Carrying forth the discussion on digital divide and globalization from the last post, let me share another interesting bit. This one is from a Bengali-speaking Dutch researcher who gave a fascinating talk at the just-concluded South Asia conference at the University of Wisconsin-Madison.

Dr. Lotte Hoek, a social anthropologist at the University of Edinburgh (and previously at the University of Amsterdam), spent many months in the darkrooms of the Film Development Corporation (FDC) in Dhaka, Bangladesh. The film industry is caught between 60s technology and traditional mores on the one hand, and the hyperactive output of satellite tv and cultural globalization on the other. This disruption is the context of Dr. Hoek’s work, and she documented a great example of bridging digital divides with localized ingenuity.

To bring the film industry up to date, the Bangladesh government has imported and installed digital editing hardware and software in the FDC editing labs. The installed machines are able to transfer frames from celluloid film into digital editing software. All filmmakers submit their rolls to the FDC, and state-employed technical editors then do their part.

So far so good. The problem is, the government did not install any machine to do the reverse transfer, from digital to film, after editing.

So what do the technicians do? They say, “dorkar nai” (we don’t need it). And undaunted, they finish their editing, then display the digitally edited parts on their screens, frame by frame, while someone shoots the display on regular film camera, frame by frame. This, of course, yields interesting colors and effects, and sometimes the portions can’t even be reconciled, since the fps (frames/second) rates are different for digital and celluloid media.

Nonetheless, films are produced, edited, and released to an enthusiastic audience. They simply call this “half-digital,” and life goes on.

Earlier this month, I attended a fascinating conference organized by the Legatum Center for Development and Entrepreneurship at MIT. Three things about South Asia stood out for me.

One, cheap connectivity. Thanks to the mobile phone, increased connectivity in South Asian countries is unleashing economic potential like never before. Countries there have some of the lowest costs anywhere in the world. Bangladesh, for instance, is third lowest in the world in total cost of ownership of a mobile line for voice and messaging. And for data, its TCO is the lowest: about $8 a month. Compare that to Brazil’s $250 a month to get a sense of who might access and benefit from technology.

To me, this cost is not just a reflection of the devices, celltowers, and labor expenses. It’s a reflection of liberal government and corporate policies, which keep taxes reasonable, provide mutual political and economic profits, and allow healthy competition. Latin America’s cost structure is certainly not high enough to justify the world’s highest data charges.

Two, better information availability. We had a great discussion in my graduate class on globalization yesterday about digital divide vs. Friedman-esque flat world optimism. Nearly 700 million people in India, a country that Friedman has gushed about, lack ICT connectivity. This information divide, which sustains much political power and corruption in South Asia, may be reducing in some areas. A great example was provided by Comat, a company that’s working currently in five Indian states. It has set up a network of two thousand ICT-enabled rural business centers that simply provide information, such as citizen records, government rules, etc. Farmers don’t have to bribe local officials to get a copy of their deed. These add up. Comat’s program evaluation, done by Harvard, estimated its corruption-reduction impact to date in the range of $400 million. And all the company provides really is information which the public has the right to access but could not earlier without paying cronies along the chain.

Three, high cost of business. All these changes are brought about by innovative business ideas inclusive of the bottom billion and by supportive government policies that allow these businesses to operate. Comat, for example, needed to get authorization from very high levels to access information that previously was the fiercely protected turf of local officials.

But across South Asia, the cost of doing business remains very high in all major areas, whether you want to start a business, get permits, employ workers, register property, get credit, protect investors, pay tax, trade across borders, pay investors, or close your business. Out of 183 countries ranked by the World Bank, India ranked 133 (and 182 in enforcing contracts). Bhutan and Nepal were slightly better, in the 120s. Bangladesh was 119, Sri Lanka 105, and Pakistan 85 (note that the doing business index does not look at political and physical risk to the business). Unless you are highly connected, the only way that entrepreneurs can reduce these barriers is by paying bribes. Imagine the potential if governmental red tape on doing business is lowered!

