Category Archives: Management

A Brief History of International Borrowing

Perry Gogas 15xx (2)

Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece

Efthimia Chrysanthidou

Ms Efthimia Chrysanthidou is a PhD candidate in economics at the Democritus University of Thrace, Greece.



Traditional Banking

In the international financial system banking institutions played a core role in raising capital. Their central position was safe and unchallenged for many decades. This happened because banks can take advantage of both the economies of scale they create and their in-house expertise in risk assessment. These can reduce significantly both the financing cost and the adverse effects of asymmetric information as compared to direct financing. Moreover, the direct and one-to-one relation between the bank and the borrower provides the flexibility to adapt the financing and repayment schedule to the specific needs of the borrower. Therefore there is a state of complete transparency between the two parties.


Over the last three decades and as a result of the process of the deregulation in the financial system and the technological progress, the disintermediation was made possible: borrowers could more easily in terms of risk, cost and transparency raise the necessary capital directly from the lenders (individuals or corporations) in the capital market. The rating agencies played the role of the assessing the credit risk and thus the intermediation of a bank was not necessary. The advantage of the disintermediation is the reduction of the borrowing cost as the banking intermediary is absent. For large corporations with high creditworthiness the risk for the lender is minimized. As a result we observed a qualitative change in the borrower lender relationship: from the one-to-one direct transaction and negotiation to a relationship where the lender is now an anonymous crowd dispersed, heterogeneous and practically unknown to the borrower. There is now no flexibility on the financing terms and the lenders assume all the credit risk.


The banking industry reacted by demanding and achieving gradually the repeal of the Glass-Steagall Act that strictly separated the lending (commercial banking) and investment (investment banking) activities of a financial institution. Universal banking, the consolidation under the same financial institution of both the commercial and investment activities has become the norm. Under this new regime, banks reacted with the practice of securitization taking advantage of the disintermediation trend in financing. The impersonal nature of the disintermediation is even worse in the case of the securitization as now not only the lender but also the borrower has become unknown and impersonal: a wide and heterogeneous lender base finances the needs of a large group of individual borrowers that are for any practical reason unknown.

The International Lenders – History

International lending experienced huge growth over the last three decades. Modern technological developments completely transformed the global financial system by making the mobility of funds from one country to another easier and much simpler. But this is not a new phenomenon. The history of international borrowing has its roots far in the past, from the first civilizations developed in the Mediterranean. We might even identify the colonization of the ancient Greeks as a form of internationalization of the capital in the known world. This colonization had exactly the same characteristics as in the 19th and 20th century: the Greek cities sent abroad their productive factors, capital and labor to gain from higher returns. Later in history, the rapid growth of productivity during the Industrial Revolution in Great Britain, and its subsequent spread to Europe and to the colonies all over the world, resulted in an unprecedented accumulation of capital surpluses. Thus, at the end of the 19th century this capital could not remain inactive and people tried to find ways to make the gains of productivity even higher. As a result, Europe and specifically the Great Britain became the main world international lender of capital. A significant development in this process was the creation of a new middle class, that of craftsmen, manufacturers and traders. They started to accumulate large amounts of wealth and power and to conquer high and influential positions in the societies of that time, which they did not intend to lose. They were particularly oriented towards investment in search of new wealth opportunities and higher productivity of their capital. Later, in the early 20th century the U.S. experienced the same rapid growth when the industrialization was transferred over the Atlantic Ocean. The U.S. continued to borrow from abroad as they were achieving significant growth rates, but simultaneously they increased capital export to international markets. As a result, the U.S. soon become a net international lender and took the lead from Britain just before the Second World War.

The 1870-1913 Period

This period was signaled by a strong growth in international trade and the liberalization of the mobility of the factors of production capital and labor. It is also the period of the largest migration that the humankind ever experienced, mainly from Europe and Asian countries to the U.S., Canada, South American countries, Australia, New Zealand, etc. The international lenders in this period were mainly capitalists, traders and industrialists. Total international financing increased from $100 million in 1820, to $4 billion in 1870 and to $44 billion in 1913. This international lending was achieved almost exclusively through the capital market, i.e. with the issuance and disposal of bonds and shares to the public.  The most important international lenders and borrowers for the year 1913 are presented in the table below:


