International markets and the global economy (1):

One of the most extraordinary aspects of economic life in the last few decades has been the way in which all nations, including the UK, have increasingly found themselves part of a 'global economy'.

To an ever increasing extent, the goods which we see on shelves and in shops are either produced abroad, or domestically in firms owned by foreign nationals. This profound change in everyday life underpins much of the political disputation we observe between nations, both within the European Union and world-wide.

Economic life between nations has become so intimately intertwined in the contemporary world that it is difficult to recall that many of the developments leading to this level of intimacy are fairly recent. The writer intends, as part of this work, to look and explore some of the major institutional and historical changes which lie behind how globalisation is being directed. A key explanation of this huge transformation in the international competitive environment is to be found in the changes that have taken place within the unitary organisation and the behaviour of business. Production, in a wide sense, has been turned into a global activity, and has, undoubtedly, driven the increasing integration of international markets.

The main objective of this article will be an attempt in developing a perspective on competition which is dynamic, focusing on change and innovation. In order to understand the dynamics of competition, we need, I believe, to start from the behaviour of firms themselves. It is institutional changes and managerial decisions at the firm level which force changes in the competitive environment. Company strategy and organisation is therefore central in developing structures within the market.

Globalisation is an enormous area that encompasses many variables from different areas. How it intends to shift and develop further is an interesting topic for discussion. Before concentrating efforts on how things might develop in the future, we must look at the transformation of the economic environment in the twentieth century, that generated changes, not only in the competitive environment between firms, but also in the nature of economic rivalry between nations.

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Economic globalisation:

What precedent is there for the interconnectedness of the present-day world economy (Dowe, June 2007)? In terms of quantitative and qualitative measures, I believe no such precedent on these terms exist.

However, the growing interdependence of global trade must look at the expanding importance of international trade, the increasing importance of overseas direct investment that is being associated with the rise of the transnational firm and, the emergence, among these transnationals, in how they think globally about their own commercial strategies.

Ladies and gentlemen, this website has a direct link to the 'Reith Lectures'. These lectures are incredibly intensive but dedicated pieces of work that go to the heart of many societal issues. I would strongly urge and recommend any readers and visitors to Legal & Financial Guardian (Scotland) to consider and hear-out the lectures in the spirit by which they are given. They are orientated towards substance of great concern and deal with intricate economic, scientific and social concerns of the current era. A brilliant lecture was delivered - in various parts - concerning the issues, threats and risks posed by globalisation. Please use those lectures in understanding further the many great complexities that exist.

The author, wrote:

"However, the growing interdependence of global trade must look at the expanding importance of international trade, the increasing importance of overseas direct investment that is being associated with the rise of the transnational firm and, the emergence, among these transnationals, in how they think globally about their own commercial strategies". (Dowe, 01 June 2007: http://www.legalfinancial.blogspot.com/).

Taken together I believe, these trends form a process of internationalisation of trade and production in the world economy. It is particularly the last of these - the 'global firm' - together with the increased speed of international communications, which sometimes leads some economists and analysts to apply the label of 'globalisation' to these trends.

In focusing on international trade, it is important in understanding how a country's trade flows as registered in its 'Balance of Payments', which forms part of a country's national accounts.

The UK balance of payments includes a current account which incorporates visible and invisible trade. Visible trade is merely the Export and Import of goods. Invisibles include the Export and Import of Services, any net balance of interest, profits and dividends that might be due and any transfer balances requiring adjustment. The UK, for example, may have financial and monetary assets deployed overseas. On these investments, the UK will receive distribution income in the form of dividends or interest. Other Invisibles include income that is received from services such as tourism and insurance services. Transfers will include such things like UK government payments to the European Union and the United Nations.

The balance of payments also includes a capital account that details transactions in UK external assets (capital exports) and transactions in UK external liabilities (capital imports).

Once these figures are generated, governments are able to produce and publish GDP and GNP data which indicates, in essence, the net worth of a country's trade. The higher GDP is, the more prosperous a nation is.

Ladies and gentlemen, exports are an important element of the UK economy. Such a view could be re-written by stating that the UK is a very 'open economy'. This, certainly, has long been true. In the second half of the nineteenth century the British economy was about as open on this measure as it is now, reflecting the country's early lead in the industrial revolution and its long trading history patterns. The trade to GDP ratio dropped sharply with the general decline in international trade as a result of the 1930s depression and the two world wars.

