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Dennis Jones is a Jamaican-born international economist, who has lived most of the time in the UK and USA, and latterly in Guinea, west Africa. He moved back to the Caribbean in 2007. This blog contains his observations on life on this small eastern Caribbean island, as well as views on life and issues on a broader landscape, especially the Caribbean and Africa.

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Friday, December 05, 2008

Change We Can Believe In.

The current series of financial problems that are hitting many parts of national and international economic activities are bringing with them a series of hard questions that will be difficult to answer to every one's satisfaction. That is nothing new. But, when economic difficulties spread it is often hard to separate emotions from other aspects of reality. Most people would not volunteer to be without an assured and regular income, so when that is threatened the level of personal fear and concern usually rises to very high levels. We are seeing a lot of that fear in most of the world as the impact of financial crisis and slower economic activities put on a pincer movement that is squeezing the delicate parts of many countries, many companies and many people.

I have been asked recently about my views on government "bail outs", from the measures to save financial firms to the latest request for government help by the US automobile manufacturers (see New York Times report on Congressional hearings). I believe that private companies, especially those who deal with the buying and selling of risk, should resolve their problems without being saved by governments. In the case of the car industry, they should face bankruptcy, and use the provisions of that process to restructure themselves. I have real concerns about people losing their jobs. I have been there and done that a few times in my life--most galling was losing a job offered by the Bank of England before I even started working: a change of government eliminated a range of the Bank's work and it was easier to absorb some of the job losses by not hiring. That was a real smash-mouth experience, and luckily for me at the time, I had not actually resigned the position I held working in local government in Wales. I was quite devastated for a few month, but regrouped and used the compensation to provide a basis of savings. (I got a job offer from the Bank the next year, so I got where I wanted to be.) I have recently volunteered to resign from my employer of some 20 years and am going through another period of personal restructuring.

I would hope that my concern is a normal human response. But other responses exist and some are blatantly political or calculating. I know that if the employees were to lose their jobs the initial repercussions would be immense and negative on them, their families, and their communities. Things may never be the same again. But nothing lasts forever. Change never comes from simply holding on to what you have without thinking about how it can cope in the future. Making quill pens is not going to be the big industry in 2008 that it was centuries ago; the market that now exists for them is as exotic items not necessities.

My basic belief is that economic progress has always been about industries failing and new industries coming into existence: I wrote a thesis on this and the essential element of birth, death and reorganization of firms is as normal as night and day. The car industry replaced those activities that produced other forms of transport: horses and buggies had to find other takers. I loved the movie 'Ben Hur' and would have preferred to live in a world where we moved around in chariots: road rage was easier to deal with then, when you could really take it to others on the roads with swords and all sorts of means of damaging their vehicles and horses. So, I could be one person who really regretted the advent of the motor car.

But, I do not see a world where cars and trucks are not made. The questions are by whom, where, what kind, etc. I am not going to get all frothy about cars being made by Chinese, Koreans, Japanese, etc. They may be better at it, and if one option were for the Big Three to be merged or be taken over, then that could be the right solution. Jobs may remain, but not with people wearing GM or Ford apparel; that's largely what happened to the British car and motorcycle industry. Who remembers the Birmingham Small Arms (BSA) Company? They began in the 1860s making munitions, turned to bicycles in tee 1880s, went to making motor cycles in the 1900s, and at its peak, BSA was the largest motorcycle producer in the world. Competition from Japan in the 1960s started BSA's demise, and after a merger with Norton Villiers in the early 1970s, the company basically disappeared from making motorbikes. In the 1990s a group reformed the company and now it has a large spares business and has produced a number of limited-edition, retro-styled motorcycles.

Those who have headed the major US auto makers have shown that they do not have the right approach at the current time. The whole discussion becomes political very quickly--more so when recession and financial crisis are on every one's lips, but one has to look at the core of the problem. The cars produced have been for too long ones that consume too much of a resource that we know is running out; when it is cheap we easily forget that, when it is dear we try to swallow the pain of the higher price but continue consuming regardless. Cars should have been produced in the USA that can go for 70-100 miles a gallon or use a fuel that is more easily renewable. Resources should have gone into developing such vehicles decades ago. Change has been too slow, and the consequence of that will inevitably be failure.

The major US airlines went into bankruptcy, and after several years of restructuring are still in business and operating differently.

The US car makers have fought fuel efficiency legislation for years, rather than showing leadership and putting forward more aggressive proposals for cars to be fuel efficient; nickling and diming.

Also, if you rescue the auto industry who do you rescue next? There may be a case for looking carefully at how the industry or parts of the industry fit into the overall economy so that if the companies have to restructure one has a clear idea of what that may mean for existing commercial and financial relations. That was one of the failings of letting Lehman Brothers fail; it could have happened but perhaps more slowly or in a more orderly manner. Because it was chaotic, that led to other problems. There is no reason why the car industry need to descend into chaos.

