The United States; Dashed expectations for Limitless Growth. US operations managers had spent much of the 1980s and 1990s responding to the assaults of Japanese and other Asian competitors. This had forced them to embark on a variety of improvement activities, many of which finally appeared to be bearing fruit. They had downsized their organizations, benchmarked the best in class, reengineering their business processes into a semblance of lean manufacturing outsourced noncore activities, and gotten closer to their customers. Finally, they appeared to have regained their competitiveness: their quality, responsiveness, and productivity all improved. Business boomed. New technologies and markets opened up, creating an attractive opportunities. The US economy grew at rates not seen since the mid-1960s and even the huge federal budget deficit, which had long acted as an anchor on business investment and prosperity suddenly shifted into surplus.
Even better stimulated by many years of apparently profitless investment in information technologies the nation’s aggregate annual rate of productivity growth slowly rose to more than 2.5 per cent by the year 2000. This allowed companies to increase wages without causing inflation. In an environment of rapid growth in sales and profits, nearly full employment and low rates of inflation, stock prices soared to unprecedented levels. The NASDAQ index, which tended to track high technology stocks, rose more than threefold in the course of just three years, and US stock markets as a whole came to be valued at more than the combined GDP of the rest of the world!
But dark clouds threatened this sunny landscape. The very attractiveness of the United States as a place to invest caused the dollar to soar relative to most other currencies, making American products more expensive to sell and foreign products more attractive to buy. The nation’s overall trade deficit, which had doubled to more than $100 billion a year between 1991 and 1998, averaged more than $100 billion a quarter in the early of the new millennium and its current account deficit rose to 5 per cent of GDP. This threatened a return to the dark days. The nation’s prosperity therefore, was at least partly due to people buying things faster than they could earn the money to pay for them- essentially borrowing against the future – and hence was sustainable in the long term.
Moreover the situation facing many American Old Economy companies was getting steadily bleaker. Because of worldwide gluts in capacity in a number of traditional industries their profit margins were under pressure. In addition, they were experiencing troubling plateaus in key measures of their operating effectiveness. As a result, they were constrained from increasing the wages of their less-skilled workers who, in effect were competing with the lesser-skilled and lower-paid workers in developing countries. Redoubling their effort to do more of the same things seemed increasingly unlikely to generate improvements at a rate any better than (If as good as) before.
Then the dark clouds intensified bringing a deluge of bad news that washed away much of the gains made in the 1990s. Consumer demand began tapering off around the world, corporate profits fell, and the new dot-com start-ups rapidly ran through their cash reserves. Just when the downturn began to level out, the horrific events of September 11, 2001 and the war on terrorism (as well as on the axis of evil) that followed gave promise that the twenty first century was likely to be a much less welcoming world than had previously been assumed. Finally, accounting scandals and increasing evidence of corporate fraud undermined investor confidence. Analysing the 1990s with the benefit of hindsight revealed that much of its apparent growth had been transient and illusory. Not only had it been fuelled by massive overinvestment in computers and telecommunications, but the corporate earnings reported at the time were later revised downward by a deluge of earnings restatements at a number of major companies – including Enron, Tyco, WorldCom, and Xerox, as well as by a delayed recognition of the real impact of stock options on profits. As a result, the irrational exuberance of the 1990s evaporated and global stock markets plummeted. The NASDAQ which peaked at more than 5,000 in early 2000 fell to below 1,100 during the following two and a half years, and even broader averages like the S&P 500 fell over a third. Major sectors of the economy – including airlines, telecommunications and steel plagued by overcapacity and weakening demand, hovered near bankruptcy.
Unlike the United States the 1990s had not been good years for Japan and much of Asia. Near the beginning of that decade, in the midst of near euphoric predictions that the twenty first century would be the Asian century Japan the region’s economic driver, saw its exuberant bubble economy (based on inflated stock and real estate values) collapse. Thereafter, it grew sluggishly (only about 1 per cent annually in real terms) despite more than $500 billion in government funding of several major attempts at fiscal stimulation. As a result, the confidence generated by four decades of rapid growth and the apparent invincibility of Japanese manufacturing companies in a number of major export industries slowly evaporated and the limitations of Japan’s traditional governmental, economic and industrial structures and systems became ever more apparent.