Sunday December 9, 2007
As I strolled down the streets of Paris and London last week, I thought why these countries prospered and Turkey, my country, did not. After all, Ottoman Empire
(1299-1922) was the foremost power in the world at the height of its power in the 16th and 17th centuries. Of the many proposed solutions (technology, geography, history of lucrative colonization) the current favorite among economists is rather bland in the abstract: institutions. In rich economies, institutions — meaning the formal laws and unwritten rules that govern society — function rather well on the whole. In poor ones they don’t. That much is indisputable.
What is tricky is showing that good institutions are a cause of economic progress rather than by-product of it. Any ideas?
A small piece of chocolate from la Maison du Chocolat is worth twenty-two Hershey’s bars.
Wednesday October 10, 2007
Monday September 17, 2007
- it’s been done before
- it’s never been done before
Tuesday August 7, 2007
Wit is a wonderful thing, especially when it’s both relevant and amusing. I’m convinced at this point that the most important insights we hear that shape our character and business judgment has an element of wit in it. Think about it.
So why it’s rare to use wit in our serious dealings? Certain mornings I wake up and decide to be wittier! And, I usually give up by the time I have my mid-morning espresso. To be clever and amusing is not easy. Just study the insights of Frédéric Bastiat, an economist born 200 years ago, and you’ll see how difficult it is to match his brilliant use of satire.
Monsieur Bastiat is best known for his essay to the French Parliament on behalf of candle makers. His essay talks about the “ruinous competition of a foreign rival who works under conditions so far superior to our own for production of light that he is flooding the domestic market with it at an incredibly low price”. The rival is the sun. His proposed remedy: mandatory shuttering of all windows. That, he claims, using all the standard protectionist arguments, will benefit the French candle industry. As a compelling statement of the case for free trade, this essay is hard to beat.
Noting the popular view that exports are good and imports bad, Bastiat thought if the best solution would be for ships carrying goods between countries to sink, thus creating exports without imports.
Bastiat also suggested that to divide out the limited amount of work available, people should be required to use only one hand, or even to have a hand chopped off. Brilliant! Missing the irony, France imposed a maximum working week of 35 hours a few years ago, hoping to parcel out available work.
Whether Bastiat was a great economist or merely a great communicator of economic truths has been much debated. In any case, writing about his wit more than 150 years after his death is no laughing matter.
Thursday July 12, 2007
Living in Silicon Valley and running an internet start-up, I often think technology is the only place where the action is. Then, I come across some numbers from other industries that change my perspective (briefly!). Listen to this:
Dominos Pizza, US’s largest pizza delivery company, cites the statistic that by 4.30pm on the average afternoon, almost three-quarters of Americans still have no idea what their families will eat for dinner that evening. So, selling pizza can be very lucrative. The US alone generates $33bn in sales (that is two times total US internet ad spending in 2006).
My estimate is that a new Domino’s store costs about $200,000 to build but probably yields an annual pre-tax cash return of 40 per cent. In addition, most of the company’s operating profit probably comes from franchised stores. These provide a stable royalties stream and a capital-light way to expand.
If The Auteurs does not work out, I’ll be running the best pizza parlour in Silicon Valley.
Monday June 4, 2007
Last night I watched, for the second time, this Ingmar Bergman film. And I realized how much I love subtle and intelligent storytelling.
The movie explores the disillusionment of an aging physician, Isak Borg, as he reflects on his life. Borg reminded me of judge-penitent Clamence in Albert Camus’ The Fall, as they both tell their life story - their quest for meaning; the process of their life crisis - and make you think about the coices you make in life that could render a life devoid of meaning.
A person usually has two reasons for doing something: a good reason and the real reason.
— JP Morgan
Monday May 7, 2007
Friday April 27, 2007
It’s not difficult to see how Islamic banks turn Islamic finance into a charade. Since Koran prohibits interest, all financing must be done on a profit and loss sharing basis. In practice, no more than 5% of Islamic financing is done this way.
Instead, Islamc banks use a structure called murabaha, or cost plus predetermined profit. Remarkably, the “profit” in a murabaha transaction and the interest a conventional bank would have charged on the same transaction happen to be exactly the same (imagine that!). Indeed, Islamic banks often quote their “profit” as a margin over Libor. Sounds dubious? It is.
What Islamic banks should do is to move away from the deceptive modes of financing they currently use and step towards venture capital. The venture capital groups who favor profit and loss sharing over interest are real islamic finance, the genuine thing. Moreover, by providing funds to entrepreneurs with bright ideas, the banks can assist in promoting innovation, invention and creation of new jobs and industries the Middle East desperately needs.
At one time - from AD750 to about AD1100 - it was the Muslim world that was making advances in science and technology, because of the availability of risk capital. But nothing of consequence has been invented in the Islamic world for thousand years. By becoming more like venture capitalists, Islamic banks can practice authentic and genuine sheria compliant financing while helping the Islamic community to rediscover its tradition of invention and innovation.
The next Forum on Islamic Finance should be in Silicon Valley, not Dubai.
Tuesday January 16, 2007
The rise of Iran has made the timing ripe for a new strategy for an Israeli-Palestinian peace. Here’s why: The primary divide in the Middle East is between the forces of moderation and those of extremism. Iran and the radicalism it supports has created a potential alliance among moderate Palestinians, Israelis and the leaders of Saudi Arabia, Egypt, Jordan and the gulf states. And, it’s in all of their interest to work now for a comprehensive solution.
The good news is that Condoleezza Rice and Israeli Foreign Minister Tzipi Livni are spearheading an ambitious new diplomatic initiative for achieving such a peace. Their strategy is to put aside the step-by-step road map, which requires that the Palestinians dismantle their terrorist infrastructure before any new phase of negotiations begins, and instead leap right to final-status talks with moderate Palestinians about what a two-state solution would look like. If a suitable framework for a Palestinian state is reached, Abbas would then go to his people with a referendum: Do you want it or not? He is convinced that more than 70% would vote yes, thus marginalizing the Hamas resisters. Olmert would do the same, and probably get close to the same support.
The region needs this breakthrough. Hope they succeed.
Friday January 5, 2007
A $100bn LBO no longer seems unthinkable. Home Depot, which is rumored to be a target, has an enterprise value of about $90 billion. Add a premium, and you are close to that number. If a deal goes through, it is feasible that private equity groups could find, say $25 bn equity, and raise a further $75 bn in today’s extraordinarily generous markets.
But what about the exit?? A trade sale is virtually impossible for any $100 bn+ company (there are only 60 non-financial public companies worldwide with that size). Financial engineering has its limits (given the risk of tougher market conditions). And, an initial public offering for a 15-20 per cent float will be extremely difficult (Bank of China aside, the biggest IPOs ever - Enel, Deutsche Telekom, AT&T Wireless - raised between $10bn and $15bn). Even with a successful IPO, a complete, staged exit from the remaining stake could take very long.
With ever-increasing amount of capital chasing bigger and bigger deals that seems to reach a plateau, expect returns on private equity investments to go down.
