Passive versus Anticipatory Industry Policies - Essay Example

Passive versus Anticipatory Industry Policies Name Institution A nation’s industry policies are critical in guiding its total strategic effort and economic vision, both in the short and long term. Industry policies influence the path taken by different sectors of the economy towards development; hence, they create an interwoven portfolio comprising the national industry, which is the sum of all sectors within the nation’s economy. The policies may also be adopted within larger jurisdictions that transcend national boundaries such as regional economic blocs and other formations that synchronize industry policies in trade areas. Policies are also vital to organizations which strive to remain relevant within their industry. This paper seeks to analyze two industry policy frameworks, passive and anticipatory, in the light of the 2008 global financial crisis. It also compares which of the two policy approaches was more effective prior to, during and after the recession. Anticipatory industry policies are formulated to predict and, therefore, adapt an economy to significant social, economic, and ecological events and changes, rather than waiting to simply react to them when they occur (Mingo & Khanna, 2014). The policies entail actions and regulations, which put mitigation measures in place or proactively venture into new frontiers at the earliest opportunity. This enables an economy to counter a possible challenge or advance it to new levels of technology, productivity and efficiency. It is thus a policy process that attempts to foresee potential challenges and opportunities and develop possible regulations and solutions in advance (p.1231). The solutions are often unique to the nature of challenges and opportunities anticipated. On the other hand, Pollin (2009) explains that passive industry policies are implemented based on preset existing set of rules. Such rules are normally formulated with the many macroeconomic variables under consideration. The rules often dictate the best course of action against specific changes to specific industry or sectors of the economy. For instance, there may be a policy that whenever the nominal gross domestic product declines by one percent, the interest rate must be dropped by one point to restore and stabilize the economy. Passive industry policies are thus reactive to the changes in industry or economic sectors, and tend to restore them within the optimal range as opposed to anticipating the changes and mitigating any effects thereof prior to their occurrence. The failure to anticipate change especially in industry can have destructive consequences. Significant instances of failure have been recorded in the past by organizations with considerable resources. Major corporations such as General Motors (GM), International Business Machines (IBM), CBS and Sears failed to anticipate shifts in the external business environment. For instance, IBM ignored the signals of rapid change in the computer industry in the 1980s. It failed to venture into the personal computer market early enough, despite having the resource advantage, instead choosing to focus on the mainframe. IBM later made desperate attempts to catch up, after other players had already entered the market and developed the personal computer technology significantly. Similarly, in the late 1960s GM failed to respond to signals of potential energy crisis and the increasing demand for small and fuel efficient cars. The failure made Japanese cars popular in parts of the United States. It is only when GM’s market share fell by almost thirty percent that they decided to venture into the manufacture of small, fuel efficient cars (Lechner & Wunsch, 2009). Given the extent to which change has become part of today’s business environment, anticipatory policies are indispensable. Strategic consideration is now based on whether change comes as a crisis or the policy makers at all levels can use anticipation and foresight to manage it in an informed, calm and systematic manner. The future agenda in all industry scenarios can only be set with sophisticated models, intelligence techniques and practical accountabilities. If lessons from the recent global financial crisis are anything to go by, survival and prosperity in the future requires industry players and policy makers to perfect their outside-in thinking skills. This requires them to relate strategic intelligence information about developments taking place in the external environment, to what is happening within organizations and economies (Reinhart & Rogoff, 2009). It, therefore, follows that anticipatory industry policies are more effective compared to the passive industry policies in the current economic dispensation in the world. Even then, there are many instances where passive policies are more appropriate. The period before the global financial crisis between 2002 and 2007 experienced significant rates of economic growth in virtually all economies, particularly in the developing countries. The economic boom had followed the mild recession of 2001 that followed a burst of the dot-com bubble. The quick recovery from the 2001 recession and the steady economic boom thereafter deceived economists into believing it was the onset of the ‘global platinum age’ of economic development (Posner, 2009). Ben Bernanke, the United States’ Federal Reserve Governor, called it the period of ‘Great Moderation’. He characterized the period with a steady decline in volatility for the macroeconomic environment that had lasted for over twenty five years. He attributed it to structural changes that saw rapid improvement in technology, economic institutions, business practices as well as the strength of economies to absorb shock (Garnaut, 2011). The perception that the macroeconomic policies had improved to stable levels facilitated the adoption of passive industry policies anchored on the strong macroeconomic environment. The perceived stability, in