Essay on Government Choices: Short Termism and Long Termism

Short-termism is a global phenomenon which affects developed countries in the form of socio-economic issues. The term was first introduced to describe the economic approach of the 1990s, when it was also used in psycho-social theory related to intertemporal choices (Loewenstein & Thailer, as cited in Barton, Manika, Koller, Palter, Godsall, & Zoffer, 2017). During the same decade, it has been claimed by Dickerson et al (as cited in Barton et al., 2017) that “companies cut expenditure on items such as R&D, training, capital expenditure and other factors which might improve longer-term economic performance in order to maximize current profits and hence dividends.”. Similarly, this new approach assumes that people choice and action are based on a short-term outcome, sacrificing more sustainable long-term values.

To clarify, Intertemporal choices refers to the great importance of rewards timing in our decision making and according to this theory, time and perspectives are both dominant in our choices. In fact, modern economic models, known as model of discounted utility (Jackson & Petraki, 2011) have followed the same line but another important factor has been introduced: uncertainty. In this regard, Jackson and Petraki (2011) advocate that when actors have to make a decision about the future, the margin of uncertain situations inevitably grows as the timeframe increases and, consequently, decisions with shorter timeframes become more desirable. As a consequence, people prefer to act in order to avoid uncertainty about the future, even if their choices lead to risk-averse situations.

As mentioned above, in the last 30 years, debate surrounding short-termism has mostly been confined to its economic consequences. Unfortunately, the phenomenon has infiltrated several sectors of society (Jackson & Petraki, 2011). It is highly likely that one of the most affected is the political field.

It is frequently claimed that the ability to rapidly improve the economy of a country should be the most salient characteristic of a reliable political leader. According to this point of view, a country with such a political approach, should see immediate benefits in terms of socio-economic prosperity. In fact, in recent years, several governments have carried out this approach in order to secure re-election. One of the example isthe corrupted Italian government during the 1990s, where a judicial investigation called Mani Pulite discovered “a widespread system of corruption among politicians and businessmen” (Garrì, 2009). Furthermore, it is worth mentioning the New Orleans disaster where, as a result of Hurricane Katrina, the levees that would have protected the city from flooding dramatically failed because of the local government’s underestimation and carelessness of the threat (Shughart, as cited in Garrì, 2009).

Unfortunately, in spite of ensuring short-term welfare, a short-term plan does not allow long-term growth. Regarding to this, Tanzi and Davoodi (as cited in Garrì, 2009) advocate that investing in new capital projects allows politicians to secure a more widespread approval than investing in long-term projects. In addition, if an elected politician does not deliver an immediate outcome, citizens often consider him an inept leader who is not capable of managing his country. It is obviously a complex issue, but it is still important to consider the negative impacts of short-term planning (Garrì, 2009).

One of the visible consequences of this approach is probably climate change. It has been claimed that underdeveloped countries are increasing their emission of greenhouse gases (GHG) in order to improve their industry. However, others maintain that developed countries are also contributing to the exacerbation of climate change. In fact, Slawinki, Pinkse, Bush & Banerjeed (2014) conducted a study regarding the inefficiency of governments to react to climate change consequences. One of the cause of their inability, have certainly be the failure of governments to not adopt any measure or agreement in order to achieve such reductions of GHG emissions (Slawinski et al., 2014). According to Margolis e Wash (2003, as cited in Garrì, 2009), over the 21 century, governments are prioritising immediate economic reward instead of more sustainable planning. Despite several attempts at environmental organisation, the spread of a populist approach is further damaging our environment with a prioritisation of unsustainable industry plans. However, organisations have acted in order to reduce their emissions and recently, investments in renewable energy have been carried out (Hoffman; Okereke & Russel; Pinkse & Kolk, all as cited in Slawinski, et al., 2014).

Nevertheless, statistics still show high values in GHG emissions which means that in spite the fact of drawing the attention to climate change, the measures adopted are not enough (Slawinski, Pinkse, Bush, & Banerjeed, 2014). Unfortunately, the capital-economic pressure leads the organisations to preserve themselves producing as much as possible to achieve the market demand (Martin, as cited in Fusso, 2013). To clarify, “the preference for smooth earnings is so strong that 78% of surveyed executives would give up economic value in exchange for smooth earnings [. . .] [and] 55% of managers would avoid initiating a very positive NPV project if it meant falling short of the current quarter’s consensus earnings” (Graham et al., 2005).

Following the same line, Barton (as cited in Fusso, 2013) claimed that “70 to 90 percent of a company’s value is related to cash flows expected outside of three years” while a new sustainable project project plan would require five to seven years in order to be feasible. In addition, the requirement of managing quarterly profits by following earnings guidance is forcing companies to focus on short-term goals. As a direct consequence, short-termism has become the salient corporate approach (Hsieh et al., as cited in Fusso, 2013).

Despite the fact that it is difficult to imagine a regression from modern attitudes, it is important to consider potential solutions involving the investment of knowledge and resources. One of the first steps could a commitment to the achievement of reductions in GHC emissions and more sustainable projects. In fact, Hulme (2009, as cited in Slawinski, 2014) claimed that the failure of preventing climate change is a result of not only social superstructures but also individual choices.

REFERENCES

Barton, D., Manika, J., Koller, T., Palter, R., Godsall, J., & Zoffer, G. (2017). Measuring the economic impact of short-termism. Retrieved from https://www.mckinsey.com/quarterly/the-magazine

Fusso, N. (2013). A systems thinking review for solving short-termism. Management Research Review, 36(8), 805-822. doi:10.1108/MRR-11-2012-0240

Garrì, I. (2009). Political short-termism: A possible explanation. Public Choice, 145(1-2), 197-211. doi:http://dx.doi.org/10.1007/s11127-009-9561-5

Jackson, G. & Petraki, A. (2011). Understanding short-termism: The role of corporate governance. Retrieved from https://refubium.fu-berlin.de/bitstream/handle/fub188/16188/GF_jackson-petraki_short-termism.pdf?sequence=1

Slawinski, N., Pinkse, J., Busch, T., & Banerjeed, S. B. (2014). The role of short-termism and uncertainty in organizational inaction on climate change: Multilevel framework. Retrieved from http://ezproxy.slq.qld.gov.au/login?url=https://search-proquest-com.ezproxy.slq.qld.gov.au/docview/1698402731?accountid=13378