The Economic Crisis of 2007 and the Future of the UK - Essay Example

?The Economic Crisis of 2007 and the Future of the UK: A Macro-Environmental Analysis This essay aims to explore the impact of the global financial crisis of 2007 on the status and future of the UK using a macro-environmental analysis approach. The STEEPLE framework will be used to identify and assess different consequences of the economic crisis. The essay will conclude with a brief summary of the findings. The Macro-Environment Worthington and Britton (2009, p.6) define the macro environment as “those ... factors ...which affect a wide variety of businesses and which can emanate not only from local and national sources but also from international and supranational developments”. Johnson et al (2008, p.55) identify the PESTEL framework as a means of analysing the environment. Following the corporate scandals of Enron and WorldCom, several commentators have added ethics to the list of analytical factors and it is this approach that will be used to analyse the macro-environment of the UK following the global financial crisis of 2007. The STEEPLE framework considers the Socio-cultural, Technological, Economic, Environmental, Political, Legal and Ethical factors that affect business and over which business has no control. An analysis of the current environment is as follows: Figure 1: Macro Environmental Analysis Although this analysis is brief, it provides insight into potential problems facing the UK in the short- and medium-term in different areas. Some of these will be evaluated in more detail. Socio-Cultural Factors Factors within this area tend to be long-term trends, such as the changing pattern of work and women’s participation in the labour market. Following the UK general election in 2010 and the change of government, there has been a significant shift in the approach to the public sector and state support for the country’s population. This is manifesting itself in student protests to increased university fees and reduced university teaching budgets (Kingsley 2010), with predictions of more extreme social action this year as the policies announced last year begin to take effect (Taylor 2010). Global organisations the IMF and OECD have identified a significant “human cost” if the government’s cuts are implemented in full (Inman 2010). The OECD are reported as stating that the cuts “risked derailing economic recovery” (ibid), with the IMF highlighting that unemployment levels will increase dramatically, leaving many people facing a significant reduction in their “livelihood, security and dignity” (ibid). They also highlight that following job losses, people suffer from health problems. Children of parents without work do worse in school and overall “faith in public institutions and democracy” (ibid) is reduced. The previous year, the OECD has predicted a “full-blown social crisis” following the expected rise in global unemployment (Seager, 2009). The OECD secretary general was reported to have said that: “restoring global growth is an economic and political priority but also an ethical, moral, social and human imperative. And employment and social policies are an essential component of a successful strategy to bring .... countries back on a growth track” (Seager 2009) This demonstrates that the different elements within the macro-environment are interrelated and cannot really be separated as this analysis suggests. The over-riding fear in the social domain is an increasingly polarised society with the haves doing much better and the have-nots being pushed into poverty as unemployment increases and welfare benefits are cut (Armour 2010). Technological Factors Technology includes not only information technology but the processes by which manufacturers and service providers create and deliver their products. Although the biggest impact in the technology area has been the increasing power and availability of computing power, the impact for manufacturing should not be forgotten. Most homes in the UK now have access to a personal computer and the internet, allowing them to undertake new tasks without leaving home, such as information and job searches. Children increasingly rely on the internet to help with school work (Mitra, 2010) and government had made plans to ensure all children had access to computers (Gould 2008), although this spending is now under threat. Technological innovations in manufacturing seem to elude the UK, although Germany has begun reaping the benefits of a long-term strategy that resulted in improved products and competitiveness (Elliott 2011b), although there might be issues with Germany’s reliance on exports. As an example, consider the textiles industry broken down into the categories of raw materials, work-in-progress and finished goods, and augmented goods. An examination of the figures demonstrates that, compared to the UK, Germany is ahead in all three areas of export (France is included for comparison purposes: Country Category of Export Textile Fibres and Their Wastes Textile Yarn, Fabrics, Made-Up Articles Articles of Apparel and Clothing Accessories (US $ mn) (US $ mn) (US $ mn) France 397.8 5,867.3 10,452.1 Germany 1,288.5 12,021.5 16,396.8 United Kingdom 702.1 3,518.2 5,326.9 Table 1 Textile Export Categories by Country for 2009 (Source: Euromonitor, 2011) Clearly the Germans are doing something right with their