Monday, July 21, 2014

Synthesis of the old and the new: General Electric’s Immelt shows the way;

 
 
“Capitalism is by nature a form or method of economic change and only never is but never can be stationary. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation  that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in”.( Schumpeter Joseph, 1942.  ‘Capitalism, Socialism and Democracy’, London: Routledge. pp. 82–83).
 
These words of the great economist, Joseph Alois Schumpeter, have a searing resonance in the contemporary world. The past couple of decades or so have witnessed creative destruction in almost every sphere of commerce, industry and society. Think of a prosaic product or service like the postal services and letter writing. Both have become redundant and have been supplanted by the internet and emails. Industrial and business organization of the past –for example, the top down and top heavy, hierarchical firms- belong to a past which is receding into distant memory.  The new mantra has been lean, flat, decentralized organizations, vertically decentralized structures where the boundaries of the firm, in the classic formulation of another great economist, Ronald Coase, have become blurred. The contemporary industrial and commercial landscape is littered with instances of creative destruction.
 
The question is: Does creative destruction, to use the phrase coined by the business guru, Andy Grove, make only the paranoid survive? That is, does the phenomenon totally destroy the old and create the new, repeating the cycle, ad infinitum? No, appears to be the answer, if the trajectory of the behemoth, General Electric, is held to be the yardstick.  The diversified conglomerate  focus on financial engineering during the pre-2008 crisis and the ‘roaring nineties’ is gradually giving way to a refocus on the ‘nuts and bolts’ or widget making businesses, in plain vanilla terms, complemented by software making and integration of technology into its businesses.  The behemoth’s acquisition of the French engineering group, Alstom and the attendant rejig and focus on what the group calls the ‘industrial internet’ suggests this. The ‘industrial internet connects physical machinery to a digital network.( see The Economist: http://www.economist.com/news/business/21605916-it-has-taken-ges-boss-jeffrey-immelt-13-years-escape-legacy-his-predecessor-jack).
 
The dot com ‘mania’ of the nineties led many to believe that a ‘knowledge economy’ or a ‘new’ economy would supplant the ‘old’ one. This ‘new economy’ was alleged to give short shrift to economic fundamentals, economic logic and would , some held, even make the business cycle-the contractions and expansions in the level of economic activity and an intrinsic feature of capitalism- redundant. ‘Widget making’ was passé; the new fashion was anything and everything pertaining to the internet, computers and communication technologies, many believed. Bits and Bytes supplanted bricks and mortar, so to speak. The lessons of economic history were ignored and businesses, consumers and even governments, to an extent, went on a manic binge. This ethereal atmosphere was punctured with the onset of the bust. Economic and financial reality hit severely bringing back a semblance of sobriety and repose back into the markets, market participants and the world of commerce.
 
Many business, consumers and economies, as is the wont, suffered. This was the price that was paid for what has been termed as ‘irrational exuberance’ and whose parallel could be the ‘tulip mania’ of yore. As sobriety and common sense sunk in, people realized the importance of the ‘old economy’. Not that the knowledge economy was discarded entirely but a new synthesis appeared to be arrived at that integrated the old and the new. General Electric’s refocus and reorientation may constitute a classic example of this. The old and the new then co-exist till a new mean and normal is found.
 
Does this carry lessons for economic and industrial policies and development paths of developing countries? Yes. Poignant ones.  Essentially, economic and industrial development in the contemporary world means a synthesis of classic bricks and mortar industries and the new information ones.  This holds true for both the developed and developing countries like India which have latched onto the IT sector and ICT development as the new frontier. Competitive advantage may be the new, fashionable buzzword in policy and academic circles but comparative advantage has not lost its salience. Countries should specialize in areas where they have a comparative advantage and at the same time proactively develop their information and technology infrastructure. In other words, synthesis of the old and the new  should be the focus of companies, industries and economies. This may be the most important lesson of General Electric’s acquisition of Alstom and the attendant refocus.  Prudence dictates that this development be paid heed to and factored into policy making.

Osborne and Hague Visit: the Saxon’s last sigh?

