notjustinfo.com

Knowledge centre for MBA students.

Development: Meaning, Measurement and Strategies - Part ten of ten

Dr Y Subba Reddy, Faculty, Institute for Financial Management and Research (IFMR), Chennai.

Future

What are the critical factors that led the return toward traditional liberalism around the world? The unexpectedly heavy costs and consequences of state ownership and intervention disillusioned the advocates of active role for state. The financial burden in the form of debts and deficits had gone beyond the ability of government management. Inflation became chronic and embedded. Confidence turned into cynicism as the perceived gap between expected and actual performance widened.

How long the apparent triumph of the market endures? Or will the state's role expand again? There are no conclusive answers to these questions. They will depend on whether the market economies will deliver the goods in terms of economic growth, employment, and higher standards of living or not. They also depend on the way the welfare state is defined, on the perception of the result as fair, equitable and just, and on what will happen to national identity in the new globalized environment.

The emergence of the market focus around the world changes the position of companies as well. The prospect is both attractive and threatening-wider opportunities and tougher competition. Boundaries of every sort are coming down. Political, economic, and ideological borders among nations continue to erode, promoting the flow of investment and trade. Companies are being forced to think differently. They have to prepare themselves for a world in which the competitive pressures are only going to become more intense. That means fostering a culture that encourages alertness, responsiveness and flexibility and speeding up the cycle time of processes and decisions.

What is the role for Government?

Governments have to figure ways to reduce their intervention in some areas, and to retool and refocus their intervention in others, while preserving the public trust. It has to create and maintain the parameters within which the market operates. And that is the new direction. The state accepts the discipline of the market; Government moves away from being producer, controller and intervener, whether through state ownership or heavy-handed regulation. The state as manager is an increasing laggard in the competitive, mobile economy.

The public money and human skills freed up through privatization and deregulation will be partly invested, in many countries, in human infrastructure- health, education, the environment - with, it is hoped, the creativity and success that can come from a clearer and better focused role. What this means, then, is that for all the erosion of boundaries and fundamental technological change, governments still matter, and most of all, political leadership matters. It also means that even if change in the direction of more market and less state is a pervasive global phenomenon, it does not lead to a single, common result.

The World After Reform

The move to the market is beyond doubt a truly global phenomenon. It draws on a stock of ideas and recent experience shared around the world. The processes of change - particularly privatization, deregulation, and trade liberalization - are largely common ones, refined over time to a professional craft by their political champions and expert practitioners. The future of the postreform world, and certainly the future health and credibility of markets, will thus be shaped not only by technology and global forces but also by how different regions come to grips with their particular challenges.

However different the issues in different parts of the world, a common question underlines the shift away from state and toward the market: Is this move permanent, or will there be a shift back - a recalibration and readjustment in the boundary between state and market place - that expands the role and responsibilities of government once more?

For some, the embrace of the market is a matter of conviction. For many more, it a matter of practicality, of finding something that works better than the alternatives. Five tests, in particular, are likely to be decisive in shaping peoples thinking and judgments about the market. The outcome of these tests will, over time, provide the signposts to the future frontier between state and market.

Delivering the Goods?

Will market economies deliver on what they promise in terms of measurable economic goods - growth, higher standards of living, better quality services, and jobs? After all, it was the failure of markets and the loss of confidence in their capacity that led to governments assuming a much more assertive role in economic management. Opening up of economies to competition are seen as job-destroying rather than job-creating, then free-market policies will surely be subject to continuing attack and constant revision. In developing countries, too, employment-along with the overall rate of economic growth-will be critical. For developing countries, the most telling measure of success will be a clear-cut one: the degree to which the move to the market delivers such basics as electricity, clean water, and reliable transportation.

Ensuring Fairness?

For many, the market system will be evaluated not only by its economic success but by the way in which that success is distributed. How widely shared is the success? Is the system fair and just? Or does it disproportionately benefit the rich and the avaricious at the expense of the hardworking of more moderate circumstances? Does it treat people decently, and does it include the disenfranchised and the disadvantaged? Are there equity, fair play, and opportunity?

Market systems, by their very nature generate a much greater range of inequality of income than more controlled societies in which egalitarian values are so strong. But notions of fairness and justice run very deep and are powerful motivators in their own right.

Excessive concentration of wealth will undercut the legitimacy that a market-oriented system requires. What a market advocate describes as incentives is translated into greed in the vocabulary of a market critic. Conspicuous consumption and the flaunting of wealth weigh the scale toward greed and thus accentuate the criticism of inequality. Privatization is particularly sensitive in this regard: Who benefits as state-owned assets are transferred to private owners? Confidence in the fairness of the system depends upon the effectiveness of the legal system and the transparency of the rules by which the economy operates. Corruption is a deadly enemy of such confidence. There is also plenty of opportunity for corruption in economies that are releasing assets and creating new opportunities as they move from state control to market focus.

