Flexible Tiger Lives by Law of the Economic Jungle Jan 98 Economist
This article illustrates how naive ecosystemic ideas pervade competitive free-market thinking. In fact, the only ecosystemic ideas in the picture are tiger, jungle and the idea that no government deregulation of the birth, competition and bankruptcy of businesses fosters a lean mean 'round of selection'. The genetic principle is completely absent. The notion of 'flexilibity' illustrates just how far current economic thinking has to go to even begin to have a scientific ecosystemic analogy in the crudest sense.
Asia's string of fincial crises has exposed the fact that the fast growth of many companies has depended critically bn easy money. The ready availability of bank loans, often extended at government behest and at attractive interest rates, allowed Indonesia's nascent conglomerates and South Korea's chaeboll to pursue market share and expand into-new fields without worrying about rates of return. In Thailand and the Philippines, fixed exchange rates made foreign-currency loans look cheap, But when the crisis came and the easy money dried up, debt-laden companies were quickly mired in financial trouble. Their restructuring will mean redundancies and plant closures, which will make the economic situation all the more serious. One of Asia's so-called Tigers, however has fared far better than the rest. While Korea and South-east Asia are struggling , Taiwan has so far escaped with a small currency devaluation and a really modest decline in share prices. Economic growth remains strong. Working out,why Taiwan has out perfromed its neighbours will keep economists busy for years to, come. A light foreign-debt, burden is one likely explanation. Better banking regulation is another. A third probable cause of Taiwan's success is more controversial: by having a more flexible economy than some other Asian countries, Taiwan may have been better positioned to withstand the storms. Exactly what does flexibility mean? A new paper by Bee Yan Aw and Mark J. Roberts of Pennsylvania State University and Xiaon-tin Chen of the World Bank, offers a partial answer. One secret of success, they suggest, is that Taiwan makes it easy for new companies to get a start and for old ones to fail. Start-up companies, they find, have a key role in the most unlikely industries. Chemical manufacturing, for example, is widely regarded as a business where the need for huge capital spending gives an advantage to big, well-established companies. And yet in 1991, 40 per cent of Taiwan's chemical output came from chamical output came from companies that did not exist in 1986. One-third of the value of Taiwan's plastics production and half its output of fabricated metal products were also attributable to firms less then five years old.
The newcomers, it seems, establish their place in the market by forcing old-timers out of business. Firms that had accounted for 58 per cent of Taiwan's chemical production in 1981 had left the business by 1991. In other sectors, including ones which were expanding rapidly overall, the carnage was even worse. Four out of five firms that manufactured clclothing, metal products, textiles and plastics in 1981 either closed or changed lines of business over the next decade. This creative destruction spurs incumbents to stay trim and helps spread new skills quickly. As the successful entrants tend to be more efficient than firms that die, they boost productivity across the economy.
Between 1986 and 1991, total factor productivity - the increase in output due to more efficient use of inputs such as labour and capital - in Taiwan's electrical-machinery industry rose 23.6 per cent. More than a third of that, the researchers estimate, came from new firms pushing out less efficient ones. In the chemicals industry, where productivity growth was slower, a huge 3/5 of the gain was due to the of highly efficient firms and the exit of -stodgier ones. These impressive figures probably understate the impact of Taiwan's sink-or-swim attitude toward business. The ease with which companies are born and fail is clearly one reason why Taiwan's productivity has iraproved faster than that of all other Asian countries. From 1984 to 1994 only Thailand had a better record. How has Taiwan succeeded in stimulating so much new business formation?
In earlier decades, the Taiwanese Government used directed lending and import protection to foster domestic manufacturing. But as these policies have receded in recent years, lowered trade barriers have forced manufacturers to face vigorous competition domestically and to seek markets overseas. This is directly related to productivity growth: the authors find that firms which export tend to have higher productivity than those which do not. Taiwan's policies differ from those of some other Asian countries in another important way. The Taiwanese legal system puts relatively few obstacles in the way of bankruptcy. This encourages investors, lenders, workers and managers to act prudently, because they know that the consequehces of bad decisions may be fatal for them. It has also made entrepreneurs accustomed to starting again after their ventures collapse. Failure is no sin. Manufacturers appear to shape their strategies in response to these pressures. In particular, many Taiwanese compannies deliberately seek to minimise irretrievable expenses or, as economists call them, sunk costs. Firms tend to cluster in less capital-intensive industries and to subcontract the production of many of their components. That means they do not need to spend much on fixed assets such as machinery, which, in any case, can easily be sold off to rivals if a firm goes out of business. Many Taiwanese companies have also chosen to be suppliers for other firms, often in America or Japan, rather than developing brands of their own. This reduces the need for expensive advertising and research. Taiwan is by no means immune from the broader forces that have afflicted all of Asia. Its stock market has fallen 7 per cent since October, and its currency, the New Taiwan dollar, is off 12.5 per cent against the American dollar. And the even larger exchange-rate devaluations in countries such as South Korea and Malaysia will undoubtedly put many Taiwanese firms under pressure. But its history of allowing troubled businesses to die and new ones to spring up should make it easier for Taiwan to adjust to turbulent times.
