Archive for the ‘Global Trade Issues’ Category

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A Marshall Plan for Greece?

February 23, 2012

According to London’s Financial Times leading industrialists in Germany have recommended a new Marshall Plan for Greece, involving both private and public investment.

This is the best (and maybe the only) good news to come out of Europe for many a month. The Marshall Plan, for those too young to remember, was one of the most remarkable initiatives of the Post War era, unprecedented in modern times.

Under the Marshall Plan (named for the Secretary of State George Marshall) the United States committed substantial funds to the reconstruction of war torn Europe. Total investment by the US in the immediate post war period, including the Marshall funds, totaled $25 billion almost 10% of the US GDP. The funds were used to rebuild civil and industrial infrastructure in a devastated Europe.

The Marshall Plan, which was in operation from 1947 to 1951, was surprising in its generosity; victors in war are not noted for their willingness to invest in the vanquished. More importantly the Marshall Plan presented a vast contrast to the hard-nosed tactics employed on Germany and its allies by the Great Powers after World War I.

The success of the Plan contributed materially to the recovery of Europe, which led to the creation of the NATO alliance and (later) the European Union. More importantly it helped heal Europe and put bread on the tables of millions and millions of people. No small accomplishment.

If (and it’s a big IF) the present debt crisis in Greece is going to stabilize somewhere short of default, it must have an upside. Lenders are imposing severe restrictions; Greece is expected to endure crippling austerity, falling lifestyles and real restrictions on its democratic systems and sense of self-determination.

Greece needs a positive future; more than being a wiping boy for global bond markets. The fact that this initiative is emanating from Germany is terribly important, for it is the Germans that are taking the hardest line in this matter. An act of generosity on the scale of the Marshall Plan could not only help the Greek economy, but also heal the wounds that have been inflicted upon the tender sensibilities of modern Europeans. They are badly in need of repair.

Let us hope that this suggestion is acted upon enthusiastically and delivered in the same spirit as the original.

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THINGS ECONOMISTS CAN’T TELL US, and WHY

June 9, 2010

Many not so casual observers, including Queen Elizabeth II, have wondered why economists did not anticipate the recent Financial Crisis. The reality is most economists were stunned when the Crisis arrived, panicked at its blinding speed and can only recommend ‘the same old, same old’ going forward. There’s two principal reasons they didn’t see it coming. One, economists weren’t looking broadly enough at the economy to see the problems developing in the first place, and second, what evidence was available (and there was plenty) tended to be discounted or ignored for ideological reasons.

The Dismal Science

Economists, despite being highly respected and sophisticated scientists, have been on the defensive for centuries. Truthfully, the study of economics was in difficulty even before Thomas Carlyle leveled his famous ‘dismal science’ charge in 1850. Perhaps the one nagging criticism  that stings most strongly these days is the charge that economists are so infatuated with the wonder of their theory that they ignore practical reality.  

Why should the rest of us care? It’s a serious issue because economics matters. The management of a modern economy, the decisions and actions undertaken by politicians, senior policy advisors, Chairmen of the Federal Reserve Bank, business leaders, Wall Street investment bankers and others, are derived from an underlying body of economic thought; today those underpinnings rest largely on the shoulders of neoclassical economics, the foundation stone of modern capitalism.

Neoclassical Economics

Although neoclassical economics is a foundation, it is by no means a unified body of theory. However modern economists working within the neoclassical paradigm tend to agree on both a quantitative approach to economic analysis and a field of study centered on the exchange process. Neoclassicism is a mathematical system of thought concerned with market related phenomena, particularly the determination of prices, outputs, and income distributions.

This is quite a change from the past. A century ago the great Alfred Marshall could say of economics: “Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.” These days you’ll find a much less ambitious definition for economics, generally along the following lines: “Economics is the social science that examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants.” …a dismal science indeed.

So, where did it all go wrong?

It all happened a long time ago, in the horse and buggy days of the Victorian era. Mid-Victorian capitalism was facing a mountain of trouble. Marxism and the rising working class movement were galloping forward on the left; on the right there was a looming – cataclysmic – breakdown of laissez faire, which eventually launched an era of vicious protectionism and hyper aggressive imperialism. According to economic historian Eric (Lord) Roll, in these confusing times there was a strong desire among classically minded economists to produce a more scientific study of economics and – ideally – find a way to side-step the theoretical challenge of Marxism once and for all.

The Marginalist Revolution of the 1870’s provided just such an opportunity. The marginal utility theories of Jevons, Manger and Walras revolutionized economic thought and with it the entirety of economic study.  Neoclassical economic theory, which emerged as a consequence of the Marginalist Revolution, introduced important new concepts into the economic lexicon, particularly a theoretical perspective that the value of goods is determined subjectively “in use” by the end-user (classical economics had assumed that goods had a hard, objective value, which was equal to the amount of labor applied in its development – the so called labor theory of value).

However, neoclassicism also introduced fundamental changes in the study of economics; its explicitly scientific approach introduced a mathematical bias into economics, which has grown significantly over the course of the past century. Unfortunately, mathematical precision has come with a hefty price tag: the Marginalist Revolution reduced the scope of modern economic analysis considerably. By drawing a ring-fence around the exchange process – forevermore the ‘legitimate’ area of economic inquiry – neoclassical economics retreated into a narrow, quantifiable definition of economics, where the larger (messy) questions were simply ‘out of bounds’. And although economists gained much greater mathematical certainty and logical consistency in adopting neoclassical principles, the Marginalist Revolution placed significant limits on the boundaries of economic study, stifling inquiry of those economic inputs that lay outside the narrow confines of the exchange process.

