The saga of low standards and false profits that has caused the collapse of the US stock market has led to the passage of two important bills, which could have major consequences for economic growth and prosperity in the US and the rest of the world. The effect of these bills on the stock market last week was a rally, with three consecutive days of gain that totalled 8 per cent. However, the issue of corporate governance re-surfaced. Last Friday the headlines focused on WorldComs increase in the amount by which it had mis-stated its earnings - up from US$3.8 billion to a whopping US$7.1 billion!
The stock market collapse has spilled over into other areas of the economy. It has been associated with, if not directly caused, the economy, which had started to show signs of recovery in the first quarter of the year, to falter as GDP growth in the second quarter slowed considerably; downward pressure on the US dollar; a fall in federal and state revenues; and, adverse developments in the US job market.
One further development that has recently come to light is that in the wake of corporate frauds and the loss of investor confidence, foreign investors in the USA have become more cautious. This is true for those investing in US securities as well as making direct investments or FDI. FDI has contributed significantly to the long economic boom of the 1990s. Throughout the 1980s and 1990s FDI flowed in to many sectors of the US economy. There were large spectacular mergers and acquisitions (M&As) and greenfield investments in new plants. These investments peaked at over US$300 billion in 2000. However, during 2001 this was nearly halved - down to about US$124 billion. Reports are that this year FDI is expected to be further reduced. Meanwhile, annual foreign capital investment in the USA to expand, re-equip, and re-tool operations reached nearly US$140 billion in 1999. This total was about 9 per cent of total private capital outlays in the US in that year. This amount was substantially up from the average of 5 per cent in the mid-1980s. The reduced FDI has added urgency to the calls for swift policy responses. Fast-tracking trade negotiations
In a very narrow vote (215-to-212) the US House of Representatives passed legislation that effectively gave the President the authority to conclude trade negotiations through 2007 "unfettered" by the Congress. The authority requires that the
Congress approve or reject the agreements entered into by the Administration in their entirety, that is, without any amendments whatsoever. This is more generally known as Presidential fast-track authority. This legislation frees the Administration to cut trade deals, which under the US Constitution can only be done with Congressional approval. President Clinton, despite his enormous popularity, failed on three separate occasions to get this authority from Congress.
The impact of this legislation will be felt in many areas. First, it could bolster investor confidence if it is perceived from this that the Administration has a firm grip on the highly disruptive economic events now taking place.
Second, it could help to improve the stormy trade relation that exists between the USA and the European Union (EU). The recent US raising of the import tariff on steel and the increase in farm subsidies have angered those responsible for the EU's trade. It is routine US trade strategy that when trade conflicts arise with other countries for the Administration to cover itself by blaming Congress with which constitutionally, it shares responsibility for US trade relations.
Fast track authority could therefore be presented to its trade partners as a unique opportunity for the Administration to free itself from the horse-trading and domestic pressures emanating from Congress.
Third, it could also enhance the US position in the WTO and perhaps breathe new interest into the post-Doha negotiations now taking place. And, last but by no means least, it could turn out to be a decisive step in creating certainty in the expectation that FTAA negotiations will be concluded by the 2005 deadline.
This certainty is important not only for the FTAA, but because in the aftermath of September 11, the Latin America and Caribbean region now faces its worst economic crisis since World War II. If there is any doubt about this, one only has to note the present instability and turmoil in Argentina, Brazil, Bolivia, Paraguay, Uruguay, Venezuela, Ecuador, Peru, Guyana, and Jamaica. 'No more easy money, just hard time'
In an almost complete about face, President Bush also signed the bill coming out of Congress aimed at curbing fraud, theft, and scams in corporate America. Three weeks before, Bush had publicly rejected many of the provisions in the Bill. The fact that this about face occurred is testimony to the truly momentous nature of the threat to the US economy and society posed by recent events surrounding the stock market collapse. I have tried in recent articles to convey the importance of what is at issue to readers, but President Bush's action speaks far louder than anything I could have written.
At the ceremony when the Bill was signed the President confronted US corporations with the blunt sentence: "No more easy money for corporate criminals, just jail time." He went on to vow that no boardroom in the US will be a sanctuary for criminals, beyond the law. He said as well, "The era of low standards and false profits is over."
The Bill is reputedly a major revamping of legislation pertaining to corporate fraud, accounting, and securities. For our immediate purposes there are a few features to stress. First, the Bill creates a regulatory board to oversee the accounting industry. This board has both investigation and enforcement powers, which means, for example, that corrupt auditors can be punished. Second, the bill establishes new standards for prosecuting wrongdoing. Third, it gives protection to persons that are described in the US as 'whistle blowers.' These are persons willing to come forward and report on wrongdoing in any organisation where they work or to which they belong.
Finally, the bill specifically singles out executives who defraud investors and assures them jail time if they are found guilty of such offences.
Taken together these two pieces of legislation represent major economic initiatives and a remarkable political achievement for President Bush, who is no doubt finding himself and his administration more and more mired in corporate theft.