Bloomberg Briefs

Rust Belt Turns ‘Brain Belt’ as Smart Beats Cheap, Says Economist Antoine van Agtmael

April 25 2016, Nina Melendez


Rust Belt Turns ‘Brain Belt’ as Smart Beats Cheap, Says Economist van Agtmael

Rust belts in the U.S. and Europe give developed world economies a boost without sacrificing jobs, said Antoine van Agtmael, founder, CIO and CEO at Emerging Markets Management. The former World Bank economist spoke with Bloomberg TV’s Nina Melendez on April 12. His comments have been edited and condensed.

Q: Why are former rust belt areas the new hotbeds of global innovation?

A: For 25 years, we tried to compete on making things as cheap as possible. Of course, it didn’t work. China beat the hell out of us. Now we have discovered that you compete on making things as smart as possible. We have these fantastic assets. We have great universities, we have freedom of thinking that is unparalleled. Now you are seeing it spread like a virus to university towns. We counted over 35, all over the U.S. and to a lesser extent in Northern Europe.

Q: What is the employment impact of smarter manufacturing?

A: The biggest job creators are not big companies, but small companies. In Akron, Ohio, the four big tire companies left. Now they have a thousand little companies that, together, employ more than the big tire companies. We have a new industrial model. It’s going away from big polluting factories to clean small plants that are often in cities. That means that you can have cities and factories go together again the way it used to in the 19th Century. I would not underestimate the amount of jobs that are being created.

Q: How many new jobs?

A: We lost seven million manufacturing jobs between 1990 and 2010. [UC Berkeley economics professor] Enrico Moretti calculated that there were about 4.4 million new high-tech jobs in that same period. Since that time, we have created another one million high-tech jobs. I went to Albany, New York, wherethey have this nano-complex, a lot of people work in that. Then, practically next door in Malta, they have this brand new

semiconductor plant. Semiconductors are about as high-paid as you get. You’d expect this is all robots. Well, there’s3,000 people working there. It is a myth to think that in this new high-tech economy, there are no jobs.

The other thing that Moretti discovered was that there is a multiplier for each new high-tech job. In terms of “good jobs,” there’s a two and a half times multiplier, and total, a five times multiplier. If you lose an industrial job, there is a 1.6 multiplier. What that means is that with this new branch of the economy, actually, the multiplier effect will be pretty strong.

Q: Jobs for all?

A: These are not just jobs for PhDs and college graduates. Half of them —  this is Brookings research — are post-secondary school jobs. We want to train people for professional skills. We should do this far better than we have.  

Q: What’s the downside?

A: The biggest problem that I see going forward is not so much job losses as it is a skills mismatch. The trained crowd is old. People are angry because they feel left behind. This is a problem.

Q: How will these new, so-called

“brain belts” affect U.S. GDP?

A: I strongly believe that we are measuring a 21st Century economy with 20th, or even 19th Century statistics. If you go to the opera, or to a movie, you pay a ticket. That goes into the GDP. Now,you use your Google map or search. Where does that go into the GDP? We have to measure productivity in a fair way. When we’re talking about these brain

belts, if we observe the productive part of the economy, and we don’t measure the GDP right, we’ll say, “Well, they don’t matter very much.” That’s not really true.

Q: Are you disappointed with where emerging markets are?

A: I made three main points in my previous book, The Emerging Markets Century. First, the monopoly of the advanced economies on economic power is over and the center of gravity of the global economy will increasingly shift to emerging markets. I still believe that. Second, it is no longer the American consumer but increasingly the emerging consumer who is king. I still believe that. [Third,] as world-class companies in emerging markets gain market share, the competitive edge will shift to emerging markets. I do not believe this anymore. The quicksands of global competition shiftcontinually and now the competitive edge is shifting back as we move from an era of “cheap” to an era of “smart.”

Q: What about slowing growth?
A: I’m not disappointed with emerging markets in general nor, in particular, with the slowdown of growth in China. The BRICs report written by Goldman Sachs in 2001 already forecasted that we would be at a 6-7 percent growth level in China by now. Even though the markets are surprised, nobody should really have been, as this slowdown has been a phenomenon of fast-growing countries for a long time. I’m not really surprised that, with the slowdown in Brazil’s major export market, China, and shale’s impact on much lower oil and gas prices, Brazil’s growth has stalled.

 Best investment advice: Invest mostly in broadly diversified index funds and take no more than five investment decisions a year


Favorite recent movie: Spotlight

Recommended book: “A History of God,” Karen Armstrong

Favorite restaurant: Out of the Fire, Easton, MD

Favorite emerging market to visit: Thailand

Number of days spent on business travel: 50

Hobbies: Reading, sailing, tennis, skiing, discovering new places

If you would have another career it would be: Policy maker



This is the new ‘brain belt’

Cities in the economically depressed rust belt of North America are reinventing themselves with new technology

Lev Bratishenko, April 2, 2016

Ask most people about rust belts and they will describe scenes of abandoned factory buildings and cars standing on cinder blocks between peeling houses. They might think of a city like Detroit, the tip of the midwestern American hurtin’ heartland of manufacturing that winds through Pennsylvania, West Virginia, Ohio, Indiana, and parts of Michigan and Illinois, ravaged by the outsourcing and offshoring of the 1980s and 1990s. But for the authors of this book, a financier and a journalist, this is a landscape of opportunity and innovation—the place new businesses and new business models grow.

