Monday, January 30, 2017

“The market benefits profit-seeking individuals and society alike”

That is paraphrasing The Economist on how it explains what they are about. And if it isn’t obvious yet, it is also what the blog is about. [And so that the postings stay true, they all end with the same quotes picked from past articles.] And it applies as much to the Philippines; and why the blog consistently calls out what’s behind our oligarchic economy, i.e., rent-seeking cronies and oligarchies, and political patronage and dynasties.

“The Economist [is] a Friday viewspaper, where the readers, with higher than average incomes, better than average minds but with less than average time, can test their opinions against ours.

“With readers such as these, and aims such as these, The Economist was bound to find it progressively harder to increase its circulation in Britain . . . The Economist has survived, and indeed prospered, by building on the internationalism of its outlook and by selling abroad.

“The Economist considers itself the enemy of privilege, pomposity and predictability . . . James Wilson [founder], a hat maker from the small Scottish town of Hawick, believed in free trade, internationalism and minimum interference by government, especially in the affairs of the market.

"If we look abroad, we see within the range of our commercial intercourse whole islands and continents, on which the light of civilization has scarce yet dawned; and we seriously believe that free trade, free intercourse, will do more than any other visible agent to extend civilization and morality throughout the world – yes, to extinguish slavery itself."

It was when the writer read the following article that he went to read (again) what The Economist is about: “The retreat of the global company,” The Economist, 28th Jan 2017. Retreat is not surrender yet it is negative, and the mind can overact to something negative – like to undo decades of efforts to promote interdependence, a manifestation of moral progress as opposed to conflicting claims of moral superiority. Think when we ourselves are driving and how we overcompensate when reacting to unexpected road conditions. Or think Trump when his knee-jerk would become US policy and how it impacts the world.

And the premise of the article and the opening arguments go as follows: “IT WAS as though the world had a new appetite. A Kentucky Fried Chicken (KFC) outlet opened near Tiananmen Square in 1987. In 1990 a McDonald’s sprang up in Pushkin Square, flipping burgers for 30,000 Muscovites on its first day. Later that year Ronald McDonald rolled into Shenzhen, China, too. Between 1990 and 2005 the two companies’ combined foreign sales soared by 400%.

“McDonald’s and KFC embodied an idea that would become incredibly powerful: global firms, run by global managers and owned by global shareholders, should sell global products to global customers. For a long time their planet-straddling model was as hot, crisp and moreish as their fries.”

And then the closing arguments: “The new, prudent age of the multinational will have costs. Countries that have grown used to global firms throwing cash around may find that competition abates and prices rise. Investors, who all told have a third or more of their equity portfolios tied up in multinational firms, could face some unpleasant turbulence. Economies that rely on income from foreign investments, or capital inflows from new ones, will suffer. The collapse in profits from British multinationals is the reason why Britain’s balance of payments looks bad. Of the 15 countries with current-account deficits of over 2.5% of GDP in 2015, 11 relied on fresh multinational investment to finance at least a third of the gap.

“The result will be a more fragmented and parochial kind of capitalism, and quite possibly a less efficient one—but also, perhaps, one with wider public support. And the infatuation with global companies will come to be seen as a passing episode in business history, rather than its end.”

What is globalization according to the referenced article? “That global firms should sell global products to global customers.” That is true yet there is the underlying reason why companies go global. To sell is the activity, the desired outcome is to sustain growth and profitability. And the market benefits society beyond profit-seeking individuals.

Why is that a critical qualification? Indeed, the global market offers great opportunity yet it poses greater competition and greater business risk. Globalization is about competition, global competition, not merely “to sell.”

It is, for good or ill, the survival of the fittest. And as Pareto would explain it, the vital few not the trivial many is what generates the bulk of the outcome. And yes, many will fall by the wayside. At the end of the day, it is about the greater good for the greater number, not tokenism or a utopian promise that is unreal; but leveraging the multiplier effect on society of successful and sustainable economic activity.

There is no free lunch. Recall Nokia – and the 10 or so brands that disappear every year as reported by 24/7 Wall St. And it is consistent with what The Economist is about: “It is to the Radicals that The Economist still likes to think of itself as belonging. ‘The extreme center is the paper's historical position.’ That is as true today as when Crowther said it in 1955. The Economist considers itself the enemy of privilege, pomposity and predictability.’”

