Transformational capitalism

He sold fruit on the streets of Sidi Bouzid, Tunisia; operating from a vendors cart on two square yards of public space and had to pay bribes to work undisturbed. That day, 17th December 2010, there had been an argument and so two police officers confiscated his two crates of pears ($15); a crate of bananas ($9); three crates of apples ($22) and a set of electronic scales ($179, second hand). Given the fact that he had bought his merchandise on credit and he could no longer sell it to pay his creditors back he was bankrupt. One hour after the police had closed down his business, Tarek Mohammed Bouazizi – known locally as Basboosa – set fire to himself yelling “how do you expect me to make a living” and triggered the Arab Spring. According to the Sidi Bouzid’s state office for employment and independent work, no permit is needed to sell from a cart. Unemployment in the area stands at 30 per cent. Within weeks many of the estimated 200 million Arabs who work in the informal markets of the Middle East and North Africa started to mobilise.

How else can I make my living?

Bouazizi was 26 years old. He was not a salaried employee but an entrepreneur. He had clear ambitions and dreamed of owning a truck that would help him scale up his business but that would have required collateral to access credit from a bank. That would have meant using the title from the family house – but that would take 499 days of red tape at $2,976 and, to legalise the business would cost 12 times his normal monthly income. When Hernando de Soto, the Peruvian champion of land rights for the informal economy, asked his brother what Tarek would about what his sacrifice would bring to the Arab world, Salem did not hesitate: “that the poor also have the right to buy and sell”. With so much talk in the UK about the St Paul’s protestors and others in the USA and all over Europe protesting about capitalism it seems timely to explore how these two events blend into a call for capitalism not so much to disappear but to transform itself and with it logistics and supply chain thinking.

In recent months, this Blog highlights the need to move beyond mainstream logistics and supply chain thinking and build a variation more relevant to emerging, developing and devastated markets. This is the Majority world; already significant with 7 billion on the planet but, likely to be utterly dominant with 9 billion by 2050. Last year, more people lived in urban than rural areas; by 2050 this will shift to 75 per cent urban, generating a raft of issues from urban lay out; infrastructure to cope; energy mix to enable sustainable livelihoods; affordable (and own-able) homes to accommodate the workforce and, the dilemma of how best to accommodate a population characterised by informal living and working conditions. This is placing logistics and supply chain thinking firmly in a wider context – the world we actually live in.

And yet, our world tends to obsess on the trading dialogue and partnerships of BIG Corporations – retailers; suppliers and bankers – and fails to understand or banish to the margins the small or micro firms that emerge despite the system all over the world – some formally set up and the majority forced into the shadows by red tape at best or corrupt officials at worst – just like the story of Tarek Mohammed Bouazizi. SMEs (small and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. These figures close on 90 per cent in other emerging and developing markets and, globally they account for a disproportionately large share of new jobs. The plight of people like Bouazizi has become a major constraint on the way out of the current smouldering global economic crisis.

Despite an ever less convincing rhetoric, the  global political elite seems to champion the BIG monopolistic battalions and ignore (or fails to understand) the very lifeblood of core capitalism – the hugely competitive small traders from Buenos Aires to Birmingham; Cairo to Conakry;  Johannesburg to Jilin – everywhere really. The issue is that most jobs are generated by SMEs or, micro firms.

These figures are for the developed world where the success of SMEs is a vital part of re-balancing the economy away from the Public sector – especially when they are more heavily concentrated in high-unemployment areas. For example, in North East England with 11.3 per cent unemployment, SMEs account for 20 per cent of jobs and throughout the UK they represent over 30 per cent of manufacturing jobs. In addition, the CBI (Confederation of British Industry) estimates that 6 per cent of UK mid-sized companies make 60 per cent of all new jobs and if more could reach their potential it could add £20 to £30 billion or a quarter per cent of GDP. If this is the case in mature economies; imagine the numbers in emerging and developing markets. More to the point, how can SMEs in mature markets work with those in frontier markets without a radical overhaul of credit lines. In fact, where are the initiatives that would see investment in global supply chains as opposed to individual companies?

One of the major issues that we need to address is the definition of an SME itself. In the EU, the distinction is being made between an SME and micro business – which employs less than 10 people and whose turnover is under €2 million. Many of these micro firms in the UK and elsewhere are tempted into the black economy – to avoid the red tape. Cash in hand is far easier than registration and this is a widespread practice. Let’s get real, 95 per cent of all businesses in the UK are micro businesses and, 90 per cent of the jobs created in the USA since the 2008 recession were created by micro businesses. This is Basboosa territory.