After speaking to CEOs in dozens of countries, their conclusion is optimistic. They identify the energetic centres of a new, flexible third wave of Western manufacturing based on robotics, 3D printing, and Internet-connected devices. And they find these in cities like Albany, N.Y., Oulo in Finland, Eindhoven in the Netherlands, and Zurich—areas they term “brain belts,” where opportunity cost is low and basic research can be pooled among similar companies or done by a public university. These are the places where they think the greatest innovation is happening today. Sometimes they are classic rust-belt cities but mostly they are university or hospital towns in the vicinity: Waterloo, Ont., instead of Windsor.

They identify characteristics of such places: high-tech facilities, quality educational institutions, taxpayer support for research, appealing living conditions and, most important for them, cultures of free thinking, in contrast to the “hierarchical, regimented thinking so prevalent in Asian and MIST [Mexico, Indonesia, South Korea and Turkey] countries.”

We meet SUNY Polytechnic Institute head and physicist Alain Kaloyeros: “After narrowly escaping death several times in the strife-torn labyrinthine streets of Beirut, he abandoned the life of an urban guerrilla and turned to academia.” Kaloyeros convinced Intel, IBM, Nikon, Samsung, and other multinational competitors that their only chance for breakthroughs in silicon-wafer technology was working together under the collaborative umbrella of his university. The authors view “connectors” like him as essential to making the shift from rust belt to brain belt.

The bigger argument is that these brain belts give manufacturing in the developed world a second chance against emerging market countries (a term coined by van Agtmael, a World Bank economist). They argue that when superior products can be produced in North America and Europe and labour costs are almost the same (recent Bloomberg News research shows unit labour costs to be only four per cent higher in the U.S. than in China) then global manufacturing may be poised to change dramatically.


City of Fremont

Forgotten rustbelts are giving the United States a new competitive edge by turning into hotspots of innovation

March 31, 2016 at 1:15 PM

By: Antoine van Agtmael and Fred Bakker

New models for innovation sometimes come from unlikely places, as the authors of “The Smartest Places on Earth” chronicle in their thought-provoking book released this week.  Takes From Silicon Valley East brings you this preview.

Just a few years ago, the United States seemed to be losing the competitive race to China, turning proud industrial powerhouses like Akron and Pittsburgh into rustbelt cities. What is often overlooked is that, while millions of workers lost their jobs and thousands of factories closed, many rustbelt universities maintained their world-class research capability and this was leveraged into developing smart new products needed for the 21st century. Washington did not provide a safety net, but the bipartisan Bayh-Dole Act (1980) allowed universities and researchers to profit from federally funded research.  Following the examples of Silicon Valley and Cambridge, universities moved beyond their ivory towers and learned to collaborate closely with startups, legacy companies and local officials in a process we call “sharing brainpower.” That became the secret sauce to reinventing innovation – this time not top-down but bottom-up, not hierarchical but collegial, not proprietary but open, and not siloed but interdisciplinary.

Today, many of these rustbelt cities are experiencing a remarkable comeback. They are becoming tomorrow’s brainbelts. There are now some 35 brainbelts around the country, two-thirds of them former rustbelt cities. How have they done it? Not by bringing back your father’s manufacturing, but by reinventing how we make things. In fact, creating a whole new branch of the economy by integrating advanced production methods, new materials, and new discoveries with wireless information technology and big data analytics. Think of self-driving cars, wearables that monitor health, smart grids, and ever-smarter smartphones.

In these brainbelts, we see the emergence of a whole new paradigm of global competition. For the past 25 years, China has been beating the “old,” Western economies by making things as cheap as possible. Now the United States is developing a more effective response. We believe that, for the next 25 years, the focus will be on making things as smart as possible, playing to our unique (and often overlooked) assets such as world-class research universities, freedom of thinking (indispensable for innovation), and a trusted legal system. “Smart” is replacing “cheap” as the new mantra.

These new brainbelts share common characteristics: (1) a life-threatening situation has forced groups that might not normally collaborate to break out of their silos and work together; (2) there is a pool of talent shared by universities and business, new and old; and (3) there is a broad understanding that an infrastructure is needed that includes incubators, informal meeting spaces, and plentiful, well-priced housing designed to keep attract and keep top talent; (4) they focus their efforts on the complex and expensive challenges of the 21st century that require multidisciplinary expertise—such as chip making, new materials, and bioscience and (5) a connector emerges with the vision to inspire people and motivate them to dream again.

Our book is an antidote to what we hear some of the presidential candidates on the left and the right say. We believe that this new competitive edge will boost our confidence and create new jobs, both for researchers and professionals with post-secondary STEM skills, and also in related and supporting businesses. It will require expansion of technical colleges and new training programs (patterned on the German work-study model). And we will see long-outsourced products such as shoes, shirts, and consumer electronics again with the Made In USA label.

On visits to a dozen of these brainbelts and in talking to hundreds of scientists, startups and business executives for our new book The Smartest Places on Earth: Why Rustbelts are the Emerging Hotspots of Global Innovation, we have witnessed this trend first-hand and are convinced that it is real. That is the basis for our optimism and strong conviction that the United States is not in decline, but is on the cusp of a new wave of innovation and competitiveness.

The Atlantic

How Cities Can Use Local Colleges to Revive Themselves

March 29, 2016                    By Antoine van Agtmael, Fred Bakker

Northeast Ohio is a quintessential example of an area that has gone from rustbelt to “brainbelt,” and one of the most telling symbols of its story is the Quaker Oats building in downtown Akron. For years, the thriving company stored oats, ready for shipment by rail throughout the country, in the huge silo complex there. After the industry left the region and the facility fell into disrepair in the 1970s, real-estate developers turned it into a hotel. Now, it is a residence hall for students at the University of Akron and stands not only as a visible reminder of the past, but also as a marker of the future: The Quaker Square complex today houses shops, restaurants, of­fices, and apartments, and bustles with street life.

