Escaping Potemkin

In 1783, the Russian ruler Catherine the Great toured her new provinces in Crimea. The entire tour had been organized and accompanied by a former lover of hers. The Russian nobleman Grigiory Potyomkin.

Potyomkin was keen to rise again in the Tsarinas favor. He was doing so by showing the new provinces from their best side. Pasteboard facades of pretty towns in the distance were erected on riverbanks. At every stop, there were feasts and dancers and the serfs were instructed to flaunt prosperity. Prosperity, that that did not exist for real.

The empress saw to urge to act on anything and sure enough, the entire region soon sunk into famine.

Let’s read it straight from Wikipedia:

“In politics and economics, a Potemkin village is any construction (literal or figurative) whose sole purpose is to provide an external façade to a country which is faring poorly, making people believe that the country is faring better, although statistics and charts would state otherwise.”

The name Potyomkin (or the better known Potemkin) became synonymous with deceit.

All leaders of large organizations try to present their organization in the best possible light. And of course the leadership’s contribution to this success. Be they large companies, civil administrations or countries. It goes without saying that creative accounting is a normal past-time. And that any communicated figures should be consumed with a fistful of salt at all times.

But some entities go more than the normal extra-mile in their efforts to present a flattering picture to the outside world. 

Those reading my contributions for a bit longer than just weeks must have noticed that I often take jibes at China’s economy. Some have concluded that I don’t like China.

Nothing could be farther from the truth. I like the idea of a rich China as eventually, it would be a force for good in the world. Rich countries tend to be a much better global citizen.

But my wish to see wealth just about anywhere on Earth cannot mask my general distrust of large systems. That’s true for any system be it

• a company; 
• a public administration or another public body;
• a state or other territorial entity;
• a non-profit organization or similar;
• a political party;
• or whatever other entity where large numbers of people led by some form of management;

cooperate.

Let me also come clean on my own definition of management. It’s any type of remunerated position where someone is in charge of a group of people and where performance depends not on actual results but on a set of key performance indicators.

This would include all corporate management especially so in public companies excluding the owners of a company. But also the management of the above-mentioned entities and all governmental, legislative and judicial positions. 

Organizations are always the sum of their members. Every member has his/her own self-interest at heart. No matter how much the organization tries to present a unified picture to the outside.

The structure of an organization amplifies those tendencies. It allows those in charge to game the rules of the system to derive advantages. Those advantages are often money but it can also be advancement or other things.

Little does it matter what the motivation is. The result always is that the measured data is getting sexed up. Negative developments and corresponding results get hidden or toned down as much as possible. And positive results get inflated far beyond their true positive significance for the entity.

Negative but dressed up results are shoved into a portfolio of bad assets. There they are allowed to fester out of scrutiny. Positive developments get cut off quickly to not endanger bonus payments. If you want to see how that works in practice, watch what happens on a badly led trade floor. 

As a rule of thumb, the bigger an organization is, the more this kind of thing happens. The more complex an organization is, the more layers of management it has, the more politics play into the organization, the more this happens.

Nature – of course – provides a corrective. Its transparency and bankruptcy rules. Failure gets exposed, examined, cleaned up and one reboots with a fresh slate. Failure gets transformed into experience. Failure is being learned from. 

But closed societies have no tolerance for failure. If you fail, that’s the end of you. So people can never fail. No wonder that they go to extraordinary lengths to maintain the appearance of everlasting success.

Why the appearance?

Everyone fails all the time. I sure failed a lot in my life. But I can fail and reboot. It sometimes produces nasty results but nothing that would put me into a permanent check-mate. That’s different is less-open societies and countries. 

What happens at an individual level is also true at the organization level. Lower-level staff messes up something small. It finds a way to cover it up but his direct superior finds out regardless. It would spoil the perfect front that this manager presents to the outside world. So he, in turn, covers it up and it ripples through the organization. The accumulation of a myriad of small issues snowballs and becomes a portfolio of endemic problems. And those, in turn, pile up with others.

When the self-cleaning mechanism kicks in, it brings down the house of cards. Some or all of the bad portfolio components get a second look and recycled. The organization reboots on a clean slate. That’s the theory at least. Practice is infinitely more complex as this game happens at many levels. 

Countries like China with their 

• byzantine structures;
• their infinite levels of management;
• their opaqueness;
• their culture of absolute perfection and;
• their drive to conceal anything that puts the official narrative in question;

usually deal with monstrous portfolios of accumulated bad assets.

In China, the story of eternal strong growth is an asset. But the level of growth should be a value that is determined every year afresh after the underlying data is known. 

In China, the figure by which the economy has to grow is known in advance. Everyone contributing to determining this number doesn’t have the job to find the truth. They rather must find ways of how to rationalize the targeted figure. True or not.

No wonder that if this happens for decades, it’s hard to know the true situation behind the facade. Probably even for the Chinese leadership as all the lower levels of management in China Inc. cheat by default.  In a country like China, this state of affairs can be rolled over for quite a while. China also uses a broad plethora of tricks to keep snoopy noses out and to maintain the facade. And the outside world likes the China growth story too so the play along.

But eventually one always pays the price. 

The Chinese leadership knows that they have to deflate a bubble but they don’t know-how and by how much. The market expects China to grow and doubt in the growth prospects of the Chinese market will produce untold negative ripple effects.

In comes the Coronavirus. As horrible as this entire story is, for Chinese leadership its a golden opportunity to cut down the communicated growth figures. Something that they would have to do anyhow at some time. Now they can blame it on the virus. 

And sure enough, as I was on my morning jog today, I hear that China thinks it might only grow by 2% this year due to the virus. This is rather measly by Chinese standards.

Will it produce the desired results?

Likely not. Foreign companies are using the epidemic as an excuse themselves. They reduce or even end their presence in China. If they had liked their investments in China, they would live through this crisis as it won’t hold up forever. But managers of big companies function just like the leadership in Bejing. Admitting that a particular investment was a bad idea kills careers and bonuses. Sticking it to the virus goes a lot easier.

The epidemic is an excuse to do what they might have wanted to do for a long time. In this case, a potential past mistake might get cleaned up for a company. The rush for the exit might even result in a stampede as uneasiness on China was strong before the virus grabbed headlines.

China’s president Xi might come to the conclusion that a less dynamic, poorer China might be easier to control. But man do I speculate here.