Paulo Roberto Feldmann: the Trick Is to Plan Ahead

Paulo Roberto Feldmann, Professor in Economics at Universidade de Sao Paulo, coordinator of Institute of Management Foundation (FIA). In addition to his academic career, he worked more than 25 years in leadership positions at Brazilian and international corporations. Among others, he served as Director of Innovation at Microsoft’s Brazilian branch, as partner in the strategic advisory division of Ernst & Young’s Latin-American Center, and he served in senior roles in the Brazilian subsidiary of Citibank and Phillips, Banco Safra and Nossa Caixa financial institutions. His scientific research focuses on Latin-American management, examining the relations between innovation, productivity, and businesses.

You command a broad range of experience in both the competitive sphere and academic community, as you served in leadership positions in several multinational firms, and, in addition, you have held a Professorship at the University of Sao Paulo for more than twenty years. In your opinion, how well can secondary and higher education keep up with the trends shaping the world and provide their students with appropriate skills?

I believe that especially in emerging countries, and here I mean the majority of Latin America, education systems are not prepared to adapt to the economic, technological, or energy changes that are expected to happen over the next years. Thus, we are facing great challenges. Education systems are mostly too slow to react, in particular to changes in technology. Of course, these are very common and very radical changes these days. At times, not even the scientific community is in a position to see them coming. The emerging nations, such as Brazil and other Latin-American nations are particularly affected, but the situation is not substantially better at other parts of the world. For instance, owing to the phenomenal pace of urbanization almost eighty percent of the entire population lives in urban areas, and some of the world’s largest cities can be found here, including Sao Paulo, Mexico City, and Bogotá. These vast urban spaces struggle with enormous challenges in the areas of overcrowding, traffic, and environmental pollution.

Despite all of this I believe that we are close to finding a way out. After all, we have solutions at our disposal on how to manage the decisive majority of these problems. Naturally, we need to prepare people, and in particular young people, students. Here education plays a central role.

You mentioned the relevance of technological changes. According to a 2016 OECD survey, employers honor advanced practical IT-knowledge with higher salary and better career prospects than official degrees paired with lesser IT-competence. In your opinion, may formal education lose its relevance due to the dominant role of practice-based learning and technological abilities?

This is a very important question with regards to the future, as currently we are not sufficiently engaged with this problem. Increasing unemployment rates are a huge issue in Latin America, but also worldwide, and the origin of the phenomenon is very complex.

The first factor is technology. As we are deploying advanced technology in ever broader circles, in many places the human workforce is becoming superfluous. In many cases, machines and computers permanently replace the human workforce, and while in the course of the transformation process many new jobs become available, the lost jobs by far outnumber those newly created. The second factor is none other than the crisis of the capitalist system worldwide, the effects of which can be felt particularly forcefully in Latin America. Owing to capital investments, those in good financial positions are able to secure sizable returns, while those who have no income to invest continue to depend on salary-based earnings. Therefore, they are also most affected by job loss. In other words, the rich become richer, the poor become poorer.

Along the same dynamics, a huge power concentration is taking place in the banks, which have become the world’s most important corporations. Those predominant global companies that are not operating in the banking sphere also have ties to the banks or are owned by them. The current situation may be pointing to the end of capitalism, and people must take account of this reality.

What is in the background of the crisis?

The age of Communism and Socialism concluded with the dissolution of the Soviet Union, for the system failed, but in my opinion currently capitalism is struggling through the greatest crisis of its history. The number of poor people is growing. In Latin America, for instance, one third of the population lives on less than 10 dollars a day, but in Asia inequality is growing at the same pace and rate. The effect of the crisis is not as strong in Europe, for the system protects jobs and social benefits. In some European countries, the model of the welfare state is still operating well, but, for instance, the United States of America is struggling with serious issues. This is the first time that the United States of America must face this reality. Wealth concentration is not a new phenomenon in Latin America, but no one has ever paid attention to it while it remained an isolated problem. Now that the United States is also affected by it, we might find its solution.