approach to industry and the use of technology, something that the UK could learn from. However, without significant investment, the UK is unlikely to catch the Germans and with the current round of cuts being implemented, availability of funds is questionable. Industry does not seem to be willing to invest in their technological capability, preferring at present to play a waiting game to see how the cuts affect the country (Kollewe 2011). As the government was hoping increased exports and decreased imports would allow the UK to move into a sustained recovery (ibid) but unless the UK invests significantly in technology development, this is not going to happen. Economic Factors Armour (2010, p.168) highlights the division of economics from it social element, to become focused purely on the numbers. This, he argues, is how banks invested in assets that turned out to be liabilities involving “unwarranted risks”. The complexity of economics has been lost as practitioners and students see the subject as “a self-contained discipline”. It appears to be something the current government have also forgotten as they pursue policies apparently aimed at reducing the fiscal deficit in five years, without any consideration of the real effects of their policies on the majority of the UK population (Gentleman 2010). The consequences of actions taken with the approval of the Houses of Parliament, including the current government who were then in opposition, are the problem to be resolved (Keegan, 2011), ignoring the impact that increased spending in 2009 has had on the speed of the UK’s recovery from recession and their own involvement in the decision (Ross 2011). Such rewriting of the immediate past do nothing for the political environment of the UK (see later discussion). Lane (2010, p.467) identifies the bonus culture as fuelling the economic crisis, with the use of paper-based instruments allowing brokers and traders to chase bonuses without regard to the underlying risks of the situation. This is a concern at it would appear that, despite what happened in 2007, and the clear identification of risk being ignored in favour of reward, banks are again announcing record profits and record bonuses for their staff (Treanor and Wintour 2011). Despite the rhetoric of last year, the current government have done nothing to stem the bonus culture, risking the possibility of a repeat of the 2007 crisis and the need for a further bail-out that, this time, the state cannot afford. Comments from economists on the government’s approach to the economy are revealing, and worrying. Redwood (in Kellowe 2010) states “the .. update does nothing to alter the fact that the fiscal squeeze will be the defining influence on the economy over the next few years”; Kern (ibid) says “the government must focus on enabling the private sector to make 2011 a year for growth”; McWilliams and Corfe (ibid) believe “that people in government have no idea what is going on in the real world of business. They seem to think that a degree of economic momentum will continue regardless of the circumstances”. The disconnect of the economic policies of the government from the reality of life in the UK for individuals and businesses could cost the country dear in the next few years. Environmental Factors In addition to identifying problems with the bonus culture, Lane (2010) identifies the need to move away from the fossil-fuel burning that underpins much of society’s activities, towards “an energy saving or at least energy efficient economy” (p.466). The appearance of the environment within the macro-environmental analytical frameworks is as a result of consumer pressure to consider the impact of business (and life in general) on the environment, which cannot sustain current consumptions patterns in the medium-to-long term. The green movement is gaining global momentum (Siegle 2011) with emphasis on sustainability creeping in to business operations. But the government, despite trumpeting its green credentials, is seen as not pushing the agenda as seriously as it should (Whitehead 2011). For businesses, there is increasing recognition that “going green” makes commercial sense, as well as boosting credentials in the ethics department (see later discussion) and providing something extra to put in the advertising. Carbon trading is being taken seriously by several organisations, including the Co-Operative Group, Aviva, Marks and Spencer, Jaguar Land Rover and Tesco (Wright, 2011), who also take other measures to reduce their impact on the environment as much as they can. One area that could reap significant benefits for both business and the environment is considering green ICT. Foster (2011) identifies several areas for improvement, including energy efficient servers, personal computers and software, as well as educating users to do simple things like switch off their pcs when not in use. And in the area of operations management, sustainability is becoming a key consideration in the design of supply chains (Lee, 2010). In the medium-to-long term, it is probable that the emphasis on sustainability will increase as natural resources come under increasing pressure. Political Factors The UK population is seen as being increasingly disengaged from the political process, as they perceive they have no voice or influence in the activities of government (Loncar 2010). In 2001, 59.4% of