The global recession is beginning to end. Asia is beginning to recover: South Korea, Taiwan, and India are doing very well. Some countries outside are also faring better, and we’re beginning to see commonalities as to why. In this post, I’ll point to two examples.

The first is from the Economist, Aug 8-14, on the strength of the German economy:

Germany’s economic machine is made of honest iron and steel, not subprime mortgages, collateralised debt obligations and other financial chicanery. Having been concocted in Wall Street and the City of London, the crisis, it is said, has proved the merit of Germany’s solid social-market economy.

The second insight is about Brazil, which was “one of the last [countries] to enter recession and now looks like being one of the first to leave it.” The ingredients are:

• responsible economic policies, ignoring pressures from left-wing Workers’ Party.
• insistence on ”rational economics” and free trade, and.
• “ambitious social policies have helped to lift 13m Brazilians out of poverty; searing inequalities of income are narrowing steadily.”

See any commonality? Social safety nets. Social policies–public support for good health, good education, minimum income, and crisis assistance. In fact, this insight is supported by decades of serious research. (I will write about that in another post.) And it’s not just policy (frequently and stupidly derided in the US as big government), but an economic culture that is thankfully more social-ist.

In America, of course, sustaining social support needs an astonishing amount of selling, so much so that the government finds it easier to bail out big investment banks and big insurance companies, whose criminally-negligent incursions into risky financial products helped create the crash in the first place, than extending funds for a sound healthcare system. Funds for public education, similarly, have been difficult to come by for years.

Yes, in the end big banks got us in the mess, and as Paul Krugman says, big government has saved us. But that’s true if “save” = “getting worse more slowly.” 

If saving = learning so that the next recession may be less of a surprise, then it’s another story. The American style of capitalism–the type that has prioritized home ownership over thrifty spending habits as the mark of success, and typically promotes the likes of Rumsfeld and Paulson as the main shapers of fiscal priorities–is sure to not learn well from this recession. The priorities of the economic culture of Brazil and Germany are quite different.

Note: A fuller version of this article was published as ”India’s Edge in Legal Process Outsourcing” on August 10, 2009, in China Daily. It was co-authored with Matthew Sullivan, a principal at Red Bridge Strategy, where he leads the LPO Advisory Practice.

Despite the global export slump, India’s emerging Legal Process Outsourcing (LPO) industry has been booming.

In the last 12 months, the LPO sector in India has reported 200 percent growth, unaffected by the economic crunch. LPO revenues grew from $80 million in 2006 to $225 million in 2007, and are expected to reach $640 million by 2010.

Noting India’s success in offshore services, China has been trying to grow its own footprint in the industry, especially since 2000. But China has managed to get only 10 percent of the world’s share of outsourced services, compared to India’s 37 percent.

If China wants LPO coming its way, it will need to pay attention to four factors that helped the process grow in India.

The first, of course, is India’s command of English, the language of offshore industries. The Indian legal system, in addition, is built upon the British system, which makes Indian lawyers familiar with Western legal concepts.

Thanks to the government’s emphasis, 200 million Chinese are now learning English. But getting trained in the law in English is a different game and will require decades of sustained effort. A shortcut, though expensive, might be government sponsorship of Chinese graduates to attend English-speaking law schools in the region, including those in South Asia.

Second, India’s federal and state governments have invested heavily in the economic infrastructure of IT and business process outsourcing. LPO uses the same infrastructure.

China has made strides in IT infrastructure, as well, but Chinese outsourcing firms are still small compared to Indian giants like Infosys and Wipro. The influence of Chinese outsourcing firms over State policies and resources is also correspondingly smaller.

Third, even though LPO can offer savings of 30 percent to 70 percent for Western firms, many have yet to come on board because of concerns about information and data security.

Any vendor that wants to win business must maintain the confidentiality and sanctity of privileged attorney-client information. As long as the Chinese government remains interested in controlling Internet activity, India will retain a big advantage.

