Is it time to be prudent and consider austerity policies again?

By Frank-Jürgen Richter

Business Times, March 31, 2016

George Osborne, Chancellor of the UK Exchequer, has introduced more cuts for the UK in his 2016 Budget. As the UK is the world’s fifth largest economy, might it be time for South-east Asian nations to consider introducing measures of austerity?

I am against “austerity measures” though I am not against evaluating core and peripheral business processes to remove redundancy and waste. We abhor lots of apps in our smartphones, calling them “bloat-ware”, so why not slim down redundant departments and processes?

In fact, this was the purpose of Business Process Re-Engineering – a consultancy portfolio action plan to be undertaken before large-scale back-office automation. It is a necessary evaluation of core processes before Artificial Intelligence applications are applied to the complex systems that comprise modern businesses.

Over years, managers have looked for ways to increase their mini-empires and have created paperwork redundancies that are perpetuated even when they retire as few wish to disturb the status quo or make paper-pushing staff redundant. But these empires absorb cash that would be better spent on modern automation and machine tools. Hence overstaffed firms gradually lose competitiveness and some actually acquire state support over fears of “too big to lose” if, say, the national unemployment figure is high on the list of government targets. All in all, while “austerity” may be a grim prospect, the rationale is reasonable: to free up corporate capital and apply it to productive purposes.

Mr Osborne states his fear that there are many global forces antithetic to the blossoming of the UK economy. Its GDP continued to grow through the last quarter to a 2 per cent annual pace – somewhat more than the EU as a whole. But when we review the situation in Asia via its Purchasing Managers’ Index (PMI), always a leading indicator, business activity has slowed remarkably over the last year.

Every nation, except India, has felt the slowdown – none more so than China. Here, they have seen a relentless fall in PMI from 52.2 in January 2013 to 48 of late. Singapore too had a high of nearly 52 in mid-2013, then again in late 2015, but it has now fallen to 48.5. In parallel, business confidence has fallen to minus 22. Just to recap, 50 in these indices is taken as the boundary between growth and recession. Most Asian nations have seen under-50 performances through the last year, so it is inevitable that business and economic confidence across the region is low, and in turn global confidence has slid. And global trade is hovering at half its long-term average of 4 per cent per annum.

A further facet follows from the 2008 global financial crisis. All banks have been instructed to shore up their capital reserves. In the first instance, this resulted in their lowering of loan rates, following which many businesses did not reinvest in their processes but sat on their money.

Later, several central banks lowered their base rates to stimulate their economies, which did not work beyond the short term – so they again lowered rates, in some cases below zero. Again no real effect, though the recent European Central Bank (ECB) move may have shocked European businesses into renewed action. However, very low interest rates make it more difficult for banks in the euro zone (everywhere, actually) to sustain profitability and return on equity remains well below pre-crisis levels. This is reflected in a 2016 eurozone growth forecast, which sees the bloc’s real GDP expanding only 1.5 per cent for the second consecutive year.

But “austerity” can work effectively and quickly to achieve a turnaround.

Cyprus is the new example: after 42 years, it may again become one country. The people are nearly celebrating, but there are some tricky negotiations to settle, one of which is property restitution. Following a Cypriot coup d’état in 1974, the Turkish army invaded to protect its Turkish-Cypriots. This resulted in a rapid flux of Turkish and Greek Cypriots from one part of the country to another, leaving their homes and belongings behind before the border closed. Presently, there is considerable impetus to rejoin the divided, but increasingly rich, nation.

This small economy had turned around its economy up to 2009 but then the Greek banking crisis struck. Greek banks were given their first loans in May 2010 by the EU, the ECB and the International Monetary Fund (the trio later came to be known as the Troika). They were not alone: Ireland followed Greece, getting a bailout in November 2010; Portugal was next in May 2011, with Spain and Cyprus requiring official assistance in June 2012 and March 2013respectively. Cyprus benefited from this easing but needed only 7.5 billion euros (S$11.5 billion) of its 10 billion euro loan. Of course, the Troika imposed heavy structural reforms, including austerity measures – which investors did not like. But with hard work, and the willingness of its citizens, Cyprus has turned around its ills and is likely to repay its loan early. However, continued prudence is needed.

I am in no way suggesting the Asian nations (much larger than Cyprus) need go right to the brink. But they might consider emulating George Osborne to address systemic inefficiencies and carefully guide their nations’ progress. In all business systems, curious and inefficient systems grow through empire building; they don’t contribute to the business or the economy, and they consume scarce resources. It might thus be prudent to enforce new policies to promote studies on better ways to manage. This may well free up government money for vital infrastructure investments in education, telecommunications, health and safety. All will benefit.

The writer is founder of Horasis, a global visions community. Its inaugural Horasis Global Meeting will be held in Liverpool on June 13-14 as part of Britain’s International Festival for Business.