Jorge A. Vasconcellos e Sá

In this section of the site you will find some news regarding Vasconcellos e Sá Associates, conferences, books and articles.

Vasconcellos e Sá alternates with the director of the newspaper Vida Económica (www.vidaeconomica.pt) - one of the largest southern European circulating economics newspaper -, in writing the editorial column.

Vasconcellos e Sá is also the European Business Editor of the magazine Paper Money (specialized in financial issues of the paper industry) published in the USA (readership of 400.000 people) and is president of the Portuguese Institute for Economic Freedom (www.institutoliberdadeeconomica.blogspot.com).

1. How did Slovakia in little more than one decade went from having a GDP per capita + half of the Portuguese to an equal one at present? What is the secret (according to the Ambassador Bohác)?

2. Besides of cork, spiritual wines, footwear and wood based panels and few more, Portugal doesn’t have many competitive industries. There is however, one exception and where Portugal is 8th in world ranking and has institutions that are the 17th, 18th, etc. best in Europe. Name: football industry (which only in 5 European countries has a turnover 77 times the Portuguese GDP).

3. Portuguese Statistics Institute. Roper Reports. SEDES (Portuguese Social and Economic Development Association). They all agree: the Portuguese are unmotivated and therefore the economy doesn’t take-off; and as the economy doesn’t take-off... Portuguese are unmotivated. How do we get out of this vicious circle? Professor Joaquim Aguiar gives an answer.

4. If there is a subprime crisis why do real estate agencies keep flourishing? And what is the risk of the internet making them become irrelevant? How to attract foreign investment to real estate? Ricardo Sousa, president of Century 21 explains.

5. A hole in Earth and we are in a country on the way of Antarctica, that is, in a very bad location. Besides being small. Name? New Zealand. Result? One of the best economies in the world. How is it possible is explained by New Zealand’s Consul Stock da Cunha.

1. Como é que a Eslováquia em pouco mais de uma década passou de um rendimento per capita de + metade para igual ao português? Qual o segredo (segundo o Embaixador Bohác)?

2. Tirando a cortiça, vinhos espirituosos, calçado e aglomerados de madeira e pouco mais, Portugal não tem muitas indústrias onde seja competitivo. Há uma contudo, que é uma excepção e onde Portugal é a 8ª a nível mundial e tem instituições que são a 17ª, 18ª, etc, melhores da Europa. Nome: indústria do futebol (que só em 5 países europeus factura 77 vezes o PIB português).

3. INE. Roper Reports. Sedes. Todos concordam: os portugueses estão desmotivados e por isso a economia não arranca; e como a economia não arranca... os portugueses estão desmotivados. Como se sai deste círculo vicioso? O Professor Joaquim Aguiar responde.

4. Se há crise do subprime porque florescem as imobiliárias? E qual o risco da net as tornar irrelevantes? Como atrair investimento estrangeiro para o imobiliário? Ricardo Sousa, presidente da Century 21 esclarece.

5. Um furo na terra e estamos num país a caminho da Antárctida, isto é, pessimamente localizado. Além de pequeno. Nome? Nova Zelândia. Resultado? Uma das melhores economias do mundo. Como tal é possível responde o Cônsul Stock da Cunha.

The aim of this series of (five) booklets, is precisely to transmit the lessons from History greatest battles to management.

However, the booklets are not about any battle, but battles which changed world History.

For instance, the Roman defeat at Teutoburger Wald was responsible for the non latinization of Germany, what – according to historians – had consequences which lasted until the 20th century. Also, because of Chancellorsville, the American civil war dragged on for two more years of bloodshed leaving scars until today. And so on.

But the booklets are not on military history. They are on business, with dozens of examples.

The military battle is used at the beginning of the booklet only, to stress the importance of the lessons for business administration.

That is, instead of starting by saying one should, or with a large case-study of a company, one starts the booklet with an event which changed world history, one extracts the lessons and finally one provides dozens of companies examples which apply those same lessons.