Since 1945 however, there has certainly been a new worldwide trend to more open economics and trade. The growth of output since the Second World War is, most probably, unprecedented in the history of capitalism, but the growth within international trade has certainly been even more impressive. Providing a quantitative measure of 'internationalisation' is fairly simple to deduce by examining any record of world trade and comparing it with industrial output. Clearly, post-war improvements in transportation, such as the development of giant oil-tankers and of 'containerisation', which has reduced the costs of on-and-off loading goods at the docks, have certainly been significant in promoting international trading patterns. So to has the remarkable developments within transnational communications with which we are all familiar. Much of this trade boom has been in trade among developed industrial economies, which, as a group have a much higher trade to output ratio than they had say 50 0r 100 years ago.

Determining trade ratios and patterns, particularly in terms of quantitative changes, is a major element within the increasing interconnectedness of the world economy. In qualitative terms, international involvement in nations’ economies is also at an unprecedented level. Unquestionably, this qualitative change is largely associated with ‘foreign direct investments’ (FDIs), or, in simpler terms, the creation and mass growth of transnational firms.

In technical accounting and economic terms any outward FDI is registered as an acquisition of an overseas asset in the capital account of the balance of payments; inward FDI as a rise in liabilities to overseas owners.

Investments abroad are particularly important to national governments because, not only are investments likely to produce investment and dividend returns for the country concerned but, by their very nature, will afford wider opportunities such as employment and other marketing facilities. The potential of increased growth on capital plays a significant part in a country’s national income account. Investments may be just in cash, directed towards world markets that will, on the balance of things, produce a return. When such markets start falling, governments will quickly act by pulling their reserves into an ‘equalisation account’. For example, Britain provides huge sums of cash-inflows into the US $ account primarily based on the Dow-Jones being a market leader in how global markets are determined. Britain converts its pound sterling into dollars and will ride high on the market until the dollar starts to depreciate. In this way the pound can become stronger which, as an investment tool, may actually attract inward investment in capital and cash towards London. In essence, what this creates is a chain of events that increases the interconnectivity of global and world trade. Other world markets, which, when combined, does create the kind of 'globalisation' effect the world is currently witnessing.

Ladies and gentlemen, in concluding this part of my written work on the global economy it is apt in pointing out that a clear difference exists between foreign direct investments (FDIs) and so called 'portfolio investments'. In many articles produced by commentators it is quite common to read that no clear boundary line exists between the two. The writer, Mark Dowe, strongly disagrees with such views because FDI carries with it the possibility of direct involvement in the economic affairs of a nation by foreign nationals; the passive activities of portfolio-investments clearly doesn't. There has to be clearer guidance, perhaps from the World Bank, in terms of what is it that determines the holding of the debt of a company as opposed to a more active investor role?

© Copyright MarkDowe, 2007: all rights protected

Cybernetic control models:

Ladies and gentlemen, the concept of ‘cybernetic control’ is simple in essence but highly complex in execution.

Cybernetics is the study of evolution, adaptation and control of systems. In principle, the cybernetic control model is a model that can provide a framework for the study of the control of any system. This encompasses the design and implementation of systems such as Geographical Information Systems (GIS) and Management Information Systems (MIS) that are used within business as a controlling mechanism within such areas like budgets, forecasts and predicting future outcomes.

Cybernetics is a not a familiar term within the public domain despite it having a long association in the development of control models. For instance, is an accounting system to be of no avail when confronted with a dynamic and changing environment?

A business may identify its principal objective as increasing shareholder wealth by a quantitative measure such as earnings per share (eps) or annual profits declared. Directing the efforts of the people in the organisation to that achievement is complex, difficult and uncertain for a number of reasons.

Generally speaking business environments are inherently unstable and many events are outside the control of the people who run the business. The common held view by those able to share expertise in the field of cybernetics is that it operates in a fairly closed environment and therefore unusual trends are likely to be ignored. However, from a scientific point of view such spurious results are of real concern to the scientist, despite protestations that may arise from those who wish to simply ignore as to what and why such results were created.

