Higher regulation, slower growth, says EIU
Capitalism entering new era of lower risk tolerance
Higher regulation, slower growth, says EIU
After close to 30 years of light-touch regulation, globalisation and free-markets, many commentators have suggested that capitalism itself is entering a new phase. In a new report, Risk and regulation: A new era for capitalism, sponsored by Dubai Holding, the Economist Intelligence Unit found that 60% of 418 global senior executives surveyed agree that the current crisis has “fundamentally changed” capitalism. According to one respondent, “Much as the Great Depression did in the 1930s, this crisis will permanently change the way governments and businesses view the world.”
The report examines the shape of this new landscape, how management decisions will change as a result and whether business people support government measures taken so far to stem the crisis. In summary, the executives surveyed believe there will be more government oversight, more economic nationalism, less risk-taking and slower growth.
Decision-making within businesses will reflect a new reality, as frugal customers and state regulators hold sway. The respondents support emergency intervention in the banking sector, but their opinions are more conservative when it comes to further reform, such as outright nationalisation of other key industries, creating so-called bad banks that buy and ring-fence toxic debts, or limits on executive pay and bonuses.
“Our survey shows how much the economic downturn has alarmed the business community,” said Robin Bew, editorial director and chief economist at the Economist Intelligence Unit. “Many respondents believe the psychological effects of this recession will last far into the next recovery. They expect they will need to adjust to a world of conservative banking, frugal customers and more active regulators for some time to come.”
The main findings of the survey include:
• Capitalism has “fundamentally changed”
Respondents say that their long-held faith in free markets is at an end, and Adam Smith's "invisible hand" appears to be malfunctioning. Nearly 60% of senior business executives agree that “the current crisis has fundamentally changed capitalism”. Moreover, 46% believe that when the upturn arrives there is unlikely to be a return to the finance driven economy of the past, with easy credit fuelling investment and asset prices.
• More regulation in banking sector and beyond
Today, regulation is no longer seen as counter-productive meddling in otherwise perfect markets, but a prerequisite for a functioning global economy. Business people are not known for their affection for red tape, and usually balk at the idea of accepting more bureaucracy. Yet almost two-thirds (65%) of executives agree with the statement: “I am in favour of further bank regulation, even if the result is slower economic growth.”
• Regulators and customers to have more sway over decision-making
Power centres are set to shift as well, with some stakeholders exerting more pressure than others. At the top of the influence list are regulators, customers and creditors. In contrast, employees, non-governmental organisations and trade unions will be left out in the cold, with large majorities believing their influence will wane or stay the same.
• Caution will prevail in the aftermath
Risk appetites will diminish in the next two years, and remain flat in the following two to five years. Respondents say that the hangover from this downturn will be longer than in the past, with almost 60% believing that economic growth will be harder to achieve in the next recovery.
• Broad support for government measures to stem the crisis
Nearly 70% of respondents support government intervention in the banking sector such as buying shares and nationalisation. The majority of respondents also believe that governments’ response to the downturn will have a long-term positive effect on their business. Only 17% think that the measures taken will have a negative effect on their long-term business prospects.
