WORLD ECONOMY IN RETROSPECT
People now want governments that treat economic stability as their first priority
By A.B. Shahid
Dec 28 - Jan 05, 2003
For Pakistan, 2002 was, perhaps, the most eventful year after 1971. The early part of 2002 was overshadowed by the fallout from the International Coalition's retaliatory strikes on Afghanistan in the wake the events of September 11, 2001. All this impacted Pakistan's economy because Persian Gulf region was declared a war zone. Foreign airlines and shipping companies suspended their services to Pakistan, oil prices shot up raising energy costs, cargo insurance charges went up sky-high, and export orders for billions of dollars were cancelled abruptly forcing many export-related industries to either drastically cut their operations or simply pack up.
It is remarkable that in spite of these shocks, Pakistan survived a collapse, though later developments on the political front greatly helped Pakistan. The country managed to dissociate itself very credibly from the former Afghan regime in return for which it was rewarded by international financial institutions and G-7 governments through re-scheduling of loans thereby reducing its external debt repayment burden. Uncertainties created by rash US action against foreigners whom it suspects of helping terrorists obliged expatriate Pakistanis to shift their savings to Pakistan that helped build the highest ever foreign exchange reserves. This huge inflow also reversed the one-sided trend of Rupee-US Dollar parity, and commenced the de-Dollarization of the economy.
While bank deposits continued to rise fuelled by inward foreign remittances, investor confidence was not restored, as reflected by a marked drop in borrowing by businesses. Stringent fiscal reforms undertaken earlier had a deep impact on business psyche. To allay this situation, the government undertook a number of steps in the 2002-03 Federal Budget and throughout the rest of the year, but with little effect because another reform measure viz. the Code of Corporate Governance forced businesses to step back to take stock of their positions. Finally, the uncertainties created by the impending general elections and prospects of reverting back to a democratic set up (in the past characterized by sudden changes in fiscal policies) again dampened investor confidence.
In spite of the current weak investment climate, institutional reforms, especially those undertaken by the Central Bank sought to create a market-based economy, though too much too soon. Monetary and Credit policies, though criticized by small savers for rapid cuts in the Discount Rate, forced lowering of lending rates and made lending easier for banks. Firms that overcame their fears to take advantage of the relaxed conditions showed signs of improvement. Players in banking, petroleum distribution, auto assembly and pharmaceutical manufacturing sectors are likely to declare substantially high profits for 2002 but in the unfriendly international business environment that is likely persists for long, the key to staging a full economic recovery will lie in encouraging domestic demand - a reality that has dawned only belatedly on the government, banks and businesses.
The stumbling block in the drive for boosting domestic demand will, however, be lack of household savings and rising poverty - factors that went unnoticed by the government earlier in its single-minded drive for cutting fiscal deficit. This is where, in spite of its visible recovery (thanks to 9/11), Pakistan falls in line with the rest of the world that is beleaguered by poverty-fuelled drop in demand. On the international scene, in 2002, regrettably, failures vastly outnumbered achievements. The continuing recession, which observers term "double-dip recession", is a manifestation thereof. Bad governance of the 1990s shrouded by the smokescreen created for "freeing" the markets caused this seemingly unmanageable chaos. But failures can be the pillars of success, provided we learn from them, and avoid making the mistakes we made in the past.
The most painful legacy of the recent past is the failure of the institution of the state, almost everywhere, in delivering a more equitable and stable socio-political environment, in spite of tall but hollow claims of politicians, bureaucrats and business magnets. Disillusionment with democracy is reaching astonishing proportions. People everywhere see a direct relationship between democracy and bad governance because lawmakers have failed consistently to resolve people's problems. Their disillusionment with democracy was amply demonstrated by the lack of voter turnout at the recent general elections in Austria, Denmark, France, Germany, The Netherlands, United States and Venezuela. In Pakistan too they got a raw deal, particularly during the last decade of democracy, which was proved beyond doubt by the low turnout at the recent general elections.
People now want governments that treat economic stability as their first priority. They worry less about the institutional character of the government raising the spectre that economic stress may encourage tolerance for totalitarian rule, because, contrary to Western perception, in many developing countries military rule enjoyed majority public support, as it did in Pakistan, at least at the outset. This development is a disaster of incalculable proportions for the future of democracy for which the incompetence and greed of the politicians is to blame. This regression is noticeable in countries where contempt for political parties is widespread because of the large-scale corruption they indulged in eventually leading to pervasive economic chaos and poverty. Recent history of Latin American, African and Asian states confirms this fact.
