Cutting out a Sustainable Economy

The choice of who allocates resources is crucial. We see spectacular examples of government mismanagement. The market should be left free to allocate resources. Markets alone can assemble and convey essential information about security and value. Prices and profits will work to maximize production and minimize resource use.

Market mechanisms are sufficient to protect forests, for instance. Growing scarcity will drive up the price of wood, reduce consumption, as well as prompt landowners to plant more trees in anticipation of higher prices.

Traditional economics asks how to produce what for whom. Sustainable economics examines these same questions, but includes future generations in the ‘for whom.’ It asks how irreplaceable resources—water, air, soil, and fish and wildlife—can be adequately conserved. It also recognizes that economic mechanisms that do not efficiently and equitably satisfy human needs are not likely to be sustainable.

Sustainable economics analyze issues complicated by politics, ideology, and nationalism. It tries to ascertain what works to make resource use more efficient. How do people behave in relation to their, natural resources? How does a country’s economic system alter its prospects for survival? Measuring national performance in food security, energy efficiency, environmental pollution and equity can form the beginnings of an answer.

The issue is not socialism versus capitalism; it is the efficacy with which economic systems achieve their intended ends. Ideally nations could be graded for degree of market orientation and assessed for changes in resource use. But no one has invented a grading system for economic philosophy or environmental sustainability. It is instructive, nonetheless, to categorize nations as centrally planned or not and to assess their resource-use efficiency. A centrally planned economy is one that through price controls, state ownership, or allocation of capital effectively, managers more than half of a nation’s industrial and agricultural production.

From the end of World War 11 until a few years ago, centralized state planning has served as a model for almost half the world. Newly independent developing countries faced with the choice between centralized control and market orientation usually chose the former. That their foreign ruler had been capitalists turned them against market systems, while the tradition of colonialism eased the transition to tight central control. In the postwar era, many military states and even most market-orientated nations also expanded the role of government in the day-to-day management of their economies.

The world today is at a turning point in economic management. The abrupt Chinese shift to market mechanisms is the most dramatic example, not only because of the vast number of people affected, but because of the reform’s spectacular early successes. Many African nations, plagued with agricultural decline, have begun to extend market incentives for agriculture. Latin Americans, burdened with debt, have moved to sell off state-owned companies. Meanwhile the Soviet Union, its confidence in uninterrupted growth shaken, is debating the need for economic reform. Ironically, although Western governments have also begun to sell off state-owned concerns, they increasingly subsidize private agriculture, restrict trade, and permit concentration of economic power in industrial conglomerates.

The efficiency with which nations produce food and consume energy provides a useful indicator of their progress toward sustainability. Countries of all political stripes seek to avoid excessive dependence on food imports. Air and water pollution and land degradation are closely associated with agricultural production and energy-use efficiency. Thus, if market pricing and competition provide greater efficiency, both economists and environmentalists have a stake in the changing role of the market in the world’s economies.

Some environmentalists reject both markets and bureaucratic planning as incapable of dealing with the crisis of sustainability. Putting a sober twist on an old joke: ‘In capitalism, man exploits man; in socialism, it’s the other way around,’ they say both exploit nature. But important differences exist between systems, as shown by comparing their efficiency in agricultural production.

Agricultural production can critically affect the consumption and disruption of resources—water, wood, and air. Soil erosion and deforestation can result from low agricultural productivity if new, marginal lands are pressed into production to make up for lost potential. Overuse of chemicals can cause water pollution. Efficiency is consequently an essential ingredient of agricultural sustainability. Economists define efficiency, roughly, as maximizing output while minimizing input. When farmers produce a given value of grain with a least-cost combination of land, labor, fertilizer, and machinery, production is efficient. When grain production increases faster than consumption of the inputs, productivity and the outlook for sustained production improve. When productivity declines, a society is headed for trouble. Inflation, the need for costly imports, even famine can result.

Land and labor productivity, two partial but important measures of performance, reveal several advantages of market orientation. Crop production per hectare is generally higher in market-orientated countries. Of course, factors others than the economic system affect these ratings, such as rainfall levels, inherent soil fertility, and farm price policies that may either encourage or discourage farm efficiency. Japan’s population pressure, for example, has pushed it to increase land productivity, but this explains only about a third of the more efficient record it has than the Soviet Union. The remainder is attributable to policies that, among other things, keep prices high, encourage larger numbers of people to farm, and keep farm size low. Similar policies have placed market oriented Hungary even higher in land productivity.

Ranking nations by agricultural labor productivity shows a dramatic advantage for market economies. European countries enjoy labor productivity rates often double of countries like Poland, Cuba and Lithuania.

Labor productivity naturally tends to be higher when farmers earn high incomes, which in turn indicates higher levels of development, a central goal of economic policy. Strictly regulated prices reduce profitability for farmers, and deprive them of capital to invest in machinery and fertilizers to raise productivity.

Land productivity says little about the ‘total factor’ productivity of an agricultural system, which also takes into account inputs of labor, fertilizer, and machinery or animals. Efficiency can be distorted and productivity diminished by poorly crafted policies. For example, high price subsidies and protective trade barriers account for part of the relatively high land productivity in Japan. Consumers bear the cost of these distortions, paying almost three times the import price of food commodities.

Total factor productivity is relatively easy to determine in a perfectly competitive economy. Ideally, price signals instruct farmers on how much to spend on production, and they maximize their earnings by choosing the least-cost combination of labor, land, machinery, and fertilizer. According to microeconomic theory, they produce at the level at which the cost of their last, or marginal, unit of production—their most expensive ton of grain—just equals the price they receive. They maximize profits in this case, making efficiency and productivity almost synonymous. In non-market economies, on the other hand, prices of resources usually do not reflect their scarcity, and so resources must be allocated by plan, a fact that directly affects productivity.

