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The global economic prospects for family business

The next quarter-century could see either unprecedented wealth creation or economic and social cataclysms that could be potentially devastating. One of the criteria for determining whether the first scenario plays out will be the degree of robustness with which family businesses will emerge and fare in the developing economies. There is a lot at stake and a good deal that the industrialised world can (and should) do to facilitate and accelerate the process.

The state of the world economy
It is extraordinary and deeply depressing to consider how exciting things appeared a decade ago – the fall of the Berlin Wall, the collapse of the Soviet Union, the emergence, in President George Bush Senior's words, of a 'new world order'– and how dismal they seem today. The last six years have seen a series of brutal global shocks: the Mexican peso crisis in 1995, the East Asian financial crisis in 1997, the Brazilian crisis in 1999 and the onset of, what appears to be, a full blown global recession in the summer of 2001. Of the three main engines of the world economy, Japan is in reverse, the European Union is turning on itself and the USA is spluttering. The effects of this major downturn among the leading industrialised economies are being felt throughout the world and sending most emerging economies into submergence.

More serious than the current economic stagnation is the disintegration of the global economic order. In the course of the 1990s, the world economy witnessed a major transformation from being divided to becoming integrated. The collapse of the USSR not only heralded the end of super-power rivalry, but also the end – or so it seemed – of deep economic splits between nations. Most countries of the developing world proceeded to adopt policies of liberalisation, deregulation and privatisation, bringing to an end the era where the state controlled the commanding heights of the economy and protectionism fostered rent-seeking inefficient oligopolies. India, China, South Africa, Brazil, Argentina, Egypt were among the many nations that undertook virtually 180°shifts in economic policy and ideology.

Parallel to these developments was the completion of the Uruguay Round of the GATT (General Agreement of Tariffs and Trade) that resulted, among other things, in the establishment of the WTO (World Trade Organisation) in 1995. Within a few years virtually all countries were either members of the WTO or candidates for accession. The world economy was in the process of becoming one huge integrated market. Indeed, it has been estimated that the population living in open market economies increased in the 1990s from approximately 1 billion to 5 billion.

With the havoc and the failure of the WTO ministerial meeting in Seattle in November/December 1999, however, it was clear that a lot of the integration was illusion. The trauma of Seattle was not so much the anarchy and demonstrations in the streets – though this was where most of the media attention was focused– but the profound disagreements between states and especially between those of the industrial North and the developing South.

In essence, the developing economies, with few exceptions, believe they have been 'conned' by globalisation. At the insistence of the industrialised countries and international organisations such as the IMF (International Monetary Fund) and the WTO, the developing economies undertook painful restructuring. This was in the anticipation that foreign direct investment flows from the industrialised economies would significantly increase and contribute to economic foundations and growth, and in the anticipation that the markets of the rich countries would be open to developing country exports. These expectations proved illusory. Over 80% of the current US$1 trillion in foreign direct investment remain within wealthy countries, while over 80% of the remaining 20% flows to a very limited number of countries, ie China, Hong Kong, Singapore, Mexico and Brazil. As for the markets of industrialised countries, they have remained closed in areas where the developing economies have competitive advantages, such as agriculture and labour intensive industries (eg textiles).

Developing countries are also faced with severe restrictions on the mobility of labour to industrialised countries, another advantage they would normally hold especially in light of the rapid aging and stagnation of the populations in industrialised countries in contrast to the booming population growth and comparative youth of the developing countries.

Thus, developing countries argue that it has been for them all pain and no gain and that globalisation is a one-way street. The growing North-South split is one of the greatest perils of the current global economic scene. It is the combination of stagnation and disintegration that could see the world economy not only descend into depression, but result in the resurgence of economic conflicts not experienced since the 1930s.

Global demographic imperatives for growth
The world population has increased over a 300-year period, in both developing and OECD countries. The next 25 years is extremely important due to, what demographers call, a 'demographic bulge'. Japan and Europe are reporting stagnating or declining populations, the USA less so thanks to higher levels of immigration. In many parts of the developing world, on the other hand, the situation is quite different.