Yet the article concludes with “the infatuation with global companies will come to be seen as a passing episode in business history, rather than its end.” Try Darwin a.k.a. Evolution?

And what is dictating the evolution? Man! Man’s wellbeing is at the center of humanity. And why innovation is not innovation for innovation’s sake. And Maslow’s hierarchy of human needs is a tool marketers use to understand man’s needs and aspirations. And they are a continuum, dynamic, not static. It is not about consumerism but seeking ways for people to be more efficient and productive and approximate self-actualization.

And so for an enterprise to assume its business model is evergreen is courting disaster. But here is the one caveat that in more ways than one created the backlash against globalization and the free market: The financial engineering behind the collapse of the financial system and the resulting Global Recession of a decade ago fed on greed, and wasn’t meant to raise man’s wellbeing. It is the height of the 1-% phenomenon.

“Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow,” William Pollard (1911–1989). [Pollard, physicist and Episcopal priest; in 1944 was asked to join the Manhattan Project and became friends with Einstein – Wikipedia]

Western behemoths are witness to how once underdeveloped nations and markets have moved up the development curve, and their relatively nascent enterprises are giving established MNCs a run for their money. Because they are highly motivated to leapfrog the West and become wealthy as well. And so do small e-commerce firms that the referenced article acknowledged. But then again, the phenomenon isn’t new. Think Gates, Jobs, Zuckerberg, among others. It’s about evolution and progress, a demonstration of man’s genius.

People like Trump make it sound as though they don’t like the idea of lifting all boats globally [to win votes especially of angry white men in middle America?] which was what effectively happened in Asia with globalization – where millions were lifted out of poverty, creating the largest middle class in history. 

But in return, American consumers had a windfall in the form of lower prices, and for the US economy, low inflation (and the 1990s and 2000s saw the longest periods of US economic expansion.) They weren’t complaining then, including the writer’s family being Metro New York residents. Yet when American companies invested in Asia, bringing along money and technology, it wasn’t merely to sell products globally but to sustain growth and profitability.

The writer has firsthand knowledge from the regional role he had in Asia then. And not only the company’s shareholders were happy, but Wall Street too – as was the organization as a whole.

Yet the boom-bust cycle is the law of nature. We have history to learn from. Through the industrialization era in Britain to the industrialization period in America to the rise of Japan Inc. and the Asian tigers and China, people, industries and nations were unnerved. And it is precisely what technology and globalization is doing again in the 21st century.

It is not about the retreat of the global company but the renewal of man’s genius. That is the challenge. From the time Adam and Eve were driven out of Eden, man has demonstrated the capacity to survive. It is when man ceases to be at his fittest that he would have no choice but to retreat.

And that is a lesson that we in the Philippines must take seriously. Today we are the regional laggard. If successful enterprises and nations are confronted with such unnerving challenges, what more of a third-world nation like us?

And, more to the point, we must step up efforts to catch up with our neighbors in FDI, raise investment and the share of agriculture and industry in GDP and look outward not inward despite the tough global environment. But focused on strategic industries that will give the biggest bang for the buck. We have to learn how to compete globally if we are to be a wealthy economy. But we will never get there if we keep to an oligarchic economy. It has done more than enough harm to this nation, if we care to think it through.

“Why independence, if the slaves of today will be the tyrants of tomorrow? And that they will be such is not to be doubted, for he who submits to tyranny loves it.” [We are ruled by Rizal’s ‘tyrants of tomorrow,’ Editorial, The Manila Times, 29th Dec 2015]

“As a major component for the education and reorientation of our people, mainstream media – their reporters, writers, photographers, columnists and editors – have an obligation to this country . . .” [Era of documented irrelevance: Mainstream media, critics and protesters, Homobono A. Adaza, The Manila Times, 25th Nov 2015]

“National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value, as classical economics insists . . . A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.” [The Competitive Advantage of Nations, Michael E. Porter, Harvard Business Review, March–April 1990]

“Development [is informed by a people’s] worldview, cognitive capacity, values, moral development, self-identity, spirituality, and leadership . . .” [Frederic Laloux, Reinventing organizations, Nelson Parker, 2014]

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