Finally, the Indian government has undertaken worldwide campaigns to showcase India’s strengths. Indian policymakers make frequent friendly visits to Western countries, and each visit is accompanied by productive discussions and events with bankers, investors and trade organizations.

India’s success in LPO came from a regional competitive strategy that weds skillful private entrepreneurship, wise economic policy and strong public diplomacy.

While China has a stronger infrastructure than India, it will probably need to rethink some aspects of its political and diplomatic strategies if it wants to wrest a bigger share of the lucrative knowledge-based services market.

First came the Gurkhas, Nepali warriors who fought for the British in the First and Second World Wars. A big campaign last year saw them winning the right to stay in Britain. And that’s the least the British could do to repay their service.

During its rule in the Subcontinent, the British always had preferred ethnicities to fight their wars. The Gurkhas were one. The Pathans, where possible, were another. After the 1857 Sepoy Mutiny, the British steered clear of employing Muslims and certain Hindu castes as soldiers.

In the First World War, some claim that Sikhs formed 20 percent of the British army. With its worldwide colonial empire, the British had globalized its fighting force to great effect, and had no qualms about pushing out a steady supply of colonial recruits into battle. The First World War, as we all know, was a war of attrition, a contest about who can throw the most bodies into trenches and into machine gun fire till the guns run out of bullets.

Even after all that fighting for their colonial overlord, it took the Gurkhas many years to win the right to stay. And Sikhs, now, are guarding the Buckingham Palace for the first time.

One of them, Sarvjit Singh, was born in India. A member of Army Air Corps, he said he was excited about the opportunity to guard the queen: “My experience being a Sikh on the queen’s guard is beyond words. It is a once in a lifetime opportunity. I feel privileged to have this honor.”

Full circle of the globalization of the guards?

Despite a global slump in the export of services, Legal Process Outsourcing (LPO) to India is steaming on, with a a 200 percent growth in the last 12 months. (See my post from January.)

So, should corporations and law firms outsource more of their legal services to cheaper counterparts in other countries? What are the pros and cons? Are there gains besides cost advantages? How does this model of globalization work?

Let me suggest that you attend a webinar by my consulting firm, Red Bridge Strategy, to get answers to your questions on legal globalization. The first one is on Wednesday, July 29. More details and the sign-on form are here.

The presenter, Matthew Sullivan, is a founder and principal at the firm, where he leads the legal globalization advisory services.

One war, numerous militarized incidents, competition for economic and political influence over the region, supply of military aid to each other’s neighbors, key players in overall grand strategy, and old civilizations with worldwide diasporas and competing cuisine.

Forget all that.

India’s external affairs minister S M Krishna met with his Chinese counterpart yesterday, and then reassured everyone by issuing the following statement:

India and China may be competitive in economic and trade areas, but they are not rivals. There is enough space for both India and China to grow.

“Space,” huh? I guess each other’s space programs don’t see it that way. From launching satellites to making plans for manned flights to the moon, the program of each has taken cue from that of its rival. It’s the next space race of the world.

Anyway, rivalry is actually not a bad thing. Rivalry, as opposed to competition, connotes the importance of strategy. Two countries, or companies, can be competitors just by existing in the same competitive space. But two rivals make policies by considering each other’s moves.

Strategic policymaking between rivals, as I have argued in my book and elsewhere, makes government efficient and privileges pro-growth economic policies. In the 1970s, improvements in India’s strategic culture, bureaucracy, and industrial policy owed much to the war and subsequent rivalry with China. The pace and extent of India’s open-economy policies since 1991 have been influenced considerably by China’s policy path since 1978.

And in the end, all that has been a very good thing for the Indian economy. So, long live the rivalry.

Many analysts are putting trust in Asia to pull the West up from the slump into which it has fallen due to its profligate appetite for credit. In addition to production and trade, The Economist recently hoped that Asian consumers would become shopaholics, like their Western counterparts. Never mind that rampant credit-fueled consumerism was a major part of the problem facing the West.