From: Focus on the Corporation:
Exxon merges with Mobil. Citicorp marries Travelers. Daimler Benz gobbles up Chrysler. BankAmerica takes over NationsBank. WorldCom eats MCI.
Corporations are getting bigger and bigger, and their influence over our lives continues to grow. America is in an era of corporate ascendancy, the likes of which we haven't seen since the Gilded Age.
Charles Derber, a professor of sociology at Boston College, believes that, contrary to the lessons our civics teacher taught us, it is undemocratic corporations, not governments, that are dominating and controlling society.
In his most recent book, Corporation Nation (St. Martin's Press, 1998), Derber argues that the consequence of the growing power of giant corporate multinationals is increased disparity in wealth, rampant downsizing and million dollar CEOs making billion dollar decisions with little regard for average American.
A couple of years ago, Derber wrote The Wilding of America (St. Martin's Press, 1996) in which he argued that the American Dream had transmuted into a semi-criminal, semi-violent virus that is afflicting large parts of the elites of the country.
That book tried to call attention to the extent to which violent behavior could be understood as a product of oversocialization.
"The problem was not that they had been underexposed to American values, but that they could not buffer themselves from those values," Derber told us. "They had lost the ability to constrain any kind of anti-social behavior -- because of obsessions with success -- the American Dream."
By anti-social behavior, Derber means the epitome of Reaganism -- "a kind of warping of the more healthy forms of individualism in our culture into a hyperindividualism in which people asserted their own interests without regard to its impact on others."
At the time, Derber was interviewed on a Geraldo show about paid assassins -- people who killed for money.
"It was scary to be around young people who confessed to killing for relatively small amounts of money -- a few thousand dollars," Derber said. "They said things like -- 'you have to understand, this is just a business, everybody has to make money.' I pointed out on the show that this was the language that business usually uses."
At the same time, Newsweek ran a cover story titled "Corporate Killers." On the cover, Newsweek ran the mug shots of four CEOs who had downsized in profitable periods and upped their own salaries.
"These corporate executives tended to use the same language as the paid assassins on the Geraldo show, 'I feel fine about this because I'm just doing what the market requires,'" Derber explains. "I develop an analogy between paid assassins on the street and those in the suites. In the most general sense, these corporate executives are paid hitmen who use very much the same language and rationalization. I argue that corporations are exemplifying a form of anti-social behavior which is undermining a great deal of the social fabric and civilized values that we would hope to sustain."
With the hitmen parallel fresh in his mind, Derber began writing Corporation Nation. In it, Derber points to the parallels between today and the age of the robber barons 100 years ago -- the wave of corporate mergers, the widening gulf between rich and poor (Bill Gates' net worth (well over $50 billion) is more than that of the bottom 100 million Americans), the enormous influence of corporations over democratic institutions, both major parties bought off by big business, and a Democratic President closely aligned with big business (Grover Cleveland then, Bill Clinton today).
One big difference between then and now: back then, a real grassroots populist movement rose up to challenge corporate power, though it did not succeed in attaining its core goals.
Today, while there are many isolated movements challenging individual corporate crimes, there is no mass movement attacking the corporation as the cause of the wealth disparity, destruction of the environment, and all the many other corporate driven ills afflicting society.
Derber, a professor of sociology at Boston College, says that when he asks his students, "Have you ever thought about the question of whether corporations in general have too much power," they uniformly say they have never had that question raised.
Derber says that one good way to again build a populist movement to attack corporate power is to study the language and tactics of the populists of 100 years ago. He has, and he makes clear in his book that the original conception of the corporation was one of a public -- not private -- entity.
We the people created the corporation to build roads, and bridges, and deliver the goods. If the corporation didn't do as we said, we yanked their charter.
The corporate lawyers quickly got their hands around that idea, smashed it, and replaced it with the current conception of the corporation, a private person under the law, with the rights and privileges of any other living and breathing citizen.
Thus, a quick transformation from "we decide" to "they decide."
Derber is a bit too modest to say it, so we will: perhaps the best way to rebuild a strong, vibrant and populist movement is to get this book into the hands of people who care about democracy. The corporations have us on the run, but we should pause for a moment or two, find a quiet place, and read this book.
Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor.
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