2010 Reflections on the Global Economy: Have We Tilted?

At first, it seemed that the machine had tilted, its levers, bells and flippers having hit some kind of glitch, causing us to lose the ball and the bonus points.

As the curtain rises on the second decade of the twenty-first century, we will see that the machine is actually fine, but it’s become a different game. Quite entirely. To put it mildly, “the economy” is proving to be quite a drama, its pungence largely dependent on where your company or career is wired into it. Although it is quite frowned upon in the U.S. to admit despair, some pundits have even flirted with the moniker, “The Great Recession” to describe the crisis, a faint nod to the Great Depression of the 1930s, but this comparison is off-base. As I have argued for some time, the 2007-2010 “financial crisis” has played a mere overture to the real story, a transformation of the global “economic architecture.” I first heard this deft phrase from His Excellency Shri Kamal Nath, India’s very diplomatic Minister of Commerce in 2008 (coverage here).

The “Crisis”

2010 saw all “developed” nations struggle mightily, most of them trying to buy their way out of the crisis by saddling future taxpayers with, in many cases, unprecedented debt. According to World Bank’s 2011 Outlook (summary), the EU will grow in 2011 by 1.4%, one half the U.S. rate of 2.8%. BRIC, on the other hand, will see “reduced” growth rates of 4.4% (Brazil), 4.2% (Russia), 8.4% (India) and 8.7% (China). BRIC are already large economies that are growing at multiple rates of developed nations, which is quickly realigning the global economy. This realignment will mean, for some companies, considerable disruption of their businesses, and more than a few will perish, especially those whose leaders cling to the latest stock market gyrations, waiting for “some sign” that things are improving. It will also mean disruption of global politics and power; hence the barely-veiled panic in more than a few quarters.

I predict that things will improve, but not in the way that many leaders think they will. Threats and opportunities will remain elevated for a long time, so vision, strategy and leadership are paramount. Companies and countries require leaders of vision, creativity and courage. Leading in disruptive times means embracing uncertainty and developing peripheral vision by listening to unconventional sources (even social networks :^). Most of all, leaders need to start accepting that the game has changed, so they can begin explaining to their people what that means and how they can adapt.

The Knowledge Economy

The Global Human Capital Journal is so named because people are the engine of the emerging Knowledge Economy, which is displacing the Industrial Economy as the primary value creator in the world. “Developed countries” usually denote advanced economies with relatively high per capita income, which was largely built during the Industrial Economy whose hallmark was using physical power to transform raw materials into products. The real economic “crisis” of today is that developed countries’ people have the entitlement that prolonged wealth always engenders. Their politicians are only now beginning to muster the courage to tell their people that their expectations are too high. Expect that “austerity” will sweep most of the G7 (Europe is waking up before the U.S. and Japan, who have yet to be kissed by the prince). Industrial and manufacturing companies that thrive going forward will operate as knowledge enterprises, and with far fewer workers. As of Q3 2010, U.S. manufacturers, who accounted for 12% of GDP, handed out 25% of the pink slips. Here’s why the jobs aren’t coming back. It’s also why I cannot be bullish on the U.S. automakers’ “revival”; it doesn’t sound like they have felt enough pain to transform.

At the other end of the spectrum, “emerging countries” used to denote commodity-based economies whose products served as inputs for developed countries. Many Industrial Economy industries face overproduction and its cousin commoditization, and their executives dream of spiking BRIC demand, but these dreams will be largely unrequited because BRIC countries will rapidly develop the means to satisfy their own demand. Western brands will do better to focus on combining customer-led innovation with mass customization (here’s one example).

