The Healing Powers Of Restructuring
In the past year and a half since a financial crisis began to sweep the globe, central bankers have cut interest rates some 73 times. Governments opened the monetary taps to flood their economies with credit in hopes of reflating their way out of disaster or, in the case of the U.S. and Europe, avoiding it entirely. Yet liquidity in and of itself may not be sufficient to regain global growth. Japan, mired in a liquidity trap, shows that even zero interest rates will not spur growth.
Monetary easing must be accompanied by corporate restructuring and a regeneration of efficiency and profitability. That is certainly the lesson of the U.S. in the '80s. The savings and loan crisis led the Federal Reserve to pour money into the banking system. But it took the severe pain of downsizing and restructuring to set the stage for the growth and profit renaissance of the '90s.
The good news is that a new round of corporate restructuring is taking place around the world. A record $100 billion in direct investment poured into Asia in 1998, replacing the bank loans and short-term capital flows of previous years. The list of U.S. companies doing deals in Japan alone is surprising--from DuPont to GE Capital. All this foreign investment is changing Asian economic performance. In historic moves, CEOs from Hitachi and NEC were recently removed by their boards. Major layoffs are being announced daily. And conglomerates all over Asia are beginning to merge factories, cutting capacity.
In Europe, raiders are speeding up corporate restructuring. The hostile bid by Olivetti for Telecom Italia marks a new chapter in European capitalism. Harking back to the heyday of U.S. corporate raiders of the 1980s, the much smaller Olivetti is using debt and asset sales to try and take over the cash-rich Italian telecom giant. The end to Europe's industrial fiefdoms is near, with tight family control over industry (Italy and Sweden), government influence over companies (France), or behind-the-scenes shareholders agreements (Germany), waning fast.
In the U.S., of course, restructuring is now a way of corporate life. Pricing power is so weak that companies are reinventing themselves to take costs out and rebuild profit margins. Yesterday it was Sears Roebuck cutting prices and moving sales online. Today it's Levi Strauss shutting half its U.S. factories to move manufacturing outside the country. Restructuring never really stops.
Central bankers get the public credit for acting to revive global growth--but without renewal in the corporate sphere, their policies are not likely to succeed.