Whatever you thought, think againMay 5, 2015 3:30
Interview: Ronald Haddock, Booz & Co.
Zurich-based partner and vice president at Booz & Co., Ronald Haddock, talks about why the future of the global economy might not rest in the East after all.
January 10, 2011 4:15 by Jay Akasie
Mr. Haddock, thanks for speaking with us. Twenty years ago, the Yale historian Paul Kennedy predicted the rise of Japan and a Pacific century in his “Rise and Fall of the Great Powers.” He also said America was economically and militarily on the decline. Yet we now know that none of this happened. Now, after the economic crisis, many people are predicting the demise of the West and the rise of emerging markets such as China and India. Please give us some contrarian wisdom; in other words, tell us why they might be wrong again.
Countries, companies, and individuals, in most of the world, have the freedom to choose. This manifests itself in policy choices at the level of nation states and their governments, business decisions by companies, and career choices by
individuals – and product choices of these individuals as customers.
The success of a country’s economy is determined by choices at two levels: macro-economic policies that spell out the rules of the game in markets and how they will be governed, and secondly, the way competition is allowed to play out in the micro economy (e.g. rules that ensure competitive markets shape pricing for scarce resources, how externalities are treated in the ultimate cost of goods, legal rules for ownership and control of companies, etc.). The World Economic Forum’s Global Competitiveness Report spells out these factors at great length and has developed a way of rating countries on these macro and micro dimensions.
In the cases of Japan four decades ago, and China and India today, policy choices created the platform for long-term macroeconomic growth. We witnessed unparalleled growth in Japan for decades and we’re now seeing the same in China. India, more recently, started on its own trajectory. Yet maintaining balance across macro-policies and policies that affect companies and individuals is, first of all, not well understood by most policy makers, nor practiced consistently, especially in the case of democracies where populism sometimes overrules economic logic. Similarly, command economies can also make policy mistakes due to a lack of understanding or political expediency.
Japan, for example, failed to make reforms as its export-oriented economy began to lose steam, and preserved policies and practices that were not conducive to success. For example, lifetime employment persisted for a long time after the beginning of the decline, plus Japan, to this day, has an unwillingness to let uncompetitive companies go bankrupt. The result is that resources (people) and assets (physical and knowledge) are not redeployed to more productive uses, resulting in stagnation.
As such, while we see the results of good policy choices in China, and increasingly India, today, it only takes a few bad policy choices and their respective success stories could unravel.
Similarly, in America and the rest of the West, addressing the right policy levers would easily reverse the course of decline. For the U.S., there are a number of items on the agenda. The U.S. should balance the national budget as quickly as possible, reducing annual deficits and incrementally paying down national debt. It should recommit to education and investments in innovation capacity, taking the education gap seriously. Its leaders must send a clear message to citizens that there is no free lunch: They can’t borrow more than they spend, and they need to provide for their futures through savings and investments in education. From a diplomatic perspective, the U.S. must reassess its military aspirations and align them with national commitments and capabilities. This will probably mean doing less militarily and pursuing policy objectives by other means. It should also use alliances to find solutions.