Gary Lipovetsky

His company, Dealfind.com, an Internet group-buying firm, offers “flash sales” over the Internet with merchants in 50 cities in North America, including 28 in Canada. Mr. Lipovetsky, the 38-year-old president and co-founder, majored in geology at the University of Western Ontario. (Joel McLean, the friend who told him business is common sense, is president and chief executive officer of Info-Tech Research Group, a global consulting company based in London, Ont.) Dealfind.com’s headquarters are in Toronto, and it has offices in New York and San Jose, Calif.

How does business come down to common sense?

Whether you’re doing $1 million in revenue or $100 million or $1 billion, running a business comes down to making decisions—and knowing that you’re going to make mistakes. It’s being able to take in information from a hundred different places at once. It’s a constant day-to-day evaluation of everything that’s going on around you. I have to make probably a thousand decisions a day, from operational small decisions to big decisions about how we’re going to steer the boat.

How does an entrepreneur develop that judgment or common sense?

The first thing is to get over the gulf of self-doubt. First you have to not be afraid to make the wrong decision. The way to develop that skill and logic is through practice and trial and error. The common sense is really developed through practice. There’s no shortcut. It’s just about doing it.

Tell me about what you gained through your experience at your first business, MenuPalace.com.

We started MenuPalace back in 1999. It’s an online restaurant directory. Mike [Tulman, the co-founder and chief executive officer of Dealfind.com] and I went door to door, pitching restaurants on the value proposition of having their hours, their operation, their menus, pictures of their restaurant on the Internet and searchable on our directory. I must have had about 100 meetings. On my 101st, I made a sale to a small pizza-by-the-slice takeout place for $59 for one year of advertising. I learned eventually what I needed to do to overcome the rejection and get someone to close.

How did that business set the stage for Dealfind?

With MenuPalace we had a really good platform. We had all the different pieces of the puzzle. We weren’t starting from scratch. We had proper relationships with merchant processing, credit card processing. We had a finance team. We had a sales team. We had a team of programmers, on a very small scale. We had Web designers. We had media buying experience. It was a big advantage having that platform and experience.

What was a key hurdle you overcame in developing as an entrepreneur?

The biggest hurdle any entrepreneur faces is himself – that fear, that getting over that hump. The key hurdle is knowing that there’s a bunch of hurdles and no one owes you anything. You’ve just got to keep pushing. All I’ve ever known is how to keep pushing. No day is easy. Sometimes there’s ups, sometimes there’s downs. When there’s ups, it’s important not to get too cocky and when there’s downs, it’s important to push through until you’re back up.

How do you avoid procrastinating or staying up all night over decisions?

I’ve got a team of people I consult with. You have to be humble enough to know that you can’t know everything. I’ve got a CFO, a CTO, a CMO, a CEO. These people are extremely skilled in their specific field. The way not to procrastinate on a decision is to get all of the facts, have a good team of people to support you.

What advice do you have for small Internet-based businesses?

Understand technology. I consider myself the average consumer. What appeals to me, chances are other people will like it, too. Build the applications and the layouts and have things run the way you, the user, would want to see them run.

What does Dealfind.com have to do to stay competitive?

We always try to stay ahead of the curve and innovate. When the market or competitors move one way, we try to compensate and move the other way.

An example?

Our big competitors were buying up media [advertising] like crazy to get subscribers. We decided to give an incentive to our loyal customers. If they like a deal they can share it with their friends and start making money. We share the profits from the deals with our ambassadors. It proved to be very effective. We pay out a tonne of money every month. There are people making a living doing it.

What is your vision of the company’s future?

In Canada, we’re in all the cities I think we can be in. In the States, we’re only in 22 cities. There’s the potential to be in about a hundred cities in the U.S. It’s also getting deeper within each city, having more members in each city. If we’ve got a million members in a given city, we want to get to five million, cover the whole population. We’re getting into a much more diverse product offering. We mastered the local part of the business: independently owned and operated stores, dry cleaners and restaurants and spas and automotive garages. We just ran a deal for the Canadian-based hockey magazine, Hockey News. We’re selling sunglasses. We’re going to be getting into electronics. We’re talking to national retailers that have a much larger footprint.

What is a lesson of your success?

I think the reason we’re successful is that even at this point, I don’t feel we’re successful. Mike and I always feel that regardless of where we are, we’re always thinking about where we need to be. If you don’t have that growth curve, if you get complacent, there will always be someone younger and hungrier coming in to do it better.

What did the lack of a business education mean to you?

I had to learn everything for myself. I didn’t have any preconceived notions of how a business should be run. I didn’t have any preconceived notions of how to sell. To a certain degree it was an advantage. Looking back at it now, if I had the opportunity to go to school, it would be great to get a formal education.

This interview has been edited and condensed

“When I get home from work, the first thing I do is make lunch for the next day,” says John Karwacki, a 22-year-old who works at an investment bank in Chicago.

Photo: Getty Images

That shift in habits is just one of many problems leaving some smaller and midsize restaurant chains, such as Friendly’s, Chevys and Quiznos, grasping for enough profit.

On top of the weak economic conditions that have challenged restaurants for the past several years, commodity costs have spiked. Shakeout, anyone?

Friendly Ice Cream Corp. filed for Chapter 11 bankruptcy protection in October 2011, unable to outrun a host of problems, including increases in the costs of cream, meat and other ingredients for its sundaes and burgers. For instance, the wholesale price of choice beef was up about 18% from a year previous, pork was up 27%, and milk futures prices were up 29% from a year before.

In the past two years, ingredient costs for the chain’s signature Fribble shakes have risen by roughly a third, a Friendly’s spokesman said.

Real Mex Restaurants Inc., the owner of Chevys and other sit-down Mexican-food chains, also filed for bankruptcy protection in October, citing the economy.

By contrast, Chipotle Mexican Grill Inc. and the Subway sandwich chain are thriving. Indeed, competition from Subway was one factor, along with heavy debt, that squeezed the Quiznos toasted-sub chain, prompting the company, formally QIP Holder LLC, to hire restructuring advisers earlier this year and warn lenders it might violate debt terms.

Chains with more marketing clout, economies of scale and smarter ways of responding to rising costs are edging out smaller chains or those that fail to attract choosier customers.

“Now that the fight for the consumer dollar is far more fierce, it’s going to become an exercise in survival of the fittest, with the stronger, more popular chains doing well and the others falling by the wayside,” said David Kurtz, a managing director and co-head of global restructuring at Lazard Frères & Co.

Revenue at publicly traded Chipotle rose 38% to $1.8 billion between 2008 and 2010, while its restaurant count went from 837 to more than 1,000 during that time.

At Subway, owned by closely held Doctor’s Associates Inc., revenue rose 18% to $15.2 billion between 2008 and 2010 while its restaurant count grew to more than 35,000 from 30,257.

Some customers say they offer healthier and higher-quality options than the competition. “The steak is fresher” at Chipotle than at competitors, said Rebekah Felts, a 23-year-old auditor at Deloitte who was eating lunch at a Manhattan Chipotle on a recent workday. “It’s quality food for not a bad price. I call this the most decent type of food you can get at a fast-food type place.”

Rising ingredient prices hit smaller and midsize chains like Friendly’s harder because they usually don’t have the leverage to enter long-term deals with suppliers that cushion them from volatile commodities markets.

Friendly’s said that while it “fared better than industry averages in the mid-scale and casual-dining sectors over the last few years, we could not shield our bottom line from the significant impact of the soaring commodity prices driven by butter and the economic downturn.” It said it expected a restructuring to help position it well for the future.

As for Chevys, “The combination of high debt, a weak economy and certain above-market leases led to our decision to restructure under Chapter 11,” said David Goronkin, Real Mex’s chairman and chief executive.

Quiznos declined to comment.

Raising prices is often a last resort, for fear of scaring away already scarce customers. Consumer prices for food at home rose at a much higher rate in the past 12 months than for food away from home, indicating that grocery stores have had an easier time passing along higher costs to consumers than have restaurants.

The weak job market is a major factor. Young people between 18 and 24 years old are among those having the most difficulty finding jobs. About 23% of 18- and 19-year-olds are jobless, according to the Labor Department, as are almost 15% of those between the ages of 20 and 24. That’s far higher than the national 9% unemployment rate.

In the year ended May 2011, 18- to 24-years-olds visited restaurants 192 times each on average, down from 245 times five years ago, according to market researcher NPD Group. Among all potential customers, people averaged visiting restaurants 196 times this year, down from 208 in 2006.

Georg Ebner, 22, who works at an investment bank, was eating a sandwich—no chips or drink—at a Chicago Subway recently because he forgot to bring his lunch. He chose Subway over nearby Potbelly Sandwich Shop because the 12-inch sub is bigger than what he would get at Potbelly.

“The quality is better at Potbelly, but their price per unit is higher,” he said. (A spokeswoman for Potbelly, which operates 200 shops, didn’t respond to requests for comment.)

A few minutes later he was joined by his co-worker, Mr. Karwacki, toting a plastic bag containing a sandwich and banana from home. Mr. Karwacki says he used to eat out all the time but decided about a month ago to bring his lunch, due to his student loans and uncertainty about the economy.

Office vs Branch
Many international banks have a global network of sales offices, but is that good enough for your growing overseas business? Also, does the bank have an international bricks and mortar branch presence, or just third-party representative offices? And do they offer true local market banking insight and access to local payment systems? HSBC Trade Services reps explain what services you should look for.

Small firms have the flexibility to learn from mistakes
Photo: Thomas Barwick

The strategy, it turns out, was less than perfect. “It was a waste of time and money,” Chan admits. Most of the power stations were too small or unsophisticated to benefit from the Kingsbury products, and the companies that could use the bearings were unimpressed by a generic mailing.