- Over the next 25 years, Brazil will grow by about 'one Italy'(54 million), while the population of Italy itself will decline (from 57 to 50 million).
- The current population of Germany is 82 million and Egypt 68 million. In 2025 the population of Germany is projected to decline to 74 million and Egypt to increase to 92 million.
- The population of the Islamic Republic of Iran is currently 63 million. Over 50% were born after the accession to power of the Ayatollah Khomeini (1979), while by 2025 it is expected to grow by 35 million to 98 million.
- The population of Asia over the course of the next decade will increase by 570 million, roughly the US and current EU combined.
- Over the course of the next decade, 700 million young people will enter the labour force in developing economies, which is more than the entire labour forces of industrialised countries at present.

Circumstances may arise that might alter some of these figures. A major war involving Iran as occurred with Iraq in the 1980s could wipe out a million people and the spread of Aids in China could have a major impact. Generally, however, demographic projections have proved quite accurate. Certainly the reality is that the developing world will experience explosive population growth. And it is that factor in turn that could either spell a great boom to the world economy as a whole, or devastation. This will depend on whether sufficient growth is achieved, ie where the rate of GDP growth is greater than the rate in population growth.

Growth per se is, of course, not perfect. For best benefits to be gained from growth in the longer term, it should both be sustainable and reasonably distributed. The problem with much of the growth that has occurred in developing economies in recent decades is that it has been neither sustainable – the environmental clean up costs in China, for example, are astronomical – and it has been very unevenly distributed. This gives rise to sharp inequalities, in turn generating social unrest. However, though growth may not be the perfect panacea, it is the minimal basic requirement in developing economies with fast growing populations. A situation in which there is no growth or low growth will be disastrous. One can look at the situation in Indonesia at present, a population of some 225 million, where growth should be a minimum 8% per annum to absorb the new labour coming on to the market, but where the current rate is half the minimum. No or low growth will result in brutal political instability, more imploding states, disease, malnutrition, absence of basic public goods (eg education). Great population migration movements will accumulate and accelerate, leading to dramatically increased pressures of people from developing economies seeking work and refuge in industrialised countries. The spectre of 58 dead Chinese in the back of a lorry arriving at Dover from Zeebrugge will be a minor harbinger of many more similar and more horrific scenes.

Growth is an imperative for the world economy. The developing economies need it desperately not just to prosper, but also to stave off any disasters that occur under a no/low growth scenario. But growth in the developing economies is also a matter of great import for business in industrialised economies. With the prospects in the West of aging and stagnating populations, inevitably markets will shrink. The developing world is where growth can occur and future business opportunities and profits found.

The fact that the world economy is stalled and the world economic order disintegrating is all the more alarming in light of the demographic pressures.

Economic growth, social development and family business
Economists do not understand what causes growth. In the 1960s countries identified as particularly promising in achieving high rates of economic growth included Iran, Nigeria, Mexico, Venezuela, the Philippines and Burma. This was based mainly on the richness of their natural resources. In fact most, but not by any means all, countries rich in natural resources have had low or abysmal (eg Nigeria) growth. The remarkable success of the resource-poor East Asian tiger economies in the 1980s and 1990s – South Korea, Hong Kong, Taiwan and Singapore – was quite unexpected and had to be 'explained' after the event. By the mid/late 1990s, economists and institutions such as the World Bank and the Asian Development Bank became so convinced by what appeared to be an 'Asian model of growth' that predictions were confidently made that the 21st century would be the 'Asian century'. It was around then that the Asian scene was transformed from a miracle to a crisis. Currently, the only country experiencing high growth is China and that may be precarious also.

A major force for growth would be if industrialised countries opened their markets. It is well-known that open economies grow, closed economies do not. In the 1970s and 1980s, whereas open developing economies grew by an average annual per capita rate of 4. 5%, the figure for closed economies was 0. 7%. During this time India, which had – since its independence in 1947 – followed a state-dominated import substitution protectionist economic policy, grew at an annual average rate of 2. 2%. Following the economic reforms of market opening and liberalisation instituted in 1991, however, India's average annual per capita growth rate jumped to over 4%. For developing economies to benefit from open policies, it is imperative, of course, that they should have access to the major export markets, such as the EU, Switzerland, Japan, the USA and Canada.

