Tighten regulations without affecting growth

Tighten regulations without affecting growth
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First Published: Mon, Dec 15 2008. 09 38 PM IST

The way forward: C.K. Prahalad at the Indian School of Business, Hyderabad, on Saturday. According to him, American consumers must save whereas Indian consumers must spend to keep their economies goin
The way forward: C.K. Prahalad at the Indian School of Business, Hyderabad, on Saturday. According to him, American consumers must save whereas Indian consumers must spend to keep their economies goin
Updated: Tue, Dec 16 2008. 04 48 PM IST
Hyderabad: One of the world’s leading management experts, C.K. Prahalad, expects the global economic slowdown to provide an opportunity to evolve global standards on reporting corporate operations and risks. Speaking on the sidelines of the International Conference on Strategic Innovation in a Flat World at the Indian School of Business, Hyderabad, he says governments will have to ensure credit availability and eliminate regulatory hurdles, without loosening supervision on companies. He also recommends more savings for Americans and more spending for Indians. Edited excerpts:
What are the reasons the US economy failed and its global impact?
The way forward: C.K. Prahalad at the Indian School of Business, Hyderabad, on Saturday. According to him, American consumers must save whereas Indian consumers must spend to keep their economies going. Bharath Sai / Mint
There are three or four basic reasons. One, financial products became increasingly complex. And therefore, the system’s interdependencies increased... If something falls, what that dipping point is, and therefore, what implications it will have on the total system, could not have been predicted easily.
The second, the desire to grow allowed companies to provide mortgages that created growth but did not have the normal checks and balances of credit checks and ability to pay cheques and so on. So, we created a whole system of growth without the underlying risk profile clearly understood.
Third, executive compensation was narrowly focused on growth, market capitalization and current profitability—almost to the point of instancing extraordinarily bright people to look very narrowly at what they are doing rather than broadly.
And finally, in the last 12 months, there has been...a new phenomenon that is emerging is the extreme volatility in the cost of running the economy or the underlying economics of volatility rather than economics of high cost or low cost.
So...how do you manage large global institutions is still not well developed, maybe because we are facing it for the first time. What is prudent management is still evolving. And therefore, what you see is the result of combination of all these.
Do I feel optimistic about the future? Yes, because what we are going to develop here is not just the new regulations which provide some checks and balances.
We are going to create a very different way of managing, a very different way of understanding of risk and very different understanding of the portfolio and accountability. That may be something new that we have never done before. That means, we understand global interdependency, system interdependency and how to manage for volatility.
This will be a new frontier and a new set of questions. Add to that globalization, the willingness to create inclusive growth and the willingness to create sustainable and ecologically sensitive growth. Then we are in the new frontier of how to do these things intelligently with good economics behind it and the opportunities are big for regulators to understand how to regulate these new kind of phenomena and how to supervise.
What kind of revamping of regulatory and management strategies does the crisis warrant?
It is easy to speak about the specifics. Don’t get to specifics before you know what the animal is. If you are a hunter in the jungle, what tools you use to hunt the animal depends on what you are trying to hunt. If you are going to get a rat, why take a machine gun? Best thing is not even to hunt. Let it be. But if it is a rogue elephant, that is a different question.
What we don’t have in the country (India) is the consensus about the nature of the problem and the nature of opportunity. Globally, a lot more supervision and transparency to accounting will be called for. And that is a must. There is probably going to be a lot more desire to get global standards of how to report and look at operations and the risks. Therefore, there is one framework to compare what’s happening in different parts of the world. The one thing that may happen is common set of standards for all important trading countries. China, India, Brazil and the G-7 or 8 or 10 or 12 or 20 countries must agree on common set of standards. Then the rest of the countries will follow. That is one thing that I am sure is a prerequisite.
How long do you think will it take for the global economy to revive?
A lot of revival is going to depend on how fast the US economy revives. The US economy is probably the most resilient and they had shown consistently that they can recover. This time the cuts have been very deep. So, I don’t expect anything to really show the real signs of an upward trend in less than 18 months. Our problems will persist for a long time. But confidence and trust in our institutions and trust in the economy will come as soon as US starts producing more jobs rather than shaking down the structure.
What role would you like to see governments playing in addressing the unfolding slowdown?
I think the governments always have an interesting role. One is to make sure that credit is available. Two, if there are any regulatory impediments, eliminate them to ensure that the companies can grow without losing control or supervision. But the most important thing is to provide stability and confidence that the institutions that we so respect are functioning well. Good governance is all that I would like the government to do. Nothing more. Nothing less.
What advice would you give to governments that are chalking out stimulus packages?
Stimulus packages are fine only for the short term. But the best way to develop a country is reduce corruption and increase investment in human resources. The governments should deal with corruption, inefficiencies and apathy.
When do you think such stimulus packages will start bearing fruit?
I think at least six months to a year before anything happens. As I said, a stimulus package is not a long-term solution.
How do you look at the capital spending by governments and companies going forward?
There is going to be lot more parsimony—getting more for less. The focus would be on how do we get more impact for less money? I think everybody is going to conserve capital. But that does not mean that you can stop growing, which is suicidal. Diversification of product portfolios, looking for new markets, increasing margins, recognizing that the price will come down and, therefore, how you cut cost not by laying off people but by increasing productivity and changing the way we work—all (this) will take place.
What strategies would you suggest to Indian companies to tide over the current global economic crisis and still maintain growth?
The strategies required include changing the portfolio, leveraging core competence, getting focused on building new opportunities and reducing the volatility and dependency on one industry sector.
What would be your advice to consumers—to save or to spend?
Consumers must save in the US and spend in India. The savings rate in the US is less than 0.5%. It is a totally credit economy. That cannot work. In India, everybody saves and nobody spends as much, and then you hear news like this and everybody totally clamps up. We have to spend some to keep the economy going.
What will reaffirm consumers’ faith in the financial system and spark demand again?
We have to be careful not to spread rumours because trust in our system is very fragile. I think the press has an important role not to sensationalize news. For example, in the recent financial crisis, there was so much of sensationalizing ICICI Bank, which is very unfortunate, if you look at their capital adequacy ratio, that is AAA. If somebody starts a rumour, everybody talks about it in television and in every front page, you will lose confidence. We need to understand this. From the side of (the) corporate sector, companies should increase the value for products and services to ensure consumers’ faith in the system. It is not just price. It is perceived value and trust that matter.
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First Published: Mon, Dec 15 2008. 09 38 PM IST