With annual revenues of US$50 million, Kingsbury could not afford to take big risks on a marketing strategy in an unfamiliar market. But as a small firm, it did have the flexibility to learn from its mistakes and develop a new strategy quickly. When Chan’s initial mail-shot strategy in China failed, he was able to rapidly regroup. Because he worked directly with the leadership at Kingsbury, he did not have to go through complex decision-making or test pilot new marketing strategies. He simply came up with a new plan, got the go-ahead and began executing it in a matter of days.

This time, instead of throwing his marketing net so broadly, he focused his sales efforts on the top 10 companies in the market. Over several weeks, he made calls and personal inquiries, then flew to China to make presentations over a two-week period to executives at all ten companies. Most of those organizations ended up purchasing the bearings and remain loyal customers today.

SMALL IS BEAUTIFUL

Having the freedom to make rapid course corrections without the weight of bureaucracy is a powerful tool for smaller companies moving into unfamiliar markets, where trial and error is often a necessary part of finding one’s niche. Of course, limited resources and access to talent can make it difficult for smaller firms to break into new markets and to grow in order to keep up with local demand. But, an ability to rapidly reinvent themselves for new consumer groups can give smaller firms an edge over their more globally established, larger and wealthier counterparts.

Small and mid-sized companies enter foreign markets with less overhead, flatter hierarchies and a more entrepreneurial approach to the market, says Ken Esch, a partner in PwCs’ private company services practice in Chicago. “They are more agile than larger firms,” he says. “They have the flexibility to try new products quickly, and if they don’t work, they can move on to something else.”

Indeed, smaller firms must leverage these strengths as the race to set up shop in foreign markets heats up. According to a 2011 PwC survey of 236 executives in the U.S., 51% of private companies plan on expanding overseas in the next one to two years, and 48% already have a global presence. Among these firms, 74% are focused on fast-growing emerging markets.

Yet, many firms are also discovering that the strong allure of emerging markets is often matched by the difficulty of selling products in them. A recent Deloitte survey of 628 executives worldwide found that 31% of companies fell short of their projected revenue goals for emerging market sales in 2011, largely because they are struggling to meet lower price point demands, develop brand awareness and compete against local businesses.

While larger firms may have the resources to stick it out for the long term and slowly build their market share, smaller firms can enter the same markets on a much smaller scale. By partnering with local firms, managing their operations remotely, and hiring only a few key staff, they can test the waters for their products or services, and build their brand for less cost and with smaller teams. Entering a new market with a specific product or service is still a risk for smaller companies, but it is not a commitment. A smaller company that has fewer heads to convince has the flexibility to change its location, its product or even its business strategy.

CHANGE PERSPECTIVES

Team Launcher, a Miami-based recruiting firm, has developed its own unique approach to establishing itself in new locations, while making the most of limited funds and human resources. The firm “leases” talented employees that provide services such as writing, graphic design and computer programming in India and the Philippines for global clients. But Tadd Rosenfeld, the firm’s CEO, does not spend much money on real estate to get a new office up and running. Instead, he simply negotiates for space in an existing firm for a few core employees until he gets a sense of whether the market has potential.

If he decides to stay, he uses his company’s relative anonymity to cut deals on advertising and office space. Larger companies with a well-known brand, like Apple or Google, are typically forced to pay top rates, Rosenfeld says. “They can’t get away with trying to cut deals, but we can.”

Once he has necessary logistics in place, he repositions the company to make it appear larger and more well-established. He purchases full-page ads in local papers, buys splashy billboards, and invests in plush offices in nice neighborhoods to establish Team Launcher’s name as a leader in the recruiting management industry.

“Even the smallest player can position itself to look like a major firm in the mind of emerging market locals,” Rosenfeld says. “For a small firm, that’s a big advantage.”

While smaller firms may want to present themselves as a large company, their strength lies in precisely their size. Their ability to adapt and reinvent themselves allows them to understand consumers, adapt to their environment and take risks. As Chan illustrates, working in emerging markets requires taking the plunge—and doing it again.

Photo: Digital Vision

Trade shows provide important opportunities for B2B companies to connect with existing customers, showcase new products to prospects and generally stay up to speed on what’s going on in their industries. For all that’s said about the efficiency of digital tactics, nothing can replace the personal connections that happen at trade shows.

The issue is that trade shows cost a lot. The fees to exhibit are often high, and when you add the cost of having a strong presence (booth and marketing collateral), and the travel expenses for getting your sales and technical people there, it’s a big investment.

That’s why it’s critical to leverage your investment in the trade shows you do attend. In my experience, about one half the value of trade shows is at the show itself, 25% happens before the show and 25% happens after. If companies don’t do the before and after part, they’re wasting half their money.

Here are tips to make sure your 2012 trade shows delivers maximum ROI.

GETTING READY FOR THE SHOW

Make contact with trade show organizers
Make contact early on with the trade show coordinators and key contacts, as they will provide valuable insight as you plan your event.

Get audience data
Find out the type of visitors that the show attracts, approximate number of attendees and any specifics the show can provide from past experience. This information will help you define how to approach any demonstrations, presentations and promotions. Understand all of the elements you have to work with. Find out exactly what you get with your space rental and the layout of the area you will have to display your business. Be sure to find out the size of the tables you will have, whether there is wall space for your company signage, if there are electrical outlets available, and anything else that may or may not be included (that is, table cloths, etc.).

Be aware of all trade show deadlines
Create a one-page cheat sheet that lists out all the due dates and forms required. Print out this list and place it somewhere you can reference weekly. (If companies waste money anywhere on trade shows, it’s that they are late in organizing and have to pay fees to expedite everything!)

AT THE SHOW

Brand presence
Put your best face forward: Make your area reflect your brand as much as possible. Think about a tablecloth that represents your company’s image and color scheme (without being overpowering), have signage where your logo is visible, and add visual appeal with photography that clearly identifies the service you offer.

Getting attention
Map out how you would like each attendee to ‘experience’ your brand, product and/or service. Will you attract attendees with a live demonstration? Is there a video looping on a large monitor? Whatever you do, make it visually appealing and you will draw their attention.

Have a portfolio of your work
You have done some amazing work and have earned some bragging rights, so make sure you print off some of your best projects to showcase.

Everyone leaves with a little something
Do not let anyone walk away without something, have plenty of giveaways, such as business cards, brochures, pens, magnets, and anything else relevant that has your company name on it. Most people who attend trade shows are expecting to take home some goodies. Connect with new people
It’s easy for reps to sit at the booth and wait for people they already know to stop by. But a big part of the value of trade shows is meeting new contacts. This means being proactive to welcome new faces to the booth and get to know them. It takes more energy (and trade shows are a very energy-intensive affair) but it’s better to exert the effort at the show and then take a few days of rest later.

AFTER THE SHOW

Lead tracking and follow-up
You need a process for tracking leads and following-up post-show. The main reason you attend a trade show is to make connections with your primary target audience, so following-up post-show is essential. If you have an e-newsletter, this is a perfect time to send your new contacts a request to receive the newsletter so you gain additional subscribers. This way they stay connected to your company.

The key to trade show success is to think about it not as just one event, but as a step in an ongoing process of building relationships. Make your event memorable for attendees and make it measurable for your business.

Lisa Shepherd is founder and president of The Mezzanine Group, a Toronto-area company that specializes in Business to Business (B2B) consulting and marketing outsourcing.

Photo: Serhat Keskin

November’s annual industrial output, which was strong across almost all sub-sectors, was also higher than the 7.3% annual rise recorded in October. The data had little impact on Turkish stocks or the lira, which moved higher after the data was released on news the central bank had offered two separate foreign exchange auctions of US$50 million.

Economists said the numbers underscored Turkey’s economic resilience, and forecast a strong expansion in full-year gross domestic product for 2011.

“Despite the sour global developments [the] Turkish economy shows a significant resilience and this was mainly due to historically low interest rates and [lira] depreciation that supported overall export performance,” said Ozgur Altug, an economist at BGC Partners in Istanbul.

Turkey’s economy outstripped China to record the fastest growth of any economy in the Group of 20 industrialized and developing nations in the first half of 2011, propelled by record low interest rates and booming domestic demand. Top government policy makers have forecast that the economy expanded 7.5% last year.

But economists are increasingly worried that Turkish monetary policy is out of kilter with growing threats to the economy, chiefly a rapid expansion of the current account deficit—forecast to top 10% of gross domestic product this year—which raises the chance of a hard landing.

Partly because of market nerves, Turkish assets have weakened, even as the economy has posted rapid growth.

Market concerns have been reflected in consistent downward pressure on the lira, which has outperformed many emerging market currencies, but has touched all-time lows against the dollar in recent weeks.

To stem the lira’s fall, Turkey’s central bank in October more than doubled the interest rates it charges banks for overnight loans to 12.5% from 5.75%. The move followed a series of attempts to intervene in currency markets to stem the decline.

But many economists see the tightening as insufficient to address the economic imbalances, with a growing number calling for a reversion to a more orthodox policy of hiking the key policy rate.

Phillip Abrary, chief executive officer of
Ostara Nutrient Recovery Technologies Inc.

Abrary, 47, trained as both a microbiologist and chartered accountant before becoming a technology consultant for manufacturers, and then decided he wanted a business challenge that could make the world a better place. Abrary designs, builds and sells water treatment systems. Ostara’s patented technology, developed at the University of British Columbia, recovers phosphorus and ammonia from municipal and industrial wastewaters and transforms them into Crystal Green, an environmentally responsible fertilizer.

The company was named a 2011 Technology Pioneer by the World Economic Forum, the only Canadian company so honoured this year.

How big are the opportunities for a small company like yours?

The opportunity’s really global. Where there is waste water and there are nutrients in that water, we can tap into that water and recover the nutrients in a valuable form. So long as people consume food, there’s a market for the fertilizer. Pretty much everywhere and pretty much on a perpetual basis.

