economy is so interconnected it’s hard to excise an entire marketplace without a whole bunch of downstream and upstream consequences [to your supply chain].”

Should sanctions increase, Canadian businesses could run into issues around international payment systems and other risks, Mr. Bergman adds. “All of this highlights the intertwined nature of our current global economy.”

Financial Post

Ukraine needs debt forgiveness, not more borrowing. Bribing Putin may also help

The on-going drama in Ukraine is rife with paradox. Russian special forces “liberated” Crimea without resistance, and now uniformed gunmen who seem to be a mixture of locals and Russians have occupied key positions in the eastern region of Donbas, including police and municipal offices in Donestk, Slovyansk and Kramatorsk. Sentiments on the streets are split, but typically people seem to want looser relations with Kiev and closer with Moscow.

Democracy dictates bowing to the will of the people; nationalism dictates resisting Russia; the exigencies of proximity, trade and finance dictate economic intercourse with both Russia and Western Europe.

Dani Rodrik, an economist at Harvard, published a book in 2011 called The Globalization Paradox. At the heart of his “paradox” is a trilemma between globalization, nationalism and democracy. Ukraine since independence is a good example. In 1991, in a wave of nationalism rooted in the West and centered in Kiev, Ukraine made history as the most important ex-Soviet state to secede. The spelling of Kiev was changed to Kyiv and universities adopted Ukrainian as their official language. The best university, Kyiv-Mohyla Academy, long considered by Moscow a hotbed of nationalism, was reopened (it had been converted into a Soviet naval academy). My home when I taught there over a decade ago in a World Bank/George Soros-sponsored economics MA program was a flat that had housed Soviet officers.

The new nationalism was cloaked in democracy. The English-language Kyiv Post that we read as a source of restaurant and night-club tips also published editorials quite critical of President Kuchma, who was alleged to have engineered the killing of a journalist found beheaded amongst the birch trees. Viktor Yushchenko, who after his later poisoning and disfigurement inspired the Orange Revolution against Kuchma, was Governor of the Central Bank when I was there and was idolized by my students, some of whom worked for him. But just before I arrived, the Deputy-Governor was shot dead in the back of his head with a silenced pistol. So democracy and the rule of law had its enemies.

The third element of Rodrik’s trilemma, globalization, was playing itself out then too. I was introduced to U.S. officers in mufti, there to “advise” the fledgling Ukrainian military. Jeff Sachs’s soon-to-be-disgraced Harvard Institute for International Development employed many of our students. An implicit paradox of our program was that although we were avowedly educating a new elite to lead Ukraine, in truth the best and brightest of our students wanted nothing more than to move into a top U.S. PhD program, with no plans to return home.

Looking at current Ukraine through the lens of Rodrik’s trilemma, we see a battle for democracy disturbingly confounded with sometimes very nasty nationalism of a neo-Nazi flavor. The very fact that it was a street battle, not an election, that restored  “democracy” is a contradiction in itself. And globalization seems to be at odds with democracy as well, with three large trading blocks  — the Russian Federation (RF), the European Union (EU) and North America — each advocating a different agenda to help the Ukrainian electorate decide how best to realize the governance they really want.

The bald truth is that Western Ukraine looks west and Eastern Ukraine looks east, but both want independence from Russia. With wise face-to-face negotiation between their respective leaders, Ukrainians might in principle be able to work out a new and looser Ukrainian Federation that would remain politically independent but exploit obvious, win-win gains from trade with both the EU and the RF.

Instead, the new Ukrainian leadership is mobilizing troops and badgering NATO for more arms. This can only end in tears. Just as misguidedly, the new leadership (installed with the blessing of the U.S. and the IMF) is preaching bone-crunching austerity to pay back the foreign debt that was run up and squandered by the just-deposed kleptocracy. Ukraine runs the risk of repeating the disaster that has been Greece: a messy default preceded by much blood in the streets. Far better to negotiate debt relief early on. But at present, political barriers to that are daunting to say the least, since the creditors — Russia and Western Europe — are on the brink of a lose-lose sanctions war.

On March 25, the IMF announced a $14-billion to $18-billion package to Ukraine, with a putative total of $27-billion contingent on commitments from others like the EU, World Bank, European Investment Bank and European Bank for Reconstruction and Development. The problem with such “bailouts” is that they are not bailouts at all, but rather loans, and the IMF in particular (quite properly, as the world’s lender of last resort) never forgets and never forgives.

