Tue, Feb 18, 2014 - Page 8 News List

China is Enron reborn as a country

By Jerome Keating

There was a time when many economic pundits and gurus promoted Enron Corp as the model company to emulate. It had a mystique. The guys that ran it were the “smartest guys in the room.” They were the innovative, bold, insightful risk-takers and the wizards that the financial world needed.

As the company grew, everyone wanted to get on this bandwagon of praise and profit. It was great as long as a lack of transparency veiled Enron’s shell game of mark-to-market profits and fabricated companies.

The hype over the numbers began to diminish once the bottom line was more closely checked. Demystification began. The shell game stumbled and the smartest guys in the room slid past clever down to being downright deceitful crooks who built an empire on deceptive practices and made-up reports.

Because of its success, Enron had, for sure, developed a mystique. It could do no wrong; it was, after all, not just financially successful, but big-time successful. Yet in the clear light of day shone, the end came quickly. Shares dropped from US$90.75 to US$0.61 in just over a year; people wondered why they had not seen the bankruptcy coming. Some of the company’s leaders went to jail, while others escaped and at least one committed suicide.

Their auditors, Arthur Andersen LLP, went down. Enron’s investors lost, but it was Enron’s 20,000 plus employees who bore the main brunt of collateral damage. Besides jobs, they lost about US$2 billion in shares and pensions. A later court settlement awarded them US$85 million, but that hardly balanced against the evaporated US$1.9 billion.

So what has this to do with China’s mystique? For the past two decades, the pundits of profit have been touting China’s growth and promise as the savior of the economic world. As a result, China has achieved a far greater mystique than Enron ever did, and one that operates on many levels.

Growth and profit are certainly there, but why and how? What needs to be demystified?

For starters, a shift in perspective is needed, one that begins with viewing China through the prism of a large corporation run by a select oligarchy and bent on regional if not world power.

Strange? Think on it. One key to Enron’s dominant early “economic success” was its lack of transparency and its ability to hide developing problems. China certainly has opaqueness in spades, as well as the added bonus of state-controlled media and a military and police force to squelch any forces that might question its methods.

As Enron sought to dominate the gas and energy market, China has initially sought to dominate the manufacturing field by becoming the factory of the world. Try the experiment of finding something that was not “made in China.”

China has other “corporate advantages,” including a much larger and more controllable workforce than Enron ever could imagine, but it still needs resources.

Pundits of profit can point to years of annual GDP growth of 10 percent and more, but as China’s growth now slows to 7.5 percent annually, cracks in the image develop. China has certainly become the manufacturing giant of the world, but why then are companies, including those based in Taiwan, already beginning to source other manufacturing locations?

There are other indicators that the pundits do not mention. While manufacturing has created jobs for millions, there remain many more millions in need of work. Meanwhile, wages rise in an attempt to keep pace with inflation, but making it more difficult for additional, newer factories to be built and compete.

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