Information systems, ladies and gentlemen, are as much a scientific issue as it is a social science facet. Combining the two, as in understanding ‘global warming’ for instance, is an imperative operative. The thrust of science will be felt harder throughout business in the coming years, and decades ahead. Cybernetic control is about perfection and rids itself of waste, inefficiencies and unproductive ethics. Delivery is an important professional gauge: those responsible and entrusted must ensure that such systems are robust, transparent, fully accountable and able to accommodate changes within the business and global environment.

Well defined cybernetic models tend to exhibit controlled reactions to any changes within the operation of the system. This, not only serving as an indicator, can be extremely useful in adapting to the system to environmental changes. Without it, the system is susceptible to becoming obsolete, ineffective and out-of-date. The application of science, even in its pure form, will become an important basis by which such systems evolve. Quantitative methods, for example, are having large scale impetus towards design and how changes to the system should be effected in the future. For instance, the effectiveness of ‘linear regression’, ‘linear programming’ and the ability to extract quick optimum results are rendering basic systems virtually useless. Organisations require systems that are much more than just merely claiming to be proactive. The combination of mathematical sciences with management accounting, for instance, should elicit systems that take no prisoners. Cybernetic models aim to bridge the expertise from various professional boundaries, not something that is entrenched from the past that was originally devised from within a narrow set of criteria.

Control in an organisation is rarely mechanistic and can take place at various levels in the hierarchy. ‘Multiple feedbacks’ should be a facility that reflects the complexity of an organisation or firm coping with many hostile influences in real world situations. Managers need to look ahead more frequently, as well as backwards. ‘Feed forward’, ladies and gentlemen, is an essential part of the intelligent approach required more and more by organisations.

In any dynamic organisation several sub-systems interact; this interdependence is a feature of the difficulty of running a business in an orderly and efficient manner. This interrelationship of subsystems is difficult to model and the broad outlook of any cybernetic control system is to view it in holistic terms. On the face of it, however, this in itself is an over-simplification.

Typically, a firm should be viewed as a whole, as a single system – that is made up of the several subsystems. Inevitably, all of the systems within a business need some form of control, the management accounting system (MIS) is one of the ways in which such control is applied. The cybernetic control model can be used in the appraisal and study of the Management Information System as a subsystem in its own right and, could also be used in analysing the organisation as a whole.

Objectives, initially set, are crucial underpinnings in the development of a cybernetic control system. Cybernetic development provides facilities that measures, compares and identifies what corrective action might be necessary as well as being able to actually implement them. Such a system is based on constant repetition of this measuring and implementation that allows for ‘feedback control’ and ‘feed forward control’.

Comparisons between actual outcomes and objectives = feedback control. Corrective action takes place after the system has gone out of control. Self-regulatory parameters allow the system to be robust enough in adapting.

If deviations are anticipated by using the model in a predictive manner and by taking corrective action so as to prevent the system from going out of control the process is described as ‘feed forward control’.

Either type of control can be applied in open or closed systems. Closed systems are systems whose operation is independent and isolated from its environment. Open systems are ones which are exposed directly to environmental change which brings in an element of unpredictability and uncertainty. A business, the framework for a management information system, is an open system. MIS’s are affected by environmental factors outside its control such as customers, suppliers, interest and exchange rates, competitors and so on.

Four essential conditions exist for the model (cybernetic control model) to be of use. Without them, such a model cannot be effective:

1. The outputs can be measured;

2. The objectives can be defined;

3. It is possible to identify the true reasons for any deviation from plan;

4. It is possible in determining corrective action which, when implemented, will have the appropriate and desired effect.

Unless such conditions apply any attempt at implementing such a model will be rendered useless. For example, unless outputs can be measured they cannot be compared to the system’s objectives. Whether a business is sufficiently predictable for the model to be useful depends on its nature. In any business, however, there are likely to be some aspects that are relatively stable where cybernetic control can and should provide useful insights.

Cybernetics is certainly becoming the preferred method of control as against other indigenous systems that may exist. The issue is certainly very complicated because of how firms operate in a complex and uncertain world and because of environmental uncertainties. Unless managers are effective themselves, the system will quickly reflect such deficiencies. However, such weaknesses require to be rooted out anyway. The great advantage of cybernetic models is its ability to reflect standards in firms as they are. Or, in other words, rise and fall by your own making.

