Bearded men in mountain cabins

The imperative that government be sensitive to the needs of business will be greater than ever in the era of the new economy. 

Only bearded men in mountain cabins want government to disappear. The rest of the population understands that yielding a certain amount of personal “sovereignty” is a fair trade for a few curbs on the effects of human frailty.

Fortunately, the rest of the population has also come to the conclusion that a market-based economy is superior to the other alternatives that have been tried over the years. Commerce is close to a natural human instinct; the market has given us the basis for a common expression or language. Frankly, we have barely begun to experience the benefits of this remarkably binding concept.

Globalisation is the catchword for the spreading of this recognition of commonality. Like any other human endeavour, it has its sharp edges. I am perplexed to see more and more statements and action from governments and even business organisations along the theme of “globalisation with a human face”. The political source for this defensive posture is obvious, but I believe that it represents a significant error in logic, as people grapple with the global market’s emergence. The truth is globalisation already has a human face, since no one but humans is involved.

Blaming the inequalities of the world on the market economy is nonsense. The facts are that the experimenting with non-market systems has left great masses of people poor and disaffected. This common understanding of the market is relatively new: that the market is clearly the answer, not the problem.

At the centre of this global phenomenon is the entrepreneur, individually and collectively in a business enterprise, the risk-taker who creates the rewards of wealth. The entrepreneur or firm is surrounded by institutions intent upon curbing those human frailties.

So be it, but there is a healthy and growing recognition that honing all the edges in this way has disastrous consequences. When institutional prescriptions crowd out innovation, the chances of total failure occurring may be diminished, but the price in resistance to change is incalculable. For it is change, the recognition that one course of action or product is less than optimal, that another is better, which feeds the creative mind. For the market to work, there must be a right to be wrong.

However, the firm is, by its nature, born of positive expectations and driven by its response to market demands. Increasingly, the management of the firm is finding commonality across sectors in the elements of this new economy paradigm, as some are wont to call it.

An array of themes is apparent in the strategies and operations of a private enterprise that is gearing itself for future success. From McDonald’s fast foods to Nokia phones, from Volkswagen automobiles to Sony consumer electronics and Tata software, firms will be focused on the introduction, marketing and management of their brands. After all, despite all their differences, human beings have converging tastes in many products and services. The important point is that each one of those themes has implications for the makers of public policy, at every level of government, everywhere on the globe.

In every sector – agriculture, retail, banking, steel or semiconductors – there will be a premium on innovation. The application of technology to the business model will be pervasive, and will frequently be the difference between success and failure. The potential scope of enterprise, large or small, will be international, if not global. And though the range of consumer choices will be stunning, the competition will be intense.

As a result, profit margins will continue to shrink, making growth essential. Even the most product-oriented firm will leverage its talent in services. As a result, organisations will be less hierarchical and employment will be more fluid. Trade and investment will blend in every international company strategy.

More than any other fact of life for a globally competitive firm, I wish to draw your attention to the most important and least understood of them all: velocity. This is new in private enterprise: the speed at which investment moves through the business cycle. The source of this exponential change is invention which, thanks to technology, feeds on itself, permitting the management of the private enterprise model to alter the model’s composition with remarkable speed. Moreover, that invention is opening new possibilities for the customers of those new goods and services, sometimes causing demand to shift so quickly that even the most sophisticated forecasters cannot keep up. In the technology business, model builders have taken to thinking in “web years”, that is, periods of three months.

It is the surge in application of new technology that is the essence of sustained growth in the broader economy. The application of technology enables the same “modeling” and new market possibilities to spread throughout business and industry.

Every government produces a range of policies that shape the micro-economic models of the private sector, resulting in a public sector burden that private players then have to carry with them into the market place. The tax load is the most obvious example of this, and policy choices give rise to a myriad of similar micro-economic costs.

Other examples include excessive labour protection rules, under-performing education systems, regulatory demands, market restrictions and tariffs. To a considerable degree, the debate about disparate rates of growth in developed economies hinges on the extent to which the state makes demands of the firm.

Nimble government 

Clearly, there is a need for business and government to understand each other’s perspective, if not to work together. One reason is that few private enterprises will escape either the global algorithm of competitiveness or the demand for nimble adjustment. As the public burden is so great in comparison to the operating margins of the private enterprise, a responsive, efficient government can have a disproportionate impact on strengthening the comparative and competitive advantage of its private sector.

Indeed, the speed with which an enterprise can react to change is directly tied to governmental policies and regulations; this is most crucial when it comes to having to shift resources out of marginally productive activities and into those with significant growth possibilities. This is Dr Schumpeter’s creative destruction. The trouble is, with narrower margins and speedier product cycles, it is all the more urgent for governments to attune their policies to improving competitiveness and to allow that adjustment to take place unfettered. Otherwise the creative part of the Schumpeter equation will be impeded, with devastating consequences.

Any lack of competitiveness, private or parastatal, sends ripples of inefficiency throughout the economy, distorting resource allocation and affecting the cost structure of customers. It is in the interests of governments and business to ensure this does not happen.

To the extent that governments ignore these realities, their policy shortcomings will most likely appear in the prices of goods and services. This is a micro-economic effect. In turn, those higher prices will impact the productivity of their workforce and the standard of living of their people. These are the macro-economic consequences. In short, the impacts of poor policy choices will not go away or be shifted to oblivion. Payment will be due.

In this context, the OECD’s Forum 2000 has a chance to differ significantly from the majority of other intergovernmental “talks”. Its analytical base, intellectual rigour and inclusiveness of business and other players is key, particularly in the face of mounting opposition to globalisation that is currently being expressed in the streets. By including antagonistic voices in the “formal” debate, the Forum obliges stakeholders to express themselves and face critical review. Everyone will have to hold their ground not on the basis of noise or numbers, but of argument and scrutiny. This is nothing new at OECD, which has always sought the opinion of business and labour representatives at the policy table of international government. What it does demand is that those invited come to the discussion to listen and make their case clearly. They will have influence in so far as their arguments make sense. That is what partnerships are all about. We could hardly ask for more.

©OECD Observer No 221/222, Summer 2000 

Economic data

GDP growth: +0.6% Q1 2019 year-on-year
Consumer price inflation: 2.3% May 2019 annual
Trade: +0.4% exp, -1.2% imp, Q1 2019
Unemployment: 5.2% July 2019
Last update: 8 July 2019

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