Then, there are the risks associated with the shareholder model of large Corporations. As EU growth forecasts are revised down from 1.8 per cent to one half of one per cent the risk of  shareholders voting with their feet and moving to where the growth is – emerging and developing markets – is palpable. As Marx pointed out: capitalism holds the seeds of its own destruction.

Transformational thinking argues against the notion that globalisation is moving towards a homogenous one-size-fits-all world or even needs to. Diversity is a viable alternative. And the transformational agenda highlights the dangers inherent in monopolistic market shares in categories from automobiles and aviation to FMCG goods and fertilisers. A transformational agenda argues that such monopolistic tendencies destroy competition – the very lifeblood of capitalism – and fails to add value.

Transformational thinking explores alternative forms of enterprise and, like global energy policy sees strength in a viable mix. Just as we need to move to a mix of fossil; renewable and nuclear fuels; we need to allow for small, medium and even micro firms; some operating with shareholders and others based on a stakeholder or cooperative model – like dairies all over the world. And then, we need to set in place the ability to finance all types of enterprise – not just the major Corporations. We need finance for innovations in product and process not just in the architecture and instruments of finance itself.

We need to acknowledge that finance is an overhead to the central core of enterprise; a means to an end and not an end in itself. And we need to understand that taxation has become discretionary for many Multi-National Corporations with their access to advice and, leverage with governments. The real point here being that MNCs employ few people in mature markets and this is unlikely to change going forward. Added to the red tape and corruption that consigns many informal players to the margins; we need more innovation on the nature of the firm. Look at the Cooperative model and the dairy industry. Amul in India have managed to build a $1 billion brand out of the collective effort of North Indian farmers. There are lessons there.

Transformational thinking argues for an ethical dimension to business. This is rooted in Adam Smith – though not solely from his book the Wealth of Nations but from an earlier and totally complimentary work The Theory of Moral Sentiments. This is the inspiration for Amartya Sen’s focus on the need for an ethical dimension to capitalism; which, in the current world, urges a triple bottom line of planet and people as well as profits. After all, the three F’s crisis of recent years (Food; Fuel and Finance) should have taught us by now that we need to know more about the real price of goods – this means adding in the real costs of carbon to operate stretched global supply chains and, the real social costs of high unemployment (especially amongst the young).

The youth factor is not to be ignored. Politicians have failed to address the issue of intergenerational equity. For example, in continental Europe, a two-tier labour market forces younger workers to suffer job insecurity, while preserving a significant degree of protection for older workers. Much of the frustration at St Pauls could be rooted in this issue and, as youth unemployment rises so too does the potential for another Basboosa – there has been a copy-cat incident in Italy already. This is not just a protest it is a business risk.

Recent natural disasters have sharpened the need to factor risk into supply chain modelling and practice. For example, the volcanic ash from Iceland closed down the Kenyan horticulture industry within hours (more than 20% GDP); the floods in Queensland wrecked the coal mines that many power stations from Japan to India depended on; the Japanese earthquake and tsunami impacted a number of IT companies worldwide and, the current calamity in Thailand is reducing many auto component and textile supply chain to a standstill. These are the type of risks that caused Ericsson to lose market share with the fire at Alberquerque and then, due to the Japanese and Thai disruptions, exit the mobile phone market altogether. Plainly, the race to the bottom price and the footloose Corporation is not the one best way when it carries risks in terms of location and, market access costs.

Humanitarian disasters themselves are part of this transformational agenda. The sheer scale of disasters in recent years argues for greater focus on the logistics and supply chain dimension. However, we need to look beyond the emergency response itself and explore what happens next. Is it enough to allow the market fundamentalists invisible hand to re-build destroyed or temporarily repaired infrastructure so vital to any supply chain? For example, was it enough to leave Iraq militarily and assume that market forces will take care of the road to sustainable growth? And surely it is in everyones interest to ensure that enabling infrastructure and market access is restored in places like Queensland and coal; Japan and IT components; Thailand and auto parts – all so vital to the global project. Does the world have time to wait for some mysterious market alchemy to deliver the solutions. Surely, we need to acknowledge that big ticket items like infrastructure; connectivity and the ability for small firms to start up and prosper cannot be left to chance.