Can we afford not to know what History teaches business? After all, to ignore military history is to waste 2500 years of accumulated experience.

2. One is a continental, napoleonic model, which can be found in Germany, Belgium, France, Spain, Portugal, etc.

3. The other is an insular, Anglo-Saxon model to be found in countries such as the UK and Ireland.

5. The choice between stability and instability; between balance and unbalance; and economic freedom and regulation; is translated into very different levels of benefits for four types stakeholders:

6. The bottom line is: it pays off to abstain from 1) intensive regulation (but rather to achieve stability and economic freedom); and 2) from focusing predominantly on price/cost (but rather to achieve equilibrium).

7. So, the best road to society well-being in general, including protecting patients interests in the average and long run, is through 1) economic freedom, 2) stability and 3) balance.

The book basically distinguishes among fourteen strategic moves, being:

- Six of attack:

Guerrilla
By-pass
Flanking attack
Frontal attack
Undifferentiated circle
Differentiated circle; and

- Eight of defence:

Signalling
Creating entry barriers (fixed and mobile)
Global Service
Pre-emptive Strike
Block the entry
Counter attack
Hold the ground
Withdrawal

Then the book differentiates between (both attack and defence) strategies carried out in isolation or in alliance (thirteen types of alliances).

Next the book presents:

the implementation criteria for each move of attack, defence and alliance; and
when to follow each (a contingency theory).

So the basic thesis of the book is that competitive success is achieved by knowing:

1st: all alternatives (6 attack moves, 8 defence moves and 13 types of alliances);
2nd: how to implement each (for instance, in order to do a by-pass well, there are twelve criteria which must be followed); and finally
3rd: when to follow each.

That is, success depends on proper management of the 1) what, 2) how and 3) when.

That it is indeed so, is illustrated by more than three hundred examples along the book’s text and an entire chapter (VII) dedicated to the case study of the USA transport vehicle industry, illustrating how Toyota and other Japanese firms (Honda, etc.) used partially these books concepts to conquer foreign markets.

The major conclusion of the book comes down to a unique statement: follow the rules. Always. You may lose in the short term, but you’ll prevail in the longer run. One may be defeated in battles, but will enjoy victory in the war. And one may run out of luck occasionally, but in the end one will overcome luck. After all, chance “is something that some complain about, while others make sure they earn it” (Warell).

Jorge A. Vasconcellos e Sá
M.B.A. Drucker School
PhD Columbia University
Jean Monnet Professor

Formerly nº.2 at Ford, 7 years Secretary of Defense and 13 years President of World Bank, has published a work on the major lessons of his life. Let’s focus on two.

First: empathy with the adversary (know the enemy).

On the 27th of October 62, on the heat of the Cuban missile crises, Kennedy received two consecutive messages from Krutschev, one after the other. The 2nd before the 1st could be answered.

The first message, (soft), essentially said: “if you promise not to invade Cuba, we will not install missile nuclear heads in Cuba”.

Kennedy was inclined to answer to the second message in strong terms, even because he was convinced that nothing, but sheer force would lead the soviets to withdraw the missiles.

It was then that at a White House meeting, Thomson, who when former ambassador to the Soviet Union had got to know Krutschev, extensively, said to Kennedy: “ignore the second message: it comes from the hard liners around Krutschev; answer to the first, soft, message; and accept it.

And Thomson added: Krutschev does not wish war, but he is very proud and he has not enough strength within the politburo to survive an humiliating withdrawal. So he searches for something to say to the Soviet people and save his face: “see, I got the Americans to promise not to invade Cuba”. (Indeed a major shift in US policy which has formerly tried to invade Cuba once – Bay of Pigs – and murder Castro twice – under Einsehower and Kennedy).

Kennedy did indeed answer the soft message and that led to the solution of the crisis. Against the opposition of the military which wanted to invade Cuba anyway, saying that war, both with Cuba and the Soviet Union was inevitable; and so, the earlier the better, to take advantage of US superiority.