$ billion


$ billion

Great Britain










Latin America










Other countries








The 1914-1950 period

This period was very important for the international capital flows as the financing of firms and the war reparations played a dominant role. When the war began there was an objective need for funding for all European countries. This need was first satisfied mainly by individuals from the U.S. as their country seemed that would not be touched by the war. But this changed in 1916 when the U.S. entered the war. At the same time, although the U.K. remained a lender, it significantly decreased its contribution to the global financial system. The same phenomenon was observed in other European countries as well. Another significant change was that excluding U.S. the other developing countries reached a pivot point in their growth due to the war. Additionally, profit margins declined significantly and in conjunction with severe recessions, there were created severe liquidity problems leading to default. This practically eliminated international lending. Especially the funding for the colonies and for the less developed countries stopped completely. By 1939, a new form of international financing was in place. The parent companies of the developed countries invested directly on subsidiaries in developing countries which were under their control. This practice became extremely widespread in Canada and Australia. About half the capital invested in the industry belonged to foreign companies. It is estimated that in 1939 the total amount of international financing was $55 billion. The U.S. played a crucial role in international lending. Not only they finance the European economies during the war, but they also provided economic support to the restoration of Europe from the damages after that. This effort is commonly known as the Marshall Plan. The total U.S. aid to Europe amounts to $40 billion.

The Impact of International Lending to borrowers and lenders

Impact on Borrowers

During the last quarter of the 19th century and the first half of the 20th century, the international capital flows played an important role in the development process of borrowing countries. The foreign funds were available for the borrowing countries in order to initiate a process of development. These funds were used to specialized uses and activities on which each country had its comparative advantage.

The results of the borrowing were not symmetrical in all countries. During the 19th and 20th century countries like the U.S., Canada and Australia used the borrowed funds in a very productive way. They succeeded to internalize the international lending both by implementing crucial infrastructure projects and by successfully diffusing the technology and the know-how they already had to enhance the inflow of foreign capital. But there were also countries that maladministered the funding that was given to them, like the countries of Eastern Europe and Latin America. The reason for this asymmetry between the countries recipients of international lending relies on institutional issues, intense corruption, political instability and war conflicts which substantially reduced the investment returns. This situation created a global competition where the efficient and productive countries managed to dominate and gain significant improvement in their balance of payments, finally becoming in that way leaders in the global market. Instead, the maladministration of funds in most of the countries of Eastern Europe and Latin America contributed to a decline of productivity and deficits in the balance of payments.  These characteristics proved significantly persistent for both groups of countries until today.

Impact on Lenders

For lender countries, the export of domestic capital to other countries abroad had a direct negative effect: the reduction of funds available for investment and production in their own economies. This situation created an intense competition between domestic and foreign markets. The economies of scale in the new and virgin markets, the availability of resources and the abundance of labor, increased the productivity of capital providing high returns for lenders. However, the resulting increase in unemployment and poverty rates in Europe and America rendered them competitors to the developing countries. The workers in the industrialized countries of Europe and America improved their standards of living due to cheaper food from the developing world and also enjoyed the positive effects of the increased growth rates in their entire economy. Overall, the distribution of income had worsened in countries acting as international lenders. Great Britain invested about 80% of its total capital abroad during the period 1893-1913.

What Happens Nowadays?

In recent years, there have been very significant changes in international borrowing and as a result the world map of lenders and borrowers has changed both quantitatively and qualitatively. The following table shows the ten largest international lenders and borrowers in 2010, using data from the International Monetary Fund.


$ million


$ million



























Great Britain

















JP-pic 2Dr. John Psarouthakis, Executive Editor of, Distinguished Visiting Fellow at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, publisher of  Founder and former CEO, JPIndusries, Inc., a Fortune 500 industrial corporation

The linkages listed in this segment and following segments on this topic to be posted in separate categories are based on my experience as senior executive as well as an entrepreneur on managing growth businesses. Because statistical techniques test for probabilities but not certainties, the wordings are stated in terms of likelihoods. Discussions of these linkages are to be presented in future articles. Other executives and entrepreneurs could come to different conclusions compared to those listed in the segments posted. Therefore, those that read my views should take them as the experience of one person and use their judgment as to whether these linkages are to be taken as stated in their case.


Linkage -1:  More effective work assignments and work coordination links to growth rates, steadier growth, and a more effective direction-setting strategy.

Linkage -2:  Neither relative- or absolute-sales size links to work flow effectiveness.

Linkage -3:  The firm’s ability to obtain managers and capital links to greater sales.

