Monday, 28 May 2007

Youth Irrational Exuberance

This week at the Time Bandits we looked at Youth Irrational Exuberance. It talked about how children all over the world are aiming for goals that are too hard for most of them to achieve. So I asked the Time Bandits what their goals are, a few answers were: move away from England, be a blacksmith, have children that love you, get a good job. But there were some that were quite impossible like take over the world.

The Time Bandits really thought that what the article was saying is all true as none of the Time Bandits had much idea of how to accomplish that goal. But when the Time Bandits started talking about blaming people most of their faces were blank, so who is really to blame?

One subject that we have in school is a lesson called “careers”, which talks to you about your future and your job. The Time Bandits didn’t think this was a good lesson to have as it gives you information about jobs like being a fruit picker on a farm which not many people want to become, also when you ask about a job that you are interested in like being a futurist they can’t come up with an answer. Overall it was unanimous that “careers” were not helping us very much. A Time Bandit told me, also, that when she was in class and was constantly good she is very rarely praised but when someone who is usually bad is good for a lesson they get a ridiculous amount of praise. This could help to pollute young people’s minds to aim for goals that are out of their reach. I think the main way to stop this is for young people to be realistic in what they think about.

23rd May 07

Friday, 25 May 2007

The Revenge Of The Bean Counters

It is hard to get excited about accounting standards. And yet, these small, seemingly inconsequential, things have a great impact on our lives. This was brought to the forefront of my mind this week through an article in The Economist about accounting standards (see article). Apparently, there are two key approaches to accounting standards – the Rules Based Approach and the Principles Based Approach.

The Rules Based Approach is just that – accounts have to be produced to conform to a set of rules that govern the construction of a set of accounts. The problem is, as Enron quite ably showed, that a set of accounts may conform to a set of accounting rules, but paint a misleading picture of the state and performance of a company. This is where the Principles Based Approach has the advantage. Not only must a set of accounts conform to the letter of law, it must also conform to the spirit of the law as well. In this case, the role of the independent auditor becomes far more important, particularly if they have a statutory duty of care to a widely based community.

It would appear that the Principles Based Approach (mainly adopted in Europe and Asia) is driving out the Rules Based Approach (mainly adopted in the US), as the users of accounts (primarily the investment community) demand ‘true and fair’ accounts from companies. This has two important futures points – one trite and the other profound. The trite point is that it gives an example of how ‘Europe’, as argued by Mark Leonard (see our review), will run the Twenty First Century by dominating the cultural infrastructure of globalisation.

This leads to the more profound point. If we accept, as Thomas Barnett argues in ‘The Blueprint For Action’, that globalisation consists of the harmonisation of national rule sets into a single global rule set observed by all of the ‘insiders’ to globalisation, then the harmonisation of accounting rules is central to that process. As it happens, I have recently encountered the XBRL programme (see link) which aims to harmonise the electronic infrastructure of international financial reporting. To conform to an EU Directive, all UK company accounts will have to report in XBRL from 2011.

This will have the effect of binding the process of globalisation even tighter than it is now. The Chinese companies listed on London’s AIM market will have to report in XBRL, as will the Russian energy companies that have sought listings in London. The impact of this change will be to make national differences even less significant than they are now.

I wonder how long it will be before this commercial transparency and accountability feeds into the political arena in both China and Russia?

Tuesday, 8 May 2007

The Dragon And The Tiger

It is often suggested that, in the longer term (say to 2050), India will have a developmental advantage over China because India is a functioning democracy and China is not. Leaving aside the question of what would constitute a functioning democracy, why India would be included in this category, and why China would be excluded; we are left with an empirical question as to whether or not democracies favour long term development. However, before looking at the facts, it is worth examining an explanatory model.

The causality of the linkage between democracy and development is rarely explained. There has been as association between the two in the past, but we do not know whether this is simply coincidental. When models are propounded, it is along the lines of platitudes rather than reason. For example, in an article in The Futurist, it was stated that ‘the incremental efficiencies of India’s democratic government are likely to overcome the greater short-term efficiencies of China’s command system’ (see abstract of article). We are not told why this should be the case.

The Economist surveyed this question a couple of years ago (see article). It would seem that the evidence suggests that autocracies have an edge over democracies when it comes to development. The causality model is quite simple. As prosperity increases, the democratic process is called into action to share the increase in prosperity more widely. In turn, this slows the process of development as funds that otherwise would have been earmarked for investment are instead used for wealth redistribution.

The Business this week carried an interesting example of this process in action (see article). The article describes how the Indian government, emulating the Chinese government, have attempted to establish special economic zones. This process has been inhibited greatly by protests – both legal and extra-legal challenges – to the detriment of the policy. In India, as the actions of government are subject to democratic review, policy-makers do not have the same freedom for action as the policy-makers in China. Local interests are not so easily swept aside for developmental projects as they are in China.

In the long term, this could develop into a situation where China is the richer country, but India is the nicer place in which to live. Perhaps this is the Asian version of the Atlantic dilemma?