Acid Rain:

Acid rain, first described in 1872 by an English Chemist, remains one of the industrialised worlds most intractable problems. What has taken humankind centuries to build, and nature millennia to evolve, is being degraded and destroyed in a matter of a few years.

Acid deposition is caused mainly be sulphur and nitrogen emissions from the burning of fossil fuels such as coal and oil in power plants, industrial boilers and car engines. When these pollutants combine with water vapour, sunlight and oxygen in the atmosphere, they create a diluted ‘soup’ of sulphuric and nitric acids. In some heavy industrialised regions, hydrogen chloride gases in the atmosphere produces hydrochloric acid, which can also be an ingredient of acid rain. It has been estimated that in the North East of the United States 65% of the acid rain is due to sulphuric acid, 30% to nitric acid content and 5% attributed to hydrochloric acid.

When this mixture is washed out of the atmosphere by rain, snow crystals, or in the form of dry particles, it increases the acidity of freshwater lakes and streams, and in some cases soils too. This consequently decreases their pH values. This pH scale measures acidity and alkalinity. A solution with a pH of 7 is neutral, anything above this is alkaline, and anything beneath is acidic. It is a logarithmic scale, so every full point is equivalent to factor of 10. Thus a pH of 6 is 10-times more acidic than neutral, and a pH of 5 is 100-times more acidic than neutral.

• Acid Rain and the ‘Environmental Toll’

Acidic smogs are destroying the magnificent historic buildings of Krakow, Poland, a world heritage site; ornate facades are disintegrating, walls and roofs are weakening. Acid rain and other airborne pollutants are biting into the marble of Athens’ monuments; experts say that more damage has been done to the Parthenon in the last 25-years than in the previous 2,400. The masonry of Cologne cathedral in Germany is being eaten away, many of Europe’s stained glass windows are fading, and many libraries in the United States have had to be fitted with special anti-pollution equipment to preserve many precious books.

Nearly, a quarter of Sweden’s 90,000 lakes are acidified to some extent; 4,000 of them so severely that no fish are thought to survive in them. Some 100,000 Kilometres of its rivers and streams are also affected. In the southern half of Norway, four-fifths of the lakes and streams are either technically dead or on the critical list; authorities say that fish have been destroyed in lakes covering a total of 13,000 square kilometres.

Thousands of lakes in the eastern United States – including at least 10% of all those in the Adirondack Mountains – are too acid to support fish. More than 300 lakes in Canada’s Ontario province are estimated to have pH values lower than 5 – the level at which most fish die – and another 48,000 are recorded as being threatened. Trout and Salmon no longer reproduce in nine acidic rivers in Nova Scotia.

Researchers in Germany believe that acid rain is one of the causes of Waldsterben (tree death), which afflicts more than half of the country’s forests. Acid deposition is also thought to be one of the main agents of the decline of Switzerland forests; 43% of the conifers in its central alpine region are dead or dying.

More than 900,000 square kilometres of European Russia is also thought to be affected by acid rain. The former East Germany has the highest per capita sulphur dioxide emissions in the world, and Poland, Czechoslovakia and Romania are among the most polluted countries on the earth. China, the world’s third largest emitter of sulphur dioxide, has growing problems in its southern provinces, and acid rain damage is spreading in other Third World countries like India, Nigeria, Columbia, Venezuela and Brazil.

• A man-made problem -

Although natural processes such as volcanic eruptions can cause acid rain, natures own doses of sulphur and nitrogen oxides are dwarfed by industrial pollution. Ever year, around 100-million metric tonnes of sulphur dioxides are released across the globe, with Europe and North America accounting for 38-million metric tonnes. More than 90% of the deposited sulphur is manmade. The countries belonging to the Organisation for Economic Cooperation and Development (OECD) generate around 37 million metric tonnes of nitrogen oxides every year.