Moreover the IMF demands “conditions,” many of them wise but some misguided. A wise pre-condition for the IMF’s disbursement was abandonment of Ukraine’s currency peg. However since mid-February, the hryvnia has dropped a dramatic 30%. This will help correct the country’s 9% current deficit, or at least the trade part of it, but it will greatly exacerbate the hryvnia burden of its external debt, which is denominated in foreign currencies.

The ideal way to deliver relief to an economy with an unsustainable debt burden is not to lend it more money but rather to write off part of the debt. In the late 80s and early 90s, we learned that debt relief can be win-win: Both creditors and debtors end up better off. The IMF and the U.S. organized commercial debt write-offs averaging about 45% for 23 middle-income countries — mostly in Latin America — and both banks and borrowers benefited. That lesson was largely ignored during the recent Eurozone crisis because there was no Paul Volcker, U.S. Treasury or Bill Rhodes to mobilize the European banks, so the German taxpayer was unduly burdened. In this case the U.S. Treasury is highly unlikely to inspire debt relief since Ukraine’s biggest creditor is Russia, not least Gazprom. So what to do?

The immediate priorities should be threefold: Avoid military confrontation and avert further annexation; proceed with and monitor the national election scheduled for May 25; and, crucially, replace the looming sanctions war with a trade, finance and debt deal.

On April 10 the IMF’s Managing Director, Christine Lagarde, intimated that it would take until early May to even submit the new loan package to her Board. She also hedged on debt relief, because that would take much longer. The dismal reality is that money won’t be disbursed before the election in late May, while Ukraine faces debt payments in June that it will not be able to meet. In fact Putin’s recent one-third hike of gas prices means that any new loan money would be bled back to Gazprom for current and past payments due.

Brussels, Washington, Kiev and Moscow are scheduled to meet in Geneva on April 17. One bribe the EU might offer Putin in return for backing off from further annexation might be to pay off Ukraine’s debts to Gazprom, and perhaps parts of its other debts to Russia as well. And one way to persuade the populace of Eastern Ukraine that foreswearing federation with Russia could be in their immediate interest might be to offer them duty free imports, markets for their exports, loan guarantees for European investors into Ukraine, and easier visas for travel and jobs.

Sanction wars and saber rattling are inevitably lose-lose. As economists, the central and sound lesson we can teach the world is that peace and prosperity flow from free trade, not the reverse.

James W. Dean is Professor of Economics Emeritus, Simon Fraser University

This article appears in the October edition of the Financial Post Magazine. Visit the iTunes store to download the iPad edition of this month’s issue.

The phrase “dead money” is one of Mark Carney’s parting gifts to the country. It was in a speech to the Canadian Auto Workers two years ago that the then-governor of the Bank of Canada famously took aim at corporate Canada, accusing it of hoarding billions of dollars in cash that could more profitably be invested.

How he knew this was as much a mystery as how the corporations themselves could have been so blind to their own self-interest. Still, the governor had no doubt. If corporations could not find useful ways to invest the funds, he said, “give it to shareholders and they’ll figure it out.”

Others have since taken his idea and run with it. A number of commentators have called for corporate cash holdings to be taxed, as an incentive to invest them. The Broadbent Institute, an NDP-affiliated think tank, recently issued a report calling for the appropriation of $670 million from corporate coffers to provide every person under the age of 25 with a “Youth Job Guarantee.” Never mind how any of this would work. As a new study from the C.D. Howe Institute (It’s Alive! Corporate Cash and Business Investment) makes clear, the whole underlying premise, of corporate cash as useless “dead money,” is an illusion.

There is no shortage of investment, for starters. Since 2011, it finds, investment “has been growing at roughly the same pace as the economy.” Indeed, as a share of output, it is slightly above the average of the last 30 years. Neither is the money “dead.” Corporations do not build cash holdings out of sheer inertia, but as a kind of insurance, protecting themselves from sudden cost increases or revenue declines. That’s entirely prudent, especially in the volatile resource sectors that make up so much of Canada’s economy. Indeed, when it comes to the banking sector, another prime “dead money” offender, it is government policy.

Corporations used to manage risk by maintaining large inventories. This tended, perversely, to amplify the business cycle: as inventories mounted in the early stages of a recession, corporations would shutter factories and lay off workers, rehiring them only after inventories had sufficiently fallen. Nowadays, there’s a greater tendency to hedge with cash, giving companies the flexibility they need to take advantage of globalized supply chains and just-in-time delivery, raising and lowering purchases as market conditions warrant.