When Luis Proenza came in as the president of the University of Akron in 1999, he vowed the institution would be a major force in reshaping the region. Wasting little time, he wrote up a plan titled the “Akron Model: The University as an Engine for Economic Growth.” In it, he argued that a university should not be an ivory tower but rather an open source of knowledge and a connector among the public and private entities and that it should, and could, drive growth for the region it served.

The university was well positioned to play this role, and materials research was a natural fit: The university had been a leader in polymer research for years and trained thousands of scientists and engineers. Many of them had gone on to staff the research labs of large tire companies. Because the labs were so deep in talent and so rich in expertise, the companies had not shut them down when they relocated their manufacturing operations. So the Akron area, Proenza knew, had a tremendous knowledge base, and much of that knowledge pertained to the materials involved in making tires: rubber, synthetics, steel. All that was needed was to reawaken and repurpose that knowledge, by applying it to marketable products that were urgently needed in the 21st century.

Today, the College of Engineering and the separate College of Polymer Science and Engineering at the University of Akron, with a combined 120 faculty members and over 700 graduate and postdoctoral students, has grown into the nation’s largest academic program devoted to the study of polymers—and is acknowledged as one of the world’s most important concentrations of polymer expertise. Researchers at the two colleges are working on advanced materials that include high-temperature ceramics, composites, and novel metal alloys. These are transforming the auto industry, and the aerospace and defense industries as well.

When Proenza described the Akron Model as being university-centric, he did not mean that the university must control or lead all initiatives—only that activity and initiatives would radiate out from and around the university, and that a quest for knowledge would always be involved.

One of those initiatives was the Austen BioInnovation Insti­tute, founded in 2008—a collaboration of the University of Akron, Akron Children’s Hospital, First Energy, the Knight Foundation, and Summa Health System. The institute’s mission is to “bring together the best minds and the most creative thinkers” to tackle health-care issues, by combining “entrepreneurial spirit with scientific innovation to achieve powerful results.” An important part of the research conducted at Austen BioInnovation centers is on the advanced polymers that will be essential in medical devices and biomedical applications. And the research there can get pretty wild, with explorations into paints that emit light, coatings that are self-healing, and contact-lens materials that change color based on the wear­er’s insulin levels.
Proenza also did not suggest that university-centric activities always center on the University of Akron itself. Kent State University, also based near Akron, has its own programs for polymer research. Its Glenn H. Brown Liquid Crystal Institute is named after the inventor of the liquid-crystal display (LCD) and is the birthplace of this now-ubiquitous material. At Ohio State University (OSU), based 150 miles to the west of Akron in Columbus, scientists are also deeply involved in polymer research, focusing on the link between polymers and nanotechnology. The Wright Center at OSU has brought together six educational institutions and over 60 corporate partners (including Goodyear, GE, Boeing, DuPont, Battelle, and Honda) and played a key role in creating several new companies.

Companies in Ohio have learned so much that they now share their knowledge widely.
As the research in these initiatives began to bear fruit in the form of new knowledge, Proenza saw that another element was needed in the university-centric model: a bridge between academia and business. Researchers could not be expected to create breakthroughs in materials, openly share the knowledge with their corporate partners, and then stand by as the advances were turned into lucrative products in which they shared no gain. That smacked of the old days, when academics were forbidden from sullying their hands with commerce. So Proenza created an independent research foundation, which provided a mechanism for professors at the state university to financially benefit from their inventions.

The state government, too, played a role in making the Akron Model a success. In 2002, Governor Bob Taft launched a project called Ohio’s Third Frontier, a $2.1 billion initiative to “create new technology-based products, companies, industries and jobs,” then the largest state effort of its kind in the U.S. Third Frontier, which was renewed in 2010, provides funding to Ohio’s technology-based companies and helps connect them to universities and nonprofit research institutions.
With grants from Third Frontier, two professors at the University of Akron, Frank Harris and Stephen Cheng, founded Akron Polymer Systems. They hired 12 Ph.D.s and many other scientists from Akron’s enormous pool of talent. Their mission was to develop special films for flexible LCD screens for use in solar cells and medical and aerospace applications—research that was licensed and has generated $1 billion in sales over the years.

Akron Polymer Systems is just one of a whole new generation of materials-focused start-ups that have risen from the ashes of the tire-manufacturing industry, thanks to the combination of Proenza’s visionary work, revitalized research initiatives, opportunities for commercial gain, and government support. Akron Surface Technologies, for example, is a start-up formed through a collaboration between the manufacturer Timken and the University of Akron. Timken moved some of its research labs onto the university’s campus to facilitate collaborative research focused on corrosion, sensors, and coatings. The arrangement combines knowledge-sharing with proprietary research, so Timken retains certain commercial rights for the use of its knowledge in specific applications, such as bearings, while allowing others to apply the knowledge to realms such as biomedicine and aerospace.

But not all the commercial action is in start-ups and in the labs of large tire companies. Other large and long-established companies with a presence in the area, such as Akron-based A. Schulman, which manufactures high-quality specialty plastics, saw that it, too, could benefit from the Akron Model. Although A. Schulman operates plants around the world—including in Mexico, Asia, and Europe—the company chose to build a new plastic-fabrication facility in Akron, precisely because of its university-centric environment. Joseph M. Gingo, A. Schulman’s chairman and CEO, said the company sees great value in “having one of the leading polymer-research institutions in our own backyard.” The company engages interns from the University of Akron and hires many graduates to staff its facilities in Akron and around the world.
According to George Haritos and Ajay Mahajan of the University of Akron’s College of Engineering, companies in Ohio have learned so much that they now share their knowledge widely. They teach other companies how to measure and minimize pollution, use sensors to develop clean energy sources, and produce fuel-cell components from polymers.