We speak of inequality as the greatest global risk these days.

What is your opinion on this matter?

A few years ago, a book written by the French economist Thomas Piketty became a bestseller [Thomas Piketty: Capital in the Twenty-First Century, 2013 – ed.] who researched income and wealth inequality among other things in the United States. According to Piketty’s thesis, the returns on capital are constantly greater than the rate of economic growth, which in the long term leads to wealth concentration in society, which increases instability and social tension, in other words leads to crisis.

Cities must prepare for this situation as well, as due to the large crowd of job-seekers flowing into cities, federal or state systems must eventually support a broad social stratum, who lose their jobs due to technological developments, but still need health care, education and public transport without being in a position to pay taxes for them. This may indeed lead to crisis.

Speaking of changes, according to a report of the World Economic Forum (World Economic Forum: Future of Jobs Report, Jan. 2016), 65% of schoolchildren today will be working in jobs that do not yet exist. As skills will become the levers of the new economy, and skill development and nurturing talent will be the central elements of national development, what in your opinion can countries do to create efficient programs on these fronts?

There are few countries in the world where education is truly progressive. Finland and Sweden, and to some extent Germany are good examples, but most education systems do not prepare children for the requirements of the new economy and technological changes. A Finnish delegation visited Brazil about a month ago to draw up recommendations to Brazilian ministers and state secretaries in relation the development of education. This is a good initiative, but the knowledge transfer can unfortunately only be partially implemented, as the education systems of emerging nations are often very backward. For instance, it would be impossible to give a laptop to every child in Brazil, whereas this is the norm in Finland or Sweden. Emerging nations face a dilemma, namely that the system must be reformed and some schools need support, but due to the budget deficit, state expenditures must be decreased. Unfortunately, education is the first area that sees its funding cut due to austerity measures.

The only alternative for parents is to send their children into private institutions. However, many don’t have the necessary financial resources for this, or they might lose their job in the meantime, or the buying power of their earnings. This problem is largely unsolved and it represents a truly great challenge with regards to the future, in particular in emerging nations.

In your book (Paulo Feldmann: Management in Latin America, Threats and Opportunities in the Globalized World, 2014) you discussed that there are certain factors that determine economic development that cannot be described with conventional economic theories. Rather, they are tied to national values, which are inherited from generation to generation and determine people’s behavior. Which values do you mean, and what effect do they have on development?

Culture has a tremendous effect on management methods. This statement is of vital importance, because large corporations have central relevance for their countries. The power of countries is based on the number of their global corporations. For instance, the United States is strong, because one-fourth of the 2,000 largest companies are American, but Japan also wields great economic power, as their share is 10-12%. Latin America could have important corporations, but it does not have any. A cause of this can be found in management methods.

Management is not universal, not the same in every culture, but rather it changes in the context of each culture. Michael Porter wrote that management is not a hard science like physics, because then it would have to be the same all over the world, just as gravitation is constant everywhere or the periodic table contains the same elements. Yet management differs in the United States, in Hungary, or in Brazil, depending on the given culture.

Sometimes culture exercises a negative influence on management methods, and this may become problematic. In Brazil, for instance, family is of paramount importance, Thus, when a new firm is founded, leadership positions are reserved for family members. This practice is unimaginable in the United States, as there the best prepared professional candidates are preferred.

This is a very good example; indeed, Italy is the only place in the world where the family-based model operates well, but only in the case of smaller firms. In my opinion one of the most important results of the Italian economy is that they have found an operational model that privileges small and middle-sized businesses. If you think about it, there are hardly any large Italian companies, with the exception of a few, such as Pirelli or Fiat. On the other hand, Italians compete very well in sectors where characteristically small- and medium-sized companies dominate, such as the textile or leather industry, or design. These businesses cooperate with one another, and thus they are able to take on larger competitors as well. Economic policies consciously support this cooperative consortium model, so that companies operating in a sector can join forces directly with one another, and, for instance, so that they are able to export jointly. Benetton is a good example of such a typical consortium, one that brings together innumerable smaller firms.