1st – At the time of the crisis back in October 62, Cuba had already 160 nuclear missiles pointed at the USA (Americans mistakenly thought they were just in their way to Cuba, thus the blockade); and

2nd – in case of attack to Cuba, Krutschev and I, we had agreed to lunch them...

That is, according to McNamara the world avoided a nuclear war by a thin hair. And the credit must go to a men (Thomson) who, knowing well its adversary (Krutschev), was able to put himself within his skin and see the world through his eyes.

In management few things are as important as this: to empathy with competition. If one defines its mission as “a car for every income strate” (General Motors) we can count on a broader market coverage than if mission is defined as “the ultimate driving machine” (BMW).

If a competitor fundamental competence is in optoelectronics technology (ex.: Sharp), it will naturally manufacture calculators, micro-owens, CD’s, PC screens, cockpit instruments, etc.: all products which share that special skill. But, if a firm’s special competence is in lens grinding (ex: Canon), then it is to be expected that from video cameras it will move into producing Xerox machines and lithography operators.

Both Yamaha and Honda started by manufacturing (low price) motorcycles. But since Honda saw itself as an engine manufacturer it moved into cars, tractors, lawn machines, small plane engine, and so on.

Yamaha? Well, given it saw itself as satisfying the need of leisure it moved into pianos, guitars, ski equipment, tennis rackets, etc.

How can firms know its competition? By creating a Shadow Cabinet which dedicates itself to producing small and periodic reports about the 1) strategy, 2) values, 3) competence, and 4) (consequently forecasting) competitor future moves.

As Sun Tzu said: if your enemy knows you better then you know him, you will be always in danger. If you know evenly each other, you have 50% chances of victory; but if you know him better than he knows you, in 100 battles you will be never in danger.

Second major lesson which McNamara learned: the importance of facts, of statistics.

When leading the Air Force Statistics Office, during War World II, McNamara discovered that 20% of planes aborted their attack missions over Germany and flew back.

McNamara went over the flight reports and discovered that it was all ... baloney. The real reason was fear: in average, 4% of the planes were shot down.

General Lamey issued then an order saying that any false flight report would lead to martial court. The percentage of abort missions dropped instantly to… almost zero per cent.

When working for Ford, McNamara was stunned with the VW Beetle sales success. He asked why. Answer: “We think... we believe… the clients are foremost European emigrants”.

McNamara asked for a market research study. Result: Beetle owners, were mostly college professors, lawyers, doctors, between 25-35 years old...

Why? Again came the answer: “We think... we believe... that it is mostly a question of status, of European glamour.”

McNamara ordered to be investigated, again. Result: a large portion of consumers want smaller cars, more discreet, easier to maneuver and park…

When Ford launched a compact model for this segment, (the Falcon), it became one of its greatest successes, ever.

Indeed, as Peter Drucker says, in any decision one must start with the facts: what do we really not know? And what do we know? How important are the facts we ignore? And to what alternative decisions, what we know, leads us to?

President F.D. Roosevelt had a saying on top of his desk: In God we trust; all others please bring us facts.

Why? Because opinions are a travesti of facts. So they change the real for the virtual. And thus create a direct path to... disaster.

Jorge A. Vasconcellos e Sá
M.B.A. Drucker School
PhD Columbia University
Jean Monnet Professor

Today, one mentions frequently the failure of the Lisbon Agenda, that is the European Union Prime Ministers meeting in Lisbon (2000), which “decided” to make of Europe the most competitive world region, within ten years.

We shall divide the numbers of such failure into three categories:

- the result (gross domestic product per capita)
- the immediate causes; and
- the initial/original causes (the causes of the causes).

Thus, as figure two shows, the EU per capita is 26,8% below the USA level and Japan is 25,5% below. So Japan is per capita 1,3% better off than Europe.

There are further bad news for Europe: at the rates of growth of the last 28 years (1980-2008), Europe will never converge with, that is reach, the USA average: for the simple reason that it grows yearly less than the USA.

