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Knowledge centre for MBA students. |
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Development: Meaning,
Measurement and Strategies - Part six of ten Dr Y Subba Reddy, Faculty, Institute for
Financial Management and Research (IFMR), Chennai. Thatcherism
In the 1970s, Britain appeared to be locked into descent
and decay and looked as though it was falling apart. Inflation was running at
24 percent. The trade unions exerted undue influence and were responsible for
a fall of the government. Constant strikes gave unions a stranglehold on the
economy and immobilized the country. The incentive structure was distorted
with very high marginal rates of up to 98 percent. People in Britain feared
that their country was becoming East Germany of the Western world. The mixed
economy was severely malfunctioning. The wisdom and knowledge implied in a
high degree of government control were proving inadequate to the reality.
Along with the high inflation, unemployment was on the increase and the
welfare state and loss-making nationalized industries were demonstrating a
voracious appetite for taxpayers' funds. The balance of payments was in
perpetual crisis and the Pound was under constant pressure. The combination
of inflation, slow growth, labor conflict, and social discontent made a basic
change imminent. Matters further worsened in 1973 and 1974. The oil crisis in
1973 hit Britain very hard and on the top of it the strike by coal miners
stoked the raging fire. Coal and power supplies were so disrupted that
British industry could work only three days a week. By the end of 1978, the
country was again in crisis when the public-sector employees struck. Hospital
workers went out, and medical care had to be severely rationed. Garbage was
piling up in the streets. The Falkland War transformed British politics and helped
set the scene for Thatcher Revolution. Thatcherism, which came to represent
Margaret Thatcher's policies of a constraining of a welfare state and
government spending, a commitment to the reduction of direct government
intervention in the economy, a sell-off of government-owned businesses, a
contrived drive to reduce absurdity and punitively high tax rates, and a
commitment to reduce the government's deficit has began to hold its sway. The
strike of coal miners in 1984, despite its intense pressure and disruption
couldn't stop the Thatcher's revolution. Privatization is an important
element of Thatcherism. British Telecom was privatized first and was
reoriented to focus on the needs and preferences of consumers rather than the
producer. By 1992, some two thirds of state-owned industries had moved into
private sector. Altogether, 46 major businesses, with 900,000 employees, had
been privatized, and the government's 'revenue' was well over $30 billion. The Thatcher years turned the Britain from being a
producer-led into a consumer-led economy and it was made a competitive
economy. Thatcher's policies have fundamentally altered the basic
institutional relationship that had defined Britain since 1945, and that had
brought the country to a stand still in 1979. In that year, 1274 working days
were lost to strikes for every thousand people working. By 1990, that figure
was down to 108. The political and economic culture in Britain had been
permanently altered by shifting the emphasis from state responsibility to
individual responsibility, and sought to give first priority to initiative,
incentives, and wealth generation rather than redistribution and equality.
Another important contribution of Thatcherism was that it had shown to others
particularly other Western European countries the path to redeem themselves
from the excesses of the states. In Italy, the ENI, which was a national champion and a
paragon of mixed economy, was losing money by 1980s. The company was under
constant pressure from Italy's political parties, which regarded it both as a
source of funds and as a prize in terms of patronage. The company was not
able to function as a coherent business. In 1992, it nearly failed to meet
its payroll necessitating urgent steps. The restructure of the company
started with selling off unproductive assets, changing the management, and
focusing the company not on meeting the interests of politicians but on
creating value for shareholders, although at the time the shareholder was the
state. In 1995, ENI shares were offered to the public on the Milan, New York,
and London exchanges. Japan: A New Super Economic Power
At the end of the World War II, Japan was a devastated
nation, humiliated by absolute defeat. Its industry was in ruins and a third
of its urban housing was nothing more than ashes and rubble. The country
existed at a bare subsistence level. It s people were demoralized and adrift,
their lives torn apart. By the end of 1940s, the US occupation made a reverse
course and began to focus on promoting Japanese economic recovery due to both
the cost burden and the emerging cold war. As a first step, the high
inflation was extinguished. The Korean war, beginning in 1950, turned Japan
into a supply base for the American forces on the Korean peninsula and
stimulated an export boom. The early 1950s were the beginning of the
recovery. It was only in mid-1950s that Japan rose from recovery into
sustained economic growth, which became the central national objective. There were many factors in Japanese rise to economic super
power. It was already a relatively developed country before World War II. The
US occupation implemented the land reform and broke up the Zaibatsu, the
great industrial and financial combinations. In the postwar, the fundamentals
were right as it had a large educated workforce, low inflation, and a very
high savings rate. American power had demonstrated the centrality of
technology, and Japanese companies set out on a forced-pace campaign to
obtain and absorb technology from America and Europe. Firms sought continuing
quality improvement as a competitive weapon and invested in ever-greater
scale in mass production in order to win market share. All this was sustained
on values that included an incredible work ethic, an extraordinarily intense
identification with the firm, a shared sense of national identity, a desire
to live better. Japan had a market system that was characterized by a
particular government-corporate collaboration. It achieved growth and
standard of living objectives that, despite the often intense competition
among Japanese firms, added up to a system that came to be known as Japan
Inc. It was one in which government bureaucrats often played a dominating
role through regulation and something more ineffable but nevertheless potent:
administrative guidance. In the Japanese system, the tight coordination
between government and business was accepted as the natural order and was
reinforced by the precariousness of Japan's position. The Ministry of
International Trade and Industry (MITI) played the role of a single, potent
agency and coordinated both external and domestic industrial strategy. It
aimed not only to help firms adapt to world export markets but also to help
them take the greatest advantage of them. It channeled information and
knowledge and facilitated the flow of new technologies. It utilized an array
of tools such as price setting, quotas for imports and market share,
licenses, quality standards, industry associations, networks, and
administrative guidance to achieve its objectives. It worked closely with
industrial-sector associations, took their advice, and sought to promote the
overall sector. For the most part, the Japanese system performed as
intended. By 1964, Japan's national income was approaching the Western
European level. This could be measured in the standard of living. In the
1960s, consumers were acquiring the three sacred treasures - television,
washing machine and refrigerator. In the 1970s they moved to the three Cs - a
car, color television, and air conditioner. When the energy disruptions of
the 1970s hit, the Japanese feared that the game was over. However, by the
early 1980s, its economy was already rebounding strongly, on the basis of
rapid technological adjustments - moving from energy-intensive economy to
knowledge-intensive economy - with a new emphasis on efficiency. Japan was
now an economic super power. However, the economy was taken over by a huge and
intoxicating speculative boom, which started to burst in 1990. In 1992, it
went into a deep slump, the most severe economic crisis since the era of high
growth had begun. The stock market fell 60 percent, real estate values
plunged, and banks loaded up with bad real estate loans teetered on the edge
of bankruptcy. The weakness of the financial system proved a persistent drag
on recovery. [To be continued] |
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