In the Knowledge Economy, a vibrant educational system with digital collaboration tools can enable a highly motivated and less entitled citizenry to outperform, which is a large driver of the World Bank’s numbers. Generalizations are often absolutely inaccurate but useful at a high level, so in that vein I’ll venture that we have seen this before. In the 19th and 20th centuries, the United States played the disruptor role and displaced European leaders, who still remain prominent although no longer the leaders they once were. Population is another major factor: China and India have large pools of human capital that will prove especially poignant: each country is between four and five times the size of the United States, itself the current gorilla of developed countries. This matters in the Knowledge Economy, in which the intelligence of educated people can be scaled with digital collaboration tools. Human capital (Knowledge Economy) is inherently more democratic than the control of raw materials and sea lanes was (Industrial Economy). The Knowledge Economy will be far more dynamic than the Industrial Economy ever was. Although this will rattle many cages, leaders of current developed nations would do well to think like business strategists and focus on developing core competencies. The relative order of the G20 will certainly change, but is that such a bad thing? Unsettling, yes, but crisis, no.

Conclusions

• I deliberately entitled this post a “reflection” because it is not founded on detailed study but rather on long-time observation. The Journal’s Economy channel traces the gestation of my thoughts around the emergence of the Knowledge Economy since 2005.
• I am not predicting a catastrophic change for any country, or the sudden downfall of the U.S. or any other developed country. Rather, I am predicting the steady emergence of a multipolar world that will require leaders to be more collaborative and less exploitative if we are all to survive long-term. Generally speaking, resources were abundant during the Industrial Economy, and capitalism had an exploitative impulse that must now be tempered with a collective sense of shared destiny and collaboration. Carbon emissions, for example.
• The world will become more balanced in its cultures, and less “western” overall. I went on record in 2006 with the prediction that India and China would become IP and innovation leaders by 2020, and I stand by that. India is especially interesting because it is a democracy in which leaders must innovate to give their people a part of the pie if they wish to remain in office and not return to their socialist-leaning past. They will transform education to deliver high quality training very cheaply in order to create knowledge workers quickly. During the Industrial Economy, physical power became cheap; in the Knowledge Economy, education and knowledge will be cheap. Globally, education is still designed and delivered as a nice-to-have for the wealthy; it is costly, outdated and backward. India will be the global leader because its leaders want to survive. Necessity is always the most powerful driver of innovation.
• I also predict that pockets of Africa will follow a similar pattern, although they are lagging BRIC and Asia for the moment. That will change in 2015-2025.
• Since Chinese and Indian populations will account for a large portion of organic demand, global winners will appreciate and accommodate their cultures. They will not want to buy “western” goods in the future to the same extent as they do now, when many people’s vision of success is buying western brands.

Recommendations

• Western leaders do not appreciate the extent to which they assume “the global economy” will continue to be western. Many will be surprised by the influence of Asian culture on the global stage. Look for opportunities to enter Asian markets and to collaborate with Asian suppliers and companies. Bring cultures to your company by hosting Asian exchange students, engineers and researchers. Start small if you have to. Realize that developing knowledge of various Asian cultures will be increasingly important. This is strategic for most businesses.
• Accept the reality that certain things about your value chain will be permanently changed or disrupted. Once your executive team accepts this, they will be able to start thinking creatively, with more focus. Act on this by growing your peripheral vision. Social networks can be very effective means to grow your company’s vision.
• During the Industrial Economy, producers focused on their products and services, but they will assume a background role going forward. The Knowledge Economy’s focus is customer experience. Use social networks to “bring the outside in” in order to increase your ability to innovate by an order of magnitude. Creativity, innovation and rapid execution are the levers of value in the Knowledge Economy, and social networking is a huge enabler because it drives down the cost of collaboration. However, it takes time to learn the tools and behaviors, so the sooner your company starts, the better. This is strategic.
• It is difficult to understand the magnitude of change that is upon us. For example, imagine trying to explain the assembly line to an artisan during the eighteenth century. Chances are, he couldn’t grasp it and wouldn’t understand the threat to his livelihood. Industrial Economy leaders don’t understand that social innovation, experience and entertainment will create the basis of much of the differentiation during the Knowledge Economy: involving outsiders (customers) in constant innovation will be the equivalent of the assembly line as the new value generator.
• Realize that social technologies drive down the cost of collaboration by an order of magnitude, and their use is the assembly line of the 21st century. Adoption of the tools, processes and culture is the most important thing you can do. Develop a social business competency team to manage and drive adoption.