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Are You An Audi Driver?

Are You An Audi Driver?

21.01.2013 9:44

When I started writing this column, the editor told me that ‘short was good’, especially in our age of short attention span and electronic media. Believe me, I am trying. But the art of short is still eluding me, so this article comes in two parts, again…

In the 1980’s and 1990’s a new orthodoxy became ascendant in what we like to call the “western world”. In the USA a Democrat President renounced 'big government'; in Britain, the Labour Party abandoned its commitment to social ownership and became “New Labour”. The markets were in command. The basic formula ran something like the following: Privatization + Deregulation + Globalization = Turbo-capitalism = Prosperity. As various commentators have since pointed out, the push toward deregulation and 'setting markets free' that so dominated political rhetoric then and there was deeply flawed. So what happened?

Apart from the apparent inability of the newly liberated markets to self-regulate,  especially on a global scale, the economic globalization has allowed a very narrow specialization of labor. Especially the US has focused mainly on the creative processes, innovation and know-how, outsourcing the actual production of practically everything to developing countries, these days especially China. This new global arrangement, in which ideas are the most financially lucrative commodity, has created multiple complex imbalances, including those between consuming and producing countries, between debtor and lender countries, between educated and uneducated people. The last division goes across as well as within nation states.

Globalization is firmly connected with the rise of the multinational corporation. According to the British political philosopher John Gray multinationals accounted for over 33 per cent of world output and 66 per cent of world trade already in 1999. This concentration has probably grown further since. Multinationals seek to increase sales, often by trying to create new needs among different target groups. One example is the push to developing countries. Another has been the development of the markets predominantly populated by children and youth. There is, by the way, increasing evidence that this is having a deep effect. That our view of childhood in the so-called 'developed' countries is increasingly the product of consumer-media culture. Santa Clause anyone? We have also witnessed the rise and globalization of the 'brand'. In fact, the astronomical growth in the wealth and cultural influence of multi-national corporations over the last fifteen years is wrapped up with the rise of the brand. Do you own an i-Phone? An i-Pad? A Louis Vuitton wallet? Are you an Audi or a BMW driver?

However, while the reach and power of multinationals appears to have grown significantly, neither they, nor individual national governments, have the kind of control over macro-economic forces that they would like. Ecological and technological risks have multiplied. While globalization decreases volatility and creates an impression of stability, it also as a by-product creates an overwhelming fragility. In other words, creates the threat – and as witnessed in 2008, a very real threat – of global collapse.

Consider financial institutions. Today’s big financial institutions are gigantic. They are also all inter-connected in one way or another. When one of them gets into distress, there is a domino effect which is likely to affect many others as well, and it is not only because of the good old run on the banks. On the face of it, concentrated banking industry should decrease the probability of crisis. But if a crisis does occur, it is going to be harder and have global consequences. In a diversified environment of small banks with varied credit policy, surely some of them were not very sophisticated and were over-dependent on either the regional economy or a particular sector. But if one of them collapsed, nothing much happened to the economy of the country or the world. These days? Just consider Lehman Brothers. In 2008 people in Prague, Warsaw and Ljubljana were laughing when I was telling them there was a huge global crisis raging in London. Crisis? What crisis? It doesn’t concern us. Well, it did. Just came with a bit of a delay.

The opening of markets, one of the pre-requisites of rise of globalization, has been accompanied by privatisation of state enterprises, which in turn gave the opportunity to multinationals to expand their activities in new areas. Whether you are a proponent of globalization and privatization in general or not (note: if you are a proponent of one, you are bound to be a proponent of the other, without fail), you see from the experience of New Europe that while the immediate effects have mostly been positive, the longer term effects are a bit more questionable. One of the first things the governments in Eastern Europe were advised to do after 1989 was to privatize the financial services sector. Their big banks, it was argued, were badly managed, were extending soft loans to technically bankrupt companies and in general, reform of the financial sector was essential to the reform of the economy as a whole. Privatization in itself was not enough, it had to be a sale of controlling stake to a foreign financial institution which is fitted with all the risk controls and management know-how which is lacking locally. So was the theory. The Czech government fully bought into the argument and sold Česká spořitelna, ČSOB and Komerční banka to foreign banks.

At first, it all worked nicely. But those who are privy to the internal workings of these large institutions could tell you long and bitter stories about what ensued after the parent institutions got hit by the 2008 financial crisis. And whose interests they, naturally, sought to protect. Then there is the case of privatization of the Czech big industry, be it Transgas, Skoda Holding, Chemapol, Unipetrol and others. Ten years ago, comparisons were made with Poland which just didn’t seem to get its act together. Poland was dragging its feet with privatization, developed some form of a funny alternative privatization strategy through domestic capital markets and then failed to sell the controlling stake in its largest corporations altogether. Now you can also contrast the situation with Poland and say that the country has retained strategic control over its largest companies and all the natural resources. You can even say that this strategy has served it well in times of 2008 crisis and beyond, when profits from peripheral subsidiaries in Central Europe have been drawn wholesale to the parent companies and where superfluous subsidiaries are being sold in open market to the highest bidder, disregarding any strategic interest of the country in which they are located.

What is your opinion?

To be continued…

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