We are all standing in amazement how fast and furious the decline has set in. No corner of the globe is spared. In China factories stand empty and twenty million workers got on the train back to the rural villages they fled years back. Once looked upon as economic miracles, the illustrious duo Iceland and Ireland have nose dived and are facing double-digit contracting economies. PIGS (Portugal, Italy, Greece and Spain) cannot fly and these countries came crashing down. Many large banks, including the financial behemoths Citgroup and RBS, bastions of capitalism, have been taken over by national governments in a desperate effort to keep liquidity in the economy. Large companies are collapsing under their own weight. Household names like Circuit City disappeared and the GMs of this world will shortly cease to exist (but not before burning billions of federal aid). This must be a wake up call. As Tom Friedman writes in the NY Times: “ What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: No more. “
It is the time for creative reconstruction. Most companies become conservative in the face of a downturn. They focus on relentless cost cutting and stop “discretionary spending” on innovative projects. While that may be necessary to remain afloat, at the same time new products and business models should be pursued. Like the famous Dutch soccer coach and philosopher Johan Cruijf (Holland's own Yogi Berra) proclaimed: “Every disadvantage also has an advantage”. Instead of putting moribund companies on life preservers, stimulus should be directed to “sustainable” innovation, aimed at long term growth without depleting the globe's rapidly diminishing resources. In a downturn, more than ever, should we get entrepreneurial instead of risk averse. We need agile local businesses in large global networks instead of huge, heavy weight multi-national companies.
I attended a round table with CK Prahalad last week to discuss sustainable solutions for a planet in distress. As a staunch believer in the positive forces of capitalism he pointed out the opportunities of green solutions, such as “extended producer responsibility” or “reverse logistics”. These concepts look at extending the life cycle of products and giving the producer responsibility from cradle to grave. So, old PCs or cars will be returned to the manufacturer who can re-use and recycle. Tom Friedman has been writing regularly about the need for the US to be become a global leader in green energy. Buildings, cars and appliances will be equiped with networks of sensors that continuously monitor resource usage to optimize and replace parts in time. New business models will be built around true resource optimization.
You can not regulate yourself out of a recession. Nor will unfocused stimulus have the required effect. Money has start flowing to the companies that have the entrepreneurial and innovative capability to create long term wealth, while doing good. Economic nationalism and protectionism, fanned by populist slogans such as “Buy American” or “British jobs for British Workers”, are counterproductive and will prolong the recession. The limitation of H1-B visas as part of the bail-out is an economic blunder. Half of Silicon Valleys companies are founded by entrepeneurs born outside the US. Globalization has helped emerging economies to charge ahead and create a large middle class, which in turn fuels the global economy.
We clearly need a jump start, but the engine will keep sputtering and it will surely die again if we give in to conservative, myopic impulses. Money thrown at dying industries is unrecyclable waste. The future is in solutions that not only turn the global economy around but also the earth's decline.
Tuesday, March 17, 2009
Subscribe to:
Post Comments (Atom)
Read a article sometime back(before this crsis hit) that upside of speculation was that it helps transform the economoy faster (Eg: dotcom boom)...but this speculation as has been said is a RESET....there is even debate whether all this federal aid being pumped by all the countries is the right way to go.....where executives from organization receiving this aid are getting bonuses(commonsense redefined)....making me remind of another article which said people make more money where they are close to money (even when they don't perform!).....no one able to say with confidence whether 2010 would be the year of recovery....making me going go back to my child like question how does economy really work?....the complexity of governing this global demand/supply chain with complex financial instrument chain.....the complexity of which is manipulated with human greed and ignorance....to me we are yet to hit Rock Bottom!
ReplyDeleteWhile a bleak picture is being painted here, I actually think the situation will become quite a measure bleaker.The US Government is promising and pumping billions to prop up failing companies. These are companies that should have failed long ago if there were enough supervision (banks, insurances) and developmental foresight (auto manufacturers, infrastructure providers). Each time money is pumped into these institutions, we later find out it was not enough. The companies which should have failed in the beginning, but which received funds, will fail nonetheless, burning that money on their way down.
ReplyDeleteWhen adding up all monies committed, the sum today is over $13 trillion Dollars - yet that will probably not be enough! The fact that only a portion of the troubled banks are being addressed shows that this looks like a bottomless pit.Why: there is so much noise about AIG, yet its $2 trillion in CDS pales against the $2.9 trillion CDS at Citi or $9.2 trillion CDS at JPMorgan Chase. Or the $57.3 trillion in CDS at the Bank of International Settlements! This is just propping up the potential triggers of a global collapse, not addressing the underlying cause.
One of the great weaknesses of the economy is therefore the lack of savings needed for healthy capital formation, investment in better technology, infrastructure, and education. Yet the solution being offered is to spend more and, by extension, to save less.
Unless the governments, and companies actually recognize this, we will be heading for an actual depression.
We actually got out of the last depression with the help of a World War; this time we may not be so "lucky".
Where am I going with this? The tools of the 40's were cheap manpower and heavy industries. The tools of today will be cheap software and innovation. We will hit bottom, yes, but that bottom is still below us. And when we hit bottom, innovative ideas, not those accompanied with the "bloated" add-ons of the dot-com era, will be sucessful. The tools will be free, and the best manpower to implement will still rake in the big bucks.
No, we have not hit rock bottom. A V or U shaped recovery is not expected this time rather a Japan style L shape might be in the offering.
ReplyDeleteI agree smaller entreprenurial companies rather than large multinational are the future. Disruptive innovation is the key to get out of the mess. I also agree that sustainability applied to energy, water, air should be the next frontier of exploration.
Excellent action provoking post.
Very true and a good path to follow.
ReplyDeleteAnd here I wonder: As enteprises turn to SCR (social corporate responsibilty), be it out of necessity or of idealism, what do governments do? They can enforce this! They can recognize and accept the natural course of events that has given enterprises so much power, more than governments themselves. And subsequently they could go with the flow - what is easier and more effective than that?... But I don't see them doing it. Now that things evolve in a positive direction - companies gradually adhering to the profit-planet-peaople triangle concept - what do we hear from all the presidents' men?