It was this reduction in scope, this retreat from the larger study of political economy, undertaken over a century ago that created the ‘boundary’, the theoretical wall that defines the limits of economic analysis; the presence of which leaves economists as mere spectators in critical elements of the economy. It is one of the reasons why so many of them didn’t see the storm clouds gathering in the first place and still can’t.

Economist’s counter these charges by pointing out that their market focus is reasonable, given that every meaningful economic activity that takes place outside the boundary eventually winds up in an exchange transaction, which they believe, essentially, brings the outside world to them on their (quantitative) terms.

Yes, economists do consider ‘out of boundary’ inputs, but lumber them into a broad undifferentiated category they call externalities. The practical consequences of this approach, however, distance economic analysis from the primary sources of economic activity. For instance most economics are unconcerned (and presumably unaware) of the nature of new asset classes in an emerging knowledge  economy or more importantly, just how these new assets impact economic risk assessment over time. In other words, economists are left to examine only the derivative (quantitative) effects of economic phenomena rather than their primary causes.

The Ideological Force of Monetarism

Unfortunately, this confusion between cause and effect has been greatly magnified by the late 20th century rise of Monetarism. Like many theoretical considerations in economics, monetarism was controversial and applied carefully within the profession; while outside in the world of finance and business it was swallowed whole, hook, line and sinker. Unfortunately monetarism became more than a new set of economic principals, it morphed into an ideology, a faith like belief in the purity of markets. The practical effect of market purism has been to undermine traditional checks and balances perfected over the ages to preserve the integrity of capital. As a result capital management practices collapsed across the board when it became popular to believe that markets purified the economy of all risk. This ideological sedative infected all aspects of economic decision making, undermining the culture of banking, accounting, credit rating, management and economic policy making.

Modern Economic Thought

Modern economics, despite being an important theoretical advance on the past limits economic thought in several ways. Firstly its dedicated mathematical approach limits the very process of economic analysis, for it implies strongly that anything that is not quantifiable simply doesn’t count. Secondly its constricted focus means it looks at the economy through a microscope rather than a telescope – in other words its missing the capitalist forest for the statistical trees. These reductive forces contribute to the fatal combination that blinded many economists in the run up to the Financial Crisis and are, even now, limiting our ability to put the economy back on a sound footing.

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Disruptive Changes in Global Trade?

May 4, 2010

“Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition,  with war”     Cordell Hull, US Secretary of State, 1944

In July of 1944, almost a year before the formal end of hostilities in World War II, the Allied Nations gathered together at Bretton Woods, New Hampshire to design the post war world. On the minds of participants were the key lessons of the Great Depression and World War II: the need to dismantle tariffs and economic protectionism, limit the extremes of economic competition and to build a stable rule-based global trading regime.  Unfortunately, there is growing evidence that the post war order is beginning to unravel, resurgent protectionism is undermining international cooperation and with it the reliability of global markets.

History seems to be repeating itself. In 1860, Britain was the pre-eminent global power, the United States of its day. Britain’s energy consumption was five times that of the United States and Germany, six times that of France and 155 times that of Russia. Britain used its political and economic strength to establish an international economic system founded on the principals of laissez faire, or free trade. This system grew strongly, encouraging globalization (on a limited basis) and increasing accessibility to markets. 

Unfortunately laissez faire began to unravel with the rapid rise in mid  19th century of newly industrializing nations, the most significant of which were the USA and (and a few decades later) Germany. These new industrial powers greatly increased economic competition among the Great Powers. The erosion of cooperation increased protectionism (in the form of imperial preference) and a set off a late century period of aggressive imperial conquest, particularly in resource rich Africa (the so called ‘Scramble for Africa’). 

 The Darkening Strategic Outlook

Today, the rise of the ‘BRIC’ (Brazil, Russia, India and China) is putting enormous pressure on the global system. The severe trade and fiscal imbalances that exist in the international system and the realization of potential commodity supply limitations, coupled with recessionary pressures are having a similar effect. They are undermining faith in the reliability of markets, unleashing forces of neo-protectionism and triggering a modern day ‘scramble for resources’. 

What will replace the free trade regime if it were to decline? At best we will see gradual erosion of free trade principals and international cooperation; more likely a severe economic downturn would trigger  a  protectionist backlash unleashing a sudden disruptive change in the global trade regime. When this happens expect disruption and much greater political involvement in the global economy, including (eventually) closed markets and  ‘managed trade’ packs negotiated between major trading blocks.

 Return to a more self-sufficient, vertically integrated companies

All the major trends of the past 40 years including de-regulation, globalization, reliable global markets, efficient logistics etc. made a compelling economic argument for corporate dis-integration. The situation going forward, however, is much different from the recent past. Major industries are more and more vulnerable to trade and supply disruptions and/or massive swings in the price of basic commodities. Major industries can be expected to reverse course and bias supply chain integration strategies through acquisitions (real supply chain integration) and/or deeper supply chain partnerships (virtual supply chain integration) as a hedge against global uncertainty.

 Things to Think About

  1. Where does your company and its assets fit in the global network. Do your homework so that you’re prepared before major changes take place. For instance to ensure access to key global markets you should be lining-up strategically positioned acquisition targets or compatible supply change partnerships in advance.
  2. You should also be asking yourself, what risks your organization would face if access to your global supply base became compromised and what we can do to build more resiliencies into your business model.
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