What does your experience tell others about commercializing an idea from university laboratories?

Get it out of the laboratory as soon as it’s ready.

Why?

Because you need to find customers. There’s no point in trying to develop something without engaging customers. The customers, in our case, are the utilities. We had the City of Edmonton signed up to do the demo project with us. That was extremely significant because that customer told us what it wanted this thing to do. We may have invented the greatest mousetrap, but if nobody wants to buy it, it’s not very interesting.

How well are we doing in Canada at commercializing university research?

I’ve seen some great successes. UBC has had a number of successful spin-off companies, as have other universities, not only in Canada but around the world. Canada is quite unique in that not only is there a great university system in place to create the initial research but there’s a tremendous support network in place for the early stage commercialization. Without funds like SDTC [Sustainable Development Technology Canada] and the NRC [National Research Council], it would have been very difficult for us to get all that early high-risk development money from shareholders.

That’s when companies really need help. Canada’s done a great job in nurturing the development of these technologies. They [the funding agencies] make you go through a rigorous process of validating your assumptions and markets before you go ahead. Once that technology reaches commercial stage, it stands on its own legs.

Do you have any policy advice to make things better?

The Investment Tax Credit available to B.C. companies for B.C. residents who make investments in private companies that are developing a technology and need that seed money to attract angel investors, is hugely helpful. That is when companies have a difficult time raising equity because there are so many risks on the table and they need to get out of the university R&D world. They need to get into the real world and build something the market will accept.

How did you find the technology?

Through the industry liaison office at UBC. They have a group that specializes in finding promising technologies at the university, applying for IP protection and then working with companies and entrepreneurial groups that are prepared to put the money and the time behind commercializing these opportunities.

What was a key hurdle when you began to try to commercialize?

Making the technology of a size and at a scale where it could be commercially viable. We had to do a 100x scale-up before it could be commercially viable. We spent a year doing background work and studies on whether it would be viable on the world stage.

What went into scaling it up?

We tried to convince different cities to acquire the larger unit, but there was too much technology risk on the table. The Canadian government, through the SDTC and the NRC, and our shareholders, through equity investments in the company, provided funds so we could actually fund the construction of this scale of unit, which was designed in a collaboration between our technical people, UBC and outside engineering firms.

What is your vision of the company’s future?

We want to go everywhere, but carefully. [The firm now employs 35 people.] We want to focus on the European expansion over the next couple of years. We have plans to move the business more aggressively into the Asian markets. There’s a tremendous amount of activity over there now. Well, it gets as big as it gets, as quickly as we can get it there without stumbling.

What sorts of stumbles worry you?

One of the things that can happen is that you take on too many responsibilities and make too many promises and you don’t deliver. Making mistakes where you get a bad reputation in some way can really be detrimental to a young company. We want to grow aggressively in markets where we’re confident we can deliver, where we have all the necessary infrastructure to do so. We need to make sure that we have all the right people in place in each market and the right partners.

This interview has been edited and condensed

Photo: Bloomberg via Getty Images

China’s global trade surplus – which peaked at a whopping US$298 billion in 2008 – has been steadily shrinking as money-conscious consumers in Europe and the United States reduce demand for foreign imports.

Indeed, the mammoth trade surplus could disappear altogether, some economists predict, as exports continue to suffer and the Asian giant’s expanding middle-class consume more products and services at home.

But China’s leaders will be loath to let the Communist country slip into a persistent trade deficit, some experts say.

“They want to run a trade surplus because they’re worried about becoming a slave of the [International Monetary Fund] and having to be bailed out and agree to conditions that would be horrendous,” said Scott Kennedy, director of Indiana University’s Research Center for Chinese Politics and Business. “There will probably be a gradual reduction in the absolute size of China’s trade surplus, [and] at some point we might see a movement toward balance. But to be like the United States — perennially in a deficit — you’d have to see China consume so much.”

China’s trade surplus, which had ballooned over two decades, ended 2011 at US$155.14 billion, down from $181.5 billion in 2010, according to new data from the Chinese government.

The country’s exports rose more than 20% for the year to $1.899 trillion, which is down from a 31% increase in 2010. Imports, meanwhile, gained a much smaller-than-expected 25% to $1.743 trillion. That’s down from a nearly 39% surge in 2010.

The climate is expected to remain tough this year.

At the height of China’s trade prowess, just before the global financial crisis in 2008, the country’s trade surplus accounted for more than 7% of its economic output. But since the global economic slowdown, China’s surplus as a percentage of its gross domestic product has come down to a more reasonable 3%, according to Chinese government estimates.

U.S. Treasury Secretary Timothy Geithner said last year that the surplus – a source of friction between the United States and China – should be below 4% to keep the global economy well balanced.

China’s official estimate of 3% to 4% is likely a lowball figure, said Ebrahim Rahbari, an economist in the global economics team at Citigroup. Citigroup economists expect the trade balance to fall gradually to less than 2% of GDP by 2030, but to maintain a surplus into 2050 and perhaps beyond.

But such figures can present a murky picture.

Rahbari and other economists point to the production of Apple Inc.’s iPhone to illustrate how global trade statistics are skewed. iPhones are assembled in China, but their components come from as many as nine different countries. The gadgets add roughly $2 billion to the U.S. trade deficit with China, but if they were accounted for in a way that reflected the actual value China added to the components, the export value would be less than $74 million.

China has been the fastest-growing economy over the past three decades, a boom fueled by lavish government spending on infrastructure and exports that critics argue were subsidized by a currency kept artificially weak by government policy.

China’s leaders have pledged to continue the country’s robust growth by shifting the world’s second-largest economy away from a dependence on exports toward more consumption at home.

But it will be a long time before Chinese consumers get anywhere close to the spending habits of their counterparts in the United States, where consumer spending accounts for around 70% of the country’s overall economy.

“What’s interesting is that even though there’s a growing middle class, Chinese people don’t buy very much and their savings rate is between 35% and 40%, which is astronomically high,” said Michael Beckley, a research fellow at Harvard specializing in U.S. and Chinese foreign policy. “So they’re not getting a consumption boom that would be very beneficial to the Chinese economy. A lot of it has to do with the relative lack of a social safety net. If you need to go to the hospital, you go with cash in hand.”

Still, Ren Xianfeng, a senior analyst at IHS Global Insight in Beijing, said China will become a net importer eventually because changes in the competitive landscape will prompt manufacturing to shift to cheaper locales, making the country lose its “workshop of the world” status.

“Our own forecast shows this will happen around 2025,” she said. “China’s becoming a net importer will be just part of a global shift of the supply chain, and its net impact on the U.S. may not be as big as thought. When China ceases to be a net exporter to the U.S., some other country will take its place.”

After overtaking Japan as the world’s second-largest economy last year, China also might pass the United States and take the No. 1 spot by 2016, the International Monetary Fund predicts.

While China’s rise as an economic superpower has prompted lots of concern in the United States and elsewhere, it should, instead, be celebrated, said Donald Boudreaux, a professor of economics at George Mason University.

“I would love to see China growing vastly faster,” he said. “It would make everyone wealthier. Even if we Americans or Westerners look at it in a very narrow, self-interested way, China’s growth is good. It means the people we’re trading with are more productive.”

He likened the situation to choosing to trade with Bill Gates versus a 14-year-old kid who’s lazy. “A rich China has a lot more things to offer us.”

“We need to pay employees from fifty different nationalities,” says Marc-André Dufort, vice-president of treasury, risks and investment projects. “But the origin of the complexity of our operations related to foreign currency stems more from the source of our revenues.”

With a score of performances each year in 40 cities around the globe, 90% of revenue are in currencies other than the ones many of the Cirque’s employees use when they return to their homelands. Citing the example of Saltimbanco, a show currently being presented in Russia, Dufort said that the revenues go into the coffers of the Quebec company in the form of rubles. “Ultimately, we need to convert income into 10 or 15 currencies,” he says.

To do this, Cirque du Soleil converts all its revenue—with the exception of that from Canada—into a single monetary standard: the U.S. dollar. “Subsequently, we pay our employees and suppliers,” he says.

Easy? Not quite. It works well in Europe, the United States and Canada, says Dufort, “because they’re democratic countries where there is a free flow of currency. They are members of the OECD. But when you go out in countries where banking regulations are not uniform, hell begins.”

In very promising markets such as the BRIC nations, for example, the reality is quite different. “Restrictions prevent them from fully converting their currencies [to U.S. dollars],” he says. The circus has to resort to a cumbersome bureaucratic process. “In Brazil for example, this process can take between two and four months,” he says.

Before developing any of these markets, Cirque du Soleil has to set the financial stage. “A month before [a show debuts] we go there to learn more about how they work,” he said. How does their banking system work? What are the laws governing financial activities? “In that sense,” Dufort says, “the greatest challenges we face are not the currency itself, but rather the regulatory aspect of some countries.”

MONETARY UNCERTAINTY

If, over the years, Cirque du Soleil has become an expert on regulatory and bureaucratic mazes, it still finds itself subject to the ups and downs of so many currencies.

At the turn of the current century the company underwent the first effects of this harsh reality, when the Canadian dollar was trading at less than US$0.65. Result: to pay for a single salary of C$50,000 (US$32,500), the circus had to sell the equivalent of 465 show tickets at $70 apiece. Today, the same salary is US$49,000 and requires the sale of nearly 700 tickets to a show. “The increase in costs has significantly eroded our profit margin,” Dufort says.

To counter the negative effects of the rising Canadian dollar, Cirque had no choice but to increase the number of new shows. Beginning in 2006, Cirque created two new shows; today, about three shows are created each year.

