Now these assets have been placed under the auctioneers’ hammer. Enron’s bankruptcy is the biggest disaster ever in the US and the world corporate history. This bankruptcy has sent shock waves leading to the White House and to the Democratic Party headquarters.
Observers predict a serious upheaval that will engulf politicians including the office of the President. While politicians may succeed in hoodwinking the public (as they often do), Enron’s winding up will certainly have a lasting negative impact on the US industry, banking, and investor confidence that has already been shattered by stock market collapses the world over. The major US and European banks — financiers to Enron - may suffer crippling losses.
The second, but a more significant disaster to hit the US economy was Ford’s recent announcement to close five plants in the US and the write-off of an estimated $4.5 billion in closure-related losses besides laying off nearly 35,000 workers representing 10 per cent of its world-wide workforce. Ford’s re-structuring is significant because it signals a belated realization among developed countries that competitors from less developed countries (LDCs) are out-smarting them in traditional industries, and it is time to shrug off illusions of invincibility. Restructuring and rationalisation of industries, which the west thought were its domain for ever, is now considered unavoidable.
The two events will also result in large employee lay-offs. But these are just two out of dozens of down-sizing (or right-sizing?) announcements recently made by Western industrial and commercial giants, not counting the US and European airlines after September 11. Isn’t it surprising that all this is happening in a world that was supposed to bask in the glory of globalisation of trade, or has yet another “bubble” burst too soon? If it hasn’t, it certainly seems heading that way, and fast. A plausible explanation is that globalisation was an attempt by the West to blunt the threatening rise of the Near and Far Eastern Asian economies but it didn’t succeed because the West tried to beat the Asians using a fundamentally flawed strategy. Developed countries find it hard to accept the fact that the world is passing through times when, for once, developing counties seem to have acquired a comparative advantage in some technologies that developed countries can’t neutralize without using unfair tactics.
Not surprisingly, therefore, the lethal combination of compliance with the WTO regulations and emphasis on ISO certifications, is being used to blunt the pace of growth in emerging economies of Asia and Latin America. But the frightening pace of business closures and massive employee lay-off in the West prove that the strategy has led its pioneers to its logical consequence — failure!
A better strategy would have been a jointly planned honest rationalization of national industrial bases using the yardstick of comparative advantage. Admittedly, it is a painful process because it calls for accepting failure, flogging a large part of traditional industries at seemingly throw-away prices, and re-training large chunks of national work forces, but one that can eventually stabilize national economies, and the world economic system. It would be a lot saner to embark on this process consciously and systematically rather than accept unplanned closure of traditional industries (as they now happen) with unmanageable social consequences. The supporters of market-based economies must realize that such consequences are generating a fall-out that is shaking the very foundations of the concept. Remember the scenes witnessed at the recent WTO conferences?
The simmering hostility between the US, developed European countries, and Japan on one side, and the rest of the world on the other, for dominating world markets cannot be resolved (at least not by the present leadership on either side of this divide) because it suffers from a singular lack of appreciation of the real issue - failure of developed countries in rapidly discovering new technologies to match the pace at which the LDCs acquire a comparative advantage in traditional technologies.
The LDCs now produce huge exportable surpluses of manufactured goods at prices such lower than developed countries, using traditional technologies. Yet, huge surplus capacity exists in developed countries in those traditional technologies. As a result, both groups are now competing for the same markets realizing little that their combined production capacity far exceeds the capacity of the markets to absorb the produce. The unfortunate part is that, despite hiccups, LDSs are making a headway in these markets pushing out the Western goods. Massive business closures and rising unemployment in the West serves to confirm this view.
The way developed country leadership has sought to resolve the current crisis (denying the LDCs a fair deal) aims more at gaining cheap popularity among the electorate, especially the advocates of the concepts of globalisation and marginalizing the State. Now they know fairly well that the globalisation “trick” has backfired because they allowed it to be spearheaded by speculators (who believe in quick and often unethically earned profits) much less in building lasting trading relationships. The speed with which the indirect foreign investment rug was pulled from underneath the feet of emerging Asian economies, proves that developed country governments placed their bets on the wrong horse that went berserk pursuing the objective of earning windfalls through globalisation.
Not surprisingly, therefore, globalisation (and the rest of it) did not perk up developed country economies. Forced lowering of tariffs through the WTO did not open the floodgates for Western goods. If anything, the fall-out from destabilization of Asian and Latin American economies, and the consequent drop in demand, forced the whole world into a recession that now seems simply unmanageable for governments (from Indonesia to Argentina), the IMF, and the World Bank. Failure is now written large on their foreheads.
To make things worse, leadership of the LDCs remained fragmented so long as some of the LDCs seemed to be doing all right in spite of the trade inequalities foisted by WTO. The apparent closing of ranks by them has been forced not by a sudden burst of fraternal feelings (even India and Pakistan pushed the same line at the WTO round in Doha), but by the fact that their majority now faces bankruptcy. The dream of economic well-being sold to them by vociferous advocates of globalisation has finally gone sour. They are now fighting a losing battle with their backs to the wall.
The few crumbs that fell off the Doha conference table will prove far too little too late to shield them from the clutches of the IMF and the World Bank because many of them have either already defaulted on re-payment of their external debt, or are on the verge of doing so. This is a truly pathetic state of affairs. It manifests the collective failure of the economic managers of the 20th century.
The IMF and the World Bank would do themselves a great deal of good by accepting the fact that precious little would be achieved by classifying more LDCs as defaulters, year after year. Breaking this mould requires admitting that attaining self-sufficiency by producing virtually everything under the sun, irrespective of enjoying a cost advantage therein, is a flawed objective. This is the age of specialisation, of producing quality at the lowest price. It calls for reaching an agreement on who should produce what, based on a fair assessment of comparative advantage, and then sticking to that agreement. Admittedly, this means abandoning some industries but expanding others to create compensating opportunities.
These are hard choices that entail pain in the short-term but well thought out choices and realistic time frames for phasing out marginally profitable industries should create an environment for eventually trading in cost-effective lots, ensure fairer prices for raw materials, and capacity utilization by domestic industries. In the long-run, it should help cut waste, and conserve domestic resources to banish unemployment, illiteracy, malnutrition, environmental pollution, child labour, bad labour practices, etc. Achieving this aim requires a strong resolve to rationalize inter-State relations on these issues rather than taking unfair advantage of each other. The IMF and the World Bank should take it upon themselves to help contain the pain in the transition stage so that resulting economic disruption does not reach alarming proportions and destabilize governments that adopt this route to economic rationality.
In the LDCs, the State must not be marginalized if these objectives are to be achieved. Admittedly, this assumes a great deal more in terms of good governance in LDCs than has been the experience, so far. But that should not be the justification for insisting on diminishing the role of the State as demanded by advocates of globalisation and privatisation virtually dismissing saner solutions in the process. Given their muscle, developed countries can still influence governance in LDCs by working closely with their governments. Unfortunately, however, developed countries have chosen the NGO route that many LDC governments find a threat to their sovereignty. As a logical consequence thereof, things have become worse.
Yet, no one seems bothered about remedying the situation. What we need to focus on is a definite and credible improvement in governance of the State, not its diminution.
Put on the right track and closely monitored for delivering, it is the only institution that can ensure equity in distribution of resources among various sections of the people in LDCs because it will pursue socially acceptable objectives, not the profit objective which, in any case, is not the objective for any self-respecting government to pursue.