In future, support for democracy will be proportional to improvement in macroeconomic indicators. Yet, going by the recent record of politicians everywhere, democracy's chances are worryingly low because people have little trust left in them. Statecraft (Western democracies included) now resembles a decadent art. Sustained economic decline of Western Europe, and now in US and Japan has shaken peoples' confidence in democracy. In the developing countries, politicians continue to treat their constituencies as their ancestral property turning them into private battlegrounds. Their erstwhile cohorts in the bureaucracy lend a helping hand in weakening institutional arrangements to enrich themselves at the cost of their people.
Now democracy will succeed only in countries where elections bring to power new groups that eject corrupt politicians. However, rise of the new power groups, which largely consist of inexperienced legislators and religious extremists (as in Turkey, Pakistan, India and the US where diehard followers of the Evangelical church are in power) doesn't hold out much promise because they seem bent upon usurping the liberty of the individual. It is time for the political columnists-turned-reformists to stop calling for giving these misfits a "fair" chance. The columnist-politician clique has had the charade going for too long. This clique, that also supports the concepts of market-based economy, privatisation and globalisation, is unwittingly siding with forces of tyranny because practice of these concepts has, so far, to led economic distress, not made amends for past mismanagement.
The drive for freeing economies without building adequate safeguards through institutional arrangements to confine the new found freedom within socially acceptable parameters could have led to no better end. In hindsight, Western defence of the freedom of choice appears to have been a ploy for advancing the cause of unbridled capitalism, not freedom of choice. Freedom is a bounty, which must be enjoyed with utmost care - something mankind has rarely done. Can we overlook the history of the past fifty years? Things worsened after colonies in Asia and Africa became free from the yoke of imperialism because the style of governance reverted back to feudalism shabbily disguised in the cloak of democracy. This is not a reflection on the nations themselves because, given the choice, they could do far better. It is a reflection on the leadership that leaves much to be desired in the context of good governance.
The Western media vocally promoted market liberalization, and relaxation of restrictions on movement of capital. Readers and viewers placed their faith in the wisdom of the press. Sadly, they were taken for a ride that ended in a crash. Most "liberated" economies now look like a wasteland. That the assessment of evolving world economic order was not well conceived is proved by the fact that even in US - the bastion of modern capitalism - large scale business bankruptcies and sustained dismal economic performance is dragging the rest of the world into a deeper recession. Throughout the 1990s, commentators pleaded for a corporate takeover of the world by diluting the role of the state. Was that the right line? Now the same crystal ball gazers see a long recession, which, according to them, may be the worst in recent history. Why couldn't they see it coming earlier when in late 1980s capitalism was going virtually berserk? In hindsight, West's defence of Regonomics and Thatcherism was not just over exuberant; it was un-warranted.
It has yet to be fully appreciated that this is the age of specialisation, of producing quality at the lowest price. It calls for reaching an agreement on who should produce what, based on a fair assessment of comparative advantage, and then sticking to that agreement. Admittedly, this means abandoning some industries but expanding others to create compensating opportunities. These are hard choices that entail pain in the short-term but well thought out choices and realistic time frames for phasing out marginally profitable industries should create an environment for eventually trading in cost-effective lots, ensure fairer prices for raw materials, and capacity utilization by domestic industries. In the long run, it should help cut waste, and conserve domestic resources to banish unemployment, illiteracy, malnutrition, environmental pollution, child labour and bad labour practices, etc.
The rational strategy would have been to press home the case for a jointly planned rationalization of national industrial bases using the yardstick of comparative advantage. Admittedly, it is a painful process because it calls for accepting failure, flogging a large part of traditional industries at seemingly throwaway prices, and re-training large chunks of national workforces, but one that can eventually stabilize national economies, and the world economic system. It would have been a lot saner to embark on this process consciously and systematically rather than accept unplanned closure of traditional industries with unmanageable social consequences. Supporters of market-based economies didn't realize that such consequences are generating fallout that is shaking the foundations of the concept. Scenes routinely witnessed at G-7, G-8, EU and WTO conferences are reminders of this stark reality.
