Klaus Meyer's Blog
On Business and Economics in Volatile Times
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As a new class of MBA students is entering Business Schools, The Economist is aiming its fire at the schools, suggesting they "have done little to reform themselves in light of the credit crunch". Infamously, many of the key culprits of scandals - from Enron to Lehman Brothers - donned an MBA, and this is taken by many to discredit the entire system. Reassuringly, The Economist found a study that finds corporate returns to increase the more they hire MBAs, so it is still a good idea to have an MBA, or to hire one.
The Economist doesn't think much of CSR courses. Perhaps that's because they tend to side with those suggesting 'doing good' is largely a waste of money. I don't quite agree. Recent research suggests that, to some extend, doing good things and behaving responsibly in various way actually does have a positive effect - if it is credible and has a long-term nature (see cites below).
The Economist has its own wish list to Business Schools.
The Times Higher Education weekly magazine has a talent for stimulating interesting lateral connections. This week, it reports the government policy to include 'impact' in the assessment of universities' quality of research - with scholars trying to figure out what that is and how that might be assessed. In another article my Bath colleague Yiannis Gabriel is musing about bygone times rand the impact of Karl Marx, which had been quite different than what he might have imagined in his life time.
Karl Marx has without doubt been the most impactful economist who was ever based in England (Adam Smith worked in Scotland!). Marx conducted his empirical research in England - notably textile factories in Lancashire, arguably the worst in terms of working conditions at the time. His empirical case research (not quite up to modern research methods, though) led to theories, that shaped policy ... is he the role model that the government wants up to follow?
Perish the thought - but might our government actually mean 'impact that benefits the ruling elites of the day'? That sounds rather outrageous in a liberal democracy with such a great tradition as the British! Yet, Marx might have found that thought rather familiar...
Eight years ago in Hong Kong I met a journalist from a weekly magazine I much appreciated: the Far Eastern Economic Review (FEER). This weekly used to provide first hand news and reports on developments across Asia, including politics, economics and business. Written by journalists embedded in the local context of the diverse countries, and written for people with some background knowledge, the FEER provided much deeper insights than mainstream newspapers and magazines, which are typically written by expats and assume that their audiences are largely ignorant of the country they are writing about. At a dinner overlooking Hong Kong from Victoria peek, the journalist shared his frustration with the new owners of FEER, US-based Dow Jones. The lead articles and opinion pieces now (i.e. 2001) were written in New York, and reflected the views of 'headquarters', often in contradiction to the reports written by reporters 'in the field'. The 'American view of the world' started shaping the journal, and this particular journalist was thinking of quitting.
This morning, I read that Dow Jones decided to close down the FEER, sales are so low that it keeps loosing money. I was not surprised, but saddened. I stopped reading FEER long time ago, and had virtually forgotten about it. However, I hope the archives of FEER will remain accessible as they should be a valuable source for the history of Asia from the 1950s to the 1990s. The question is, will a new pan-Asian source of News will emerge to replace the vacuum left by FEER?
As everyone seems to anticipate that we are coming out of the recession soon, even more than usual effort is spend on interpreting data emerging from various sectors. It is chronically difficult to extract insights about the future from such scattering of data, though they are a bit more informative than tea leaves. Retail sales seem to be still down over last year; yet I noted two exceptions that probably say a lot about what people do during the recession: do-it-yourself retailer B&Q and IKEA assemble-it-yourself furniture appear to do fairly well. So, are we all spending more time improving our homes ourselves?
Another number that struck me was British exports. Despite the fact that the British pound is about 20% lower than last summer, they are still declining. You would have expected that devaluation would help exports, but that does not seem to be happening. Perhaps, Britain does indeed need a national debate on what sectors of industry it may be able to compete internationally - and how it can build the capabilities needed to compete. Many smaller European countries had such debate continuously over the last decades.
The news are full of governmental rescue missions for the car industry, both in Germany and in Britain. Yet it is very different stories.
The BBC reports at length over a new report (costing the tax payer £16 million) into the failure of MG Rover, the car company that after years of struggling had been taken over by BMW in 1994, and then divested again in 2000. At that time the British government put up big load guarantees to back a group of entrepreneurs who promised to turn the business around. The report - and thus today's media report - blasts the management team for drawing huge salaries, but letting MG eventually go bankrupt in 2005. Union leaders are outraged about managers' salaries and the lack of help for the 'highly skilled workers' that now have to work in 'low skill jobs' because of the bankruptcy (given the skills shortage in the U.K. this is rather odd). Anyway, what am most wondering about is: was there any realistic scenario for MG Rover succeeding as a small independent car manufacturer? I vaguely recall huge skepticism when the four entrepreneurs came arrived in back in 2000, and promised to achieve what BMW failed to achieve. Shouldn't the unions be appreciative that they kept their jobs four more years until 2005, rather than going down in 2000?
The German media are picking apart the deal of Magna taking over Opel from General Motors. German politicians in government are pleased to have negotiated a deal that appears to save many jobs, while the opposition parties point out that nothing is clear - well, elections are coming up. Of all the commentary in the media, I found most interesting the remarks by a business person, Manfred Wennemer, representing the German government in the Opel trust, reported e.g. by Handelsblatt. He publicly criticizes the deal because it would inhibit necessary restructuring, and thereby the long-run viability of the firm. Moreover, the Magna consortium, which includes Russian Sberbank, envisages huge market growth in Russia, yet it is hard to imagine this market growth being served from high-labour-cost Germany. At the same time, GM retains a minority stake in Opel and controls crucial patents and brand names, which constrains Opel's future strategy. A lot remains unclear, and the negotiating parties did their best to confuse the media while driving hard bargains behind closed doors. What I am wondering is, is there a viable strategy for a comparatively small mass market car manufacturer that is burdened with all these constraints? Or, will we in ten years have an Opel investigation report lambasting the entrepreneurs in Magna for trying the impossible under pressures from politics?
