Common Purpose: Realigning Business, Economies, and Society….PART 2
Accelerated Success and Misalignment, 1989–2008
How reasonable it seemed by 1989 to think that this virtuous cycle
represented the natural order of things. Humanity appeared to be moving to a
world without borders, in which virtually every major nation relied upon market
economies to make life better at a societal level, and now in an increasingly
interconnected fashion. Or as political philosopher Francis Fukuyama wrote in
1989, “What we may be witnessing is not just the end of the Cold War, or the
passing of a particular period of postwar history, but the end of history as
such.” The new political thinking, he said, “describes a world dominated by
economic concerns, in which there are no ideological grounds for major conflict
between nations, and in which, consequently, the use of military force becomes
less legitimate.”
Later that year, on Nov. 9, the fall of the Berlin Wall suggested
that Fukuyama was right. This was one of four significant factors in this
period that caused the drivers of change to converge, accelerate, and transform
not only their nature but also their combined impact on a global scale:
1. The fall of the Berlin Wall marked the start of a period in
which every major country in the world adopted some form of market economy. The
event also had a significant psychological impact. Market economies were
plainly seen to have made better provision for their citizens than their major
ideological competitors.
2. Deng Xiaoping’s southern tour in the spring of 1992 ensured
that China would retain market-based economic reforms and international trade
as its central economic strategy. This was to become the country’s focus during
the next two decades.
3. The emergence of the commercial Internet provided the
technological backbone to allow ever more efficient global supply chains and
ever-faster transfer of information and money throughout the world. Businesses
were disrupted at almost every level, as technology and the communications
revolution facilitated truly global operating models for the first time.
4. The “big bang” of financial deregulation in the City of London
in October 1986 contributed to the massive movement of capital over the next
few decades. For the first time, a truly global financial system could emerge,
abetted by the communications revolution, reinforcing and underpinned by the
financial discipline of shareholder value.
Partly through the
influence of these four events and partly as an extension of the previous two
decades’ logic, the years between 1990 and 2010 were marked by a plethora of
free trade agreements of one kind or another. This helped streamline
bureaucracies and spawned greater overall economic integration. Billions of
potential workers and therefore consumers became accessible globally.
Over a short time, these developments brought about a significant
change in how the three drivers all behaved. Previously, international trade
had been dominated by countries with relatively equivalent wage rates, legal
structures, and technological development. Now, the international trade system
was connected to countries with massive populations, low wage rates, immature
capital markets, and nascent market-based legal processes. This contributed to
a form of trade that was quite different from that of the previous period. In
particular, large-scale labor arbitrage — the movement of work from
high-labor-cost countries to those with low labor costs — became commonplace,
facilitated by financialization and technology.
Through the 1990s, the
march of prosperity hastened. Economic activity and global trade increased
throughout much of the world while society continued to make great strides
forward. People were living longer, poverty was being reduced, and the world
was getting better.
Globalization moved rapidly beyond Europe and Japan to countries
that previously had been largely left out. Asian tigers, Middle East oil
producers, former Soviet bloc countries, and large emerging countries such as
China and India all adopted market economies, making remarkable gains in
economic well-being. In China alone, more than 600 million people were lifted
out of poverty between 1990 and 2013. (Despite this progress, World Bank
figures show that 10.7 percent of the world’s population lived on less than
$1.90 a day in 2013.) India also began its 20-year transition from a largely
subsistence economy to a global economic powerhouse, with an explosion of
private companies. The rise of skilled and semi-skilled labor forces in these
countries brought higher wages and greater levels of middle-class privilege to
them, spreading wealth and opportunity more equitably around the world.
Continuing advances in digital technology reinforced this
movement. The personal computer, the World Wide Web, and the mobile phone gave
people unprecedented access to productivity, opportunity, global trade, and one
another, generally irrespective of national boundaries. This new level of
connectivity made it feasible for global companies to manage complex supply
chains. The development of technologies, from the container ship to the global
Internet, made it easier to communicate and ship goods. Goods no longer needed
to be produced near consumers, and components no longer needed to be
manufactured together. Manufacturing jobs began to migrate en masse to emerging
economies, which at the same time experienced a surge in inflows from foreign
direct investment.