Akron’s many small polymer companies now employ more people than the big tire companies did at the height of their dominance.
One major beneficiary of this knowledge network is the steel industry. Akron has applied its expertise in polymers to create corrosion-resistant coatings for the region’s steel producers, so they can produce next-generation steel that has superior performance characteristics and that better resists rust, as well as minimizes wear and tear in bearings, a little-known problem that some analysts esti­mate costs the U.S. economy 1 percent of GDP each year.

Tom Stimson, the vice president of technology and operations at Timken when we spoke with him, and who remains a passionate believer in collaborative innovation, told us about his company’s work with researchers at the University of Akron. The goal is to develop special polymer-based coatings for bearings that are 40 percent more resistant to wear and corrosion. The company invested $5 million to build the Timken Engineered Surfaces Laboratories, a joint venture with the University of Akron. The arrangement required 18 months of sometimes-difficult negotiations to address intellectual-property issues, but the resulting solution is becoming a national model for sharing knowledge.

Akron’s breakthroughs in this little-heralded field of an­ticorrosion coatings is important for a wide variety of industries, not just the automotive sector. Polymer-based coatings are used in everything from personal-care products such as hairspray and lipstick to antimicrobial surfaces for surgical devices. The University of Akron’s independent research foundation is starting to un­lock the huge commercial value of these advances. The artificial-stent producer Boston Scientific paid $5 million for access to the university’s work on coatings, and the U.S. Depart­ment of Defense is also keenly interested in this area and has sponsored a program at the university to further develop anticorrosion coatings.
The result of this extraordinary 15-year period of ac­tivity in Akron, which began with Proenza’s articulation of the vision of the Akron Model, is that Ohio is today the acknowledged polymer capital of the United States. Ohio is the largest producer of polymer and rubber products of any state in the country as well as the second-largest producer of plastics, and polymer manufacturing is the state’s leading industry. Ohio is recognized as the global leader in the polymer and specialty-chemical industry, with about 1,300 companies that together employ over 88,000 people.

“Ohio is still making things,” said Barbara Ewing, the COO of the Youngstown Business Incubator. The companies that couldn’t make the transition from the old model to the new have been left behind, but the ones that could manage the change have grown smarter and found new paths to suc­cess. “People are more optimistic again,” Ewing said. “The sense that we can’t compete with the Chinese is gone.”

One of Akron’s greatest strengths is that it is keenly aware of how quickly a once-proud industrial area can find itself facing an existential crisis. Equally important, university and city administrators have learned that, through knowledge-sharing, such threats can be overcome and whole regions can be successfully transformed. Akron will likely never feel the sense of invulnerability and superiority it had when it was the world’s tire capital (and that is certainly a good thing in today’s ultra-competitive world). But people in Akron have also rid themselves of the self-doubt and risk aversion that became so prevalent after the automotive bubble burst. According to Proenza, Akron’s many small polymer companies now employ more people than the big tire companies did at the height of their dominance.

Financial Times book review

Shawn Donnan, March 13 2016

For years the dominant narrative about the American rust belt has been one of decline and decimation — a once-thriving industrial core turned into a dystopian wasteland by the winds of free trade and persistent undercutting by China.

But in The Smartest Places on Earth, former financier Antoine van Agtmael and journalist Fred Bakker make a courageous case for an alternative vision. What if the real story of the rust belt these days is one of reinvention? What if we ought to consider these regions “the emerging hotspots of global innovation”?

It is a courageous argument because it goes against the political grain in America. Eight years after the global financial crisis, the US is reaping the political damage of not just the crisis but also of the decades-long economic patterns blamed for hollowing out the manufacturing sector and the middle class. Whether you call it anxiety or anger, the dominant economic mood has little to do with the optimism that breeds innovation. If voters elect as their president Donald Trump, the billionaire property developer turned populist politician, it will be because they are tired of feeling vulnerable to the effects of globalisation and technological change.

It is also courageous because van Agtmael is the man who, while working at the World Bank in 1981, coined the term “emerging markets”; and in a previous book declared the onset of an “emerging markets century”.

Here, he and Bakker, the former editor of Het Financieele Dagblad, the Dutch financial daily, make the opposite case. They argue that depleted industrial centres in the US and Europe — such as Akron in Ohio, Albany in New York state, and Eindhoven in the Netherlands — are finding new lives as “brainbelts” likely to be the source of the solutions to some of the world’s great problems.

Their case is compelling. In city after post-industrial city, remarkable reinventions have followed the collapse of local champions and mass jobs forced by globalisation. There is no doubt, either, that in the US new sources of cheap energy have made entire industries competitive again.

Akron, in their telling, has turned itself from a tyre manufacturing centre outplayed by China into a world leader for the polymer industry. Albany sits at the forefront of nanotechnology research that has been crucial to producing next-generation silicon chips. Eindhoven, too, has reinvented itself as a hub for the chip industry following mass job cuts by Philips in the 1990s.

All the cities described in the book once owed their fortunes to dominant local corporations or industries that fell on hard times. As told by van Agtmael and Bakker, the hard times left vast underemployed pools of talented people who, faced with crisis, turned it into opportunity. left vast underemployed pools of talented people who, faced with crisis, turned it into opportunity. Local universities became open innovation hubs. Local leaders mobilised to recruit talent and especially “connectors” — visionary individuals or groups able to plug in to new international business networks.

