As Global Really Becomes Local

For better or for worse, 1998 provided the most powerful evidence yet that the business and financial world has become a global village.

Huge corporations, both American and foreign, geared up for international competition with a record-breaking torrent of billion-dollar acquisition deals.

Financial crises raced from East Asia to Russia to Brazil, pushed along by speculators who moved money around the world with blinding speed. And 11 European nations readied themselves to launch a common currency, the euro, and to unify their monetary policy.

“This year has been a watershed,” said Warren Bennis, a management professor at USC. “I don’t know what’s global and what’s local anymore.”

The march of globalization in 1998 offered the hope of a future with more jobs around the world and, particularly in developing nations, the prospect of a growing middle class.

Yet the globalization trend--supported by advances in information technology that help managers and investors deal with increasingly complex issues--also triggered alarms. The main concern: Do politicians and other policymakers around the world have the wherewithal to shield their nations from the turbulence of global financial markets?

The past year’s performance suggests that they generally don’t. The volatile markets contributed to the ouster of Indonesia’s President Suharto and threatened Russian leader Boris N. Yeltsin’s grasp on power.

“Developing nations were virtually powerless to do anything about capital flight,” said Robert B. Reich, who served as U.S. labor secretary during President Clinton’s first term and now is a professor of social and economic policy at Brandeis University in Waltham, Mass.

The story was far happier in the United States, but its main economic management tool, the Federal Reserve, was drawn into the international fray too. Guided by Chairman Alan Greenspan, the Fed moved to inoculate the nation against the Asian flu and other international financial trauma by easing short-term interest rates three times between late September and mid-November.

Many analysts saw the central bank’s actions as a historic departure from its longtime focus on fighting inflation.

Yet the Fed’s management of monetary policy, amid economic weakness overseas, let the buoyant U.S. economy continue to achieve a remarkable combination of low inflation and low unemployment.

With joblessness averaging 4.5% through the end of November, the nation is on the verge of posting its lowest yearlong unemployment rate since 1969.

Inflation, meanwhile, has been running at a skimpy 1.6% rate. If that pace holds through this month, 1998 will end with the second-lowest inflation rate the nation has seen in 34 years. The Fed, however, didn’t save stock market investors from a wild--albeit generally profitable--ride in 1998. The Dow Jones industrial average hit a peak of 9,337.97 on July 17, then plunged nearly 20% by the end of August before it rebounded to reach an all-time high of 9,374.27 on Nov. 23.

In a variety of other ways as well, things happened on a grand scale this year. The impotence remedy Viagra became the most successful drug ever introduced; Internet e-commerce emerged as a true force in retailing; and, in a jolt to many working people, layoff announcements soared. In the entertainment business, enormous severance packages sometimes softened the blow. Frank Biondi Jr., for example, was paid nearly $30 million for being fired as chairman and chief executive of Universal Studios.

It wasn’t just Hollywood executives, however, who prospered. The overall economy of Southern California demonstrated its resilience.

“1998 is the year when Southern California grew faster than Northern California, and that was symbolic of the move back to equality between the northern and southern regions” of the state, said Stephen Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy.

Although the Fed’s management of the national economy no doubt played a role, Southern California benefited mightily from an array of rising manufacturing industries, including toys, apparel and furniture, Levy said. In all, it marked a solid comeback from the deep recession of the early 1990s that stemmed from big defense industry cutbacks.

But Californians also saw two of their longtime leading bank companies gobbled up in acquisitions. BankAmerica was snagged by NationsBank, and Wells Fargo was bought by Norwest. Levy lamented that those deals mean more absentee ownership in California, reflecting what could be a damaging loss of business leadership in the state.

Nationally and internationally, big mergers were big news too. Nine of the world’s 10 largest merger deals ever were announced in 1998, according to the Newark, N.J.-based research firm Securities Data Co. “We have moved away from ‘big is bad,’ ” Levy said.

In the pursuit of size and global clout, some of the combinations evoked memories of corporate behemoths of bygone years. The pending Exxon-Mobil combination, for instance, would put back together much of the Standard Oil Trust that was broken up in 1911.

AT&T--which; divested the Baby Bell operating companies in 1984 and then, within the last three years, spun off two major divisions--bulked up again with a series of big purchases. The Baby Bells, meanwhile, kept reconnecting, with SBC Communications’ deal to buy Ameritech.

On the Internet front, a deal was reached between two U.S. companies with worldwide influence: America Online and Netscape Communications. Yet the merger that perhaps best symbolizes globalization is the one that united Germany’s Daimler-Benz with U.S. auto maker Chrysler.

In the face of the giant mergers, the nation may have started to reconsider its approach to antitrust enforcement. On the one hand, the public was blase about some mergers, such as the pending Exxon-Mobil deal, that would have frightened consumers a decade or two ago.

A recognition emerged that many industries operate in competitive global markets that protect American consumers from the threat of business monopolies, reducing the need in some cases for antitrust enforcement.

But 1998 also saw the Justice Department as well as 20 states bring a landmark antitrust case against software giant Microsoft. Ex-Labor Secretary Reich said the case signals a new focus on how a company’s technological dominance can damage competition in emerging industries.

Still, the year is ending with few solutions to the potential problems raised by globalization.

Reich said policymakers need to find new ways to slow the kinds of rapid flows that spooked financial markets in 1998. Last year, he said, “once money began to move, it effectively stampeded out of Southeast Asia.”

Other analysts offered similar assessments, saying the International Monetary Fund and World Bank have shown lately that they aren’t up to the task of dealing with global financial turmoil.

The vulnerability of the financial markets was dramatized in this country by the near-collapse of the Connecticut-based hedge fund Long-Term Capital Management. A crisis that threatened to rock global financial markets was averted only when a consortium of banks and brokerages agreed to bail out the fund with a $3.6-billion investment.

That frightening episode “raised the question of whether we need to move aggressively to unify and homogenize the rules and regulations that apply to financial institutions around the world, so that you don’t find some of these institutions falling between the cracks,” said Samuel L. Hayes, a finance professor at Harvard Business School.

“There’s a recognition that we dodged the bullet this time, but we can’t be sure we’ll be able to dodge subsequent bullets.”