This post emergency opportunity is especially valid in terms of traditional indigenous industries. For example, the traditional Persian rug style carpet industry is estimated at being worth over $2.5 billion. As Iranian, Pakistani and Afghan “brands” have their problems, the opportunity opens up for alternatives. In fact, it is Chinese industrial production that is soaking up global demand and thereby reducing the opportunity for the creation of sustainable local business where it is most needed. A failure to respond to this creates unemployment and from this a breakdown of the social cohesion that can result in terrorism and global security problems. Transformational thinking champions a an inclusive agenda and more could be done to develop traditional industries with huge benefits to social cohesion and global security.

The transformational agenda offers a focus on traditional industries characterised by fragmented, low-tech and under-funded players. This contrasts with the modern, highly concentrated and high tech MNCs with their ever widening global reach. And yet, this focus does not hark back to a better yesterday but opens up fresh potential for adaptable and proportionate technology responsive to local context and needs. This last summer in Andra Pradesh, we worked on seven traditional supply chains and noted a host of opportunities for mobile telephony (aggregation of demand and capacity to supply); packaging (shelf ready post-harvest packaging) and, a range of ideas on adaptable, affordable products and processes.

Transformational thinking challenges market fundamentalism and monopolistic capitalism – these days both are targets for the UKs Business Secretary Vince Cable and an increasing number of politicians of all types and, pundits alike. For example, the top ten companies in aviation, automobiles, oil, fertiliser, FMCG goods – the list goes on – have a global market share of from 50 to 85 per cent. This is hardly a recipe for competition and more than likely triggers other issues such as fashion stores being challenged on child labour; MacDonalds on child obesity; tobacco companies over the use of chemicals to accelerate addiction; banks over lending practices; retailers over payments and margin pressures on small producers and, their local impact on small traders. It is increasingly acceptable to argue for social and environmental sustainability as well as financial returns.

Questions on business fundamentals came fast and furious after the financial crash of 2008 when the developed world socialized losses after a lengthy period of privatized gains. This was the bonus culture across the banks and multi national corporations.  Economists call this “asymmetric incentives.” You make money by taking risk, but nobody takes it away from you when the strategies don’t work and lose lots of money. That’s not capitalism! That’s not a market economy. It’s a game of heads they win, tails taxpayers lose.

The analysis turns on other examples of monopolistic or oligarchical behaviour all over the world. For example, parallels can be drawn between the decline of Argentina from being a leading economic power in 1914 and how the conservatism of major land owners, oligarchs, destroyed innovation and wrecked the chances of a diversified economy. It is a lesson for African countries with sudden mineral wealth – will Ghana become Norway or Nigeria – and, places like Russia where the oil price impacts all of the economy. It is a lesson for all businesses that have created a massive gap between the remuneration of the boardroom and entry level employees – on average an America CEO earns 185 times more than the entrant employee. Discuss. In a more integrated world, inclusivity is ceasing to be a political choice; it has become a social and environmental imperative that the politicians cannot ignore.

The point from the Arab Spring is that protest will come from unexpected quarters. Let us not forget that leading South African companies were actively supporting exiled revolutionaries to wreck the apartheid system. The logic of apartheid said that the black majority were to be denied an education and that meant that businesses were starved increasingly of skilled labour. Then, there is the relevance of small traders in all of this. Jan Palach, the Czech student whose death in 1968 in St Stanislaws Square triggered the Prague Spring had more in common with Tarek Mohammed Bouazizi than setting fire to themselves. Jan’s parents were small traders and owned a sweet shop and Basboosa was a fruit and vegetable vendor on the streets of Tunisia.

We are experiencing political and economic tectonic plates shifting. Much of this is being driven by demography – the biggest and the youngest populations are in the emerging and developing world and, these developments have been speeded up by the financial crisis of 2008 and are likely to speed up still further with the Euro crisis now. These markets have growth where the mature economies are stagnating. Orthodox economics builds a narrative on two levels: macro and micro economics. The macro level focusses the allocation of resources subject to constraints – and now that markets are globally integrated a complex cocktail of geographical, institutional, social, cultural and  geographical make for real problems of alignment. Then, micro economics – where the rubber hits the road. As we factor in the unique characteristics of this emerging world order we note and increasing tension between the macro and micro levels and a need to build better ways of relating the two. This is part of the transformational agenda.