This is a very advantageous model, and I have argued for a long time for its introduction in Brazil, but alas creating the legislative environment has proven to be difficult. As the President of Fecomercio (Federagao do Comércio do Estado de Sao Paulo – Trade Alliance of Sao Paulo) I have negotiated with several governors and ministers about the legislative environment necessary for the creation of consortia, but unfortunately, I failed.

Why do you think I did not succeed? In Brazil, politicians owe their success to large companies, as they pay for the costs of the election campaign. Large companies do not want to see legislation that protects the interests of their smaller competitors. This, in a nutshell, is the reason why there are no consortia in Brazil. But the question is all the more justified as Brazilian culture greatly resembles Italian culture. Italian influence is particularly strong in Sao Paulo. After all, descendants of Italians make up nearly half the city’s population. Due to political lobbies, however, we failed in creating a similar economic model as in Italy.

In your opinion, could such a model be successful in Hungary? One of Hungary’s most important resources is a well-trained workforce. Natural science and engineering education has a long tradition in the country, as evidenced by Hungary’s Nobel Prize laureates.

For Hungary, the quality of education makes a real difference, as it is of very high quality. I am not an expert on the Hungarian economy, but before I arrived, I took a look at the list of the most important companies in the region. These were mostly banks, just as in Latin America. Therefore, the creation of a mechanism that channels the power of the banks into education would be very important. How would this be possible? In the case of Brazil, and I know this sounds incredible, banks give no credit to companies and private persons, because they prefer to invest their money on the stock and bond markets.

At the same time, many small and middle-sized businesses face difficulties. Just in the last six months about half a million small and medium-sized businesses filed for bankruptcy. The employees of a well-known magazine did some research and interviewed about two thousand entrepreneurs to chart the reasons for mass bankruptcy. The main reason was none other than lack of credit. In Brazil, the banks are strong, but they give very little credit to small and medium-sized businesses. Therefore, banks must be given incentives to invest in the local economy, in promising projects, to contribute to the development of industry, and to create new jobs.

What would you recommend in the case of Hungary?

In the case of Hungary, it would be of advantage to exploit the high quality of education and to provide sufficient support to people to become entrepreneurs, to establish startups, in particular in the technological sector. This is not at all a widespread practice. The only country that succeeded in institutionalizing this is Israel, which is widely regarded as a country of start-ups. A book discussing this topic was published, and it sports the title “Start-up nation” [Dan Senor: Start-up Nation: The Story of Israel’s Economic Miracle, 2011, – ed.] as there are as many start-ups in Israel as there are in the United States. But how it is possible that a country smaller than the city of Sao Paulo or even Hungary could catch up with America? The three main ingredients of the successful model are incentive for the setting up of companies, close cooperation between companies and universities, and finally the operation of business incubators. In Israel there are 450 incubators, in Sao Paulo there is a grand total of one. Yet for the support of small companies we need business incubators, particularly in the technological sector. In my opinion this is a fundamental question of national strategy. If a nation wishes to get ahead, it needs strategic developmental policy.

How can we implement such a strategic development policy in practice?

There is an example I often bring up with my students. Namely, what is the difference between Latin America and Asia? Why did the Asian region outpace Latin America in development so spectacularly in the past fifty years? If we compare Brazil and South Korea fifty years ago from the point of view of income per capita, South Korea was much poorer than Brazil.

This situation took a 180 degree turn since then. What is the trick? The trick is to have a plan. South Korea prepared a long-term developmental policy, and it stuck to that plan. We in Latin America have no such plans. In fact, we do not plan ahead. Why not? Because some believe that to make plans is at loggerheads with the principles of the free market. The free market must reign. This is an ideological question, which gained strong currency as a result of American influence in the nineties, in the wake of the Washington consensus.

Would you tell us about the effects of the Washington consensus in Latin America?