And Japan, given the last 28 years, will take over 4 centuries… to reach the level of USA prosperity. Provided, of course, that the rates of growth of the last 28 years are indicative of the future growth.

So, not only are Europe and Japan poorer than the USA, but also they will never, or require over 4 centuries, to catch up with the USA.

What happens is that the USA are better off than Europe, regarding all four variables. Indeed, Americans:
1 – Produce more per hour;
2 – Work longer hours;
3 – Have a higher % of its population in the labour market; and enjoy
4 – Lower rates of unemployment.

And so, it is the joint effect of all four variables that make americans enjoy a standard of life 36% superior to europeans.

So, when we ask ourselves: why are the USA so much better off than Europe, the answer must be: because America

Here arises a new question. Why is it so? Does this happen by accident, or are there some root (initial) causes? And in such a case, which are they? The answer respects to the initial causes.

No, it is no accident that the USA works better and more than Europeans. The reasons are immersed in US society and can be found in the fabrics of its population and culture.

First: Americans are younger than Europeans. The median average is 36,7 years against 40,5 years in Europe and 43,8 years in Japan.

Second: a larger % of women are in the active (working) population in the USA than in Europe or Japan (46,3% against 44,8% and 41,4%). That is important. It happens that women are different (not better, not worse) from men. So they bring to the working place different attitudes and qualities. And diversity is a source of wealth.

Third: then, the American mind is… different. That is what Alexis de Tocqueville in the 19th century called: the American excepcionalism.

Americans are more motivated. When asked (by the Pew Research Centre): are you very proud of your nationality? 80% of Americans answer yes.

The British? Only 50%. The French? 38%. Italians? 25%. Germans? Less than 20% (one in five). This is obviously important. It is harder to be motivated, when you believe you were born in the wrong place.

Fourth: Americans believe in themselves. They have self-confidence. When asked (again, by the Pew Research Centre): does your success depend upon yourself?, 64% of Americans answer yes. But in Europe only 43% agree (54% say it all has to do with forces “outside” their control). So, Americans are inner directed. Europeans are outer directed.

Fifth: the USA enjoys more freedom. Commercial freedom. Fiscal freedom (lower taxes). Investment freedom (openness to foreign investment). Market freedom (lower regulation and lower black market). Property freedom (stronger property laws). Banking and prices freedom.

And freedom is at the root of economic development. The Heritage Foundation (in Washington) prepares a ranking of the countries with more and less economic freedom.

The IMD (in Switzerland) has another ranking, this time of the more and less economically competitive countries.

How both rankings compare? Not surprisingly the countries which top one list, also top the other: Singapore; Hong Kong and of course the USA; also countries at the bottom in the both the economic freedom list and the competitiveness list tend to be the same. The statistical correlation is +0,82 (significant at a 0% level), indicating that beyond any doubt: freedom works.

As it happens, some European Union countries are well placed in both lists (Luxembourg; Denmark; Holland. But then others destroy the average: France, Italy, and of course, Greece and Portugal).

The only variable where Europe is better is in yearly migration (% of immigration minus emigration in the total population): 0,45% in Europe, against 0,35% in the USA and –0,03% in Japan. But that is a recent phenomenon due to recent restrictions in entering the USA related to the international situation.

In short, it is (among other variables) the conjunction of A) youth; B) diversity (higher in women but lower in migration); C) motivation; D) self-reliance; and E) freedom, which explains that Americans are nearly 21% more productive than Europeans (the GDP per capita is 36% above – figures two and three before).

The creation of the Euro currency raised the expectations regarding the Competitiveness of the European Union. That was further enhanced by the Lisbon Summit in 2000 when the Prime Ministers of all EU-15 countries announced their aim of making of Europe, within 10 years, the world most competitive region.

Reality however is far different from, either the citizens expectations, or the governments announcements.

Indeed, not only is Europe far from the USA, in terms of competitiveness, but also (what is far more serious for Europe), it is not closing the gap (figure two).