To guard against financial tumult, Cirque du Soleil is also developing its markets accordingly. “First of all, we promote markets that will generate higher revenues and whose currency corresponds with ours,” he said. This explains the strong presence of Cirque du Soleil in Japan and Australia over the past five years.

To see a video in French on how Cirque du Soleil’s addresses currencies click here.

Not all web-based banking platforms are created equal. Domestic banks focus on domestic platforms for their clients. But providing online financial services on a global scale – and making the user experience consistent while integrating domestic and international accounts – requires a banking partner willing to make substantial investments in technology. As HSBC Global Payments and Cash Management reps explain, it also requires a financial institution with local presence supporting their worldwide operations and the knowledge to recognize the benefit of having everything in one place.

By 2050, Goldman Sachs estimates Brazil
will be the world’s fourth-biggest economy -
leapfrogging Japan and Germany
Photo: Dado Galdieri/Bloomberg News

In a time of global economic uncertainty, the breadth of Brazil’s continuing boom is remarkable. Extending far beyond the new roads needed to host global sporting events, it ranges from oil, potash and newsprint to new homes, cellphones, cars and coffee.

And increasingly, Canadians want in. Trade has more than doubled in the past decade, and observers from KPMG Canada to the TSX Venture Exchange say Canadian interest has surged even more in the past year. As Canada reawakens to Brazil’s potential, though, so does the rest of the world.

“From a business perspective, you can sense the energy and optimism [here],” Jean Cardyn, regional vice-president of South America for Export Development Canada, says in an interview from Sao Paulo.

Despite the difficulties – it’s a tough market to enter, costs are high, infrastructure and educational needs are pressing – “you feel a lot of enthusiasm – in some ways, it seems like anything is possible here,” he says.

The allure is clear: By 2050, Goldman Sachs estimates Brazil will be the world’s fourth-biggest economy – leapfrogging Japan and Germany.

Twenty million Brazilians have joined the middle class in the past few years, and they’re hungry for goods. The country is one of the world’s largest consumers of mobile phones, high-definition TVs and laptops. It is also the world’s biggest exporter of orange juice, sugar cane and coffee, and has the most cattle.

“The image people had of Brazil as a third-world country doesn’t stand,” says Mr. Cardyn. “It’s not emerging  it has emerged.”

Growth will be less than 4 per cent this year, down from a blistering 7.5-per-cent expansion in 2010, because of global headwinds and inflation, says Nick Chamie, head of emerging markets research with RBC Dominion Securities. Weakening commodity prices are also a concern.

But in the long run, since Brazil’s momentum will outpace much of the developed world, it’s attracting the interest of companies such as Toronto-based Innovative Composites International Inc., which recycles plastics – Coca-Cola bottles, for instance – into low-cost modular homes.

In November, the firm won a $160-million contract to supply several thousand homes to the Brazilian market. The contract is part of the government’s Minha Casa Minha Vida campaign to build two million units for low-income families by 2014, one of the largest property investment projects in the world.

Canada’s involvement in Brazil is far from new, however. In 1899, William Mackenzie took over an old mule-drawn tram line and called it the Sao Paulo Tramway, Light and Power Co. The company was later named Brascan, and is now Brookfield Asset Management – with $8.5-billion invested in Brazil’s shopping malls, property and infrastructure.

Smaller Canadian firms are entering the market too, such as Rio Verde Minerals Development, a Toronto-Rio firm developing fertilizer projects in Brazil, an agricultural giant still largely reliant on imported potash.

“Brazil is, to me, one of the best places to invest. But you only do it if you have smart local partners … and you foster the right relationships,” says Rio Verde chief executive officer Stephen Keith, who travels there every six weeks.

Up to now, he says, his biggest obstacle has been educating Canadian investors. But that’s changing.

“We’ve seen a significant increase in Canadian investor interest in Brazil in the last 12 to 18 months,” says Craig Walter, partner and head of the Latin America desk at KPMG in Canada. The interest extends from the more usual mining and infrastructure projects to high tech and consumer markets – largely as a result of increased demand from Brazil’s growing economy and its hosting of the World Cup and the Summer Olympics.

Brazil is not without some serious short-term challenges, however. It’s ranked 126th out of 183 countries on the World Bank’s ease-of-doing-business list, well behind Peru, Mexico and Argentina.

“Brazil is a long-term market,” said Ed Dosman, a senior research fellow at York University, who has studied Latin America for more than four decades. He cites Molson Coors Brewing Co.’s money-losing purchase in 2002 of the Brazilian brewer Kaiser as an example of what can happen when companies lack a deep knowledge of the market.

Still, Prime Minister Stephen Harper, who visited Brazil last summer, counts it as one of Canada’s top-priority markets. Earlier this month, Canada named its participants for a CEO forum that will explore trade opportunities between the two countries, and which includes executives from Kinross Gold Corp., Brookfield and Research In Motion Ltd. Brazil has yet to name its team.

BRAZIL’S BIG JUMP

Brazil broke into the top 10 Canadian export markets for the first time in 2010, landing in ninth place – a big jump from 14th place in 2009.

Exports and imports have more than doubled over the past decade, Statistics Canada figures show.

Still, Brazil remains a tiny component of Canada’s total exports, accounting for less than 1 per cent last year. Top exports to the country from January to November last year were fertilizers, coal, newsprint, telecom equipment and organic chemicals.

Brazil was the eighth-largest source of foreign direct investment in Canada in 2010, with $13.5-billion invested. That same year, Brazil was the 11th-largest recipient of Canadian direct investment abroad, with $9.7-billion invested.

Sources: Foreign Affairs and International Trade Canada, Statistics Canada.

THE SPORTING BOOM

Brazil, home of Pele and the “beautiful game,” has long been synonymous with soccer. Now, it is in a rush up the field as it prepares to host the 2014 World Cup and the 2016 Olympic Games, creating an unprecedented infrastructure boom in Brazil.

Along with arenas and athletes’ villages, Brazil is spending billions on power plants and transmission lines, roads and public transit. A bullet train will link Rio de Janeiro and Sao Paulo. Airports, ports, and water and sewage systems are being expanded.

Companies around the world have been scrambling to get in on the building boom, including Canadians. One low-profile winner is Toronto-based Thales Canada, a unit of France’s Thales Group, which will install its train-signalling technology on a new monorail in Sao Paulo, opening in time to move World Cup crowds in 2014.

Chief operating officer Michael Mackenzie said the company has high hopes the deal could be first of many in Brazil: “As a developing market, obviously, for all industries, not just ours, it’s a market that certainly has a level of attractiveness.”

Photo: Bloomberg via Getty Images

Now, a strange moment has arrived: Germany’s neighbours find themselves hoping it will stop dithering and accept a strong leadership role. In a speech in Berlin in late November, Polish politician Radek Sikorski declared, “I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.”

He’d best prepare for a frightful year: Germany will likely continue its gradualist approach to combating the sovereign debt crisis—even if it means taking the rest of the continent to the brink and beyond.

There can be no hope of salvation for the euro unless Germany acts. Peripheral eurozone states have bankrupted themselves. Core states, many of them also fiscal basket cases, are weakening. Europe’s recklessly leveraged banks are struggling to avoid going bust. Although German Chancellor Angela Merkel collaborates with French President Nicolas Sarkozy, there’s little doubt who the senior partner is: the euro crisis will be solved on Germany’s terms, or not at all.

The remedies devised thus far—leveraging bailout funds, rewriting treaties—amount to palliatives intended to restore confidence. Each successive summit produces less of that ephemeral commodity. The latest solution, a compact that would see states surrender fiscal sovereignty to a central authority, is necessary but arrives a decade too late. Meanwhile, Merkel continues to demur on more forceful options. She’s against allowing the European Central Bank to operate as a “lender of last resort.” She also opposes issuing “euro bonds” guaranteed jointly by all member states. In short, she’s not willing to do what’s necessary to save the euro.

It’s not that Germany’s leadership has forgotten the benefits of a united Europe. Its exporters profited tremendously from the common currency, and Germany is now so intertwined with its neighbours that there can be no graceful exit. “With foreign assets worth €6 trillion, most of which consist of claims on its eurozone partners, Germany would lose out massively if the eurozone fragments,” wrote Jean Pisani-Ferry, director of Brussels-based think-tank Bruegel, in a recent commentary.

Merkel is partly constrained by socio-cultural forces. Germany’s experience with hyperinflation in the 1920s led to a deep aversion to rising prices, one that is all the more severe because Germany is a nation of savers. Finance Minister Wolfgang Schäuble once explained that unlike American policy-makers, who favour short-term corrective measures, “we take the longer view and are therefore more preoccupied with the implications of excessive deficits and the dangers of high inflation.” That attitude militates against granting the ECB unfettered ability to print euros, a move that could seriously damage those savings. As for euro bonds, they would merely encourage the same moral hazards that led to reckless borrowing. Merkel, up for re-election in two years, cannot afford any appearance of rescuing southern Europe with German money.

Her fellow heads of state also overestimate Germany’s ability to intervene. Despite its image as a sober fiscal steward, the country has violated the Maastricht treaty’s deficit and debt restrictions. And with a debt-to-GDP ratio above 80%, it isn’t exactly bursting with budgetary resources. Germany cannot prop up indefinitely the growing coterie of peripheral states, much less Spain or Italy. Threats from debt-rating agencies to strip the country of its sterling credit rating and investors’ lacklustre response to a bond auction in November are just two signs that this reality is beginning to sink in. The price of becoming Europe’s potentate is something Germany simply cannot afford.

Argentinian President Cristina Fernandez
Photo: AFP/Getty Images

Argentina often blocks or delays imports to boost its trade surplus and force foreign companies to make their goods here. Last month, the European Union complained that Argentina was limiting imports for around 600 products, according to a report by the World Trade Organization. Argentine trade officials declined to comment for this article.

