The last six months have challenged the hitherto unquestioned faith in capitalism and free market supremacy. Among the sometimes provocative opinions on this subject, stands outSupercapitalism, a new book by eminent American thinker, Robert Reich who teaches at the University of California at Berkeley.
Reich makes the point that until the 1970s, there existed in the US, a moderate variant of capitalism where employees and unions, government and companies worked together, often behind the scenes, to ensure the avoidance of socially disruptive change.
The price of stability, was limited product innovation, considerable regulation (think airlines, banks, telephones) and thinly veiled oligopolies supported by national governments. In this golfing variant of today’s competitive environment, CEOs luxuriated as corporate statesmen. Some went so far as to suggest that their work was fully aligned with the national interest, notably GM’s post-war CEO, Charlie Wilson, who memorably stated that what was good for GM was good for America. In return for all toeing the general party line, wealth sharing was more egalitarian, employee benefits were generally higher and regulation was managed to avoid too much competition.
This moderated capitalism created a society which included a large middle-class, suburban communities, a social security programme and a few great companies encouraged to invest in their people and communities. This balanced version of capitalism was instrumental in creating the foundation for US economic power.
Things have changed. A number of technological changes have intensified global competition. These include cheap container ships, the expansion of satellite and optic fibre, and the equalizing character of the World Wide Web, all of which have allowed the creation of global supply chains.
Barriers to entry have also fallen, as scale economies, once the cornerstone of economic success, are offset by the use of relatively cheap technologies. Corporations now live entirely at the pleasure of their consumers.
In parallel, opportunities to invest have grown. Since 1974, when the Employee Retirement Income Security Act in the US was passed, allowing pension funds and insurance companies to invest in the market, and 1975 when the US Securities and Exchange Commission ended the regime of high fixed trading commissions, the daily volume of trading has grown over 30 -fold. More citizens are a part of the investing community and their interests aligned with the stock market.
Companies which could think of multiple stakeholders such as local communities, charities, environment, unions, and the like, now have only two masters, their customers and shareholders. The CEOs who value their country club, skiing at Vail and the myriad attractions of the company jet, are unlikely to think of any stakeholder but shareholders and customers. CEOs are important persons and the content of national debate on most issues is therefore judged almost exclusively by whether the outcome benefits investors or shareholders.
Without doubt, in a democracy, citizens in their capacity as consumers and investors represent important constituents. However, citizens are not only investors and customers. They also remain part of various other interest groups (the unemployed, small business, environmentalists and commuters). For any nation, a single-minded focus on the interests of one or two groups would seem iniquitous. The risks of such a unidimensional focus are mitigated, if as is the case in the US, most citizens belong to the consuming or investing classes. The benefit to citizens, from being the recipient of the corporate sectors unswerving dedication to investors and customers, generally outweigh the disadvantages of having their voices in other capacities drowned out. Fortunately for the US, two generations of soft capitalism has gradually allowed almost everyone to be a consumer or investor.
Such a situation does not exist in India, at all. India has, leapfrogged the softer variant of capitalism entirely. Its corporate structures and financial institutions resemble those of Western democracies today. Competing in a global environment, Indian companies no longer have the liberty to focus on anything but their customers and shareholders. Thanks to this single-minded focus, consumer and investors have, since 1991, had their voices heard like never before. Companies have cut costs and jobs to increase efficiencies. Laws that have hobbled growth, capital flows or investment are changed at short notice (by and large). Most recently when the credit crunch hit upon the country in October 2008, the consuming and investing class, spoke with their feet, and intelligent measures were taken swiftly to ameliorate the problem. Although responsivity to consumers and investors is a good thing, it now seems to drown out all other voices.
For a country whose percapita income at purchasing power parity is still less than 10% of that of a US citizen and where fewer than 5% of the population have ever invested in stocks compared with the US where at least half of households own stock, it cannot makes sense for such an unbalanced public policy.
Consumption and investment, those visible elements of the urban ethos, are really far less entrenched in our society than we believe and appear to garner an out of proportionate share of the national debate. Little is heard of the need for the creation of public goods to provide the kind of equal opportunity which makes the US dream possible for all but we have seen extensively discussions on bailing out certain sectors. There is far less discussion on the unconscionable human potential lost through unemployment among millions than the angst shown in the political establishment over the firing of pretty air hostesses.
On behalf of those who had jobs once and or were laid off in a downturn, one hears no voice asking for a safety net, although the sounds of those clamouring for duty cuts are heard loud and clear. For small entrepreneurs needing cheaper interstate transport there is not the same alacrity of response as when the currency appreciates making some exporters uncompetitive. For rural customers who may need access to financial and insurance products to garner the courage to take the risks that also bring reward, one sees no subsidy although there are mind numbing deliberations in the media on arcane elements of the new companies bill.
Without suggesting that investor and consumer reform should be held back in any way, all corporates recognize the relevance of changing the character of the public debate in the direction described above.
Moving on those economic dimensions which do not necessarily provide immediate benefits to shareholders or customers will create the institutional plumbing, on which, the larger economic framework stands. There are dozens of other such issues, all of which are needed for a second wave of reforms to succeed.
Reforms turn 18 this year. Coming of age in a year of unprecedented economic challenge, citizens have to introspect, about the path they have chosen. By any yardstick, Indian reforms have been an unprecedented success with dramatic changes in the standard of living of millions of households.
But these benefits have generally gone in an asymmetric manner to consumers and shareholders, while many others, perhaps two-thirds of Indians, wait for a say. As customers and investors our voices have been heard for 18 years. Perhaps it is time to be heard as citizens.
As we head into an election, one hopes that the voice of Indians as multidimensional citizens will dominate the debate and the choices we make. Only then can we see another 18 years of 6% growth.
Govind Sankaranarayanan is CFO, Tata Capital Ltd. He writes on issues related to governance.The views expressed in this column are personal. Write to him at firstname.lastname@example.org