The book describes a recipe for success and as such ought to be a must-read for any newly elected mayor of a metropolis with a faded industrial past. It is a 266-page inspirational Ted talk for anyone pondering the future of cities.

Because of this it also skirts over many of the problems facing cities in the rust belt and elsewhere in the US and Europe these days. Only in the final pages do the authors acknowledge that, just like globalisation and technological change, the rise of their “brainbelts” is likely to yield a period of disruption that has losers as well as winners — and potentially to contribute to that aforementioned political mood.

In keeping with their theme of technological optimism, they dismiss concerns about lost middle-class jobs as “ill-informed and misguided”. It is ill-informed, they argue, because the world is “much better at counting the lost jobs than the newly created ones”; and misguided “because it misses the main point. The real concern is not that there will be no jobs, but that there will be a lack of trained workers to fill them.”

Van Agtmael and Bakker may turn out to be right. The world may indeed be rescued by their new brainbelts. If, that is, these same cities are not sunk by their economic misfortunes.

The writer is the FT’s world trade editor


A rust-belt revival

The Economist, March 5 2016

In 1984 Ronald Reagan ran a re-election ad on the theme of “It’s Morning Again in America”. Today’s presidential hopefuls ought to run a follow-up called “It’s Almost Midnight”. Donald Trump laments the loss of America’s greatness. Bernie Sanders says the country is being wrecked by greedy businesspeople. America’s leading intellectuals are equally gloomy. Charles Murray, a conservative, says that America is “coming apart”; and George Packer, a liberal, agrees that it is “unwinding”.

Mercifully, not everyone is a doom-monger. In his annual letter to shareholders of Berkshire Hathaway, on February 26th, Warren Buffett noted that “for 240 years it’s been a terrible mistake to bet against America, and now is no time to start.” The March issue of the Atlantic magazine has a cover story by James Fallows on “How America is putting itself back together”. The author undertook a three-year journey across the country in a single-engine plane and saw signs of reinvention and renewal wherever he went—and not just in trendy tech hubs. A new book by Antoine van Agtmael, who coined the phrase “emerging markets”, and Fred Bakker, a Dutch journalist, called “The Smartest Places on Earth”, argues that the rust belts of the rich world, especially in America, are becoming hotspots of innovation.

Boosterism is as American as apple pie. But this time the boosters can point to some hard data. The Kauffman Index of Startup Activity, which measures business creation, had its biggest increase in 2015 for two decades. Bruce Katz of the Brookings Institution, a think-tank, reckons that America’s 50 most research- and technology-intensive industries have added nearly 1m jobs since 2010. These industries are disproportionately based in cities and, since they pay high wages, have a galvanising effect on local economies. Three powerful forces are breathing life into bits of America that had looked as if they were permanently left behind.


First, old industrial skills are acquiring new relevance thanks to such things as advances in materials science. As Messrs Van Agtmael and Bakker note, Akron, in Ohio, has capitalised on its heritage as home to America’s four biggest tyremakers by turning itself into America’s capital city of polymers. The University of Akron’s Polymer Training Centre houses 120 academics and 700 graduate students. Companies such as Akron Polymer Systems and Akron Surface Technologies are inventing new ways to commercialise synthetic materials. North Carolina has done the same for textiles. Its state university is home to the Nonwovens Institute, which does research on textiles that can resist heat and chemicals, including ones used in weapons.

Second, old industrial towns are realising that they have a vital asset: cheap property. Disused mills and warehouses, with their high ceilings and exposed bricks and beams, can make attractive homes and workspaces for knowledge workers. In Watervliet, New York, firms such as Cleveland Polymer Technologies occupy space in an old US Army arsenal. In Manchester, New Hampshire, the old and once-crumbling riverside mill district now buzzes with knowledge businesses and fancy restaurants.

The hunt for Lebensraum is driving young entrepreneurs to explore the neglected peripheries of big cities, such as Boston’s South Side (“Southie”), Seattle’s South Lake Union Area and San Francisco’s twin city of Oakland. Some entrepreneurs are cutting the cord completely and swapping broom-cupboard-sized premises by the Bay for mansions in flyover territory. Mr Fallows also found older industries reviving in out-of-the-way places, such as in north-eastern Mississippi, where a steel mini-mill was expanding and a $300m new tyre factory was opening.

The third trend combines elements of the first two: the rise of manufacturing entrepreneurs. Startups are beginning to transform manufacturing just as they transformed service industries like taxi-hailing and short-term room lets. New techniques such as 3D printing, combined with a rapid decline in the cost of computing power, are making it easier for small firms to compete with big ones. Crowdfunding sources such as Kickstarter are making it easier for them to raise capital. And big companies such as GE are trying to crowdsource innovation by providing small manufacturing firms with space and seed-money. Exponents of this “hardware renaissance” frequently locate themselves in old industrial towns such as Pittsburgh and Detroit, in part because there is lots of cheap space available and in part because they can draw on established manufacturing skills.

Formidable problems, formidable resources

There are plenty of reasons to be sceptical about rust-belt revivalism. The overall number of jobs in manufacturing has been declining for decades, and is set to continue falling as automation keeps advancing. Brain-intensive manufacturing will not provide many jobs for high-school dropouts. Such rebirths have been heralded in the past, only to come to nothing. The rate of business creation is still 50% lower than it was in the 1980s.

Still, America’s old industrial cities have formidable resources as well as formidable problems. Akron and North Carolina point to one of the country’s strengths: it has first-rate universities almost everywhere. GE built a factory for jet-engine parts in out-of-the-way Batesville, Mississippi, largely because Mississippi State University is a centre of expertise in the new materials needed for them. America’s success in software also gives it a huge advantage in a world in which ever more software is being embedded into hardware, be it cars or smart watches. American firms also enjoy much cheaper energy than their European and Asian rivals, thanks in large part to an American innovation, fracking.