Following an import ban on its BlackBerry smartphones, Research In Motion Ltd., said in July it would partner with Brightstar Corp. to assemble its handsets in Argentina’s remote Tierra del Fuego province. RIM declined to be interviewed and Apple Inc. didn’t reply to requests for comment.

Many governments imposed trade barriers after the 2008-09 financial crisis wreaked havoc on global trade balances. But Argentina stands out because of the scope, depth and unofficial nature of its nontariff trade barriers.

Argentina often resorts to what Simon Evenett, an economics professor at the University of St. Gallen in Switzerland, and his colleague Richard Baldwin call “murky protectionism.” Such barriers are verbal edicts—or threats, some executives say—made over the phone or in person by Commerce Secretary Guillermo Moreno and other government officials to importers. Executives often abide, fearing the government would otherwise use the tax collection agency, lawsuits or some other means to persecute them or their companies.

“No country implemented more protectionist measures in the third quarter of 2011 than Argentina,” said Evenett.

Argentina erected 25 protectionist regulations, almost double that of China. Russia enacted seven, India six and Brazil two, said Evenett, who tracks such measures at Global Trade Alert. “Since November 2008 Argentina has taken 123 protectionist measures which have harmed at least 175 of its trading partners,” he said. “Nearly a third of all product categories that Argentina imports are covered by some type of protectionist measure.”

Argentina’s trade violations would likely be much higher if all unwritten measures were counted, Evenett said.

“Moreno calls and tells you exactly what you can import and what you can’t,” said an executive at the local subsidiary of a major international firm. “The government leaves no paper trail. It’s all done verbally so nobody can formally complain about it. It’s like working with the mafia.” Moreno couldn’t be reached for comment.

In December 2011, Kirchner gave him even more power over trade by formally placing both import and export policies under his purview. To some extent the policies are working. Investors are plunking down US$400 million in new manufacturing projects in Tierra del Fuego, according to the Industry Ministry. The area’s electronics industry now employs 12,000 people, compared with 2,000 three years ago.

The production of cell phones and other goods in the area has allowed Argentina to substitute imports totaling about US$3 billion, says the ministry. Around 94% of the LCD TVs sold in Argentina are produced in the province, up from 50% in 2003. Production in the province has also risen for air conditioners, computer monitors and microwaves, among other items.

Kirchner aims to replace 45% of today’s imports with locally made goods by the year 2020. In practice, the policy means Argentina’s trade partners increasingly stand to lose out on the country’s market of nearly 42 million people.

Frequently, foreign officials cannot even get meetings with Argentine officials to discuss their grievances. “The problem isn’t that Argentina delays imports,” said a Peruvian embassy official, who has a difficult time explaining the problems to Peruvian exporters. “The problem is that the delays are unpredictable. You never know how long they’ll last.”

Trade experts and former WTO officials say the lack of written evidence dims prospects of winning a case and deters formal complaints against Argentina at the WTO’s dispute settlement body. “Companies aren’t complaining about this out loud because the economy is booming and they’re still making money,” said a foreign trade official. Still, “Argentina is violating WTO rules more than any country that I can think of.”

Executives and diplomats asked to comment anonymously given the sensitive nature of the subject and fear of government reprisals.

While some trade policies have led to foreign investment in manufacturing, others are even more unusual. Earlier this year, importers of Porsche and BMW AG cars agreed to export wine, olive oil and even rice in exchange for authorization to bring vehicles into Argentina. Neither company responded to requests for comment.

Kirchner plans to expand the policies. In October, she won a landslide re-election, as voters rewarded her for years of economic prosperity, falling unemployment and political stability. She recently launched a plan to boost local book production. “It’s embarrassing that 78% of the books we read in Argentina are imported,” she said.

Photo: AFP/Getty Images

Last October, Putin announced his intention to swap jobs with Dmitry Medvedev after the Russian elections in March, taking back the more powerful role of president that he had held until 2008. Shortly after this news, Putin laid out a plan to reunite Russia with its former Soviet neighbours. Having once called the collapse of the Soviet Union “the greatest geopolitical catastrophe of the 20th Century,” he now sees an opportunity to rectify that wrong. Writing in Izvestiya, a Moscow newspaper, he assured this wasn’t an attempt to “recreate the USSR,” but added, “close integration based on new values and a political and economic foundation is imperative.”

Of course, Putin first needs to take back control of the Kremlin, at a time when his personal popularity is under fire. (He was publicly booed at an event in November.) Meanwhile, last month marked the largest show of dissent since the fall of the Soviet Union, when tens of thousands took to the streets over alleged tampering by Putin’s United Russia party with parliamentary elections.

Russia’s opposition is no match for the man, however. Cyril Kopytin, a risk analyst at RBC Capital who previously worked for Rosbank, Russia’s largest private bank, closely follows economics and politics back home. He’s convinced that after the recent outburst of emotion cools, “the protesters, lacking leadership or an action plan, will return to their reality of a ruling United Russia, deteriorating economy, growing corruption and worsening quality of living.”

Putin’s strength rests on the fact that he represents the interests of well-organized power groups, including the secret police and the military, says Andrei Korobkov, a politics professor at Middle Tennessee State University. “And his popularity is still way above anyone else” who could realistically run for president.

The post-Soviet generation of engaged and wired Russians who are loudly finding their political voice remains small in number for a country of Russia’s size. Social media has limited Putin’s ability to “simply crack heads,” says Lauren Goodrich, a Eurasia specialist with Stratfor, a geopolitical analysis company based in Texas, but few doubt his willingness to use force if he perceives a real threat. Putin’s real opposition are the nationalists, she says, who view him as too moderate. He also remains popular with the silent, conservative majority. “I don’t even think Putin has to steal the election,” says Gooderich. “He is going to get it.”

Putin has reason to believe this a good time for Russia to step back forcefully onto the world stage. The country, which became a full member of the World Trade Organization last month, has recovered relatively well from the financial crisis. Prior to that downturn, it was far more politically aggressive, emboldened by high demand for its commodities and membership in the vaunted BRIC club of emerging economic powers. Putin openly used Russia’s vast energy resources and military muscle to impose his will on neighbouring states.

Today, Russia remains heavily dependant on oil revenues, but its debt is low, and forecasts predict that its economy will outperform all other central European, eastern European and Middle East countries. Russia is fiscally sound enough to offer a US$20-billion bailout to the European Union, and with the eurozone in trouble, Putin sees the so-called Eurasian Union of former republics as a way to counter U.S. influence. Gooderich expects Putin to rapidly expand the economic partnerships Russia has in place with Kazakhstan and Belarus to include other members of the Collective Security Treaty Organization, the military alliance between these nations signed in 1992. The goal is to have most former Soviet states in the union by 2014.

The talk in the Kremlin is about an economic club, but if the plans extend to common security, that would bring it much closer to recreating the Soviet Union. “If that happens,” says Gooderich, “we have a whole new beast on our hands.”

Photo: AFP/Getty Images

This shuddering correction to a three-decade miracle will come as no surprise to those who have been watching China’s stock markets over the past six months. If you think the S&P/TSX 60’s had it tough, consider Hong Kong’s Hang Seng index or the Shanghai composite, both down 20%-plus in 2011 and nearly 30% off their 2009 highs.

More troubling than the sliding value of equities is what’s happening in the housing market. Reliable official statistics of resale home prices are hard to come by in China. However, a number of private surveys suggest that the 20% annual price increases of the past several years have come to a halt, and the momentum now points in the opposite direction. According to China Index Academy, a property research firm, average prices in Shanghai have already declined 40% from their 2009 peak.

“The housing sector is experiencing a cold winter as sales fall sharply,” the Xinhua news agency reported in December. One analyst quoted by the state-controlled service, Beijing professor Zhao Xiao, predicts that prices nationwide would fall by 15% to 20% in 2012. In the China Economic Weekly, Cao Jinhai, an economist with the Chinese Academy of Social Sciences, forecast an average 40% decline in national housing prices from peak to eventual trough. For the biggest cities, he expects the average drop to top 50%.

China’s central government in part orchestrated this deflation of the housing bubble by reining in speculation and financing rules, but it’s a perilous undertaking. In Beijing, Shanghai and other cities, mobs of recent buyers have trashed the offices of developers that offered steep discounts in the same developments for new buyers.

That the home-price bubble should end with a pop is especially worrisome to economic prognosticators. Housing construction in China accounts for an unusually high share of the economy—13% of GDP, according to UBS China economist Jonathan Anderson, compared with 6% or 7% in mature economies. So a potential halving of residential construction would almost wipe out the country’s official 9% growth rate, even without considering the knock-on effect for sectors such as steel, concrete and retail. Then there is the impact on consumer wealth that a decline in home equity would engender. The Credit Suisse Global Wealth Report for 2011 shows Chinese citizens have roughly half their net worth tied up in real assets (mostly property), compared to less than one-third in the U.S. It follows that a drop in home values will have a dramatic effect on consumer and investor behaviour.

And, as happened in the U.S., trouble in the housing market tends to spread. Longtime China skeptic Vitaliy Katsenelson, a strategist for Denver-based Investment Management Associates, expects a cascade of loan defaults throughout the economy, including in the unregulated “grey” or “shadow” banking sector. “Like the movie Speed with Keanu Reeves, China is a bus with 1.3 billion Chinese on board,” he observed in a presentation last fall.

Were it simply a case of overinflated asset values, the coming crash would be short and V-shaped. Unfortunately, the country suffers from the same problem that’s hobbling developed economies, albeit in a different form: the misallocation of capital. In China’s case, the recipients of this capital are real estate developments, public works, and companies promising to build the new China. They include vast and deserted shopping malls, even entire cities, as well as state-owned industrial enterprises, riddled with corruption and inefficiency.