After the collapse of the Soviet Union and the end of the Cold War, the United States implemented a foreign policy change. They thought it was necessary to open these markets for American companies, therefore they ratified the Washington consensus.

In a nutshell, the consensus sent this message to the countries: open up your import market, do not protect your industry, companies must compete! Get rid of state enterprises, privatize everything! Thus, the state as a market player became superfluous in principle, or, if you like, it was excluded in the interest of the marketplace. But this rhetoric only applied to other parts of the world. The Americans themselves did not follow it. In the United States, the state remained a strong market player.

Encouraging the reign of the free market and the exclusion of the state, however, had disastrous consequences in the Latin-American region. As there were the accepted guidelines, each country had to abide by them if they wanted to secure support from the IMF or the World Bank. So, everyone followed the prescriptions, which three Washington-based organizations dictated: the IMF, the World Bank and WTO. Following these prescriptions also meant that these countries no longer planned ahead and slowly lost their ability to do so. In contrast, Asia did not accept the Washington consensus, as from a geopolitical perspective they were not under as strong an influence by the United States as Latin America.

Could this be one of the reasons behind the regional differences in economic development between Latin America and Asia?

South Korea, Japan, India, China, in fact the success of all the Asian small tigers originates in having prepared good plans and having stuck to them, even if a regime change takes place in the meantime. This is a very important aspect, for the plan’s time frame might be 20 or even 30 years, such as in the case of China. The plans do not fundamentally change, they might be modified eventually if there is a serious need to do so, but this has no influence on their execution. In contrast, in Latin America not only do we see frequent regime change, but we make no plans at all with regards to the future, which explains, in a nutshell, why we fell behind in the technology, infrastructure, and energy sectors.

We have already spoken of the challenges that come with the rise of urbanization, but in addition to all the negatives, cities are also the center of research and development activities. According to a survey of the OECD (OECD: “Trends shaping education”, 2016) cities register more patents than all other parts of a country put together, in all sixteen examined OECD countries. Stockholm and Paris are important centers, but could Budapest become a regional hub in the Eastern-Central European region?

In my opinion Budapest has great potential to become a research and development center, as the most important criterion is given, which is none other than highly qualified labor force. In my opinion, it is necessary to strengthen developmental policy so that it stimulates the appearance of technological innovation. This stimulus is important from the financial and the legal points of view, for technological start-ups need protection at the beginning so that they become strong and are able to compete with large companies. Here I am not only thinking of patents as in the absence of legal-economic protection, large companies either destroy or buy up rising start-ups. It is a common occurrence that a promising start-up survives for three, four, or five years, but then it is bought up by a large company. Skype, for instance, was a European company full of promise, and today it is a Microsoft subsidiary. Therefore, it is important to create the necessary protection for smaller companies. After all, in the absence of protection the large companies become ever more concentrated, and local industry has no chance to develop.

In addition to aiding and protecting technological start-ups, what else constitutes an important opportunity to break out for the Central European region?

With regards to Central Europe, I would like to stress that generally it should strive to create closer economic ties to Latin America, as their economies complement one another. Latin America has a wealth of natural resources and raw materials, much more so than the Central European region, but it lacks a trained workforce, which it could import from Central Europe. If I may include a related anecdote: as two or three years ago there was a shortage of medics in Brazil, President Dilma decided to invite doctors from Cuba to work in Brazil. First, she was greatly criticized for this decision of hers, but in time the initiative became extraordinarily successful, as Cuban doctors are amazing experts. In addition to doctors, we also need engineers, who could be Hungarian, Polish, or Czech in origin. I see many unmined opportunities and I feel that creating closer cooperation between Latin American and Eastern and Central Europe would definitely be a worthwhile undertaking.

written by: Lilla Balogh

Feldmann visited Budapest at the invitation of the PAGEO Foundation to give lectures at Corvinus University of Budapest, The University of Pécs, and in the Institute for Foreign Affairs and Trade.