Governments moving away from globalisation and funding basic salaries are pretty quick ways to increase costs in a national economy and hence inflation.
As Kartick Maheshwari, partner at law firm Khaitan & Co, said, India has a new policy for Chinese foreign direct investment: “All investment from China now requires prior approval of the Indian government and will increase timelines for transactions in this corridor; apart from adding the obvious new layer of regulatory uncertainty. The policy doesn’t distinguish between majority/control investments or minority/passive investments from China.”
This follows moves by the American government to restrict Chinese investments through the Committee for Foreign Investment, while European countries should buy stakes in companies to stave off the threat of Chinese takeovers, European Union (EU) competition chief Margrethe Vestager said last week.
Taking greater stakes in businesses also enables more effective control on how they use their cashflows – whether to support higher wages or reduce dividends and share buybacks to support innovation – and can be joined up with what is effectively a universal basic income through state-funded furloughing of staff or payments to citizens.
To be effective, this measure should ideally be able to support all parts of the economy, so it is no surprise to see countries offer to support leveraged loans, unprofitable small companies or almost anyone else wanting to claim.
In the UK, which is preparing to split from the EU at the end of the year (in its own strategic plan to increase local costs), the government is committing between £125,000 and £5m to UK-based, high-growth companies if matched by private funding, to a maximum of £250m, until the end of September.
Smaller businesses focused on research and development can also apply for a pot of up to £750m in grants and loans.
The UK’s scheme follows a package from the French government totalling €4bn in March, made up of bridge financing, loan guarantees and tax breaks, while Germany put forward €2bn to support its startups three weeks ago, according to the Financial Times. At a joint press conference, EU presidents revealed ambitious emerging plans for a trillion-euro recovery plan baked into a complete reconstruction of the next seven-year EU budget due to start next year.
And a powerful group led by William Stevens, founder of Bulgaria-based events business Tech Tour, is pushing for more of this funding to go to innovative businesses.
As Stevens said by email: “NOW is the time to select and invest in the right companies. NOW is the time to take a brave approach for renewal, responsibility by investors and entrepreneurs bottom-up (not top-down) and significant long-term returns (which will eventually allow us to pay back the huge debt being piled up).”
However, having destroyed the savings culture and productivity-led growth over the past 30 years, governments’ understandable reaction to the current crisis through protectionism, bailouts and localisation risks the return to an earlier, 1930s-style era of beggar-my-neighbour policies – the last time a long-run debt cycle came to a close in the west – and people turning on each other, as Alex Danco warns.
But while deleveraging and rebuilding growth is important, the bigger picture requires reflection on the larger changes underway in society. Anthemis partner David Galbraith said in a thoughtful post on Exponential View: “Current secular shifts are the result of transformational changes to flows of trade and capital (due to globalisation and the re-emergence of China), and information (due to the internet).”
In Scale, Geoffrey West showed that cities last longer than corporations because they crop up naturally in places that facilitate existing flows of information and ideas, and adapt to changes of these flows.
Governments should spend more time worrying about how to retain and encourage flexibility, innovation and resilience in their societies and economies together with openness to flows of information, even if the short term seems threatening.
