Successful Business Leadership

By Alan K Rudi

Capitalism has proven to be the only social model that improves the standard of living for people and it is creating significant global business and social opportunities in the long term, but there are also significant structural issues that could derail long term economic growth.

The structure of each global society differs significantly, with freer societies tending to have a higher degree of a democratic structure including: 1) government institutions and regulations that enforce the rule of law and provide the right to property ownership; 2) free markets and capitalist practices where people make their own economic decisions; and 3) moral and cultural institutions that serve as a watchdog of both government and free markets.

The Economist states: “Although almost half of the world’s countries can be considered to be democracies, the number of ‘full democracies’ is relatively low (only 28). Almost twice as many (54) are rated as ‘flawed democracies’. Of the remaining 85 states, 55 are authoritarian and 30 are considered to be ‘hybrid regimes’. As could be expected, the developed OECD countries dominate among full democracies. More than half of the world’s population lives in a democracy of some sort, although only some 13% reside in full democracies. Despite the advances in democracy in recent decades, almost 40% of the world’s population still lives under authoritarian rule.”

During the last 25 years, the long term performance of the US economy can simply be described as follows:

• The size of the civilian labor force has had a compound annual growth rate of 1.3% per year, while the total US population has grown at a slower rate of 1.1% per year. In other words, the US has created more jobs over time than the population has grown. The labor force participation rate, subsequently, has increased from 57% to 63% today.

• During this time - the US experienced only 3 recessions with peak unemployment ranging from 5.9% to 10.8%’ overcame stagflation and inflation while recently flirting with deflation; continued global trade expansion; growth of the Japanese and German economies followed by the opening of China and India’s economies’ terrorist attacks; and increased outsourcing of information technology. All of which led to loss of some US jobs.

• Also during this time, though, the US experienced a continually improving standard of living (real disposable personal income grew 3% per year); productivity grew1.6% per year; the US expanded the highway system and built a digital highway (the internet); businesses mass produced more products lowering costs and making them available to more people; developed the banking and credit system; made significant scientific and technological breakthroughs; reduced trade barriers and tariffs; formed more small businesses; provided education broadly; and replaced mainframe computers with personal computers and servers.

• As a result, during the last 25 years, the US Gross Domestic Product (GDP), on a real basis (excluding inflation), has more than doubled in output growing an average of 3.1% per year. Note: the Federal Reserve Bank of St Louis provides a good summary of current national economic trends as of November 2007 (looking through the graphs will give you a good understanding of the current short term state of the economy).

In other words, despite significant disruptions, the economic system and structure has been very flexible creating changes that have significantly improved our lives. It is not perfect and no one can really predict what will happen next. As you think about the technologies under development, though, you can imagine the potential for creation of new businesses, products and services, further economic growth, and new types of jobs. All we can do is continually prepare and plan.

Alan Greenspan (former Chairman of the USA Federal Reserve Board), from his 2007 book The Age of Turbulence, describes the economy and its structure as follows: “We are living in a new world – the world of a global capitalist economy that is vastly more flexible, resilient, open, self-correcting, and fast-changing than it was even a quarter century earlier…it is the rediscovery of the power of market capitalism…I can think of no circumstances where the expanded rule of law and enhanced property rights failed to increase material prosperity…(but) we cannot function without some set of values to guide the multitude of choices we make every day…(and) the world’s citizens face a profound choice: to embrace the worldwide benefits of open markets and open societies that pull people out of poverty and up the ladder of skills to better, more meaningful lives…or to reject the opportunity and embrace populism into which communities retreat when their identities are under siege and they cannot perceive better options…for Americans, opening our borders to the world’s skilled workforce and education reforms must be high on the policy agenda, so too must be finding a solution to our looming Medicare crisis.”

Tom Freidman, from The World is Flat, says: “Having listened to the arguments on both sides (of globalization), I came down where the great majority of economists come down – that more American individuals will be better off if we don’t erect barriers to outsourcing, supply-chaining, and offshoring than if we do. The simple message is that even as the world gets flat, America as a whole will benefit more by sticking to the basic principles of free trade, as it always has, than by trying to erect walls…India and China are not racing us to the bottom. They are racing us to the top – and that is a good thing. They want higher standards of living, not sweatshops; they want brand names, not junk; they want to trade their motor scooters for cars and their pens and pencils for computers. And the more they do that, the higher they climb, the more room is created at the top – because the more they have, the more they spend, the more diverse product markets become, and the more niches for specialization are created as well.”

If the globe’s countries continue to open up their economies and businesses are more innovative in thinking beyond their existing markets, then economic development could be greater in the next 25 years than experienced historically. C K Prahalad, (a corporate strategy consultant) in his book The Fortune at the Bottom of the Pyramid, says: “The dominant assumption is that the poor have no purchasing power and therefore do not represent a viable market. If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up…What is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win-win scenarios where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable…by focusing on (the poor’s) capacity to consume private sector businesses can create a new market.” For example: Unilever produces Surf Excel Quick Wash detergent for India, which provides a low foam formula that reduces water needed for rinsing clothes by up to two buckets per wash (i.e., saves water in a dry area).

Key Issues

The significant structural issues that could derail long term USA economic growth are:

• A Current Account deficit that is too high for too long.
• Dependence on oil will likely continue for the long term, but are we also beginning to create the environment for alternative energy as a result of higher oil prices?
• Aging of baby boomers will continue to materially transform society, especially in healthcare, travel, and wealth transfer. The problem is how to pay for an aging population.
• Real wage growth has been uneven.

[1] Organization for Economic Cooperation and Development – the 30 major economic countries of the world including Australia, Canada, France, Germany, Ireland, Japan, Korea, Norway, Spain, Sweden, United Kingdom and the United States.