Let’s make no mistake about this, a transformational agenda asks questions about how a values driven agenda can succeed – which CAN be both inclusive AND good for business. Given the evidence of global stock markets, this is a welcome insight. For example, Vodafone is writing off £450 million from its Greek business and looking to emerging markets to re-build revenues; Diageo, whose brands include Guinness and Smirnoff, is cutting payroll in the EU by £80 million and refocussing on emerging markets in Latin America, Africa and Asia. The list goes on and, as mature markets stagnate and the coherence of the Euro Zone falters, Financial Institutions and MNCs will look for growth elsewhere.  These companies cannot afford to ignore the true context they will be trading in and, they cannot abandon their roots either. An innovative approach has to build from a platform of environmentally realistic; socially sensitive and economically inclusive roots.

For decades capitalism was able to sell the idea of a better future. Now, there are real questions about the legitimacy and integrity of a system where executives make, on average, 350 times more than the lowest-paid workers. Professor Michael Porter has joined the chorus urging businesses to create economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress and create shared value. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. Porter is clear: shared value is not on the margin of what companies do but at the centre and can be the next major transformation of business thinking. See: Harvard Business Review.

Add to this the perception that austerity budgets, funded by ordinary citizens paying taxes, are using the money to pay off the country’s debt and not to invest in job creation and the well-being of its citizens by building schools or improving the health care system. Market capitalism will ultimately be judged by the reaction of the business sector and public sector to the human problems caused by today’s crisis. If steps are not quickly taken to improve the social consequences that affect huge portions of the population, the backlash against capitalism will be serious. As the FT’s Economics Editor Martin Wolff puts it in a BBC Radio programme this week: “”we can’t continue with business as usual.”

The celebrated historian, Braudel said that history is what people make of their geography and the history of this next phase in capitalist development will be a function of how diverse and inclusive that geographical reach will be. Capitalism is suffering from those who defend it as being monolithic when there is more to be gained by accepting that  there is more than one variety – to critique and to defend.

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11 Responses to Transformational capitalism

  1. Hugh Marcy says:

    An umbrella strategy for the future of commerce! Details will be interesting and assuredly local.

  2. Fernando says:

    This raises important questions. The capitalism that does not evenly distributes its wealth is condemned to perish. Communism did not work neither. That is why this “revolution” in the arab countries is not understood or it could not be foreseen by the rich. The leaders of this world can not stop this phenomena because they live inside this bubble that is not capitalism but selfishness…

  3. Ben says:

    We are faced with a situation now that can be taken two ways. Either as a great opportunity to rebuild an economy with a new set of values or to continue to trust in the traditional orthodoxy of the market. The latter argument can no longer hold any force after it has created the current situation; a monopolistic capitalism where huge amounts of wealth are held by a tiny percentage, with the sole purpose of wealth creation for themselves and the risks they take underwritten by a society that has somehow become dependent on the survival of those who exploit it most. The only solution is to build an economy based on the needs of a world whose population has just expanded to 7 billion. Green issues can no longer be the interest of environmental groups, but must form the basis of our thinking towards a new inclusive, wealth-sharing economy. This has to be the responsibility of governments, who must have the courage to abandon the trend for small-c conservatism being favoured presently. Foresight is better than hindsight…

  4. robjbell says:

    This morning on BBC Radio 4, John Humphries interviewed Deborah Hargreaves of the High Pay Commission on how executive pay is playing a role in de-stabalising the economy. “In the 1980s, the boss of Barclays earned 14.5 times the average pay at the bank; the current boss is on 75 times the average representing a 4,899% rise over 30 years. Since the mid-1970s the general workforce share of GDP has shrunk by 12% and the British Public have become disillusioned not so much with the gap but, as with the bankers, rewards for failure. Hargreaves then went on to list action needed such as simplifying pay scales; greater transparency and, worker representation on Boards.

    In came Dr Heather McGregor, Director of Head Hunting firm Taylor Bennet. First, she started the interview by rubbishing the idea of worker representation on Boards and championing shareholders as the oracle on pay. Humphries made the point that Germany does have this in place already.

    McGregor changed tack, claiming that we already have worker representation on pay committees, because some workers have pensions, and some pensions have worker representation, and some pensions with worker representation own large enough shares in companies to make it on to the renumeration committee, so there needn’t be any change. McGregor went on from there to compare workers to children, saying to John Humphries:

    John, you have young children, you would not give your children a say in how much money you allocate yourself every year for clothes or for haircuts.

    Finally, she closed her case by pointing out that workers are allowed a say on pay in workers co-operatives, and they have workers co-operatives in Cuba, so if you think executive pay is too high, you should move to Cuba.

  5. Raul Sanchez says:

    Reference to this radio programme. Why does it always have to be a zero sum game? This is yet another example of market fundamentalism. It is either black or it is white. Surely there is more to this than capitalism good and anti capitalists bad OR the other way around!

