How the World is gripped by the Doctrine of ‘Diminishing Returns’

The World today is facing profound challenges flowing from the fact the way forward in Economic / Political and Social terms is being questioned and resistance is building up to the idea of ‘business as usual’.

The major ideas that covered the last 3-4 decades of thinking were:

1. Globalisation will increase World Trade and Business, thereby enriching participating countries and as a consequence, the inhabitants of countries will be benefitted;
2. That Information Technology will continue to increase efficiency of Operations / transactions;
3. That Corporates will become larger and more transparent in an era of Disclosures and Compliances.  That improved audit quality will add to more ethical business practices;
4. That open commercial trade markets will generate political openness within nations and the idea of Democratic way of life will get strengthened.

Sadly, in some way the ideas above stand dis-credited and the world is looking at a new paradigm of operations to take matters forward.

It is now believed that Globalization has created a World Manufacturing Centre / Country (China) which presumably pays sub-par wages to it’s employees while taking away employment from the consuming countries / nations.  The USA has suddenly woken up that Globalized Trade (with supply chain logistics) is not entirely Fair Trade and that national tariffs are not unform – some protect their domestic industries much better and retain employment.  The next few years will see the current idea of ‘Global Trade’ being questioned on the grounds of diminishing returns and unfair trade practices by purchasing / consuming nations.

IT and efficiency of Business Operations. The monster of AI (Artificial Intelligence) is threatening employment possibility in the IT sector.  For the first time in decades, one is facing the reality of redundancy in IT jobs and nobody knows where AI will take IT and the World for manufacturing & services.  IT industry on capital markets is getting much lower Valuations and many are wondering whether the Industry as currently structured has a Role to play.  Existing IT Business structures are facing up to the reality of ‘diminishing returns’.

The corporate sector was looking as if the ‘Big is Better’ mantra will work and the expectation was that Compliances and Disclosures would be much superior.  As Corporates grew across the World, Audit and Management Advisory firms also grew.  However, the hope that large corporates would improve compliances and disclosures quality was belied.  Frauds continued to hit large corporates (sometimes management approved) and audit firms continued to be questioned on their audit methodology and audit controls.  In fact, the question being asked globally is whether audit services and management & Tax advisory services should be under the same firm structure.  In India, the NFRA (National Financial Reporting Authority) has called out the audit quality of the Big 4 firms operating in India.  Naturally, the India Big 4 firms are contesting this.  What we need to understand is that size is no guarantor of quality accounting, financial reporting and audit.  The Law of ‘Diminishing Return” has established itself.

There was a simplistic thinking in Europe and USA primarily that free and open trade externally will bring in freedom and fair play within the country.  Nothing could be further from the Truth. The case of China is clear to all.  China has become the World manufacturing base but the Chinese population continues to be politically deprived of freedoms.  In fact, China may well be on the road to becoming the ‘Communist Capitalist’ of the World.  They build huge infra works (whether required or not required) in nations, under onerous Debt covenants and when the Debt is not serviced and interest not paid (since the infra work has not given suitable returns), the project is seized.   In this way China is becoming a land owner of multiple areas of the World – successfully altering and modifying the practices of the East India Company in India in the 1700s and 1800s.

CONCLUSION:

The World is facing major threats in the economic model followed to date since some decades:

World Trade Order is being challenged. Tariffs are being weaponized and World Trade under WTO is looking like a dead duck completely irrelevant amidst the new political winds that are blowing;

Information Technology is undergoing a huge metamorphosis and may possibly consume itself and it’s stakeholders (corporates and the employees) to emerge in a new shape we are still unfamiliar with; Corporate Compliances, Disclosures, Accounting Quality and Audit thoroughness are being questioned;

The World structure of Manufacturing and Consumption is being reviewed.  Nations are relooking whether they were smart in giving up low technology manufacturing because that has employment potential.  One cannot be a consumer without having an employment source of income.  The middle class of nations is being squeezed out and income differentials between the lowest and the highest is sharply increasing.

The doctrine of ‘Diminishing Returns’ has hit the current World Economic Order like a tsunami, destroying all structures in it’s way.

The World will need to evolve a new World Order.  Hopefully, this World Order will be more equitable and fair than the existing that is collapsing.

This evolution of the new World Order is not the responsibility of Governments and their bureaucracy only.  Corporate managements and Professionals in IT and Corporate Finance / Audit will need to be an integral part of the development.

The Challenge is Huge but Humans have always faced challenges and overcome them.  The new World Order will not be perfect.  Over time, the doctrine of ‘diminishing returns’ will prevail and new structures will need to evolve.  ‘Constructive Destruction’ will always happen.