Falling economic growth, and rising unemployment, poverty, and terrorism speak volumes about the style of governance. It helped institutionalise inefficiency and corruption leading to economic chaos and pervasive lack of respect for the law. It led to degradation of values - a slow process of death of the society as a whole. Yet, we punish only those who fall within the limited legal definition of murderers, not the apathetic politician-bureaucrat-businessman mafia. This is largely due to the gullibility of the media - the conscience of the masses - to the cold, often wholly faulty logic advanced by this mafia to justify criminal transfer of advantage from the masses to the state and the business sector who continue to misuse national resources, especially cheap public savings. For the first time even in US, the lack of social responsibility of businesses is the subject of Presidential speeches.
Worried by mounting criticism, market regulators are now coming out with yet another maze of long, winding regulatory frameworks more as a bulwark to protect themselves than to arrest the rising trend of greed and corruption among the market players. A case in point is the Code of Corporate Governance, which places excessive confidence in the supervisory capabilities of non-executive Directors (in Pakistan often the wives and children of major shareholders), and wherein a company CEO is to be held responsible for virtually everything that goes on in the company. In a complex corporate set-up, it will be a nigh impossible task for any CEO to take charge of everything that goes on, no matter what his or her mental and physical capabilities. Unless future CEOs happen to be Durga Matas with ten hands, they will fail to fulfil the requirements of the code, which only confirms the suspicion that this much-praised code is more a mechanism to pass on the buck rather than credibly address the problem.
CEOs don't take every decision; they provide guidelines and coordinate inter-action among organizational units, and through that, strive to achieve the organization's objectives. Were they to sit in judgment on every issue, their organizations will stagnate and eventually die because one-man shows stifle initiative and growth rather than produce future managers to sustain organizations in the long-term. Inefficiency and corruption can be checked only if all decision-makers are endowed with the qualities of integrity and sincerity of purpose, and have requisite professional skills. In spite of the so-called intellectual "progress" of yester years, the harsh but undeniable reality is that such codes can't change the wayward behaviour of individuals coming out of educational institutions that no longer place teaching ethics at the high pedestal that it deserves.
Ethics, especially the critically important values of integrity and sense of social responsibility cannot be drilled into their heads at a late stage, more so through laws imposed by governments that remain suspect in the eyes of people for a variety of conduct un-becoming, of which the hallmark is disregard for maintaining equity in human inter-action. The exercise to instil integrity in human conduct has to be undertaken much earlier when individuals are at schools where the lasting contours of their personalities are formed. The basic code in urgent need of re-defining is the curricula taught at schools. This applies to almost every country, especially the US that produces the largest number of MBAs - managers of the world's largest economy, which influences all other economies because the US accounts for nearly one third of world trade.
Faulty education systems, that downgrade principles and values in favour of expediency, produce dangerously devious minds. 2002 will be remembered for years to come for unmasking the largest-ever number of crooks, fraudsters and criminals running some of the world's biggest corporations the failure of which had devastating consequences for their shareholders, employees and stock markets everywhere. The development played havoc with investor confidence at a time when it needed rapid revival to stem the recession that has engulfed the world. Once again one is forced to ask whether the law needs to be changed to re-define killers; should it only include individuals who kill using a physical weapon or should it also include those whose deliberate dishonest actions lead to widespread misery and consequent slow deaths of millions from poverty, deprivation and starvation?
Intellectual dishonesty is at the core of the disaster. In many businesses, product pricing, advertising and sales promotion visibly lacks integrity. It was used more as a gimmick to misinform, dodge and fleece customers rather than perform the ethical function of helping them make the right choices. Expediency often took the better of the senses of both businesses and their promotional agencies. Only in countries where consumer associations are strong have consumers been compensated for losses. In countries like Pakistan, consumers remain entirely at the mercy of the manufacturers. Retailers are oblivious to their critical role as the entities ultimately advising the consumer and delivering value in exchange for the price received. They have turned into cold-blooded agents of manufacturers ignoring their responsibility in the business transaction. Meeting promises of quality and weight, deadlines, and terms of business contracts is a rarity. Few bother about the rapid decline of the value system.