Linkage -4:  The better a firm is able to obtain supplies, the smaller sales are likely to be.

Linkage -6:  The better able a firm is to recruit and to obtain capital, the faster the rate of growth and the more effective the direction-setting strategy are likely to be.

Linkage -6:  Steadier sales growth and a common sense of mission link to effective value-sharing strategy.

Linkage -7:  Faster growth is linked to a more effective value-sharing strategy.

Linkage -8:  Faster growth links to employee goal integration (lagged).

Linkage -9:  Steadier growth, faster growth, and a more effective direction-setting strategy link to better community image and reputation.

Linkage -10:  Steadier growth links to quality of product or service, better productivity, and a better skill level.

Linkage -11:  Faster growth links to better product or service quality and better employee technical skills.

Linkage -12:  Firms whose primary mission is to expand market share are likely to be more profitable.

Linkage -13:  Firms whose primary mission is quality are likely to be more profitable.

Linkage -14:  Firms whose CEOs emphasize product or service uniqueness are likely to report higher profits.

Linkage -15:  Among “mini-firms” (10-20 employees), those offering a full range of services are likely to be less profitable.

Linkage -16:  Among “medium-sized firms” (20-80 employees), those with diversification as a primary goal tend to be less profitable.  But in the largest firms (above 80 employees), the pattern is reversed.

Linkage -17:  Intense competition, with respect to both customers and technical know-how, links to a poor rating of direction-setting strategy.

Linkage -18:  Firms that serve customers demanding quality tend to rate their direction-setting strategy more highly.

Linkage -19:  In “micro-firms” (10-20 employees), the more customers expect discount prices– even if it means lower quality–the slower the growth rate is also likely to be and the less profitable the firm is likely to be.

Linkage -20:  In firms of 80 to 500 employees, the more customers expect discount prices–even if it means lower quality

–the more profitable the firm is likely to be.

Linkage -21:  Companies that select or design products and services and/or set direction anticipatively tend to report less steady growth, a poorer rating of direction-setting strategy, and lower profits.

The next productivity revolution: The ‘industrial internet’

Marco_Annunziata-7878Dr. Marco Annunziata, Chief Economist and Executive Director of Global Market Insight, General Electric Co. Dr. Annunziata holds a PhD in Economics from Princeton University and a BA in Economics from the University of Bologna.

This article is published here in by permission of Vox. (

Today’s technological innovation is regarded by many as all about social media and entertainment, with no impact on economic growth. This column argues that such skepticism is premature. A closer look at selected industries suggests that the ‘industrial internet‘ – a network that binds together intelligent machines, software analytics and people – through accelerated adoption of sensors and software analytics, will have a powerful impact on productivity and growth.

The largest advanced economies are struggling with weak growth prospects and daunting fiscal challenges. Looking at the macroeconomic equation, there is no easy way out. Looking at the microeconomic level, however, suggests that it is innovation that might come to the rescue.

Game over for productivity growth?

US labour productivity surged to an annual average of 3.1% between 1996 and 2004, nearly double the rate of the previous quarter-century; empirical evidence suggests that the Information and Communication Technology (ICT) revolution was an important driver of this productivity boost, which benefited both manufacturing and services (see for example Stiroh 2001 and Bosworth and Triplett 2003, 2007). Then it fizzled out. The deep 2008-09 recession and subsequent weak recovery, as well as the dramatic reduction in employment levels, make it hard to draw any meaningful conclusions from the swings in productivity growth rates of the last few years (labor productivity growth accelerated sharply in 2009-10 and then collapsed in 2011) – but overall, labor productivity has averaged a meager 1.6% since 2005.

Figure 1. The US productivity decline and rebound

CaptureFigure1The skeptics argue that technology has exhausted its growth-enhancing potential, that innovation is now mostly about social media, entertainment and silly games, with no ability to boost living standards. In a recent provocative piece, Robert Gordon (2012) has argued that the recent waves of technological innovations are simply not as transformative as those of the industrial revolution, and Martin Wolf of the Financial Times commented: “Today’s information age is full of sound and fury signifying little.”