It is too early to remake Reagan’s “It’s Morning Again” ad. But it is time for Americans to recognise that, for all its troubles, their country has not lost the ability to remake and revitalise itself. As Hillary Clinton put it, “America has never stopped being great.” Messrs Trump, Sanders et al should take note.



Emerging markets start to look less barren

Financial Times, March 4 2016

John Authers

What are the chances that the detention of Brazil’s former president Luiz Inácio Lula da Silva goes down in investment folklore as the moment that emerging markets turned upwards? The shocking news, amid intensifying scandal over kickbacks from Petrobras, the country’s oil company, was greeted by a sharp rebound for Brazil’s currency and stock market, which rippled to other emerging markets.

Emerging markets have been in a bear market for five years. Many believe a final cathartic moment is needed before markets can make a bottom — that, as the old Rothschild dictum has it, we should “buy when there’s blood on the streets”. After all, Mr Lula da Silva’s initial election as president in 2002 was seen at the time as the final nail in emerging markets’ coffin — and sparked a historic bull market. Could his detention be the moment that Brazil draws a line under its corruption problems and moves forward? It is a seductive idea. So let us look at the reasons for emerging markets’ rise and subsequent fall. For a guide, I will enlist Antoine van Agtmael, who coined the term “emerging markets” back in the early-1980s while at the International Finance Corporation.

Long a champion of emerging markets, he this month publishes a great new book, The Smartest Places on Earth , which documents how the baton has now passed from the emerging world to the old “Rust Belts” of the developed world. Hotbeds of innovation, usually surrounding great universities, they are leading growth.

According to Mr van Agtmael, two critical assumptions behind the rise of EM have been overturned. First was that globalisation was irreversible. At least as it relates to the physical movement of goods around the world, it turns out that it could go into reverse. As numbers released this week confirmed, global trade is growing more slowly than at any point since the implosion of 2009.

The second was that the emerging world’s cheaper labour would be an enduring competitive advantage. This is far less true than it used to be. What matters now, Mr van Agtmael realises, is how smartly something is produced, rather than how cheaply.

That smart production turns out to be happening in Rust Belt cities that Mr van Agtmael visited, like Akron, Ohio, or Albany, New York. Spurred both by necessity, and by innovative universities keen to be used as incubators for new innovations, they are leading a quiet renaissance. Akron, for example, used to be the tyre capital of the world. It lost its tyre manufacturers, but now has more than 1,000 polymer companies which jointly employ more people than the tyre groups once did.

Add to this the powerful secular downward force provided by China’s attempt to make an economic transition away from manufacturing and towards services, and the consequent collapse in the price of industrial commodities — and you are left with all the conditions for a savage bear market in the emerging world.

All of this is impossible to refute. The historic shift in favour of emerging markets, foretold by Mr van Agtmael and others a generation ago, is over. Buying emerging markets can no longer be an exciting story about dynamism and global growth.

But can it now be a more prosaic story of buying stocks and bonds because they are too cheap? The recovery in US manufacturing has happened. On a cyclical basis, this week’s latest supply manager surveys suggest that manufacturing is going through both in the US and across the world as a whole, while profits in the US as a whole are in danger of a wholesale slump.

Is Mr Van Agtmael’s brain belt recovery now in the price? If so, it might well make sense to buy emerging markets again, simply because after long years of a bear market they are far cheaper, while the US market looks expensive by almost any sensible metric.

Timing a market bottom is difficult, if not impossible. But Mr Lula da Silva’s detention is not the only reason to hope that a bottom may be in place. First, there are industrial metals, which helped drive the bear market. They have been rising since January, and are up for the year.

Then there are emerging market currencies, under pressure for many years. Judging by the JPMorgan emerging market forex index, they enjoyed a rebound against the dollar as the US entered its recession scare earlier this year — but crucially they have held on to their gains, even as those fears in the US have receded again. This is not true of developed market currencies, which have generally weakened against the dollar once more. And even before the Lula news, emerging market stocks had begun to outperform the developed world.

In all, this looks like what we would expect to see at the bottom — a pick-up for metals and for currencies, followed by stronger equities, and a piece of galvanising news to act as a catalyst and get people excited.

None of this guarantees a bottom, or a steep climb away from it. Nobody should expect a repeat of the rally that followed Mr Lula da Silva’s election back in 2002. But the case for long-term investors to maintain or increase their allocations to emerging markets, at the expense of the US, looks good, and stronger than it did at the beginning of the year.

‘Brain Gain’ set to transform rust belts

Video interview by John Authers, Financial Times

February 26, 2016


What’s Up With You?

April 15, 2015
By Thomas L. Friedman

While U.S.-Iran relations are taking up all the oxygen in the room these days, and they’re vitally important for the future of the Middle East, U.S.-China relations are vitally important for the world — and there’s more going on there than meets the eye. The concept of “one country, two systems” was invented to describe the relationship between Hong Kong and mainland China. But here’s the truth: the American and Chinese economies and futures today are now totally intertwined, so much so that they are the real “one country-two systems” to watch. And after recently being in China to attend the big Boao Forum on Hainan Island, and hearing President Xi Jinping speak, what is striking is how much each side in this relationship currently seems to be asking the other, “What’s Both countries almost take for granted the ties that bind them today: the $600 billion in annual bilateral trade; the 275,000 Chinese studying in America, and the 25,000 Americans studying in China; the fact that China is now America’s largest agricultural market and the largest foreign holder of U.S. debt; and the fact that last year Chinese investment in the United States for the first time exceeded American investment in China.