Press and electronic media are often used to spread misinformation rather than true information to help readers and viewers make correct situation assessments and exercise appropriate choices based thereon. Misreporting of company performance, their future prospects, and the prospects of their share prices has became a specialist skill. It may surprise many that in 2002 in the US alone over 1,000 corporations revised downwards their reported profits for the past three years. Information about many unethical research methodologies, defective products, fraudulent business practices, regulatory violations, tax evasion, and similar crimes became known only due to the courageous efforts of the whistle blowers, not the investigative media reporting.
Another important question begging an answer is "where is technological progress leading us to?" Technology holds out immense prospects of improving human life on this planet and, admittedly, there have been numerous advances in technology used by all types of enterprises. But a spectacular failure of these achievements has been the progressive elimination of the human factor. Should this be the direction of technological development on a planet that witnesses a devastating rise in human population everyday? Isn't something fundamentally wrong with the way the scientists, inventors and engineers perceive the future needs of mankind? If technology is to replace human beings in every sphere, what precisely is going to be their occupation on this planet? Is it not fuelling unemployment? More importantly, who will eventually be in control of this planet, machines or the human beings?
Technology has created more problems than just dehumanising enterprise. Environmental pollution with its disastrous effects is the other. On the one hand it creates pollution that is causing an ever-increasing variety of killer diseases, and on the other, technology breakdowns result in unmanageable consequences not only for those using it but also for the millions that are affected by its after-effects on environment. Take, for instance, just four out of the many technology-based disasters; release of radio activity in the aftermath of accidents at nuclear plants, massive oil spillages as a consequence of huge oil tankers breaking apart on high seas, introduction of inadequately tested medicines, and shocking transport accidents in air, on high seas and over land because of instrument failure. The worst is the race for beating adversaries in acquiring technology giving rise to yet another evil - industrial piracy and criminal intrusions into privacy.
In the name of right sizing of the organizations, thousands were laid off because "the skill they possessed had become redundant". No serious efforts were made to re-train such employees and make them useful for their organizations. None of these organizations accepted their failure in rendering these employees dispensable although the employees had, in most cases, given the best years of their lives to their organizations. If they were not trained and developed to meet the challenges of the future, the better part of the blame quite justifiably lies with the organizations. Yet they all went scot-free. In the drive for making enterprises cost-effective, thoughtless right sizing was resorted to, which added significantly to the already expanding problem of skilled unemployment and frightening levels of poverty.
Today, the biggest problem confronting most governments is poverty - the mother of all evils. They lost the opportunity to stem the rising tied of poverty because the distinction between the role of the state and a profit-seeking corporation was blurred. Where to begin from the process of restitution is the challenge that now haunts governments everywhere. Not many seem capable of facing up to it because they all seem to over-simplify issues; they only scratch the surface rather than go to the root of the problem. This style of governance does not augur too well for the future of statecraft, which will always hold the key to salvation whether economies become market-based or remain as they are. After the recent massive corporate failures, corporatising the state no longer seems a workable idea.
BANKRUPTCIES IN US
Pacific Gas & Elec
BIG EUROPEAN FAILURES
FAULTY PHARMA RESEARCH
US Food and Drug Administration recently faulted the pharmaceutical companies on the way they make pills. The hardest hit was Schering-Plough that was taken to task by FDA for the offence. Eli Lilly, Abbot and Wyeth were issued warnings. The problem is over-exuberance of the manufacturers. MIT's G.K. Raju thinks that because companies are in a rush to get their products to the market, they often tend to use the laboratory scale methods to expand the results for industrial production, which is the heart of the problem
METEORIC RISE OF POVERTY
According to World Development Report-02 sustainable development should "enhance human well-being through time", which means helping people to improve not just their "net worth" but their "sense of self-worth". It defines society's assets to include more than land, labour and capital. Property rights, transparency, trust and above all, the rule of law count as much. While policy benefits are dispersed, its cost is concentrated. So the benefits are captured by only a few. The majority just grows poorer.
LIMITING THE HUMAN FACTOR
The nerds in the typical IT firm's support department are proliferating too fast. According to IBM, growing complexity means the number of IT workers required globally to support a billion people and millions of firms connected via the internet - possible within the next decade - may be over 200 million (two thirds of America's population). But fear not. Help is on the way. It comes in the form of N1, a supper-operating system unveiled by Sun Microsystems. N1 will ensure running large corporate data centres yet eliminate the work currently done by "armies" of system administrators.
BIG EMPLOYEE LAY-OFFS
Ford Motor Company
Boeing Aircraft Co.
Cable & Wireless