Just today, The [London] Times reports that the current credit crisis has forced Honda to pull out of Formula One racing (see report), saving itself £200 million per year. Now, whether or not you think that this is a good sport, it shows that adaptation has to and does occur. But, what gives and how is also about priorities. As the report notes, this "deals a huge symbolic blow to the company’s image and could plunge the sport into crisis" [my emphasis]. The symbolism is not trivial but it's also not substantial. That is part of the problem facing the US car industry.

The US has gone through major industrial shake ups over the past 50 years, and some areas have been hit very hard. The steel making areas, now unaffectionately called "the rust belt" are perhaps the most evident for people to see. As I mentioned, the airlines too.

But companies form, reform, dismantle themselves, get reassembled. Look this week at British Airways and Qantas in yet another reorganization in the airlines industry.

When I worked in Wales, my first job was to restructure public bus services: that was simply a matter of reducing drastically the services available to towns and villages in north Wales. Populations had changed in size and had relocated, and the service schedules did not reflect the new realities. For many communities, the regular bus services was an important life line, whether the services were very frequent (say hourly) or less so (a few days a week). I had to deal with seeing the major bus company cut its services; that was the immediate negative. I then had to negotiate how services could be retained, at different levels and by different suppliers. Small, private bus companies existed and many of them bid to replace the major bus company or combine with them to come up with a new set of service schedules. Sure, there was anger, disappointment, accusations of uncaring attitudes, etc. Yes, we made attempts to explain the economic and social changes that were prompting the changes. Bottom line: services were pared overall, but a service was maintained everywhere that one had existed before, in some cases using 15 seat minibuses instead 45 seater coaches. Certain essentials were protected, such as services geared to dealing with journeys to school and work.

Car makers today need not be car makers tomorrow. In the same way that Wales was a country built on coal mining, steel making, and then shipbuilding in recent years, as these industries faced economic woes, the industries shrank and closed. People lost their jobs: I know first hand how that affected communities because I lived in Wales during some of the years when coal mines were being closed. Many of my friends were miners or in mining families and it was hard. But the economy was also changing. Wales was looking to attract new industries, car making, services especially in new technology sectors, and others. The changes were such that a generation of workers had to deal with their skills being obsolete; they retrained, remained unemployed, moved to other areas, did many things. Wales now has a different stronger economy.

My other view is that, if the car makers have a viable plan then the market for private financing should be tapped to come up with the money. The fact that that is not happening tells us several things.
  • The current credit crunch might have occurred at the worst time for the car makers, but it's also a bad time for the whole economy.
  • They initially came begging with no worked out plan, and now have some numbers, but do they make real financial sense?
  • They may only want to ask for help when they face losses, but where are they to share their gains?
Heavy industry was once a mainstay of many economies. They had largely been in decline over the past century but are still very apparent. Services are now more important and diverse manufacturing activities exist. Manufacturing has diversified, for example, making car components. Farming remains important. The continuous decline in heavy industry (coal mining, iron smelting, steel making) over the 20th century, culminating in the virtual disappearance of industries such as coal-mining in Wales during the 1980s, left that country with very high levels of unemployment. But, it's part of a cycle.

Admitted, when one is not directly affected, it may seem easier to appear accepting of the kind of job loss and economic reshaping that lies ahead for the US. However, I was discussing over breakfast a few moments ago what has happened in the small world of my former employer, the IMF. Over recent months, it has allowed a large number of staff to leave and in the process allow early retirements and voluntary redundancies. It was a shocking and depressing exercise for many. Yet, several months later, after the world was adjusting to a need for a slimmer institution and representative offices in various countries were closed, talk is strong of the need for new staff and to reopen some of these offices. True, those such as myself who have left are not likely to make up part of any restaffing, but there are now openings at various levels for other people. Perhaps some of those financial experts in Wall Street will make the journey down Interstate 95 from New York to work in Washington. So, the economic wheel turns.

The change will not be easy and not without pain. But so often, by avoiding the pain and hardship now, all that is done is to pass those on to the future.

2 comments:

Caroline said...

Excellent! Fully agree! Short-sighting, resistance to change, irresponsible corporate governance and, in Europe, what I call a certain “mentality of assisted” (focus on my rights only and little on my responsibilities) … some of the devils.

Daphne said...

Great article - blog or whatever! That makes so much sense - so, why aren't the people in the industry getting it? You are so good at seeing the whole picture. It seems like most people (even those it is their job to know) only see a bit here and a piece there, so all the efforts are putting out little fires all the time and never fixing the big problem that is causing the fires in the first place! You need to send this article to Washington!