  6. robjbell says:

    Raul, you raise a great point. Have a look at this from Ha Joon Chang, a Cambridge based Economist with some useful perspectives on all of this:

    His article is focussed a multi-faceted captalism and the fact that beyond the tents outside of St Pauls there are already many financial reform proposals floating around, often supported by very “establishment” figures like Adair Turner, the Financial Services Authority chairman, George Soros, the Open Society Foundations chairman, and Andy Haldane, the Bank of England’s executive director for financial stability.

    By labelling the Occupy movement “anti-capitalist”, those who do not want reforms have been able to avoid the real debate. This has to stop. It is time we use the Occupy movement as the catalyst for a serious debate on alternative institutional arrangements that will make British (or for that matter, any other) capitalism better for the majority of people.

    Ha Joon Chang has written some superb books and is well worth looking at. Recently, he has worked with Milford Bateman on micro finance. Again, useful insights widening and not narrowing the debate.

  7. Carla Lewis says:

    Again, this Blog challenges Logistics to go beyond BIG Food and BIG Retail. The crazy thing is that more effort on this transformational agenda will open up real opportunity elsewhere. Keep it up!

  8. robjbell says:

    BBC News this evening highlights the 2010 numbers for the UK: Average pay @ £25,900. Average FTSE 100 CEO @ £3.74 million or 145 times. The FT leader this morning highlights that four out of five people find pay and bonuses for top executives are out of control and “If shareholders could exert pressure on pay, as on all other costs, it would help British business build trust with a wary public. Highly paid company bosses who live in a parallel universe risk being viewed as aliens, Sir Richard Lambert, former head of the CBI warned last year. He is right.”

  9. Mary Gordon says:

    A superb piece. Great to see a bit of pluralism around rather than this turgid black and white nonsense. There really Is more than one type of capitalism and surely the purveyors of line extended brands should know that by now! Anyway …

    These market fundamentalists (as Soros calls them) worry me greatly. There is a dangerous assumption at work here – that the selfish interests of shareholders in pure play capitalism ensure that businesses are run well and that this trickles down beneficially to wider society. Leaving aside whether selfishness does have a trickle down benefit the nature of the shareholder is starting to come into focus. These days, shares in the FTSE and NASDAQ are owned by well known groups. What happens when the shareholders quit the FTSE and NASDAQ and invest in emerging brands from high growth economies? And, what happens when the balance of shareholders shifts to private investors or sovereign wealth funds that may not share the same enthusiasm for freedom, democracy and the best interests of society as they do today (sic)?

  10. Javi Garcia says:

    Wow! You mean that there is more to capitalism than MNCs?

  11. robjbell says:

    Let’s highlight an issue that emerges from various conversations I have had since I posted this. Ha-Joon Chang raises the point that there are many types of capitalism. Add to this the fact that there are many types of firm. In the UK, about 1 million or 95% of firms employ UNDER 10 employees; that is, 3.5 million people in total and all of these companies generate under £1 m turnover.

    Consider this – how much did the HR Director for Cadbury earn in the last year when figures are available (2008)? Bob Stack, then head of Cadbury was “rewarded with a package of” £3.8 million, including £2 m in exercised share options and when, Stack retired he did so with an £8 million pension pot, paying him £700,000 per year – for life.

    Two points:

    1. We need to be careful on our definition of the firm: A FTSE listing and a Multi-National is a firm apart; an SME employs under 200 people and, a Micro Firm employs under 10 people.

    We need to be careful that we don’t mix up the managers and employees for each of these very different types of firm. Most SMEs and micro firms don’t come close to what Mr Stack, the aptly named HR head, earned per year. It tells us a lot about the nature of entrepreneurship in mature markets. Why would you bother launching a business when the Corporate ladder can be so rewarding. And HR is regarded by many CEOs as an overhead. Some overhead – that equates to 152 colleagues earning the average wage of c £25k. Hardly an irreplaceable and indispensable CEO.

    2. Regulations need to recognise that micro firms do not have “redundant” capacity – equipment or people that are available just-in-case. Many of these regulations are designed for bigger companies but applied across the board.

    The SMEs and micro firms are modern day kulaks – those small scale growers so vilified by Stalin. They get all of the pressure and insecurity but very little of the reward. Mind you, they generated over 90 per cent of the jobs after the last recession in the USA and employ over 1.8 billion people world wide.

    This is Basboosa territory.


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