Rainfall is naturally acidic, with a pH of around 5.6. But man’s pollution routinely increases acidity up to 100-times the natural level in industrialised countries. Data gathered by the European Monitoring and Evaluation Programme shows that the average pH values in central Europe are 4.3 or below. According to the OECD, polluted areas in Scandinavia, Japan, central Europe and eastern North America have annual pH values that can fall as low as 3.5.

Ever year, Norway experiences some rainfall that is as acidic as lemon juice. In the US, precipitation as acid as vinegar has fallen on Kane, Pennsylvania, and ‘rain’ with a pH value almost equivalent to battery acid once fell on Wheeling, West Virginia.

The effects of acid rain would be much more widespread if nature had not provided many areas with their own protection. Alkaline soils, like those covering most of Midway US and much of Southeast England, can resist acid fallout because the calcium in the soil neutralises – or ‘buffers’ – the acids; so can lakes which have beds of limestone or sandstone. On the other hand, where lakes and earth sit on thin glacial soils or thick slabs of granite – as in most of Scandinavia, Scotland and Central Europe – this buffering capacity is greatly reduced. It is these sensitive areas that are hardest hit by acid deposition.

• Hidden Killers -

Acid Rain, in itself, kills few fish. Sensitive species like salmon, trout, minnows and arctic char succumb to the lethal water chemistry which acid rain fosters. Acid waters contain increased concentrations of toxic heavy metals such as mercury, aluminium, manganese, lead and zinc. It is aluminium – the most common metal found in soils – leached into lakes and streams that really deliver the final blow. Aluminium toxicity peaks at around pH value 5. It clogs fish’s gills, causing them to suffocate.

Research shows that acidity of forest soils has increased five- to 10-fold over the past 20 to 50 years across vast areas of Europe and eastern North America. Acid rain leaches crucial nutrients such as potassium, calcium and magnesium from soils, depriving trees and other vegetation of these life-supporting elements. If sufficient stocks of soil nutrients are not available, trees become more susceptible to climatic stresses like frost and winter damage, as well as damage from other pollutants.

Acid rain has been linked to the alarming decline of sugar maples in northeast US and eastern Canada. Surveys carried out in Quebec province showed that nearly 50% of all sugar maple stands were affected by Waldsterben-like systems of dieback. Certainly if not reversed, Canada’s maple syrup industry – worth in the region of $80 million a year – could collapse.

• Conservation efforts: the acid test -

The costs of acid rain damage are difficult to assess. But it has been estimated that damage to metals, buildings and paint in the OECD member countries costs around $20 Billion annually. This does include costs of dead forests, acidified lakes or damaged crops.

By 1990, Sweden had added lime to some 6,000 lakes, covering more than 75% of the total acidified lake area in the country, in an effort to neutralise the acid and bring them back to life – at a cost of nearly $15 million a year. This, however, is at best a stopgap measure, mitigating the effects of acid rain but failing really to tackle the causes.

The Convention on Long Range Transboundary Air Pollution, promulgated by the United Nations Economic Commission for Europe, calls for reductions in sulphur dioxide emissions at source. It covers both West and East Europe and was ratified and brought into effect in 1983. At a meeting in Helsinki in 1985, a protocol mandating sulphur dioxide reductions of 30% by 1993 (using 1980 as the base year) was opened for signature and was quickly endorsed by 21-countries. A second protocol freezes nitrogen oxide emissions.

The European Community (EC) had gone further. Large fossil fuel power plants have had to cut emissions of sulphur dioxide by around 40% since 1998 and extending to 60% reductions by 2003. Austria, Germany and Switzerland had committed themselves to a two-thirds reduction by 1995 and empirical data available via the OECD shows that nitrogen oxides have been cut by the targets set of 30% by the end of 1998 in 12 Western European Countries.

European directives set new conditions that by the end of 1993; all new cars sold in EU countries will have to be fitted with catalytic converters that reduce emissions of nitrogen oxides and other pollutants.

Certainly, the conclusion of the author is that many industrialised countries are finally beginning to get to grips with the pollution that causes acid rain; even the US and the UK, which for a long time resisted controls, are taking action to reduce emissions. I do say however and warn that greater cuts are needed; sulphur dioxide emissions, for example, need to be cut by 90%. This is not unreasonable because until this happens, the scourge of acid rain will continue to spread and manifest itself.

© Copyright MarkDowe, 2007