the macroeconomic environment, facilitated economists to ignore open warning signs. There were large deficits in current accounts of major economies like United States of America, France, the United Kingdom and others. The deficits depended on financing from oil exporters and emerging economies, which had accumulated excess savings. The United States had also adopted loose monetary policies as well as lax financial regulation, which led to the misperception of risk by banks and other businesses. The early 2000s experienced a surge in external financing in developed economies mostly from developing countries through remittances, export revenues and private capital flows. The inflow facilitated a consumption boom in the United States, particularly in the housing market, which saw the rise of subprime mortgages. The increased credit flows lowered the cost of capital inducing a sense of optimism among investors and complacency among policymakers who stuck to the passive industry policies (Horwitz, 2009). In early 2006, personal income from real estate and construction services started to decline in the United States while the rest of the economy enjoyed about five percent growth in personal income. The federal government stabilized the overall nominal incomes by steadily raising interest rates, which led to an increase in home loan defaults. By mid-2008, the federal government was no longer able to contain the declining growth in aggregate demand. The response was a passive tightening of monetary policy leading to a decline in real and nominal yield on government treasuries, hence the subsequent collapse of mortgage lenders. The greatest impact of the decline was first felt when Lehman Brothers collapsed in September 2008. The collapse caused a reversal of perception by investors and banks that had ventured in the housing markets (Lechner & Wunsch, 2009). The extent of impending losses was not clear to the banks due to the complex nature of mortgage-backed securities; they thus became suspicious of each other and stopped transacting business among themselves. Consequently, there was a decline in liquidity which caused the near collapse of the global financial system (Astley et al, 2009). The situation in passive industry policy was unsustainable. Governments, both in the developing and advanced economies reacted to the financial crisis by injecting credit into the financial markets, reducing interest rates, nationalizing banks and introducing fiscal stimulus packages to increase discretionary spending. These anticipatory policies helped many countries avoid slumping into a catastrophic depression. However, the effectiveness of the policies depended on the vulnerability of the economies and the magnitude of response. Even with the interventions, the financial crisis evolved into a jobs crisis as the credit crunch strangled economies causing trade flows to collapse (Horwitz & Luther, 2011). It is worth noting that countries that had adopted anticipatory industry policies such as China, Australia and India bore a lesser burden of the global financial crisis. The effects were adverse in economies that had embraced passive industry policies, since, in the face of the mortgage boom and expanding liquidity; they had allowed government debts to expand hence, the high budgetary deficits (Posner, 2009). Australia for instance, had adopted prudent fiscal and monetary policies prior to 2008 such that the crisis found the economy in good financial health: growing steadily with significant assets, debt free and having surplus budgets. With the robust foundations and favorable terms of trade, the Australian economy was guaranteed to go through the financial crisis with little harm. Similarly, China was on the surplus side with a lot of foreign reserves mostly in dollar dominated assets in the United States (Acharya & Richardson, 2010). The Chinese economy had continued to grow significantly for more than a decade. Debt free economies with surplus budgets felt a pinch of the credit crunch and the eventual financial crisis but the anticipatory policies, and particularly the finances, cushioned the economies from storms of the global crisis. Consumers, investors and business people in the cushioned countries went through the crisis with more optimism than in the hard hit economies with current account deficits. The response by most countries, especially the advanced economies, was to engage in historical expansionary monetary policies that included both quantitative easing and aggressive lowering of policy rates. The nations also assumed contingent liabilities for their banking systems through schemes for deposit guarantee and massive financial support for beleaguered banks (Horwitz & Luther, 2011). Policy makers further recognized that the monetary and financial policies alone could not overcome the recession. More than fifty countries implemented fiscal stimulus packages that accounted for about four percent of the world gross domestic product. Twenty of them were developing countries. The global financial crisis had important lessons for many countries: what mattered was not the response of nations after it hit, but the preparedness prior to the crisis. To avoid building economies into vulnerable positions, anticipatory policies that prepare them for any eventualities should always be in place. References Acharya, V. & Richardson, M. (2010). Causes of the Financial Crisis. Critical Review, 21(2): 231-240. Astley, M., Giese, J., Hume, M. & Kubelec, C. (2009). Global imbalances and the financial crisis. Bank of England Quarterly Bulletin, 2009Q3. Garnaut, R. (2011). The Great Crash of 2008. Melbourne: Melbourne University Press Horwitz, S. (2009). ‘The Microeconomic Foundation of Macroeconomic Disorder: an Austrian Perspective on the Great Recession of 2008’ in Kates, S. (Ed.) 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This Time is Different: Eight Centuries of Financial Folly. Princeton: Princeton University Press. Read More