But a dose of reality was injected recently by Minxin Pei, who doubted Asia’s ability to fill in for the West. Pei wrote in an article in Foreign Policy: “Even at current torrid rates of growth, it will take the average Asian 77 years to reach the income of the average American.”

The problem with most economist-driven expections of Asia’s ability to pull the world out of a slump is that such analyses ignore the crucial part that politics, and states, play in economic globalization.

But if lack of ability is one issue, so is a possible lack of willingness.

Political scientists and political risk analysts for decades have pointed out that international financial movements take place only within parameters allowed by states. Ian Bremmer of the Eurasia Group recently restated that observation, from the angle that post-financial-crisis state capitalism is now the main decision-making prism.

What this means is that competition between states will inevitably dampen Asia’s ability and willingness to clean up the mess left by the West. As I have argued in my book, India’s Open-Economy Policy, India’s political rivalry with China, whether in securing energy or in inward foreign investment, will be the first influence on its international economic policies. China’s assessment of the US and Japan will determine its foreign acquisitions. US interpretation of Chinese influence in the Middle East and Africa will also temper cooperation toward free markets.

On top, you have respective Buy American and Buy Chinese policies. These have stayed below maximum so far — but put all of these together and the expectation that Asian consumerism or dynamic growth will be West’s savior is just economic optimism, not political reality.

Over the last couple of months, each bad news from India has been matched by a corresponding good news. 

Since September 2008, foreign institutional investors have withdrawn over $8 billion from the Indian stock market. The key index, Sensex, has fallen by almost a third. At the same time, over 100 new foreign institutional investors have entered the market.

On foreign direct investment, September to December were particularly bad. Satyam’s fall compounded the fears. But in January FDI jumped to $2.7 billion, almost a 60 percent increase over the previous January. But it’s too early to tell if this is just a blip or harbingers a trend.

In the 12 months to March 2009, the rupee depreciated by 25 percent, a good news for exporters, including Indian outsourcing industry. But it makes the import of fuel and the general sustenance of subsidies difficult, and will result in overall decrease in tax receipts.

Elections are weeks away, so the government will not cut back spending. The government is also under pressure to offer extra tax reliefs to ease the impact of the global crunch. All of this will add pressure on the budget.

The final two good news is that inflation has come down drastically, now at a six-year low of 2.4 percent. And by IMF’s calculation, GDP is still expected to grow substantially, 5.25 percent in 2009-10 compared to much of the world. But then IMF’s predictions about global economic health have been pretty off the mark the last couple of years.

So, is India hurting or not? The overall verdict is a definite maybe. It cannot be claimed that India has been shielded. It also cannot be claimed that the future is rosy for India, since the global recession is not going away any time soon. This is the type of conclusion I hate to reach, but there is no other right now: we just have to wait and see.

As the global recession deepens, the big question is whether we will see a repeat of the protectionist and nationalist policies that marked the Great Depression era.

In the US, President Obama had to temper down Congress’s Buy American provisions to ensure that that the US stance is not misinterpreted. But he is under pressure to consider greater forms of protectionism.

The UK Prime Minister Gordon Brown addressed the US Congress yesterday, and tried to support a pro-globalization position. But he is also under pressure. Anti-immigrant sentiment is rising in Britain. Demonstrations have taken place even against fellow workers from other EU countries.

Both Obama and Brown may be sheltered a little bit, for they don’t face immediate elections.

India is heading for elections next month. While the major parties, Congress and BJP, are pro-openness, fallout from the global slump may begin to empower the Bahujan Samaj Party, which draws more from the poorer classes and the lower castes. If BSP gets a bigger share of the electoral pie (which I think it will), then Indian policy will be under pressure to extend protection of the poor. Deficit spending will rise there as well.

It is unlikely that India will become protectionist. But it will have to diversify, because no matter how rosy its industry associations are sounding, FDI will continue to fall for the foreseeable future.