 
 
Britain’s foreign secretary William Hague and its Chancellor, George Osborne are in India. The purpose of the visit obviously is to boost ties between Britain and India. The visit comes after a landslide victory for the Modi led BJP and the anointment of Mr. Modi as India’s prime minister. Britain and India share deep historical ties: India was a British colony-albeit an important one so much so it was held to be the ‘jewel of the crown’ in colonial Britain’s possessions. It is from the yoke of British colonialism that India attained independence. While colonialism was bad-morally and ethically- it is held by some that India owes its post independence institutional configuration and the deep imprimatur of democracy to the legacies left by what was called ‘Great Britain’.
 
Alas Britain is not great anymore. Gradually and inexorably, British power, prestige and position have waned.  Britain is no more the power it used to be. It is a shrunken shell which may even shrink further if the Scots opt for outright secession or independence from the ‘mother’ country in the referendum slated to be held later this year. A whole host of reasons account for the country’s decline and weakness. Structural changes in world politics and the global economy, the bipolar structure of world politics after the Second Great War, the revival of Europe, and contemporarily globalization and the putative emergence of a more multipolar world are some of the salient ones.  Even Britain’s so called ‘special relationship’ with the United States did not count for much. (Apart from support in the United Nations on issues of salience to the United States- for which Tony Blair was lampooned as a ‘poodle’-, intelligence sharing and some degree of military support to the United States, British support was mostly rhetorical).
 
Perhaps the most important factor that explains British decline is the lack or even loss of will to be a player, in its own right, after decolonization and the Second World War British was exhausted and drained. And it has never really recovered. The country could not re-invent itself as a player (state) of some reckoning in a decolonized world of mostly free and sovereign states. British insipidness does not appear to accrue from post imperial political decay , as was the case with the Ottoman empire or other imperial metropoles that were relegated to the dustbin of history. Rather, at the risk of repetition, it was because of structural factors and the loss of will and confidence by the British.
 
After the Cold War, the country tried a novel tack to carve for itself a niche in international relations and the global economy. It marketed itself as ‘ Cool Britannica’ and generated for itself competitive advantage by transforming London into a hub of global finance and banking. It achieved a degree of success in this but the financial crisis of 2008 threw this paradigm into a tizzy. In the domain of international relations and politics, it latched onto the United States and approved of every misstep that the sole superpower took. Under this patina and veneer of international relations dominated by the United States and a unipolar world, profound structural changes were occurring. The centre of gravity of economics was gradually moving to the East, emerging powers were stirring, the country was stuck in Euroskepticism and the contours of a more multipolar configuration of power could be discerned. Politically, instead of the End of History where a democratic and liberal nirvana was predicted, authoritarianism has not died; it has made a comeback. China is held to be a competitor to the United States; India an emerging pole of power along with the BRIC’s. All in all, it is even held by some that the West is in decline.
 
This is the world that Britain finds itself in and has to operate in. Can the country rebound?  Will the India visit by Osborne and Hague do the trick? Unlikely is the answer.  The reasons again are structural. Too much water has passed under the bridge for Britain to make a vigorous comeback. The world has moved on and there is talk of general decline of the West-politically and economy. The India visit may draw some form and quantum of investment into Britain and vice versa. However, this would amount to a trifling which would not make much of a dent in the political economy of both countries. India would stand to benefit more; a demonstration effect of world leaders making a beeline to India would boost India’s image. This may also generate pressures and momentum  for fourth generation reforms in India.
 
Is Britain doomed? Not really. It may, in the final analysis, be prudent for Britain to ‘look East’’, so to speak, and leverage its diasporic connections with most of the world and build a different profile for itself. This does not mean disavowing the United States but rather balancing and leveraging Britain’s strengths proportionately and crafting both a domestic and foreign policy that speaks to the needs of the times. The world has and is changing; the speed and scale the transformation is stupendous. It calls for radical departures from the past and , in the least, attempting to catch up. A new and bold paradigm is needed by Britain to reclaim for itself space that it forfeited after decolonization. Delaying this would be at the country’s peril.