In Europe resource efficiency in agricultural sector is frequently undermined by heavy farm production subsidies, both with trade barriers and direct budgetary expenditures. The United States is by no means unique among market-oriented countries in failing to adjust agricultural policies properly.

Common Market countries’ agricultural policies drive prices one fourth above world market levels on most products. Such subsidies hurt not only domestic consumers but also exporters of developing countries who could produce more efficiently and sell cheaper. The policies have the aim of preserving and sustaining the farm sector and its way of life. Cut the goal could be equally well served without the damage caused by price distortions if governments substituted direct income transfers for agricultural price supports.

Western nations, nonetheless, have long satisfied basic and fiber needs, and government policies have played a major role in this success. When policies such as minimum price supports are introduced in order to ensure food security and stabilize markets—this is, when supports are set below international market levels—they can be useful. When supports exceed world market levels, however, they interfere with trade, stimulate environmentally disruptive over production, waste taxpayers’ and consumers’ money. These distortions, like their more pervasive counterparts in planned economies, have political motivations that may well be worthy. But their impact on environmental and economic sustainability cannot be ignored. Ultimately, they become counterproductive.Asif J. Mir, Organizational Transformation

21st Century Business Leaders

In comparing the desired characteristics of future business leaders with the desired characteristics of the past business leaders there are both similarities and differences. Many qualities of effective leadership are seen as being important for yesterday, today and tomorrow. Characteristics like vision, integrity, focus on results and ensuring customer satisfaction which are still alien to Pakistan, are factors that were critical in the past and will be so in the future.

21st Century leaders will be thinking globally, appreciating cultural diversity, demonstrating technological savvy, building partnerships and sharing leadership.

Globalization is a trend that will have a major impact on the leader of the future. In the past, even major companies could focus on their own country or, at most, their own region. Those days are soon going to be over. The trend toward globally connected markets is likely to become even stronger in the future. Not only would leaders need to understand the economic implications of globalization; they will also have to understand the legal and political implications.

Two factors that are seen as making global thinking a key variable for the future are the dramatic projected increases in global trade and integrated global technology. There will be difficulty buying something made in one country because it will almost be impossible to determine what percent of the product is actually made in that country. Future leader will need to spend time in multiple countries to better understand how multi-country trade could help their organizations achieve a competitive advantage. In an environment where competitive pressures are rapidly increasing, producers will have to learn how to manage global production, marketing and sales teams.

New technology is another factor that is going to make global thinking a requirement for future leader. With the use of new technology it will be feasible to export even office and "white collar" work around the world. Computer programmers in Pakistan will communicate with designers in Italy to help develop products that will be manufactured in Indonesia and sold in Brazil. Leaders who are stuck in local thinking will be hard-pressed to compete in a global marketplace. Leaders who can make globalization work in their organization's favor will have a huge competitive advantage.

As the importance of globalization increases, future leaders will also need to appreciate cultural diversity. They will have to understand not only the economic and legal differences, but also the social and behavioral differences that are part of working around the world. Respect for differences in people is one of the most important qualities of a successful global leader. Developing an understanding of other cultures will not be just an obligation, it will be considered as an opportunity.

The appreciation of cultural diversity will need to include both the "big things" and "small things" that make up a unique culture. For example, few Europeans or Americans who work in the Middle East have taken the time to read (much less understand) the Qur’an.

The ability to motivate people in different cultures would become increasingly important. Motivational strategies that are effective in one culture may actually be offensive in another culture. Leaders who can effectively understand, appreciate and motivate colleagues in multiple cultures will become an increasingly valued resource in the future.

Technological savvy will be a key competency for the global leader of the future. It means that every future leader will be a gifted technician or a computer programmer. It also means that leaders will need to understand how the intelligent use of new technology can help their organizations; recruit, develop and maintain a network of technically competent people; know how to make and manage investments in new technology and be positive role models in leading the use of new technology.

New technology would become a critical variable that will directly impact organization's core business. I however feel pity for Pakistani executives who stubbornly think that they are either "too busy" or "too important" to learn the power of new tools. The organizations that have technologically savvy leaders will have a competitive advantage over organizations that did not.

Many of the future leaders will see the management of knowledge workers to be a key factor in their success. Knowledge workers are people who know more about what they are doing that their managers do.

In dealing with knowledge workers old models of leadership will not work. Telling people what to do and how to do it becomes ridiculous. The leader will be more in a mode of asking for input and sharing information. Knowledge workers of the future may well be difficult to keep. They will probably have little organizational loyalty and view themselves as professional "free agents" who will work for the leader who provides the most challenge and opportunity. Skills in hiring and retaining key talent will be a valuable commodity for the leader of the future. Sharing leadership may be one way to help demonstrate this skill.

To successfully prepare for the next millennium, tomorrow's organizations will have to either change the mind-set of many leaders or change their employment status. For leaders who are near retirement, this may not be an issue. For middle-aged leaders who lack the needed new skills this may be a challenge. Leaders will have to learn why the new skills are important. They will have to understand what they need to learn and be shown how they can best learn it.

The "bad news" is that many existing leaders do not see the value of these new competencies. The "good news" is that almost all of the top high-potential future leaders do see the value of these new competencies. Future leaders may be recruited to help mentor and develop present leaders. If future leaders have the wisdom to learn from the experience of present leaders and present leaders have the wisdom to learn new competencies from future leaders, both parties can share leadership in a way that can benefit their organization. Asif J. Mir, Organizational Transformation