But dig underneath and you find these two systems increasingly baffled by the other. Chinese officials still have not gotten over their profound shock at how the United States — a country they took as an economic model and the place where many of them learned capitalism — could have become so reckless as to trigger the 2008 global subprime mortgage meltdown, which started the trope in China that America is a superpower in decline.

Chinese officials were also baffled by an effort by President Obama’s team to resist China’s establishment of an Asian Infrastructure Investment Bank, by lobbying our biggest economic allies — South Korea, Australia, France, Germany, Italy and Britain — not to join. While the Treasury secretary, Jack Lew, kept stressing publicly, and responsibly, that the only American concern was that the bank operate by international standards, other Obama officials actively pressed U.S. allies to stay out. Except for Japan, they all snubbed Washington and joined the Chinese-led bank. The whole episode only empowered Beijing hard-liners who argue that the United States just wants to keep China down and can’t really accommodate it as a stakeholder.

Americans, though, are asking of President Xi: “What’s up with you?” Xi’s anti-corruption campaign is clearly aimed at stifling the biggest threat to any one-party system: losing its legitimacy because of rampant corruption. But he also seems to be taking out potential political rivals as well. Xi has assumed more control over the military, economic and political levers of power in China than any leader since Mao. But to what end — to reform or to stay the same?

Xi is “amassing power to maintain the Communist Party’s supremacy,” argued Willy Wo-Lap Lam, author of “Chinese Politics in the Era of Xi Jinping: Renaissance, Reform or Retrogression?” Xi “believes one reason behind the Soviet Union’s collapse is that the party lost control of the army and the economy.” But Xi seems to be more focused on how the Soviet Union collapsed than how America succeeded, and that is not good. His crackdown has not only been on corruption, which is freezing a lot of officials from making any big decisions, but on even the mildest forms of dissent. Foreign textbooks used by universities are being censored, and blogging and searching on China’s main Internet sites have never been more controlled. Don’t even think about using Google there or reading Western newspapers online.

But, at the same time, Xi has begun a huge push for “innovation,” for transforming China’s economy from manufacturing and assembly to more knowledge-intensive work, so this one-child generation will be able to afford to take care of two retiring parents in a country with an inadequate social-safety net.

As Antoine van Agtmael, the investor who coined the term “emerging markets,” said to me: China is making it harder to innovate in China precisely when rising labor costs in China and rising innovation in America are spurring more companies to build their next plant in the United States, not China. The combination of cheap energy in America and more flexible, open innovation — where universities and start-ups share brainpower with companies to spin off discoveries; where manufacturers use a new generation of robots and 3-D printers that allow more production to go local; and where new products integrate wirelessly connected sensors with new materials to become smarter, faster than ever — is making America, says van Agtmael, “the next great emerging market.”

“It’s a paradigm shift,” he added. “The last 25 years was all about who could make things cheapest, and the next 25 years will be about who can make things smartest.”

President Xi seems to be betting that China is big enough and smart enough to curb the Internet and political speech just enough to prevent dissent but not enough to choke off innovation. This is the biggest bet in the world today. And if he’s wrong (and color me dubious) we’re all going to feel it.

US revival warrants EM strategy rethink

Financial Times, May 16, 2014

John Authers

Ignore the words of investing’s greatest brand marketeer at your peril. The man who gave us emerging markets now suggests that the linchpin of growth in the world is moving back to the developed world. The implications are profound.

Antoine van Agtmael, for many years an official of the International Finance Corporation, coined the term “emerging markets” in 1982. He wanted to foster equity investing in the developing world, and end a dangerous addiction to debt.

His proposed response was for the IFC to sponsor the first ever emerging markets equity fund. Most investors, even at large institutions, lacked the resources to hunt bargains in distant markets. But a diversified portfolio of stocks from across the emerging world might solve this problem.

What, though, to call it? A debt crisis was swirling around “Lesser Developed Countries”. The initials LDC were used almost as widely as EM today, and the label could not possibly be used. Nobody was likely to buy into a “Third World Fund” either.

A weekend’s thought produced the phrase “emerging markets”. No financial branding can ever have been more successful. Mr Van Agtmael himself has been an evangelist of emerging markets, ardently suggesting that the most successful companies in EM have the smarts, after learning to survive in their home countries, to become dominant multinationals.

There is symbolism, then, in his new project to document how and why the global advantage is shifting back to the US.

There are complaints in Asia about competition from the US. Manufacturers that had moved to China are moving back to Mexico, or even to the US itself. In China, where the priority is to raise real wages (and erode competitiveness), he points out that self-satisfaction after the 2008 crisis has given way to unease. Wages have risen 400 per cent since 2001, according to Ernst & Young, while US unit labour costs have dropped 12 per cent since 1995.

Fundamentally, the US is more competitive than had been thought, while China is less so. What Mr Van Agtmael calls the “creative response” from the west has come sooner than he anticipated. The advent of robotics, 3D printing and the like, he suggests, have moved the west from manufacturing to “brainfacturing”.

As this plays out, investors are rediscovering political risk (and singling out state-owned companies for punishment), and drastically reappraising their projections for the emerging market future.

Has he given up on his positive thesis for the emerging markets? Certainly not. As he points out, long-term potential is always ignored when markets come down (just as problems are ignored when prices are rising).

It is still the emerging, and not the American, consumer who will steadily become king. Already, he points out, more cars, washing machines, televisions and mobile phones are sold in the Bric countries (Brazil, Russia, India and China) than in either the EU or the US.