And so, if the past (1980-2008) is prologue, never will the EU 15 GDP per capita reach that of the USA.

What that means? Basically that more of the same is not the solution for Europe. And so, structural reforms are necessary. Even because, the best guarantee of a strong social protection system, are high levels of productivity.

Jorge A. Vasconcellos e Sá
Mestre Drucker School
PhD Columbia University
Cátedra Jean Monnet

One of the most important European Union objectives is to achieve real economic convergence among its member countries. That is, to “push” poorer european countries (in terms of Gross Domestic Product per capita) towards the European average. For such a purpose a considerable portion of the European budget is allocated (33%) and central transfers into poorer countries represent over 1% of their GDP.

Nevertheless, results have fallen below expectations. Economic convergence has been slow in some cases; non-existent in others.

The example of more than 200 years from the USA, illustrate that, that should not come as a surprise: the process of economic convergence is neither automatic nor always speedy. Sometimes, even, it does not exist at all.

However what is really surprising is the fact that, today, the economic convergence achieved by the USA is below that of Europe. Further illustrating that in the process of development, some regions fall merciless behind. Even, if they are within the same economic space.

One of the great economic objectives of the European Union is to achieve real convergence among its member states. By that it is meant to bring poorer countries (measured in terms of gross domestic product per capita) into the European average.

For such a purpose the European Commission in Brussels (the equivalent to the federal government in the USA) has for the last two decades invested year after year considerable amounts into the economy of four poorer European countries: Spain, Ireland, Greece and Portugal.

These investments have come under different forms: costs sharing of major public work programs; financing of education; subsidising private companies under special programs.

Also, the values of these transfers into poorer countries have been significant. Both for the European budget where they represent 33% of the total budget and in terms of each country’s economy: at 2004 prices (between 2000-2006) what Portugal, Greece, Spain and Ireland (the four poorer European countries when they joined) received in transfers represent respectively 2,2%, 1,6%, 1,3% and 0,33% of their gross domestic product.

Nevertheless, progress among poorest European countries has been relatively slow.

Portugal joined the European Union in 1986. At that time its GDP per capita was 57,8% of Europe’s average. In 2007 it is 65,7%. Thus a progress of (65,7% - 57,8%) 7,9% in 22 years, for an annual convergence rate of 0,61%. At this trend Portugal will reach European GDP average only after another half of a century; in 2075 (see figure one). And the European Union will need to keep on pumping funds at the present rate (2,2% of Portugal’s GDP).

The convergence of Greece has been even slower. Greece joined the European club in 1981. At that time its GDP per capita was 84,5% of Europe’s average. Twenty-seven years later it is at 87,5%. An increase of 3% in 27 years: 0,13% per year. At this rhythm Greece will reach the European GDP average in 2107 (see figure one).

Spain joined in 1986. At that time its GDP per capita was 72% of Europe’s. Twenty –two years later, in 2007, it is at 91,3%. A progress of 19,3% in 22 years, that is 1,14% per year. If the trend is kept, another 8 years, will pass by before Spain reaches the European average (figure one).

Ireland is the only poor country (when it joined the European Union) that has achieved fast convergence. It joined in 1973 with GDP per capita of 60,8%. In 1997, twenty-four years later its GDP per capita reached Europe’s average. In 2007 it is 28,1% above that average.

So what is the outcome of the European Union process of economic convergence? At best, a mixed outcome. Ireland achieved a fast convergence. But for Portugal, Spain and Greece convergence was slow: another quarter of a century will be needed before Portugal reach the European average. In spite of the fact that all countries received in central transfers over one per cent of their GDP, year after year (except Ireland).

Should this come as a surprise? In part. We knew from economic theory that there are forces in favour and against economic convergence (figure two).

In general, in favour of convergence of a poor region there are three variables:

Then, against convergence, that is in favour of more developed regions, there are two factors:

So, we knew from economic theory that there were factors for and against economic convergence.