The rise in cash holdings is not just happening in Canada, but around the world. It isn’t a reflection of some uniquely Canadian tendency to caution, but a response to changing circumstances. The uncertainties of the world economy, in the aftermath of the financial crisis, are an obvious contributing factor. And with interest rates near zero, the opportunity cost of holding cash is low.

Most of all, it has nothing to do with the level of investment. Believe it or not, corporations have other options when it comes to funding investment than cracking open the piggybank. They can borrow, issue stock or sell fixed assets. There is no simple relationship between the decision to hold cash and the decision to invest. Indeed, some of the biggest cash hoarders, such as energy and mining, are also some of the biggest investors.

As the C.D. Howe study’s author, Finn Poschmann, says, if governments are concerned that businesses are not investing as much as they might like, they should “attend to factors that encourage business investment, such as a stable fiscal environment, stable investment policy, and committing to reduce rather than increase taxes.”

As for Carney, it wasn’t long before he changed his mind. Dead money, he said the following spring, is “dead no longer. Resurrected.” If only he would pass the word to some of his acolytes.

Comment

Call it “globalisation 2.0”. China’s integration into the global economy is now a 35-year-old story, dating back to the free market reforms of Deng Xiaoping.

For both China and the West, the consequences have been transformational, and for the West at least, not obviously in a particularly good way. Many jobs have been lost to the cheap labour of the East.

Yet it is also a job only half done, for although China is now an integral part of the global supply chain, its financial system remains pretty much a closed shop. This mismatch between trade liberation on the one hand and capital account constraint on the other has for the West proved a profoundly destabilising force, laying the foundations for the financial crisis and many other modern-day complaints.

Tentative steps taken by China this week towards capital liberalisation – allowing money to flow more freely in and out of China – are therefore of potentially huge significance. As the Bank of England puts it, “few other events over the next decade are likely to have more impact on the shape of the global financial system [than financial deregulation in China]”.

Assuming full liberalisation actually happens, it is also one of the main reasons for feeling reasonably positive about long-term prospects for the global economy.

Regular readers will know that I’ve been particularly gloomy about the economic outlook of late; it is quite hard to be otherwise, looking at the ruinous mess Europe has created for itself in mismanaged monetary union. Yet it is important to distinguish between these short-term challenges and dislocations – what might be characterised as the growing pains of overly rapid change – and longer-term prospects for advancement, which are still broadly positive assuming political leaders do the right things.

Chinese integration into the global financial system is one such prize. In Hong Kong this week we witnessed a small step in the right direction, with the launch of the “Shanghai-Hong Kong Stock Connect”, allowing a limited two-way flow of capital between the cities. For the first time, Chinese nationals can invest freely in Hong Kong stocks, and Hong Kong deposits can be used to buy Chinese shares.

In future, growth is going to be far more dependent on household consumption

On the face of it, this might not seem such a big deal. Yet Hong Kong is China’s gateway to the West, and an important testing ground for wider reform. As a precursor for greater things, Stock Connect is a major development.

That said, China does not like to do reform in a hurry. It may be over-optimistic to think capital controls will be gone within 10 years. An important signal comes shortly with the appointment of a new governor for the People’s Bank of China. The incumbent, Zhou Xiaochuan, is an avid reformer and would go the whole hog tomorrow given the chance. The choice of successor will give clues as to how the regime is thinking.

There are essentially three reasons behind Chinese capital controls. First and most important, they make it easier for the government to keep the currency low, which in turn supports China’s export and investment-led growth model.

Second, by preventing potentially destabilising capital flight and market dissent, they act as a form of political control. And third, they help make China immune to Western interference of the type now being applied with great effect via financial sanctions to Russia.

For the Chinese high command, these are important attributes that won’t lightly be given up. At the same time, however, there is recognition that the growth model of the past has essentially run its course. In future, growth is going to be far more dependent on household consumption and the aspirations of an increasingly affluent middle class. To catalyse this switch, China needs both internal and external financial liberalisation. (By the by, free movement of capital will eventually allow the renminbi to start countering the dollar as an international reserve currency. Already, the Chinese currency is quite extensively used in Asia for international trade.)

For the West, the prize is potentially as big as for China itself. With more balanced economic growth in China comes a less financially destabilising form of growth elsewhere, as well as the likelihood of much higher levels of Chinese investment in the West.

