The Return of the Politician

The Return of the Politician

          
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The Return of the Politician

Back in the Driver's Seat
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  • In This Article
    • With the economy showing signs of stabilizing, it may be tempting to think that things will soon return to normal. Instead, a fundamental and persistent shift is under way that will require business leaders to reassess some of their basic assumptions.
    • Governments will play a much more pervasive role in business affairs. This expanded role will significantly alter growth prospects, cost structures, and the ability to attract top talent.
    • Farsighted business leaders will be able to accommodate—and even take advantage of—the rising influence of politicians and government officials.
     

    Today, Vilfredo Pareto, the Italian economist and philosopher, is best known for his principle that 20 percent of a group is responsible for 80 percent of its results. In the early part of the twentieth century, however, Pareto was equally well known for his theory about the rise and fall of power in society. In Pareto’s view, power rotates among different groups of elites. Overlooked in recent years, Pareto’s “circulation of elites” theory may be about to make a comeback.

    For the past 30 years, business leaders have essentially called the shots, proclaiming markets, deregulation, and globalization as their mantras. Global capitalism has triumphed at the expense of national governments. The world of business has attracted the brightest talent and offered the most attractive careers and compensation.

    The next few years will likely witness the return of the politician and the advent of a larger role for the state in the economy. Barack Obama, Angela Merkel, and Nicolas Sarkozy have shoved business titans off the front page. Politicians are now the ones in the driver’s seat.

    Evidence for the swing in power from corporations to governments is all around us: new trade barriers, the U.S. takeover of General Motors, the nationalization of banks, greater regulation of financial markets, and the reshaping of economic activity in the interest of climate control. Business leaders need to be prepared for the return of the politician into the affairs of business and adapt to that new reality.

    Taking Back the Power

    Politicians—or, more broadly, government officials—have always played a role in the economy, but that role has been significantly downplayed in recent years. If free markets, free trade, and technological innovation have largely defined the modern era, we tend to forget that they owed some of their initial success and development to governments. In the early 1980s, President Ronald Reagan in the United States and Prime Minister Margaret Thatcher in the United Kingdom triggered the worldwide trend toward liberalization, deregulation, and privatization. Meanwhile, the rapid expansion of China, India, and other developing nations over the past decade was facilitated by government officials and state-influenced economic policies as much as it was by the activities of entrepreneurs. In addition, in the United States, federal funding starting in the 1960s provided the spark that ignited the Internet and the subsequent explosion of creativity and wealth.

    The influence of government can be expected to increase in the future. As China has shown, the integration of politics and economics, under the right circumstances, can provide a tremendous advantage in speed and coherence. China has accelerated out of the global recession faster than most other nations by virtue of a broad array of innovative industrial policies and market interventions, not just traditional Keynesian government spending.

    The return of the politician is not merely a temporary outcome of the financial collapse, which required government intervention to repair. It is a consequence of business elites defining their roles and responsibilities both too narrowly and too extremely. As Indra K. Nooyi, chairman and chief executive officer of Pepsi, said in a recent speech, “Somewhere along the line, the advocates of the joint stock company began to believe they were running a sovereign entity.” Now, the true sovereigns—or, at least, the representatives of the people—are taking back the power.

    Many of today’s leading economic, environmental, and social challenges will require forceful and concerted action by politicians. Take, for example, the emergence of the so-called next billion in China, India, and other developing nations. This emerging class of new consumers is straining global demand for natural resources—which are often located in regions where nationalization is a risk or even a reality. If the next billion are to fully join the middle class, businesses and governments will need to work together to provide natural resources, infrastructure, and social services. Climate change is another issue that will require a strong role for government, independent of the outcome of the United Nations Climate Change Conference in Copenhagen.

    Responding to the New Realities

    The consequences of a shift in power from business executives to politicians are profound. Four, in particular, stand out.

    The Reallocation of Social Costs. Companies have long avoided bearing the full costs of doing business. Climate change and financial risk taking are two examples of business passing along costs to society. National and international efforts to reduce carbon dioxide emissions and government action in the United States, United Kingdom, and France to curb pay (and consequently risk) suggest that this reallocation is under way. Businesses need to broaden their strategic perspective to embrace social and ecological dimensions, not just as risks but as sources of potential advantage.

    A Less Global, More National Footprint. The globalization genie cannot—and should not—be put back in the bottle. But it will be increasingly constrained. The power of political institutions is bounded by national—or, in the case of the European Union, regional—borders. Politicians will be more sensitive to local needs and—as the financial crisis shows—more willing to nationalize banks and other companies essential to the domestic economy. Companies will need to rediscover the importance of national interests, local markets, and interactions with politicians. So, in developing growth strategies, multinational companies will have to consider a larger array of constraints, such as higher regulation, taxes, tariffs, and foreign subsidies that are essentially local in nature.

    Lower Profitability, Tougher Regulation, and Reduced Growth. Tighter regulation and the restructuring of financial markets will limit long-term risk taking. The capital markets will eventually recover. But for the foreseeable future, the leverage and speculative excesses that powered the rise in asset prices will be held in check. Outside of financial markets, politicians will likely limit the ability of companies to take advantage of lower labor and production costs—and lower standards in safety and environmental protection—in developing markets. In the United States, the Buy American campaign is just one example of the impulse of politicians to prop up local industry. If the climate bill becomes law in the United States, punitive tariffs might be imposed on imports from countries with weaker CO2 standards. Companies will need to find more ingenious ways to unlock growth and achieve lower costs.

    The Reorientation of Talent. The most talented people in society gravitate toward elite positions in order to achieve personal growth and career aspirations. The new elites will increasingly be attracted to government positions as the public sector regains credibility, visibility, and even admiration. Executives will need to rethink their recruiting strategies in order to compete with the public sector. Businesses will no longer be able to simply lavish recruits with more money when government jobs offer prestige, status, and real power. They will need to better define their social purpose and contribution in order to create meaningful careers.



    Business leaders can no longer draw comfort from Milton Friedman’s belief that “the business of business is business.” Fortunately, one of the enduring features of capitalism is its ability to evolve, and it will need to demonstrate this strength in accommodating the return of the politician and the increasing influence of the state on the economy. Executives will need to share power with a new class of elites, become more astute politically, and recognize a legitimate role for government in their affairs. If Pareto were alive, he might tell them that the business of politicians is now business, too.



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