The protectionist restrictions that these rich countries continue to maintain is pernicious and ultimately self-defeating. Business firms from the industrialised countries will increasingly need to rely on the developing economies, both as growing markets and as sources of labour, including skilled labour in areas such as software engineering.

Opening of markets in industrialised economies, however, is not enough. Most of the problems of the developing countries are home-grown. Inadequate institutions, poor infrastructure, excessive and inefficient bureaucracy, poor macro-economic management, corruption and nepotism are among the more prominent defects that, to varying degrees, plague most developing economies. In a word, poor governance. Although cultures across various parts of the globe diverge, the entrepreneurial urge and the work ethic appear to be quite universal. Thus it is not social or cultural features that retard growth, but deficient institutions and forms of governance. Consequently, a great deal of the efforts undertaken by international organisations such as the World Bank or other aid agencies to promote growth and development in developing economies have tended to fail, because they have been directed at and channelled through the state.

The Peruvian author Hernando de Soto has pioneered interesting and innovative research to show that in developing economies the problem is not the absence of capital – in fact he estimates that the hidden wealth of people in developing economies is monumental – but the failure of local institutions to tap and foster the wealth. Apart from the very rich and well connected elite, the vast majority of citizens in developing economies have no real jurisdictional standing and no institutional frameworks or property laws that adequately protect their assets.

It is very difficult for an 'ordinary'person in developing economies to start a (legal) business, as they are unlikely to obtain a bank loan, due to absence of collateral, or to get the various permissions required. (In some countries, over 1000 stamps are required to obtain a license to start a quite simple business. ) Consequently, de Soto explains that the only alternatives for 'entrepreneurs' in developing economies are either to migrate to countries where proper institutions and opportunities exist (hence the large number of, for example, Egyptian, Indian, Pakistani, Chinese and Argentinian entrepreneurs and family businesses in the USA, UK and Australia) or, in most cases, to become engaged in the informal (black) economy. The negative implications of the informal economy apply not only to lost revenues by the state that may be used for development, eg investment in infrastructure, health, education, environment, but also to the generally precarious existence of those engaged in the informal economy, whether from official prosecutors or local mafia. It is difficult to build more than a rudimentary business under such conditions.

The problem often refers to the adequacy of institutions and whether citizens trust their national institutions. An American writer, Francis Fukuyama, published a fascinating book entitled Trustwhere he described business structures and practices in different societies on the basis of trust. In protestant Western European countries, the 'AngloSaxon'countries (USA, Canada, Australia, New Zealand) and Japan, it is possible to establish large non-kinship based businesses because citizens in these countries basically trust their national institutions, eg courts of justice, administrations, tax collection and other regulatory agencies. In the rest of the world, only kinship-base, ie family, businesses can thrive, due to the absence of trust in national institutions and hence the imperative of relying exclusively on family. The author compares China and Italy, showing how in both countries, the absence of trust in institutions and bureaucracies means that large enterprises are always state-controlled enterprises while the private sector is dominated by family businesses. Indeed Chinese business, virtually everywhere, is family business.

The most dynamic developing economies tend to be those that have not impeded the growth of family business.

Family business and the economic challenges of the 21st Century
Business of any kind, including Western family businesses, needs to be interested in the developing economies as this is where growth and future profits are to be found. There is, however, a much broader and bolder conclusion to be drawn. While institutional reform in developing economies is to be encouraged, it is unrealistic to expect that it will happen quickly and even more unrealistic to expect that popular attitudes, especially those of trust, in respect to national institutions will change quickly. Developing economies need to provide the environment and infrastructure to permit the development and growth of family businesses. Given the current shortcomings of national institutions and the negative attitudes they foster, family based businesses are likely to be the only powerful engine of growth, wealth, job creation and innovation in the developing economies. Developing economies stand to learn a great deal from those industrialised economies where family businesses thrive. There is a great deal to be done in fostering networks, providing management skills, transferring technology and generally educating officials on family business dynamics.

Far from being relics of the past, family based businesses are the only means that may make the 21st century the tremendous opportunity for growth and prosperity it should be. 

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