According to Bank of England estimates, China’s gross international investment position could rise from around 5% of world GDP today to as high as 30% in 10 years’ time if Chinese money was free to invest as it liked, a truly epic reallocation of capital.

The opportunities for Britain, with what is the most powerful western banking franchise on the Chinese mainland in the form of HSBC and Standard Chartered Bank, are equally mouth-watering.

As with all transformational change, the difficulty is getting from here to there in an accident-free manner. When the sluices are opened, it’s impossible to know which way the waters will run; capital will flow as freely into China as it flows out. The potential for financial crisis along the way is obvious.

None the less, once the process is complete, the world economy will look a more stable construct, and the benefits of globalisation – often hard to articulate as things stand – will seem a good deal more apparent. Let’s put it like this; if it doesn’t happen, a very troubled future of economic warfare between nations awaits.

The Daily Telegraph

As far as I can tell, nobody asked Apple CEO Tim Cook at his company’s product event in California Monday whether he’s enthusiastic about Donald Trump’s repeated call for the company to move its production of iPads, iPhones and MacBooks out of China and into the United States. As Trump has said over and over and over again, “We’re gonna get Apple to start building their damn computers and things in this country, instead of in other countries.”

Not a chance. Eventually the real world will catch up with and demolish @realDonaldTrump and his barmy populist rants on the evils of free trade and globalization. Take a look around at the daily evolution of the real economy. This week alone, as America’s political system rattles and quakes through the Trump candidacy’s appeal to rank economic nationalism and protectionism, U.S. and world corporations are happily expanding and deepening the inter-connectedness of the global economy.

As Trump rages against China and threatens 45 per cent tariffs, Mark Zuckerberg on Monday met with Chinese officials as part of a campaign to expand Facebook operations in China. At the same time, Google and Facebook are aggressively moving in on India as ground zero for a massive expansion of Internet and smartphone adoption. A Financial Times report over the weekend said that “India is set to become the world’s largest open Internet market—and two Silicon Valley giants are vying for the loyalty of more than a billion potential users.”

In the global hotel business, Marriott and a Chinese insurance company have been locked in a takeover battle for Starwood Hotels, which operates Sheraton, Westin and other chains. China’s Anbang Insurance Group appeared to have the winning offer, with a US$13.2 billion bid for Starwood, but Marriott moved Monday to clinch the takeover with a US$13.6 billion offer. Take that, @realDonaldTrump: Real American corporations dominate the global hotel business.

Recent merger and acquisition trends are largely dominated by international deals and global integration. Through 2015, according to Dialogic, global merger deals totalled US$4.7 trillion in transactions that crisscrossed national boundaries around the globe. From drug companies to hardware chains, integration continues. So far this year, deals worth US$635 billion include the US$14 billion merger of the Deutsche and London stock exchanges, TransCanada’s US$13 billion takeover of Columbia Pipelines, a US$6 billion Chinese corporate takeover of Ingram Micro of California, and Lowe’s takeover of Rona in Quebec.

Trump may rant against such trends, but the logic of international markets and globalization are inescapable. Growth depends on global integration and trade. This might also be news to Trump’s numerous fellow travellers on the liberal left.

The latest theory making the rounds is that the rise of Trump, the economic nationalist and free-trade bashing demagogue, can be easily explained by globalization. The last 50 years of expanding global trade have left workers and the middle class behind — or so the theory goes — opening the gates for Trump to parade as the national leader, maybe even global leader, who will push back unfettered and unfair trade to make way for new deals that will protect the millions of people who have been left behind.

Trump’s barmy ideas have always had broad appeal. Trade unions and scores of corporate interests have long favoured tariffs and other protections to ward off evil foreign competitors. In fact, nobody is more alarmed by Trump’s populist appeal than the intellectuals and commentators on the political left.

Writing in The New Republic, two such commentators claimed the other day that Trump is appealing to genuine widespread alienation that can be blamed on “the worldwide acceleration of economic inequality, propelled by globalization.”

Canadian writers have also seen Trump as a reflection of the rise of inequality and the loss of worker “bargaining power” brought on by “globalization — especially the rise of China — and certain “market-friendly” policies.” So wrote Peter Nicholson, noted Canadian mandarin, in The Globe and Mail over the weekend.

The success of increasing global integration in boosting living standards around the world is beyond dispute. The global numbers should be evidence enough (see above graph). Across all countries, from Canada to Cambodia, economic wellbeing and standards in most countries have doubled or more. In an attempt to deflate this unassailable and evident achievement, economic theorists on the left have concocted the idea that the distribution of the wealth brought on by globalization has been unequal.