Just arrived in Oslo, I asked my colleague over dinner how Norwegian businesses are coping with the global crisis. "Our problem is overheating of the economy", he replied - and had me speechless for a moment. Yet, he wasn't joking. Today's morning press (confusingly called Aftenposten) ran the headline "Immune against the crisis", and the biggest space in the business section was discussing how to save money when celebrating children's birthdays. If you don't have any other problems to worry about, then times must be good indeed.
So, what has been happening in Norway? Aftenposten suggests four factors that explain why the Norwegian economy has been doing well: First, the government budget accounts for a large share of the economy, and that has been stable. Moreover, Norway has a huge wealth fond based on past oil revenues that the government can use in times of trouble. Hence, Norway (contrary to e.g. the U.K.) does not experience an anxiety about tax hikes and budget cuts in the near future, and therefore more stable consumer behavior. Second, interest rates have been cut in line with interest rates elsewhere. Third, the Norwegian currency has depreciated vis-a-vis the euro and the dollar, hence oil revenues translate in more revenues in local currency. Fourth, many Norwegians work in either the government sector (including a growing health sector) or in the oil industry, both providing relatively save jobs. The export-oriented manufacturing industry in Norway has been hit like elsewhere, but due to the strength of other parts of the economy this led only to a mild recession.
My colleague was in fact worried that Norway is experiencing a house price boom now with many characteristics similar to Spain, Ireland and the U.K. before 2007. While economists are warning of the possibility of a substantive housing bubble, "the market" isn't listening ...
News headlines from the Financial Times today:
and, worse, yesterday:
Sad news for the U.K. to receive on the 70th anniversary of start of World War II. May be it is time to forget about past glories and acknowledge that the world economy has changed... If you have been following this blog you are probably not that surprised this news.
France and Germany reported positive economic growth already in the second quarter, as did Japan and many Asian emerging economies. Irritatingly, English-language newspapers all too often add the word 'surprise' when reporting good news from the French, German or Japanese economy. Why that?
If you read British newspapers (including Financial Times and The Economist), you would indeed think that an export-oriented economy, like Germany (and China), or an economy where trade unions have real power, like in France, is doomed. Yet, what what they don't understand is that each economy has a different inner logic, and things just work differently. Such view has been discussed in the scholarly literature on "Business Systems" and on "Varieties of Capitalism", yet these views have been over-shaddowed by mainstream neoclassic economics.
During the current economic crisis, the Germans refused to panic (as they should have, according to British journalists). However, an economic crisis has much less effect on ordinary consumers in Germany than on their British counterparts: jobs are relatively safe, social security provides a net for those who loose their job, mortgages are usually long-term, and housing prices are fairly predictable. Hence, consumption patterns remained fairly stable during this recession. Domestic consumption thus grew as a share in GDP and acted as an economic stabilizer. Moreover, unemployment grew only only slowly - in fact it is now only slightly higher than in the UK, which is quite remarkable given that for a long time it had been much lower in the UK. than on the continent. Of course, there are structural problems in Germany for the long-term, but so far the cooperative model of Europe proves remarkably resilient.
In fairness, I should add the German and French newspapers are likewise gleefully reporting bad news from that outlying island, while underreporting on good news. The other day, I picked up Le Monde at the train station in Bath; it ran a big story about youth unemployment in England; likewise the travails of the British banking crisis are reported in great detail in the Frankfurter Allgemeine Zeitung and the Sueddeutsche Zeitung. My obvious recommendation is to regularly check what the foreign press reports about your own country ... as a reality check!
At the end of summer, it seems that the world economy is over the worst. Most countries have recently been reporting positive numbers in output, sales or business confidence indicators - some earlier than later. The UK is a bit on the slow side, which is not what you would expect if British newspapers were your only source.
Traditional macroeconomics would suggest, of course, that a massive devaluation of the currency is a good way to kick-start an export-led recovery (It was called "beggar thy neighbour devaluation" in the textbook we used 20 years ago). With the Euro and the Dollar being strong, and the British pound loosing 30% last year before recovering 10% this spring, you might expect an export-led growth in the UK. But this argument assumes that you have an export-oriented industry, but in the UK this is rather small. In recent years, the economy has been driven by the growth of financial services and by the property boom, i.e. construction and real estate; neither of which has much potential in the near future. The UK has a few pockets of excellence in for example creative industries (movies, TV shows, advertising), in education related services (capitalizing on English being the global lingua franca), and some technologies - but these industries are too small to pull up the economy, and they face human capital constraints.
Few people I talk to expect the British pound to rise much higher to close the gap that opened with last year's devaluation. Thus, Britain would need quite a sustained higher growth to regain its position in the European income league tables. It is hard to see that happening. This is good news for some - such as students heading for education in the U.K. - but not for everyone.
Yet not only students, also headhunters are heading for the UK. Just in the last couple of days I heard about U.K.-based professors having accepted positions elsewhere. While the U.K. has been quite successful over the years in attracting foreigners to fill leading roles in business and science, the tide may be turning. Salaries are now much less attractive for people whose main base is in continental Europe, North America or Australia, and large government budget cuts are expected hurt quality of life in various indirect ways.
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