In the mid-2000s,
outsourcing services as well as products became increasingly common. The exporting
of jobs expanded to include call center operations, software development, and
secretarial and clerical work. Technological and financial factors, such as the
short-term imperatives of automated trading and the pressure for financial
performance from shareholders, added incentives for companies to conduct labor
arbitrage (and other forms of financial and environmental arbitrage) at an
ever-larger scale.
These business decisions, shifting activities and employment from
one part of the world to another, were rational. In fact, they represented the
only way for an MNC to stay competitive. Collectively, on a huge scale over
time, they contributed to huge global progress by spreading income and
employment into new markets. But this also inevitably impacted the advanced
economies that had often been the original homes of these now truly
international businesses. Already high levels of unemployment in some communities
were further raised by increases in automation, particularly in manufacturing.
Although the economic engine was delivering as planned in macro terms, this
unemployment was a sign that not everyone was benefiting and all was not well.
Global Progress, Local Disharmony
The Great Recession of the late 2000s exposed these weaknesses.
The financial crisis itself was less a cause than an indicator, revealing a
misalignment within the system as a whole that had been growing for years. In a
more globalized, technology-enabled world, the recession’s impact was felt at
unparalleled speed.
The two primary indicators
of success for the previous 60 years, GDP at the macro level and shareholder
value at the micro level, were now shown to be problematic. GDP did not reflect
the negative effects of economic growth; people who dropped out of the job
market, for example, were invisible to it. The GDP figures showed great global
prosperity on average, while significant portions of the population
were experiencing years of income stagnation and decline. GDP also ignored
intangible factors such as environmental degradation, the low wage levels and
insecurity associated with many of the remaining jobs, and the diminished
quality of life in some communities.
Research conducted by World Bank economist Branko Milanović found
that big earners and those in the bottom two-thirds of income levels (on
average, globally) received major gains, but households in the 75th to 85th
percentile of the global income distribution were scarcely better off
economically in 2008 than they had been 20 years before. This group includes
most of the middle class in industrialized countries.
The male labor force was
particularly hurt
“Tracking
the Fortunes of the White Working Class,” an Economist article
published in Feb. 2017, reported on a recent study in which 41 percent of white
males with high school education or less between the ages of 25 and 65 in the
United States were found to be unemployed, most no longer even seeking work.
This group represents 23 percent of the American male workforce. In some
communities affected by high unemployment, middle-aged white men have been
getting sicker and dying in greater numbers than before, even as the world is
living longer and healthier. These men are also more prone to suicide, drug
overdoses, and alcohol-related liver disease than they used to be, with less
access to medical care. Women too have been affected. Estimates show that
although the gender gap on measures such as education has made significant
progress, there is much less progress on economic measures. Global female labor
force participation rates have declined since 1996, although less as a
percentage of the original than is the case for men. In the U.S., for example,
female prime age (25- to 54-year-olds) labor force participation peaked at
about 77 percent in 1999, but declined to 75 percent earlier this decade and
has remained stagnant.
People who were affected by these challenges reacted in a variety
of ways. Some moved from rural areas, while others took on additional
employment when they could find it. Many households burdened themselves with
unsustainable levels of debt to fund a standard of living that was no longer
affordable, facilitated by lending practices that contributed to the financial
crisis.
As for shareholder value,
its sustained use as an indicator of commercial success had two significant
consequences. First, companies retreated from their previously long-standing
relationships with local communities. Second, businesses placed greater
emphasis on short-term financial results. Since Alexis de Tocqueville
published Democracy in America in 1835, economic success has
been presumed to be linked to social progress. The shareholder–owner lived in
the same town, went to the same market, and attended the same place of worship
as the rest of the citizenry. Business success was intrinsically linked to the
success of the community or society within which it operated. This linkage
became far less important for a business operating on a global basis, which was
not only expected but required to deliver competitive short-term financial
returns, even as technology created an apparently endless range of competitive
and disruptive threats and opportunities.
The nature of the three key drivers has now transformed so
fundamentally that they will continue to behave differently. This has important
implications for our future.
