13.5.96

Economist downsizes claims for panacea

By David Sapsted in New York

DOWNSIZING has lost its most vocal supporter. Stephen Roach, who has preached the cause for five years in Congress, on Wall Street and to any economist prepared to listen, has decided he may have got it wrong.

Not that downsizing was ever that popular among the tens of thousands of Americans who lost their jobs in the search for the holy grail of leaner, fitter corporations. Increasing numbers of economists have also been doubting in recent years that a smaller workforce equals higher productivity.

But Mr Roach, the 50-year-old chief economist at Morgan Stanley, the American merchant bank, and former chief forecaster at the Federal Reserve, has always held out against the backsliders. Until now.

"And now I am not a hold-out," he said in a remarkable turn-around contained in a Morgan Stanley circular sent to clients at the weekend.

"I must confess that I am having second thoughts as to whether we have reached the promised land.

"These doubts have caused me to rethink many of the glorious conclusions that I have long argued would be part of the sacred productivity-led recovery.

"If it turns out that all we have done is squeeze out labour, then I have to reverse what I have built a reputation on. And it is increasingly clear to me that the improvements in operating performance and profits have been built on a steady stream of downsizings and cost-cutting that is just not sustainable.

"If all you do is cut, then you will eventually be left with nothing, with no market share."

Mr Roach's surprise conversion comes five years after he set out his position in the Harvard Business Review, arguing that service-sector corporations investing heavily in computer technology would become increasingly efficient by mergers and downsizing.

Steady economic growth, low inflation and strong profits have been real enough, he says, but they do not constitute a basis for the sustainable rise in productivity he once thought.