The next wave of innovation

This scepticism might be premature. In a recent report (Annunziata and Evans 2012), my co-author Peter Evans and I have looked at the productivity-enhancing potential of the ‘industrial internet’, a network that binds together intelligent machines, software analytics and people. The declining cost of instrumentation is beginning to enable a much wider use of sensors in machines ranging from jet engines to power generation turbines to medical devices. Software analytics can then leverage the enormous amount of data generated in order to optimize the performance of individual machines, fleets and networks. This means, for example, having a better insight in the performance of a jet engine and being able to anticipate mechanical failures so that maintenance can be performed in a pre-emptive way, minimizing the delays that occur when the problem emerges shortly before take-off. It means being able to track the exact location of medical devices in a hospital and whether they are in use or idle, so that patient admissions and medical procedures can be scheduled more efficiently, yielding better health outcomes to more patients at lower cost.

The potential benefits are sizeable. Just a 1% gain in fuel efficiency over fifteen years would yield $30 billion in savings in aviation and $66 billion in the power generation industry, while a 1% efficiency gain would yield $63 billion in the healthcare industry and $27 billion in the rail industry. Our study focuses on the sectors where General Electric has a strong presence, because those are the sectors we know best and where we are seeing these gains materialize. But the industrial internet has the potential to impact a much wider range of industries, as well as services.

The industrial internet’s impact on economic growth

As the industrial internet spreads, it could have a major impact on economic growth. Forecasting productivity is an extremely difficult exercise. But looking at the potential efficiency gains in individual industries, we feel it is not unreasonable to posit that the impact of the industrial internet might be comparable to the first wave of the internet revolution. In the US, if the industrial internet could accelerate annual labor productivity growth by 1-1.5 percentage points, bringing it back to its previous peaks, it could give a crucial boost to US economic growth. And the benefits would not be limited to the US. In fact emerging markets , where investment is likely to increase at a fast pace in the coming years, have the opportunity to become early adopters of the new technologies. Given EM’s greater share in the world economy, this would quickly amplify the impact on the global economy.

Turning point

The technologies underlying the industrial internet have been in the making for some time. Why get excited about it now? The cost of instrumentation is declining, making a wider use of sensors economically viable, and is matched by the impact of cloud computing, which allows us to gather and analyse much larger amounts of data at lower cost. This creates a cost-deflation trend comparable to that which spurred rapid adoption of ICT equipment in the second half of the 1990s.

The mobile revolution will compound this effect, making information sharing and decentralized optimization easier and more affordable. Industrial internet technologies is set to accelerate.

Enabling conditions

Reaping the full benefits of the industrial internet will require a set of key enablers and catalysts:

  • Investment to rapidly incorporate the new technologies into the capital stock.
  • Strengthening cyber security to manage the new vulnerabilities of a more internet-heavy industrial system.
  • Development of a strong talent pool, which will include new professional roles combining mechanical, industrial and software engineering expertise.

More jobs?

The last point is especially important. Every wave of innovation raises a concern that higher productivity will simply mean fewer jobs. In today’s context of high unemployment, this concern is especially acute. As in the past, technological innovation will make some jobs redundant. But it will create new ones and, if the impact on global growth is as strong as we believe, it will certainly create more jobs overall. But the education system will need to ensure that the supply of skills matches the evolving demand.


The industrial revolution unfolded in waves over a very long period of time. The internet revolution is following a similar pattern, and we think the next, most powerful and disruptive wave is arriving now. The efficiency gains that are coming within reach in individual industrial sectors suggest that the potential impact of the industrial internet on productivity and GDP growth is substantial. In 1987, Robert Solow famously quipped: “you can see the computer age everywhere but in the productivity statistics”. Ten years later, productivity growth surged. Today’s widespread scepticism might prove similarly premature.


Annunziata, Marco and Peter C Evans (2012) “Industrial Internet: pushing the boundaries of minds and machines”, report, GE.

Bosworth, Barry and Jack Triplett (2003), “Productivity Measurement Issues in Services Industries: ‘Baumol’s Disease” Has Been Cured‘”, Federal Reserve Bank of New York, Economic Policy Review.

Bosworth, Barry and Jack Triplett (2007), “Services Productivity in the United States”, Hard-to-measure goods and services: Essays in Honor of Zvi Griliches, Chicago, University of Chicago Press.

Gordon, Robert (2012), “Is US economic growth over?”,, 11 September.

Stiroh, Kevin (2001), “Information Technology and the US Productivity Revival: What Do the Industry Data Say?”, Staff Report, Federal Reserve Bank of New York, 116.

Wolf, Martin (2012), “Is the age of unlimited growth over?”, Financial Times, 3 October.