Upholding National Identity?

For many countries, participation in the new global economy is very much a mixed blessing. It promotes economic growth and brings new technologies and new opportunities. But it also challenges the values and identities of national and regional cultures. People in a number of countries may not believe that their cultural life should be dominated by the satellite - borne media images from the West that globalize the values of Hollywood and New York. Nor, they argue, should their companies be subjected to what has been called the Anglo-Saxon cult of shareholder value, which would ruthlessly cut away what are seen in other societies as social obligations and responsibilities.

The interconnection of financial markets, while promoting investment flows, also makes national economies vulnerable to major shocks and turbulence that call into question what participation in the global economy actually means. Leaders and publics are stunned to see how 20 or 30 percent of a country’s economic value, built up over decades by the hard work and sacrifice of the nation, can be destroyed in a matter of weeks.

Securing the Environment?

After more than a quarter century of activism, the environment is firmly ensconced as both a national and an international priority. Economic systems will be judged by how they respond to the wide range of Governmental concerns, and they will be compelled to find further improvements and new solutions.

The most pressing environmental issues are those that affect countries start from low levels of standards. Their environments are under stress because of poverty-for example, in many countries, the rural poor have cut down forests for firewood, creating a host of difficulties, including erosion that cripples agriculture. These problems can be ameliorated, but the price tag is high, especially for a country that is struggling to raise its income and has many needs but limited resources. How will investment be mobilized? Who will pay the price? Such choices are not limited to developing countries.

Increasingly, however, environmental issues are becoming international. Some are regional matters. The burning of forests in Indonesia creates terrible air pollution hundreds of miles away, in Malaysia, Singapore, and Thailand. Some issues are global, and climate change is the best known. In such matters, the potential for conflict between developed and developing countries is considerable. Calls for concerted action by the industrial countries can appear to developing nations as an effort to constrain their growth opportunities-imposed by countries much richer than themselves.

In all this, the private sector will find itself carrying an increasing environmental role. Not only will companies be regulated from a multitude of directions and by multiple authorities; they will also find themselves judged by the nature of their commitment and contribution to improving the environment. Focusing on the environment will become a growing responsibility of senior management.

Coping with Demographics

Population trends will challenge the performance of market economies. The more familiar population issue is in the developing world. Those countries confront and enormous swelling in the younger age groups and the daunting tasks of generating jobs and increasing per capita income. The surge in population creates a combustible mixture of idleness, poverty, disillusionment, and bitterness that can be a tremendous source of political and economic instability. For the developed world, the key population trend is the growing proportion of the elderly, which will add to the critical need to reform the traditional welfare state. On whose shoulders, on which age group, will the costs of retirement and health care fall? How much responsibility will belong to government, and thus to taxpayers, and how much will be the responsibility of individuals and the private sector? One can well imagine political conflict along generational lines over health care and pensions.

The Balance of Confidence

How successfully these tests will be met will have much to do with how publics around the world respond to the great shift in the commanding heights that is now unfolding. Will confidence in market systems be reaffirmed, or will it be eroded?

Of all the dangers, perhaps the greatest threat to the new consensus, and the confidence that underlies it, would arise from massive disruption of the international financial system. Capital markets are growing far faster than the capacity to regulate them - or indeed even to understand them. The very scope and reach of the integrated global markets create financial risks of an unprecedented scale. These dangers result from the interconnection of currency markets, interest rates, and stock markets, along with the extraordinary growth in the various ancillary markets that hinge on them.

Financial markets have transcended national boundaries and traditional regulation. But coordination and communication among governments and international institutions can help identify and manage weaknesses before they give rise to contagions that turn into epidemics. New methods need to be developed to keep pace with the growth of the global capital markets. That means more transparency by governments in terms of their financial positions and more disclosure by companies-in particular, by firms in the critical financial sector.

The market also requires something else: legitimacy. But there it faces an ethical conundrum. Yet the essential morality of the market is twofold. The first is in the results that it delivers, in what it makes possible for people - which is based upon the premise that the pursuit of individual interest cumulatively adds up to the overall betterment of society. The second lies in the conviction that a system based upon property, contracts, and initiative provides protection against the arbitrary and unchecked power of the state. Those two premises are the bedrock of the market, and it is against them, over time, that the workings of the market will be evaluated.

In the meanwhile, in a vast drama, the state continues to withdraw from the commanding heights, leaving it more and more to the realm of the market. This represents a great reconnecting-a conjoining of the beginning and the end of the twentieth century.

[Concluded]