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President Obama’s budget projects 1.3 trillion dollars in deficit in fiscal 2011. This has provoked a Republican outrage that I simply fail to understand. Here are the facts:

  • When President Bush came to power, America was in its 3rd consecutive year of budget surplus.
  • He cut taxes and went on a spending binge, with strong Republican support. He eventually spent more than any other president since LBJ, including nearly a trillion on the invasion of Iraq.
  • In the process, the Republicans used up the surplus so swiftly that America ran a large deficit 7 out of the 8 Bush years, consecutively since 2001.
  • They accelerated the hands-off policies started during the Clinton era, giving financiers the biggest say in a democracy, and ushering the biggest downturn since the Great Depression.
  • The administration spent another $868 billion on bailing out the financiers and providing stimuli before bowing out in 2008.

So after the “frat boy shipped out,” as The Economist put it, leaving America in a mess on multiple fronts, his supporters are now upset that the “socialist” Obama administration has to run another budget deficit?

This is the type of irresponsible amnesia on part of the Republicans and the Tea Party fanatics that’s going to hurt America’s global position.

And that’s what my article is about.  But I had to introduce the context, because another irresponsible refrain you hear from the right is that the rest of the world is just out to get America.

My question is, will the world continue to sponsor the debt that the United States has raked up? America’s “aura of invincibility,” wrote David Sanger in the New York Times, will last “maybe a long, long time.” While investors would malign any other economy under similar management, it shrugs off “American financial exceptionalism.” So the capital markets worried this week about Europe’s growing debt, but they hardly paid attention to Moody’s polite warning that America’s financial health “will at some point put pressure on [America’s] triple-A government bond rating.”

This optimism and this belief in exceptionalism is a dangerous consequence of the way US politicians allowed the development of a neo-laissez faire: Just borrow and spend, all will be fine in the end. You see that in consumer habits, in subprime markets, in Wall Street’s philosophy of heavy leverage, and in wanton federal spending while lowering taxes. Risk management was mostly rhetoric.

And so, the US government debt burden now is 85 percent of GDP. This is higher than the proportion in the “socialistic” Europe vilified by the American right. Germany: 79 percent, France: 77 percent, Portugal: 76 percent, Britain: 69 percent, and Ireland, which IMF claimed was the sickest of them all: 61 percent.

Still ok, if someone (read: China) is willing to underwrite the debt. China still holds the world’s highest share of US treasury bonds, almost $800 billion worth. But it has been buying less and less, signaling discomfort.

In the 1990s, Canada lost Moody’s triple A rating when its combined federal and provincial debt approached 100% of GDP. As the US inches to that level, a ratings blow may be nearer than most optimists believe.

And for America, that type of a blow will be more than economic. It will send a powerful political message about the overstretch of the world’s superpower. The world wants to believe that US politicians will be able to enact meaningful fiscal change, keeping its long term financial health squarely in sight. But so far, especially with the naysaying, amnesiac, and reactionary performance shown by the right, they will have little to find comforting.

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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.
Just a few years ago, there was virtually no industry called LPO.
Some multinationals such as GE and Microsoft, which had become comfortable working in the Indian environment, decided to experiment with the use of English-speaking Indian lawyers to process legal work in other jurisdictions.
Local vendors quickly adapted India’s tested outsourcing model to offer routine legal services such as e-discovery and document review.
And so began the growth of the LPO industry.
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 not just LPO but most 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 to reduce investor sensitivity to economic and political risks.
Successive campaigns, from BJP’s much-criticized “India Shining” to the current “Incredible India” initiative, have ensured that Indian policymakers make frequent friendly visits to Western countries, and that 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.
Jalal Alamgir, Ph.D., is the author of India’s Open-Economy Policy (London: Routledge, 2009), and teaches international relations at the University of Massachusetts, Boston. Matthew Sullivan is a principal at Red Bridge Strategy, where he leads its LPO Advisory Practice.

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.

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I’m posting excerpts from an article of mine published recently in China Daily.

‘Going Global’ Seems Tough Journey

By Jalal Alamgir, China Daily, 19 May 2008

More and more firms from Asia are going global. According to United Nations data, between 2005 and 2006, China’s outward investment increased by 32 percent to $16 billion, one of the fastest.

State-owned companies are responsible for the bulk of China’s overseas investments. But does this mean that smaller private companies are left out? No, foreign investment in most sectors shows a pattern: large investments by a few big firms, and numerous small investments by small firms. Small and mid-size companies have also been going global.

Cross-border interactions

What does ‘going global’ mean for small and mid-sized companies? It means recognizing and structuring cross-border interactions as part of the firm’s business. These interactions can take many shapes. A firm can have customers, distributors, or suppliers in foreign countries. One can spread business functions, commonly done in services such as outsourcing. One can pursue a financial strategy, spreading assets under different jurisdictions through hedge risks. But small and mid-sized companies are more likely to follow a haphazard path; that is, [unlike large multinationals] they often do not approach globalization strategically…

Substantial risks

Can smaller firms afford to neglect globalization? … Even those midsize firms that play exclusively in the domestic Chinese market need to develop an understanding of how the external economy impacts them. And their domestic strategies need to be renewed periodically in light of this understanding. This is becoming critical for success in highly competitive markets.

The first part of this understanding relates to risk. Unlike many other governments, China has successfully cushioned the economy from external risks, a success that has earned it laurels since the Asian Financial Crisis in the late 1990s. But the global economy has evolved. Risks are increasingly intertwined; they now spread more rapidly from one region to another. Any government will find multiple risks, from oil prices to food inflation to political instability, harder to manage simultaneously.

This environment is particularly threatening to midsize firms. The first part of their globalization strategy, therefore, should be informed by a strategic risk management approach. It requires a bit of research into understanding overall risks to the firm, the industry and the economy, the level of control over these risks, strategies to mitigate them, and implementing a flag-raising mechanism that kicks in toward suggesting alternative strategies when risks increase.

Global opportunities

Beyond risk, the global economy, of course, offers manifold economic opportunities. To maximize them, a midsize firm will once again need to put on its strategic hat. It will need to juggle multiple geographies and products, and understand and manage them on a timeline from present to future.

But doing this successfully requires two fundamentals that mid-market firms in emerging economies cannot take for granted. The first is information [on how to go global] … While information sources are not available easily in the public domain, there are boutique firms that specialize on providing information on how to go global, from marketing and selling, to tax, laws, and regulations, to organizational structure and communication, to infrastructure needs, and to managing people.

The second is a strategic mindset or capability. An example will make this clear. To make use of global opportunities, many firms decide to acquire another firm abroad. But acquisition is the easy part. Most firms struggle to manage the post-acquisition reality because they have either not thought through the strategies or neglected to build the capabilities ahead of time. And so, almost 70 percent of all mergers and acquisitions fail to deliver the intended results. Here, too, specialized consulting firms that focus on capacity development in a global context can help.

Like it or not, the world economy is a reality even for domestic-focused firms, and the value of global information and strategy is something that mid-size firms can no longer afford to ignore.

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