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Comment                                                                                5 February 2017

Damaging corporate fallout    

by Cees Bruggemans                 words 1050

The bigger, older and richer the company, the more it has the resources to look after its interests. Such companies don't only play offense (maximizing market share and wealth for their stakeholders), they also play defense (defending themselves from legal attacks for alleged misdoings).

So today we are aware of discrimination laws, labour regulations, environment regulations, overseas child labour politics, financial regulations and much more. But something blindsided this collectivity for years, both due to its insidiousness and because how could it sanely be possible to incur latent liability when playing within the rules? Yet it has happened on such a scale that it has unleashed revolutionary reactions.

 

The larger economies globally have for decades (centuries) accepted capitalism as the fastest way to develop longer term, though most of this time was also marked by reactions to excesses, addressing the rough edges of this system of economic organisation, through expanding regulatory oversight and lawmaking.

Even so, something crucial in recent decades slipped through the net and is only becoming clearer in the reflected light of populist uprisings.

For the past generation, two major engines added to global productivity gains, income and wealth, namely technological change and trade globalisation. These trends allowed cost reductions, price reductions, and expansion of markets on unprecedented scale.

But instead of the structural adjustments, especially in the richer, older nations, remaining politically manageable, they didn't. They ended up undermining the very vitality of the healthy market engine driving development.

Fed chairman Alan Greenspan thought the larger financial institutions would have the common sense of self-interest to police their own actions. That turned out to be a miscalculation, and a big one every second generation or so.

For relaxed regulatory oversight loses track of the creative geniuses and there many schemes to get rich. In the process, they can become reckless and lawless, too. The core of the 2007-2008 great financial crisis was the unwinding of such excesses of decades.

But in the process millions (of Americans) lost their homes, jobs, pensions. And this spilled over globally, with victims everywhere.

Similarly, labour laws create the frame within which companies in rich countries can manage their labour forces. When competitive struggles intensify due to major technological changes and trade globalisation (the co-opting of billions of low-cost labour and operating environments globally), cost reduction is an acceptable way of protecting the corporate entity, and where possible benefit from such global trends.

But there aren't only benefits accruing to some, we have found. There are also downsides accruing to others, such as losing a job and benefits. And not having the flexibility, experience, education to reinvent oneself, move to a different region and start afresh.

America particularly was for long famous for such flexibility, while Europe was more inclined to protect its people, either in jobs or through subsidies when down to hard luck.

But in both these regions it wasn't sufficiently registered by the bigger companies this past generation that the hardship accumulating beneath their feet was becoming indigestible. Systems were changing radically while not flexible enough to handle the social fallout.

All this created anger, further worsened by steadily increasing migratory flows, whether due to war or economic underdevelopment, many refugees in both cases seeking a better life.

When such migratory flows remain digestible over time, they need not invite social resistance. But when their scale and nature becomes such as to ignite localised anger, it can no longer be digested adequately. As such anger rises and spreads, it combines with the rising anger from economic causes already present.

If political systems cannot contain these excesses, ruptures can be expected. In democracies, such ruptures occur in voting booths. If on a large enough scale, revolutionary eruptions can become possible.

Many companies and people, in America and around the world, still can't get their minds around where Trump originated. Or his equivalents in Europe. But it is mistaken to focus only on the man, who in many respects is a mere messenger of great numbers of people who put him there, democratically.

America has known ruptures before. Remember Jackson or is that too long ago? But what is new is the scale and speed, globally and mostly instantly. This is unprecedented, as are the numbers.

It took time, but many companies are waking up to the reality that unbeknown to them, their legitimate actions in their own backyards (and sometimes criminal behaviour, as during the financial crisis) took a growing toll which cumulatively is reaping a whirlwind of unprecedented proportions.

Trump triumphed on a wave of anger. But now many of the presidential actions he has instigated are unleashing new waves of anger, aimed against him (and beyond him against his electorate), amplified by new social media means just like he used to do.

If this goes on a little longer, as it will, it could deepen the societal fissures yet further. Apparently California already wants to leave the Union. Can you imagine the consequences of what is building here?

No, you can't. Just as you didn't see the first wave coming, so subsequent dislocations are a mystery until upon you as well.

This isn't Russia tearing itself apart in the late 1980s & 1990s, or the Chinese leadership at some future date losing the plot and control of the ship. This is western democracy turning itself on its head and inviting an enormous shakeout.

In retrospect it could all have been foreseen.

But the year 1989 is still fresh in my memory. The visiting chairman of Germany’s largest insurance company in May of that year could not see the Wall falling for another decade. Yet it fell within six months, with all of Eastern Europe following, and within two years Russia too.

Events have a way of accelerating when the foundations have been undermined. The world is recasting itself today as much as it did then (and on previous such occasions in the distant past). It isn't just Trump. It isn't only Trump. And they have hardly begun it seems in addressing a number of issues from the past.

Where were you in the war? If on the victorious side, that's a matter of heroics. But if on the loosing side, there were the Nuremberg trials as well. That bad? Give it time. Revolutions are unpredictable things.

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website www.bruggemans.co.za

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