But wait, sinophiles will interject: it’s precisely that central control of the economy that will help the outgoing generation of leaders pilot a soft landing for their successors toward the year’s end, aided by China’s continuing strong fundamentals of trade and current-account surpluses, high savings rates and overall competitiveness. “The public sector is still close to 50% of the economy,” notes Joseph Caron, a strategic adviser to law firm Heenan Blaikie and former Canadian ambassador to China.

Taken to its logical end, though, this reasoning puts China’s policy-makers on a higher pedestal than their counterparts in other countries. If you believe they can make better decisions more consistently over the long term than leaders in the developed world, you must really believe that democracy, transparency and free enterprise are inferior models of governance. We don’t.

China’s suppression of information only increases the risk to investors and slows the response to shocks that arise. In 2012, those shocks will become impossible to hide. As Katsenelson put it bluntly, the crash “will tank the commodity markets, commodity producers and commodity-exporting nations. Demand for industrial goods will fall off a cliff.” When the Chinese economy collapses, Canada will have to brace itself.

View of the construction of the new
locks of the Panama Canal in Cocoli, Panama
Photo: AFP/Getty Images

Often referred to as Latin America’s Miami, or Singapore, or Dubai, Panama is garnering attention as a market that is attracting investment and tourism. A steady stream of U.S. shipping firms, financial institutions, logistics companies and real estate developers are opening offices in Panama City to take advantage of the country’s burgeoning economy, its massive investments in capital infrastructure projects, and its aim to become the region’s logistics and trade hub.

Though Panama has only 3.5 million people, it does have a geographical advantage—and thanks to the nearly US$6 billion six-year Panama Canal expansion project, the country’s appeal for North American businesses is growing further. The project, which aims to double the canal’s capacity by allowing transit of larger vessels, has helped sustain the country’s average 8% yearly GDP growth for the past five years, making it a Latin American economy with Asian growth rates. By the time it is complete in 2014, the Panama Canal Authority estimates it will generate up to 40,000 jobs, increase cargo volume by 35% in 2012-25, and bring in an average of US$1.2 billion per year in extra toll revenue. This translates to further domestic demand, greater tourism sector, and stronger international presence—in short, business opportunities.

MOVERS, SHAKERS, AND SERVICE PROVIDERS

While the Panama Canal expansion will not be completed for another two years, the country is already seeing strong economic growth. The Economist Intelligence Unit expects GDP growth of 8.5% in 2011 and 6% in 2012, largely driven by the country’s service sectors. Along with construction jobs, the canal project and other infrastructure investments in Panama are increasing demand for engineering and logistics expertise and equipment providers.

Powertrans Freight Systems, a freight management company based in Miami, Fla., is one such company. Powertrans has provided generators, cranes and other heavy equipment for the canal project, and plans to open an office in Panama City to support the subway, metro and highway construction projects currently underway.

According to Corey Yoo, Powertran’s vice president, one of the great appeals for the company is the fact that Panama currently does not have enough equipment providers and expertise to meet the demands of its infrastructure investments. Foreign firms have the opportunity to step in and fill the gap.

Meanwhile, 77% of Panama’s GDP is driven by other service industries, including finance, insurance, health and medical, transportation, telecommunications and tourism. Its financial sector has remained remarkably robust and profitable, even as adverse developments in the US and Europe pose risks to the global financial markets. And tourism is considered a growth industry that is projected to support 6% of total employment in the country by 2021, according to the World Travel and Tourism Council.

“Small or midsized companies that offer services in any of these sectors typically find the most opportunities,” says Glenn Tjon, partner at KPMG Advisory Central America, Panama and Dominican Republic.

But Tjon notes that these firms must be competitive in order to be successful. “They have to be able to enhance their product or service offering while reducing the overall cost,” he says.

LURING IN THE INVESTORS

In an attempt to establish itself as a global transport hub, and to develop ties with major international trading partners, the Panamanian government has taken great pains to woo foreign investors. This includes the creation of special economic zones that offer tax incentives and favorable recruitment and employment laws. For example, the mixed-use real estate development zone, Panama Pacifico, is tax free and has a special legal, tax, customs, labour and immigration regime; and the Petroleum and Oil Free zones allow companies to import, re-export, store, trade and sell oil products to domestic markets and ships in transit through the Panama Canal without paying income and import taxes.

In addition, the government allows businesses to establish themselves in the country relatively easy, especially when compared with some of its regional neighbours. The Ministry of Commerce and Industry’s Proinvex office offers fast-track visas and other work benefits to streamline ramp-up time for global investors. According to the World Bank Doing Business ranking, time to starting a business in Panama can take on average eight days, compared to an average 54 days in Latin America, and 13 days in OECD.

Despite these benefits, however, Panama still suffers from challenges that may deter some foreign investment. Limited access to skilled labour, in particular, is viewed as a major obstacle for foreign investors in a country that already has a small population. English proficiency is moderate to low, though many business people and professionals in the country speak some English.

“These problems have been identified by the government and might take several generations to solve,” Tjon admits, though be believes the country is making strides. There are currently 88 institutions of higher education in Panama; the first six years of primary education are compulsory.

In addition, a government that may turn out to be too heavy-handed and not forward-looking is a lingering threat. Though the president, Ricardo Martinelli, whose term runs to mid-2014, has not explicitly challenged foreign business, the way in which he manages foreign investment, development and reform in the country will determine how attractive Panama remains. Changes to mitigate such threats are certainly afoot. Martinelli recently signed the Tax Information Exchange Agreement with the US, a factor that convinced Congress to pass the recently-ratified Free Trade Act between the two countries. The FTA is expected to further boost trade and also reinforce for foreign investors the security of Panama’s investment environment.

Still, as with any new market, business owners must understand the regulations and laws that govern the corporate culture of Panama, and be prepared to do their research and accommodate the still-changing local business laws before diving into the market. But even with new banking regulations and a relatively small consumer base, the lucrative and virtually untapped opportunities it offers to North American businesses make it almost too attractive to ignore. As firms look for opportunities south of the US border, they should turn toward the tall Panama skyline. They may be surprised to find that the country is indeed rising.

Consider the trade mission: a kind of package tour for businesses aspiring to do business internationally. Often led by officials from one of three levels of Canadian government (although trade associations lead them as well), they ferry company executives overseas and get them face time with foreign officials, potential joint-venture partners, investors and customers. But are they worth it?

Ottawa-led trade missions have declined in
profile since Jean Chrétien’s government
Photo: Getty Images North America

There’s no easy answer, just as there is no single template for what a trade mission is. Rana Sarkar, president and CEO of the Canada-India Business Council, describes three basic kinds of missions. First, he says, is the high-level strategic mission, attended by trade ministers and vice-presidents of government affairs for large corporations. Then there are what Sarkar describes as more “episodic” missions, which attract small- and medium-sized enterprises looking for hook-ups with potential partners and customers. The third kind, he says, is basically business tourism—getting the lay of a land. Sometimes missions are industry- or sector-specific, but may also be wide-ranging.

Alex Benay, vice-president for government relations for Ottawa-based OpenText and founder of Global Indicium, has had plenty of experience participating in trade missions, and he says the key is having a clear sense of what you want to achieve. He advises preparing for the market and contacting channels appropriate for your company’s size. “The secret to a successful trade mission,” he says, “is clearly understanding what you wish to achieve. In one instance, targeting political levels of a given market may be a must to establish the right relationships, while in other instances you may want to target upcoming procurement vehicles.”

Benay has three practical suggestions:

Ensure organizers of the trade mission know you and your business. “Too often,” he says, “these events become a last-minute effort to fill vacancies: client vacancies, speaking vacancies, country presentations, etc.” Benay says you should insist on one hour with the organizers present your company, your strategic objectives and your aspirations. “The more organizers know about you, the more chances of successful match-making during the mission,” he says.

Have a clear plan and communicate it. Rather than blaming organizers for any frustration you encounter, be clear in your own mind on what your goals are in the region, both short and long term, what you want out of the mission, and that you communicate your aspirations to the mission leaders. “This is important,” Benay says. “If your goal is to establish senior-level relations but the mission is focused on targeting procurement opportunities, you may be greatly disappointed.”

Get references. Don’t be shy—it’s a simple question to ask and it’s too often overlooked. “Perferably you would want to be referred to a company that is in the same line of business as you are,” Benay says, “but what you want to make sure is that you are not attending a speed-dating session, that you will have time to develop the right relationships, or at a minimum to have the seeds planted to nurture the right relationship. Ask around, do your homework.”

TRADE MISSIONS AREN’T JUST FEDERAL

Ottawa-led trade missions have declined in profile since the government of former prime minister Jean Chrétien, whose celebrated Team Canada missions often saw the garrulous first minister collaring companies and foreign officials in countries such as Malaysia and China and personally brokering deals. Under the government of Prime Minister Stephen Harper, who is said to be less comfortable playing the role of gregarious business broker and even less comfortable being compared to Chrétien, the provinces have taken up the task.

Last November, the government of British Columbia hauled 250 representatives from 125 B.C. companies on a trade mission to China and India. Representing key B.C. industries such as forestry, seafood and transport, the trip was the largest ever organized by the Victoria government. Led by Premier Christy Clark and aided by trade-savvy ministers Pat Bell and Steve Thomson, the two week trip took companies to meet Chinese and Indian government officials ays well as industry leaders.

And provinces and territories are not the only entities leading tours. Cities such as Calgary and Chatham-Kent, Ontario have led trade missions. Terence Johnson, vice-president and co-founder of Chatham-based Scribendi.com, says he’d found the latter city’s trade mission to Korea and China valuable. “I made useful contacts for my business in both countries, got to learn about their business cultures and found solutions to a number of issues that I could not have resolved as easily without being there. Scribendi.com is an online business, but there’s still no substitute for being on the ground and meeting people.”