the population voted, the lowest turnout on record, with 2005 not increasing by much (1.6%) to 61.4% (ibid). Since the 2005 election, there have been several political scandals, the worst of which was the expenses claimed by politicians that led to a criminal investigation and, thus far, the conviction of two MPs. The scale of the claimed expenses exposed an attitude towards taxpayer funds that the electorate were extremely angry about, especially as the scandal broke after the recession when many people were either losing their jobs or being forced to take pay freezes or cuts (Baker, 2009). The ripples continue to be seen today: in addition to the criminal trials taking place, it is reported that an MP has reported six colleagues to the police (Press Association 2011). Worse, for the electorate, MPs’ complaints might lead to an overhaul of the new system’s “unfair rules” (Curtis, 2011), despite indications that the electorate still do not trust politicians to claim expenses correctly (Helm 2011). Further problems stem from an emerging belief that the economy is being run on ideological grounds rather than economic ones. Prentis (2010) is the first to voice the concern, disputing the espoused progressive approach of the new government and voicing concerns about potential social unrest involving riots. Snowdon (2010) had previously highlighted the differences between public views and the political stances taken, which does not bode well for political engagement. Public campaigns are springing up to fight the cuts, including protesters targeting tax avoiders who have scored some victories in this area, with public support (Macallister and Clark 2010). It is difficult to see how political engagement might increase with such a divide between politicians and the electorate. Being involved in politics is seen as being part of life satisfaction (Pacheco and Lange 2010): the “Big Society” idea is on shaky ground in the political arena. Legal Factors There is an interesting stand-off developing between the government and the judiciary, with an increasing number of legal challenges being launched against government and being upheld by judges. It can be argued that legislation represents an expression of the political ideology of the party in power, especially when, facing the possibility of riots, strikes and general civil unrest, it is reported that consideration will be given to strengthening anti-strike legislation requiring a majority of those entitled to vote back strike action (Wintour 2011) and that this is being done at the request of business. Proposals to compel businesses to undertake activities are shelved, including compulsory equal pay audits (Gentleman and Martinson 2010), or postponed (Elliott and Jowit 2010). It is no wonder that the government seems to be in the pockets of big business. Ethical Factors Corporate social responsibility has also been subject to interesting treatment by businesses. Rossi (2010) proposes that compliance should be considered an integral part of any business and their strategy, although compliance is on a self-regulatory basis and assumes that shareholders are both rational and in a position to demand compliance. It could be argued that self-regulation in the banking sector has failed, given the economic crisis. And it appears that some businesses are not minded to act in what might be considered an ethical way. Several banks were tardy in signing a tax-avoidance code, implying an intention to put shareholders’ interests first regardless of the consequences (Treanor, 2010), and this at the same time at boardroom pay is found to have risen 55% when the country is still emerging from recession (Goodley and Wearden 2010). Interestingly, though, the new head of the CBI is reported to have indicated that those who earn more should pay more tax (Clark 2010), which is a novel approach coming from an organisation representing the heads of major organisations traditionally opposed to any taxes on earnings, whether company or their own. Whether this will generate a sea-change in approaches to taxation is another matter. Conclusion Drawing definitive conclusions from this analysis is extremely difficult as the UK business environment is volatile and likely to remain so for a considerable period of time, given the different forces at play. The possibility of a further economic crisis cannot be ruled out, although the World Economic Forum (WEF) believes that the global economy could not cope with such a thing (Elliott 2011a). The social consequences of the current economic policy become more frightening by the day, with increased reporting of new sectors of the population being adversely affected by cuts and/or increased taxes. The WEF reports that globalisation has only benefited the few (ibid): the current outlook is that, within the UK, that minority will continue to be the only ones who benefit in the future. Word Count: 2,445 words including tables but excluding diagrams and references References Armour, L. (2010) ‘Radical economics and our current predicament’ International Journal of Social Economics Vol. 37 No. 3 pp.168-178 Baker, N. (2009) ‘More transparency on MPs’ expenses’ The Guardian 18 June available online at http://www.guardian.co.uk/commentisfree/2009/jun/18/mps-expenses-transparency [accessed 16th January 2011] Clark, A. 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