It takes a lot of number crunching and moral invention to make the case that inequality is rampant and/or unjust. Trump and the left may hope to capitalize on such invention, but the inevitable and logical triumph of globalization cannot be ignored — as the world’s corporations demonstrate every day of every week. As President Obama visits Cuba this week, maybe he can trigger what Cuba needs most of all to join the list of growing nations: a dash of globalized trade. A good start was the Starwood hotel deal Monday to become the first U.S. hotel chain to enter Cuba since modern globalization began in 1959. Viva la globalización!

Financial Post

Globalization was the driving force behind the growth miracles in emerging markets, lifting millions of people out of poverty over the past few decades.

Now, a backlash against how the global income pie has been divided is increasingly influencing the political affairs of developed markets.

A chart first published in a 2012 World Bank working paper by Economist Branko Milanovic details which segments of the global population saw a rise in real incomes from 1988 to 2008.

“The biggest losers (other than the very poorest 5 per cent), or at least the ‘non-winners,’ of globalization were those between the 75th and 90th percentiles of the global income distribution whose real income gains were essentially nil,” wrote Milanovic. “These people, who may be called a global upper-middle class, include many from former Communist countries and Latin America, as well as those citizens of rich countries whose incomes stagnated.”

HandoutThe 'elephant chart' of change in real income between 1988 and 2008 at various percentiles of global income distribution.

Globalization constituted a massive labour supply shock, allowing corporations to tap cheaper workers. The benefit to consumers in advanced economies took the form of downward price pressures on these goods. Along the way, however, the middle classes in developed nations failed to see this rising tide lift their boats.

Toby Nangle, co-head of asset allocation at Columbia Threadneedle Asset Management, called this “globalization as an elephant” visual, “the most powerful chart of the last decade.”

This chart is now making the rounds on Wall Street as strategists search for an economic rationalization of the British referendum vote, the success of U.S. populists, and the rise of separatist movements in Europe, many of which are isolationist in nature.

“We equate the same malaise in the U.K. with that in the U.S. as well as the rest of Europe, reflected in the populist leanings of the electorate,” writes Deutsche Bank AG’s Global Head of Rates Research Dominic Konstam. “This calls for a radical policy rethink from the established political class and, at this stage, there are limited options but all of them have one thing in common: the need to redistribute spending power from those that have to those that have less.”

The fact that this narrative has spread to these corners, rather than being confined to the left side of the political spectrum, is itself noteworthy, according to Duncan Weldon, Resolution Group’s head of research.

“When people like Deutsche Bank are starting to say, ‘Maybe capitalism needs a form of reinvention,’ maybe that’s the time to start listening to that,” he said during an interview on BloombergTV. “It’s not Bernie Sanders; it’s a global investment bank.”

The easy access to credit prior to the collapse of the U.S. housing market helped paper over the angst stemming from this unequal distribution of income in the western world, Weldon said, but the extent of the problem has been laid bare in the aftermath of the crisis.

Strategists at Bank of America Merrill Lynch echoed Konstam’s words in a note yesterday, calling Brexit a harbinger of a move towards more insular stances by governments in advanced economies — and referenced Milanovic’s chart to bolster their case.

“While globalization, immigration and the free market have strong support from the winners of these themes — the plutonomists and the highly educated, in our view they seem to have underestimated the frustration of developed market middle and working classes,” write Equity Strategists Ajay Singh Kapur and Ritesh Samadhiya. “We think Brexit could just be the first surprise in a re-calibration of the world away from globalization towards more inward looking policymaking. Away from Wall Street and more towards Main Street. Away from financial asset reflation to more income support and wage inflation.”

Conor Sen, portfolio manager at New River Investments, placed the proliferation of this chart (and the associated focus on those who’ve lost out from globalization) on a continuum with other narratives that have captured popular attention since the financial crisis.

Reinhart and Rogoff brought a focus to government debt burdens that lent support to austerity movements; Piketty, meanwhile, suggested that inequality was destined to get worse because the rate of return on capital is higher than economic growth.

“What’s now captured the interest of intellectuals is the elephant chart, the idea that over the past 30 years the winners were emerging market middle classes and the 1 per cent in developed markets, but the developed markets’ middle classes were stagnant,” he wrote. “And I think we’ve finally found the correct framework for thinking about intersection of politics and macroeconomic trends.”

Bloomberg News