Matthew Hobbs agrees that the personal touch still prevails. The managing director of UK-CAN Business International in Toronto says: “In the age of the Internet and social media, the temptation is to believe that you can do everything from your desktop. But even for the most developed markets nothing beats actually visiting the country/markets. It isn’t just about having face time with potential partners and customers (although this is of paramount importance), it’s also about getting a feel for the country—culture, language, food, people, etc.”

Johnson says that participating in an official delegation opens doors, enabling opportunities that businesses might not be able to set up on their own. “You’re likely to have someone co-ordinating your travel, briefing you while in country, making introductions, booking interpreters where needed and helping you to avoid cultural misunderstandings.

Andrew Beattie, vice-president of marketing, sales and business development at the Ottawa Convention Centre, says that there are unexpected benefits as well. “You may find an equal or greater benefit of using the mission to forge stronger relationships with the politicians and other business executives attending. Look closely at who will be participating on the mission. It will be these relationships that will be the ones you forge the strongest ones with.”

Not everyone is satisfied with their trade missions. Brenda Kelleher-Flight, president of St. John’s-based GDP Consulting, a corporate-governance consultancy, says she found that the firms she’d been matched with on a trade mission were her competitors, not potential partners or clients. Claude Collin, international sales and marketing director for Machinerie AM, a farm-equipment maker in L’Islet, Quebec, says that you’ll have a better experience with fixed appointments with potential customers who have been informed on “who you are, what you’re doing and why you want to meet them.” Rana Sarkar adds that structuring your follow-up to a trade mission is a key goal.

One other avenue worth exploring if you don’t want to make the investment in a literal trade mission. Some governments, such as Ontario’s, offer “virtual trade missions.” Organized by the Ministry of Economic Development and Innovation Videoconferencing brings together Ontario businesses and selected overseas businesses and market experts. Canada’s federal Trade Commissioner Service has also put together virtual trade events. Read about one of them here in our exclusive country guide, Hong Kong for Canadians.

Steve Carkner, chief executive officer of Panacis Inc.

Panacis makes batteries for mission-critical systems for medical, military and renewable-energy uses–“anything from powering artificial hearts to military communications, weapons, tanks,” Carkner explains. The United States Air Force is a customer.

At 42, Carkner has been an entrepreneur since he was 15 (for his first business, he created a compression method for computer software that made software installation cost-effective). He is a founder of Canada’s national organization for angel investors, the National Angel Capital Organization. An engineer, he was involved in the early days of Research In Motion Ltd. His company has 10 employees and big dreams.

You’ve been an entrepreneur for 27 years. What are some broad lessons of your career?

You have to have a certain element of fearlessness, and your management needs to have an element of fearlessness. A mistake I made was thinking that all the employees had to have an entrepreneurial spirit. It’s really only your highest level of management–it definitely needs to have the entrepreneurial spirit.

Why do they need it, as opposed to just the CEO?

Because otherwise they won’t understand the decisions that I make and the directions I want the company to go. They’ll always be searching for the safe bet. The funny thing is the exact opposite is true, I think, of employees. Ultimately they’re the ones designing the product, and the product has to work. The risk-taking should be done more on the business side than on the technology side.

Can you connect risk-taking to global business?

One of our biggest customers is the U.S. Air Force. I think a lot of small Canadian companies wouldn’t even consider it, and I would say, why not? Why shouldn’t we be a supplier to the U.S. Air Force? We’re just as good as everybody else. We took a risk and spent the money and took the time and managed to get contracts that are, frankly, going to be the main reason for our success in the market. We’re putting systems on fighter jets to keep them flying. That’s a lot of risk, but the fact that we were willing to take that risk meant we got contracts where other companies just weren’t even willing to step forward.

How should Canada nurture that spirit of fearlessness?

One of the biggest things lacking is financing. When I look at the venture capitalists and even a lot of the angel and private investors—heck, even a lot of the government agencies—they are not fearless. Without them taking some risk, the entrepreneurs never get the chance. There are entrepreneurs who are willing to take the risk and can’t get the financing to do so. The way to nurture it, frankly, is with money.

This is something that you hear again and again, that in Canada right now there is no risk financing. It used to be that if your company had a really good idea, you could get some funding to get going. Now you need an idea, a product, your first customer, preferably two or three, and you need revenue. Well, by that time, there’s no risk left.

As an angel investor, what do you look for in start-ups?

The team is a big piece of what I look for. I look for passion, and it’s funny how often passion isn’t there. A really big one I look for is what they’re doing for Canada. I’m sick of seeing the company pitch of “I’m going to go out and do something and really quickly sell my company to someone else.” That doesn’t help my kids find jobs when they get older because those sell-offs typically go to the United States or some other country.

People start companies without passion?

This is what’s disappointing. I see it a little more in software, I think—“I’m just going to go out and build the quickest app I can and I’m going to be Facebook and somebody’s just going to buy me.” And they don’t care about the product. All they care about is the spin, putting enough spin onto whatever they’re doing to convince somebody to buy them. They have no passion for the product. What they have passion for is the money. I don’t want to invest in somebody who has passion for money.

How do you get your products into the marketplace?

Through partnering. I don’t say, “Here’s all the cool stuff my battery does, buy my battery.” Instead I ask, “What is your product’s competitive advantage?” And then I show them how our battery improves the competitive advantage of their product. The customers actually learn a lot and they go, “Wow, that’s neat, I didn’t know I could do that. If I do that in my product, my product will now be different from all of my competitors’ products, because of the battery.” It could be improving how low a temperature it runs at. It could be improving the environmental aspects of the product.

How would you translate that same principle for other businesses?

The fundamental mistake I see in business plans that come across my desk is that they sell a product, they don’t sell a solution that the end customer needs. If I find myself in a position where I am pushing my product, then I know I’ve made a mistake. Either my product is wrong, or the market I’m going after is the wrong market for it. As soon as I see myself pushing a product, I’m done. It’s got to be pulled by the market.

Pulled in what sense?

Pulled in the sense that the end customer isn’t getting satisfied with anything else. They should be saying, “I need, I need, I need,” as opposed to you trying to convince them to go to the next big thing.

What is your vision of Panacis’ future?

You can laugh if you want, but I think we’re going to be Canada’s next billion-dollar company.

This article has been edited for length and clarity.

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Photo: Gunay Mutlu

Photo: Alex Barlow

Twenty years ago, this background would itself have seemed a dream for anyone foolish enough to be trying to fish the Cheonggyecheon. Its waters, dirty and hidden, were trapped beneath a roaring highway; its surroundings were a slum of sweatshops, metal bashing and poverty. The reclamation of the Cheonggyecheon, one of the great urban-regeneration projects of the world, has about it the air of a dream achieved. So, to a large extent, has the Korea through which the stream flows.

In 1960, in the aftermath of a devastating war, the exhausted south was one of the poorest countries in the world, with an income per head on a par with the poorest parts of Africa. By the end of 2011 it will be richer than the European Union average, with a gross domestic product per person of US$31,750, calculated on a basis of purchasing-power parity (PPP), compared with $31,550 for the EU. South Korea is the only country that has so far managed to go from being the recipient of a lot of development aid to being rich within a working life.

For most poor countries, South Korea is a model of growth, a better exemplar than China, which is too vast to copy, and better, too, than Taiwan, Singapore or Hong Kong. All three are richer than Korea but all are, in different ways, exceptions: Singapore and Hong Kong are city-states, while Taiwan’s disputed sovereignty makes it sui generis.

South Korea has not merely grown fast. It has combined growth with democracy. Though its spurt began under a military dictator, Park Chung-hee, for the past 25 years the country has had a vibrant parliamentary system. Korea scores the same as Japan in the democracy tally kept by Freedom House, a think-tank in Washington, DC. No other Asian country does as well. At the same time Korea has combined growth with equity. Between 1980 and 1997, its Gini coefficient, a measure of income inequality, fell from 0.33 to an exceptionally low 0.28, before rising back up during the 1997-98 Asian crisis. In 2010, the level was 0.31, a bit worse than Scandinavian countries, a bit better than Canada.

A MODEL THAT WORKED

Now Korea can add resilience to its roster of achievements. It was walloped during the global financial crisis, but recovered faster than any other rich country. Between June 2008 and February 2009, Korea lost 1.2 million jobs. South Korea’s relatively open financial system made it vulnerable to the volatility in world markets, a vulnerability that continues. This September, foreigners withdrew over 1.3 trillion won (US$1.1 billion) from the stock market and the currency slumped 10%.

Yet in 2010, GDP grew by 6%. This year’s expansion is likely to be 4%. The unemployment rate is now a covetable 3%. Some of the recovery is the result of Korea’s happy dependence on China: it exports more capital goods to China relative to the size of its economy than anyone else, even Germany. But this is only part of the explanation (which is just as well given China’s slowdown). The government also initiated a public-works scheme that is mopping up over 2% of the labour force. It introduced an old-age pension and began, then expanded, an earned-income tax credit. All this from President Lee Myung-bak, who was once chief executive officer of Hyundai Construction and is widely assumed to be excessively friendly to big business.

Korea’s relentless convergence towards America’s standard of living has barely missed a beat. China’s dollar GDP per person would have to grow at 7.5-8% a year for 20 years to reach the heights Korea has already scaled. If the Korean economy goes on growing at 4.5% a year and America’s at 2.5%, Korea would overtake America (in PPP terms) only a few years later.

To keep growing that impressively, though, Korea will need some new tactics. And it will need to develop them from scratch. When a country or a company is playing catch-up it can look at what others are doing and do it better. This Korea has done well. Hyundai has outcompeted Toyota in the market for reliable, efficient, cheap cars. Korea’s shipyards have beaten everyone through economies of scale.