In our globalized world,
economic growth has shifted to countries with their own unique histories that
are very different from those of Europe and the United States. The E7 group of
the largest emerging market economies (China, India, Indonesia, Brazil, Russia,
Mexico, and Turkey) have begun to dislodge the G7 (the U.S., the U.K., France,
Germany, Japan, Canada, and Italy) as the countries with the largest shares of
world trade. Russia, Turkey, Saudi Arabia, and the UAE all have market
economies combined with forms of governance that are different from those in
the West. The most prominent example is China, which proved that it could
foster market-style economic growth just as well as a democratic country could
(or, perhaps, better). Enterprises in China made up 20 percent of
the Fortune Global
500 in 2016.
The effects of globalization have been felt unequally by different
countries. Thus, while still very interdependent, the world has begun to
fracture along broad cultural lines — a point made prominently by political
scientist Samuel Huntington. One consequence of this is that globalization is
more difficult to sustain. Countries naturally tend to focus on those more like
themselves. This is evident not only in the political arena, but also in the
approach to business and the economy. More than one version of a market economy
has emerged.
Technology has changed its
trajectory as well. We are moving from an online world that has facilitated
much greater human interaction to one that will enable things to communicate
with each other, and decisions to be made with artificial intelligence. In a
recent global survey of CEOs conducted by PwC. the vast majority of respondents
said robotics and machine intelligence would significantly remove labor from
their workforce over the next few years. The scale of information flow and the
speed of transmission have also added to the strain felt by existing
institutions. These are not just Western issues; a labor glut is likely to
appear in China and India as well. According to the International Federation of
Robotics, quoted
in the Economist in
March 2015, the public and private sector in China purchased 20 percent of all
the robots made in 2013.
Regions such as sub-Saharan
Africa may be the hardest hit by the growing reliance on automation and
robotics. They tend to have inadequate access to technology, particularly
electricity and the Internet, and the further disadvantage of a late start. By
the time the African workforce is ready to adapt to industrialization,
automation may have taken away industrial jobs that, in the past, have lifted
other regions of the world out of poverty. Since many African countries have
large youthful populations, the end result could be very challenging in civil
terms, with the possibility of even larger movements of people, not just from
Syria but migrating from a variety of Middle East and Central African
countries.
Together, these trends have
led to the erosion of trust in mainstream global institutions, including
government, business, the media, education, and nongovernmental organizations (NGOs). The 2017 Edelman Trust
Barometer survey found that only 15 percent of
the general-population respondents believe the present system
is working; 53 percent do not and 32 percent are uncertain. Edelman argues that
the trust collapse has now become a systemic threat. The claim that “elites are
out of touch” has struck a chord. This rising polarization could add fuel to
nationalist and populist movements. This may in turn lead to greater
protectionist policies, which could exacerbate the root problems discussed
here.
Today we find ourselves at a crossroads. For decades,
globalization, technology, and financialization worked as a system to create
both economic growth and social progress, but retaining them in their present
form is unsustainable. We cannot return to how things were, nor should we want
to. We need to reframe the alignment of these forces, or face a challenging
future. If we do not intervene, the risk is that many of the trends we see now
will continue and even accelerate: slowing growth in advanced economies,
continued erosion of the working and middle classes around the world, stagnant
or declining pay to workers in advanced economies, unemployment in large
sections of the world made worse by automation, Africa missing out on the
benefits of globalization altogether, sustained harm to communities and our
broader environment, and continued erosion of trust. These factors will feed
increased political uncertainty and instability.
Addressing these issues will require realigning our economies and
political systems so that they again better meet human needs. We have an
opportunity to change our course and achieve a more positive future. This will
require immense effort among a broad range of government, business, and
community groups. None of these groups can solve these problems unilaterally.
The solution will require an extensive engagement among all. The answers are
not all clear, but there are some observations that we believe can help inform
a way forward.
CONTINUESIN PART 3
by Colm
Kelly and Blair
Sheppard
https://www.strategy-business.com/article/Common-Purpose-Realigning-Business-Economies-and-Society?gko=f1919&utm_source=itw&utm_medium=20170606&utm_campaign=resp
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