He also contends that slower emerging growth is not a problem – for China, it is an advantage – and he denies that the inevitable unwinding of quantitative easing in the US need cause anything like the panic that briefly gripped emerging bond and currency markets last year.

But the enthusiasm with which he charts the growth of a US “Brain Belt” to supplant its old “Rust Belt” is reminiscent of the excitement with which he once charted the rise of emerging multinationals. Innovation centres are sprouting up across the US, he points out, in places like Minneapolis, Akron or Boulder, as well as around prestigious universities. He charts more than 200 examples of “re-shoring” as companies like GE return to the US, while Apple makes Macs in the US for the first time.

For the next decade he expects growing confidence in the US (like post-1970s Japan), more innovation in manufacturing, and an epic “battle for the billions of emerging consumers”. He still expects emerging markets to grow faster.

The notion of a Brain Belt might yet be as catchy as the notion of “emerging markets”. Is that a good thing?

Van Agtmael’s “emerging markets” certainly aided his aim of opening up new markets to equity finance. It also had some negative consequences, such as a succession of attempts to impose brands on new markets with increasingly absurd results. Think of acronyms, from Brics to Civets, Mints and Biits.

This is part of a broader trend to oversimplification. People lazily assumed that all “emerging” markets would indeed emerge, that they would outperform the existing developed markets, and that they would grow in a straight line.

None of these ideas is necessarily true. There is no cause to abandon carefully chosen positions in EM (or to invest mindlessly in the “Brain Belt”). But, three decades after “emerging markets” arrived on the scene, all investors should follow Van Agtmael in accepting that the game is changing.

Here comes the next hot emerging market: the U.S.

The Wall Street Journal, April 24 2013

Jason Zweig

The investment visionary who coined the term “emerging markets” and helped launch the first funds to invest in developing countries thinks he has spotted what you might call the next great emerging market.

It is called “the United States.”

Antoine van Agtmael is arguably the founding father of emerging-markets investing. He still is an evangelist for investing in parts of Africa, Asia, Latin America and other less-developed regions, where he thinks the future remains bright. But he believes the U.S. is at the beginning of an industrial revitalization that most analysts only have begun to recognize.

Over the past year, investors have pulled $22 billion from U.S. stock funds and added $339 billion to bond funds, according to Morningstar. If Mr. van Agtmael is right, that exodus is premature.

Mr. van Agtmael, now 68 years old, has been analyzing emerging markets since 1971. In the late 1970s he ran an investment bank in Bangkok as the local stock market boomed and then fizzled. That taught him the enormous potential—and explosive risk—of stocks in developing countries, highlighting the urgent need for diversification.

Later, at the International Finance Corp., an affiliate of the World Bank, Mr. van Agtmael helped create the first database of stock returns and pushed to launch a diversified fund to invest in what was then called the Third World.

After he came up with the catchier term “emerging markets,” the first such portfolio was launched by Capital International in 1986 with $50 million. Today U.S. fund investors alone have more than $420 billion in emerging markets.

Mr. van Agtmael founded an investment firm, Emerging Markets Management, in 1987. It peaked at more than $20 billion in assets before he and his partners sold a 63% stake to Ashmore Group in 2011.

So when Mr. van Agtmael says he sees an under-appreciated investment opportunity, he is worth listening to. When he visited China last year, one manufacturing executive after another complained to him about American competition, “something I had never heard in 40 years in Asia,” he says.

 Mr. van Agtmael points out that labor costs in China have been rising roughly 15% annually while stagnating in the U.S. Meanwhile, oceans of cheap oil and natural gas are flowing from American shale.

The U.S. is well ahead of China in cellphone infrastructure, he says; it also is advancing faster in three-dimensional printing and the use of robots in factories. At least 200 companies have relocated plants from offshore to U.S. locations, estimates Mr. van Agtmael.

     “A decade ago, nine out of 10 companies would tell you they were thinking about building their next plant in China,” he says. “Today it’s more like three out of 10, and maybe five out of that 10, say they want to build in the U.S.”

Some of these emerging advantages haven’t shown up in higher profits for American companies—yet. “U.S. manufacturing is becoming more competitive than you would think, and China’s less,” Mr. van Agtmael says. “And the idea that manufacturing is old-fashioned is itself old-fashioned.

These ideas aren’t a secret, of course. Stock-market bulls have been snorting over shale gas and 3-D printing for a couple of years now. Mr. van Agtmael outlined his message in Foreign Policy magazine last year and has recently been presenting it to sovereign-wealth funds, family offices and other investment audiences. Nonetheless, he thinks investors have underestimated the rate and importance of these changes.

     “When I first started talking about emerging markets 30 years ago, people knew it made sense but they didn’t quite believe it,” he says. “This is the same kind of thing: They get the message on one level, but they haven’t yet rationally absorbed it, and it hasn’t changed their behavior yet.”

Mr. van Agtmael, now a senior adviser at the consulting firm Garten Rothkopf in Washington, is writing a book about the resurgence of manufacturing in the U.S. and Northern Europe. But he still is bullish on many emerging markets, including Mexico, Peru and Colombia; Indonesia and South Korea; Turkey; and much of sub-Saharan Africa.

He thinks Americans should have up to 25% of their equity exposure in emerging-market stocks, well above the 6% average among fund investors.

Still, his most surprising message is that the U.S. is back.

     “My belief is that markets are not efficient, but they are emotional,” Mr. van Agtmael says. “They are driven by raw feelings. Why has everybody been surprised by how well the U.S. stock market has done lately? Because they’re only beginning to realize the glass is half-full again instead of half-empty.”