But this way of doing things works only when others have blazed a trail before you. As you join the ranks of the richest, you run out of beaten track to follow. Your economy comes to depend more on innovation and on learning from your own mistakes than on improving on the successes of others. The South Korean model of 1960-2010 remains an example for developing countries; but Korea itself now needs something new.

The Korean model had four distinctive features: a Stakhanovite workforce; powerful conglomerates; relatively weak smaller firms; and high social cohesion. All these are either coming under strain, or in need of reassessment, or both.

South Koreans lay great store by education and hard work. They put in 2,200 hours of work a year, half as much again as the Dutch or Germans. Their reaction to the 2008 slump was to work harder still. During the 2009-10 recovery, reckons Richard Freeman of Harvard University, Korea had the second-largest increase in hours worked in manufacturing, after Taiwan. And the quality of labour has been even more important than the quantity. Along with Finland and Singapore, Korean schools regularly top international comparisons of educational standards, such as those run by the Organization for Economic Co-operation and Development (OECD), a rich-country club. Korea spends a larger share of GDP on tertiary education than any rich country other than America. Given relatively low wages, this superbly educated workforce is hard to beat.

But with Korea already top of the league tables, it is harder to generate further jumps in income from big increases in hours and skills. Indeed, the immediate problem is merely to maintain its excellence. According to Yeong Kwan Song of the Korean Development Institute (KDI), a think-tank, companies are starting to worry that graduates are emerging from university with the wrong skills. On some estimates, half of recent graduates are failing to find full-time jobs and are going into further study or part-time employment. So while general education remains good, some industrial skills may be declining.

One way to boost the skilled labour force might be to have rather more people working rather fewer hours. The extra people would be women, often highly educated ones. Quite a lot of Korean women stay at home—the participation rate for women aged 25-54 is only 62%, the fourth-lowest in the OECD—even though they are usually better educated than men. In almost all rich countries, the best-educated women are more likely to work than their less-educated sisters. Not in South Korea.

Shorter hours might encourage some of these skilled women into the workforce. So might a change in attitudes to schooling. The job of supervising a child’s education falls to women, which is one of the reasons why relatively few women have jobs.

This does not mean that they have a lot of children instead. Korea has a fertility rate of 1.2, one of the lowest in the OECD. This is in part because those good educations make having children a pricey proposition. An unusually large part of the spending that makes Korean education so good is private, not public. The government spends just under 5% of GDP on education, slightly below the rich-country average. Families add an extra 2.8% of GDP on top of that, easily the highest rate in the OECD. At universities, family spending is three times that of the state. And families spend an estimated 8% of their household budgets on after-hours programs for each child, an investment which explains the effort mothers put into making sure it pays off. If you have three children, their after-school activities alone could swallow up a quarter of the household budget.

THE POWER OF CONGLOMERATES

Much of South Korea’s miracle has been the work of big conglomerates, or chaebol. Barry Eichengreen of the University of California, Berkeley, argues that they are “among the most technologically and commercially progressive agents in the Korean economy”. Samsung Electronics, for instance, one of 83 constituent parts of the Samsung empire, sells more smartphones than Apple. Korea’s shipyards have just started work on a new class of container ships called the triple E-class which are easily the largest container ships ever built (Maersk, the ships’ buyer, says the three Es refer to economy of scale, energy efficiency and environmental cleanliness; simpler just to see them betokening EEEnormity). Korea’s large companies employ slightly less than a quarter of the workforce and produce more than half the country’s output. Chaebol-alikes exist round the world, from Carlos Slim’s Group Carso in Mexico to Lee Ka-shing’s holdings in Hong Kong.

The surviving chaebol have proved resilient. During the 1997-98 crisis, some chaebol’s debt-to-equity ratios soared to over 500%; half of them went bust and conglomerates were widely seen as a drag on the economy. Now, those that came through the time of trial have returned to profitability and respectable debt ratios—but their success still has a downside.

The chaebol system has proved prone to fraud, dodgy accounting and illegal political contributions. Many of the companies depend to an unhealthy degree on a founder or his family. About half the managers of Samsung’s firms used to work in the chairman’s secretariat—and thus directly for the founder or his son—and owe their promotion to the associated patronage. As with any family business, the moment of greatest danger is when the leadership passes to the next generation. Samsung passed this test in 1987 when the founder handed over to his son, Lee Kun-hee. Now Lee’s son, Jay Y. Lee, has been appointed chief operating officer of Samsung Electronics and a new transition looms. If Lee the third has business acumen, fine. If not, the whole country could suffer.

Moreover, there are signs that the chaebol may be stifling innovation and entrepreneurship. They have proved expert at applying and improving existing technology, even the high technology of touch-screen smartphones. But except in some internet businesses and computer gaming, South Korea has few start-ups or cutting-edge technology firms. It lacks nationwide venture-capital businesses, says Hasung Jang, the dean of Korea University’s Business School, because each chaebol has one of its own. The firms snap up the best and brightest and turn them into company men. Mr Jang compares the conglomerates to light-hogging trees in a forest: their canopy may be impressive, but it is hard for anything to grow underneath.

Koreans perceive fewer opportunities for entrepreneurship than any of their peers in rich countries except Japan, according to an annual survey by the Global Entrepreneurship Monitor, set up by the London Business School and Babson College, Massachusetts. As South Korea moves towards the technological frontier, such attitudes will have to change. Innovation is not going to come if everyone shelters from risk in the chaebol.

There is a huge productivity gap between Korea’s export-oriented chaebol and small and medium-sized firms (SMEs) which dominate services. Value added per worker in small firms is less than half that in large ones. SMEs’ operating profits were 4.5% of sales in 2007, compared with about 7% for large firms. Small firms spend about half as much on research and development as large ones per unit of sales and borrow far more relative to assets. Over time, their performance seems to be getting worse. Korea, in short, has first-world manufacturing exporters and third-world services.

CODDLED, NOT COPING

There are several reasons for the mismatch. Small firms are crowded out of markets for people and skills by the chaebol. And because chaebol pay scales often rise according to years in service, they squeeze wage bills by firing older workers, with the service sector working as a recycling system for surplus labour. Small firms have also been coddled by the government. Korea maintains various entry barriers to shelter mom-and-pop stores from competition. Government support to SMEs rose from under 6 trillion won in 2008 to 10 trillion in 2009. Public credit guarantees rose from 33 trillion won in the Asian crisis to almost 60 trillion won in 2009. Last year, the government “requested” banks to roll over their loans to small firms. Randall Jones of the OECD argues that all this help has made SMEs less, not more, efficient, and damaged competitiveness. The richest economies are switching into services that in Korea are dominated by small firms, which cannot compete.

Korea’s equal distribution of income is changing. Judging by the relationship between the richest and poorest tenth, Korea is becoming more unequal than it used to be. Worse, the growing number of poor people is disproportionately elderly. In other rich countries, people between 66 and 75 are no more likely to be poor than the population as a whole. In Korea, they are three times as likely to be poor. This is all the more worrying because the low birth rate means the country is ageing more rapidly than any other rich country. In 2009, people over 65 were outnumbered ten to one by the working-age population. By 2050, there will be seven over-65s for every ten working-age adults. Disproportionate old-age poverty would have a huge impact on the social backing for policies designed to foster growth.

Korea’s equitable income distribution used to provide a sense that society as a whole was benefiting from breakneck catch-up. But discontent is rising both about inequality and about the role of the chaebol, producing growing disenchantment with both main political parties. The recent election for mayor of Seoul produced an upset win for a left-wing anti-establishment maverick.

It is proving hard to resist the trend towards inequality because of another basic feature of Korea’s economic model: total tax revenues are just 26% of GDP. Taxes are especially low on labour, a choice designed to boost work and foreign investment. But as a result, social spending is low (11%); public spending on family benefits is exceptionally low (less than a quarter of the rich-country average); and the tax-benefit system is the worst in the OECD at reducing inequality and poverty. Korea’s tax-benefit system reduces poverty by only 18% (compared with what it would have been without the benefits). Sweden’s tax-benefit system cuts its poverty rate by 80%.

Korea, argues Jones, needs to increase taxes and social spending in order to reduce poverty and inequality. One reason it is reluctant to do this is because it is afraid of the impact on jobs. Its changing demography also suggests caution in expanding the social safety net too fast or far, as it will be used ever more over the decades to come.

And then there is the ever-present imponderable: the possible need, at some point, to finance the horrendous costs of reunification with destitute North Korea when that state collapses. That would make the vast expense of unification in Germany pale into insignificance. At some point in the future Korea may need all the room for future fiscal expansion it can get.

A BRIDGE TO THE FUTURE

The problems of the South Korean model should not be allowed to obscure either its achievements or its continuing strengths. True, over the past 40 years annual GDP growth has declined from about 10% to 4-5%. Business investment has halved from over 30% of GDP in the mid-1990s to 17% in 2010—but that is still 50% over the OECD average. Further declines in growth seem likely.

That is not surprising. As Kwanho Shin of Korea University and Dwight Perkins of Harvard show, every country’s growth starts to ebb as its income reaches about $10,000 a year. South Korea has kept going longer than most. If it can increase public spending a little to reduce inequality and poverty, boost its labour supply by encouraging more women to work and avoid compromising its educational standards and penchant for hard work, then it should be well placed to pull ahead of Europeans and catch up with America, too.

South Korea has long been a model for outsiders. President Kennedy’s chief economic adviser, Walt Rostow, wanted to use it as a testing ground for his theories about stages of economic growth. But Koreans do not see themselves as a blank slate, or as a new world power. They stress a long legacy of openness and innovation. Before the wars of the 20th century Korea was a bridge between the more closed worlds of China and Japan. It developed movable metal type two centuries before Gutenberg; its last imperial dynasty benefited from checks and balances more extensive than in its Chinese prototypes. The more Korea brings these qualities of domestic innovation to the fore, the better its chances of blazing a new trail for itself.