London, Asharq Al-Awsat- In a world full of gathering storm clouds and uncertain weather, I hope the sun will continue to shine on each of you as you journey through an eventful 2012.
The topic for debate this week seems to be how Greece would leave the euro. The true answer is that no-one knows for sure because it would be unprecedented. There was no legal mechanism put in place for a country to exit the eurozone when the single currency was created. I will leave that to the many thousands of other commentators that will be speculating on this right now to give their opinions and I will say no more on the subject. So whilst the Eurozone problems manifest themselves we have to remember there are other things happening. My good friend Andrew K.P. Leung, another Visiting Professor at London Metropolitan University Business School, wrote to me this week from Hong Kong. His note read, “On the European front, things have not looked so gloomy for many years, but neither are the BRIC countries (Brazil, Russia, India and China) immune. In particular, China’s economic engines seem spluttering on all fronts.” Andrew is an international and independent China Specialist and considered to be well informed in such matters.
The question that the editors at Asharq Al-Awsat asked me this week is, “What should governments do next?”
To start with it is important not to oversimplify the problems facing the world. They did not happen overnight and they will not be solved without huge amounts of hard work and determination. It is also important to realize that there are three parallel crises all working at the same time here. They are a banking crisis, a sovereign debt crisis and the severest one a competitiveness crisis. The first two can eventually be fixed but the last one of the three will take a lot longer and will require a lot more honesty from politicians.
Governments should work very hard to put in place the best possible environment for private sector enterprises to flourish. They have to help the private sector to grow, to become more productive and to encourage economic activities that take advantage of each country’s comparative advantage. What government must do is to establish a programme of lower taxes and deregulation, repeal as many unnecessary employment laws as possible, and work together to give the world economy the one big stimulus that would really make a difference: an expansion of trade freedoms. It is also important for governments to maintain a strong deficit reduction plan.
According to the British Prime Minister: “Even with the election of a Socialist president in France, he’s actually said, ‘how am I going to stimulate the economy, I’m not going to do it through extra public spending, because actually we’ve got to cut back on that.”
The bottom line is that austerity fails if there is no productivity; productivity cannot happen without re-allocation of investment into sectors where a country can develop comparative advantage. In a mixed economy, that does not happen without co-ordinated government and private sector leadership focussed on economic redevelopment, with a political and a cultural commitment to institutional (rules of the game) reform – those are the regulatory, tax, etc environment.
There is also the problem of inflation and much of that is a direct result of food and energy costs. So in addition the west must renew its joint efforts to support growth, financial stability and energy security.
In my first article in March this year I suggested that one of the core elements of any successful economy is its small and medium sized enterprises (SMEs). I have in past articles suggested that domestic private sector organisations operate in a wide array of services and are seen as society’s entrepreneurial response to developing and providing new services. The regulatory regime should be enabling and should not threaten their growth. That is the first and foremost thing that governments can do. The second is to make mandatory terms that SMEs are paid on time and in full as their survival often depends on cashflow and the truth in many countries is lamentable on this score.
Many government actions involve the tax code: tax credits that reduce moving expenses when companies bring jobs back to their own country; a permanent tax credit for R&D; and a reduction in the corporate tax rate. These are government policies intended to improve the business climate for manufacturers; programs to encourage people to develop skills useful for manufacturing jobs, especially through community college education; and funding for new regional technology-development test beds such as Manufacturing Innovation Institutes. Governments should include more incentives for business investment; better worker training on the part of companies, not just within the education system; and continued innovation by local firms.
There has been recent talk that “spending” could replace “austerity” as a way out of the crisis. That’s perhaps more aspirational than practical. We have to decide whether we are going to again have programmes for growth which are on the back of debt, or whether we are going to have programmes for growth that are sustainable and indeed rely on countries’ competitiveness.
At a more macro level and the subject of better worker training on the part of companies there is much available here on Britain that is available to Middle East organisations. For example, whilst there remains a very big demand from the Middle East to buy top quality London hotels, and this is good, there should also be an emphasis for the younger members of Middle East society to learn more about how to run and ‘start up’ hospitality, tourism and leisure facilities effectively. Governments can encourage these service industries and the vocational training that is essential to them.
The new generation will need even higher levels of skills than their parents in a global world increasingly dominated by hospitality as a first level employer. London Metropolitan Business School, where as you know I am a Visiting Professor, is focussing on both the customary finance and management post graduate degrees and also those that are both academic while vocational – those that will be essential for sustainability in the future modern global world. LMBS offers excellent masters degrees in the business and management of the hotel and restaurant industry with the option of work experience in London in a leading world city for the hospitality industry. The hospitality industry needs lawyers, marketing/PR/Sales, HR, financiers/accountants and entrepreneurs who all need to understand this service sector. There are excellent careers for those with the best knowledge.
I think this demonstrates that there are government actions and also individual company actions to be taken. Too many countries including Britain rely too much on hard-working skilled immigrant workers. People need to gain appropriate skills and thereby allow countries to rely less on willing immigrant workers; and governments need to urgently embark on programmes of lower taxes and deregulation. Both add up to ways of addressing the most difficult problem; the competitiveness crisis.
John Davie is a visiting professor at London Metropolitan Business School and chairman of Altra Capital