However, it was thought that in the long run, forces in favour would outweigh those against. That this is not the case, comes somewhat as a surprise. But that should not be so if one had looked at the example of the United States.

The U.S.A. is an economic union (no internal trade tariffs) for more than 200 years (Europe started, slowly in 1957). It has been a monetary union for long, too (single currency). And has a federal budget over sixteen times larger than Europe’s. And what is the result? What economic convergence has been achieved by the U.S.A.?

The answer is: much lower than could be expected. There are two ways of seeing this. The first is by looking at the difference in the standard of living among the fifty-one U.S.A. states. The other is by comparing the level of that difference with the difference among the fifteen countries of the European Union.

Indeed, among the fifty-one U.S.A. states there are great differences. The average GDP per capital (PPP¹) in 2006² of the U.S.A. was 44 363 dollars (see figure three). But the state of Mississippi is 34,79%

below (GDP per capita equal to 2/3 of the average of the U.S.A). West Virginia is 30,95% below. And Arkansas 26,4%.

There are the riches states: District of Columbia is 240% above the average; Delaware is 60% above; and Alaska 38,3%.

Comparing the richer states with the poorer, the differences are enormous. In relation to the average of the three poorest states (Arkansas, Mississippi and West Virginia) the GDP per capita of the District of Columbia (capital Washington) is 400% times superior, Delaware is 130% superior and Alaska 100% superior.

So, there is a large economic divergence. There are a few states very much above the average. And others well below. After two hundred years of an economic and monetary union. This is illustrated in figure three.

This happens despite the existence of a large number of states with a GDP per capita close to the average, forming a solid nucleus of convergence: Louisiana, Texas, Hawaii, Washington, Maryland, Illinois, etc. But afterwards there are extreme cases. Of richness. And of poorness. Here, apart from the abovementioned three states (Arkansas, Mississippi and West Virginia), there are other poor states: Idaho (23,3% below the average of U.S.A.), Montana (22,9% inferior) South Carolina (22,2% below) and Kentucky (21,8% below). Among others.

Then, there is a major surprise. When one compares how similar they are among themselves, all fifty-one U.S.A. states with, how similar are all fifteen European countries, in terms of GDP per capita, one reaches the conclusion that European countries are more similar (have greater convergence) than U.S.A. states!

Two measures indicate that much. The Gini Index and the GDP per capita variance divided by its mean.

As figure 4.1 shows the Gini Index is greater for the U.S.A. (0,22) than for Europe (0,16).¹ Thus the economic divergence is greater in the U.S.A. Convergence is larger in Europe. There is a six per cent difference.

That is represented in figure 4.2 where the U.S.A. Lorenz curve (the geometric representation of the Gini Index) is below that of Europe.

Indeed, the higher the economic divergence is, the flatter over the horizontal axis the curve would be. On the contrary, in the case of no divergence whatsoever (total convergence), the curve would be equal to the straight line linking the southwest and northeast corners.

Another indication that U.S.A. economic divergence is higher than Europe’s is provided by the GDP per capita variance divided by its average. The fifteen European countries rate here far below the fifty-one U.S.A. states: 3,82 against 6,45 (see figure 4.3). Indicating that variability is far greater in the U.S.A. (2 times greater) than in Europe.

The example of the U.S.A. indicates that it should come as no surprise that the economic convergence of some poorer European countries has been slow in some cases (Portugal) and practically non-existent in others (Greece).

Two hundred years of economic, monetary and political union were not able to achieve that convergence in the U.S.A.: Arkansas, Mississippi and West Virginia stand out as the most important non-convergence cases.

However, what is most surprising is that, at present, economic divergence is greater in the U.S.A. than in Europe (figure four).

That indicates that contrary to the wide spread belief, time and transfers of central funds will not do it all.

Thus the conclusion that the sole way of achieving and speeding up the process of economic convergence, is through structural reforms in the economy of each state or country. Without them, all regions may equally benefit from the transfer of central funds, but in the end, some will be more equal than others.