Global
Power Shift
Winners,
losers, and strategies in the new world economic order.
During the mid-2000s, when emerging markets
were growing at breakneck speed, the cavernous gap separating industrial and
developing economies began to close. This convergence took place against a
backdrop of economic liberalization, built on the idea that the financial
systems of all nations would dovetail.
That
period is now over. Emerging nations are no longer growing as rapidly as they
were, particularly in comparison with developed economies; further, the
fissures among different systems have become more evident. In PwC’s 19th Annual Global CEO Survey, only 35 percent of the corporate leaders who responded
said they believe the world is moving toward greater economic union. Instead,
59 percent of these chief executives believe that multiple models will coexist
and compete. Consider, for example, how differently government and business
investment is conducted in the United States, China, India, Japan, and the
European Union. These nations and regions operate with fundamentally different
assumptions about the way an economy should be organized. The tension among
these assumptions is growing, not diminishing.
In short, a new global economic order is now
emerging to replace the one that has existed since the end of World War II. For
the foreseeable future, the global economy will be defined by a complex and
continuously shifting set of economic relationships. They will be increasingly
interconnected, to be sure, but with ever-changing rules for conducting
business across borders.
As a business leader, how can you manage this
complexity? How can you cross the threshold to the next economic order with
confidence and skill? The most effective way is to pay attention to three basic
trends: the dispersion of economic power, the continuing evolution of
state-directed growth models, and the accelerating disruption felt by business
from technological change. These trends may seem self-evident. But none of them
is quite what it seems to be at first glance. Further, they will continue to
evolve along uncertain paths. None is likely to progress simply as a
continuation of what we have seen in the past few years. By looking at these
trends closely, you can help your organization take the substantive steps
needed to thrive in the new global economic order.
Trend 1: Economic Power Disperses
A fundamental change is taking place. The
U.S. dollar is losing its exclusive position as the world’s reserve currency.
For the next few decades, no single country will be able to dominate the
balance of payments as the United States has done for more than 70 years.
For the next few decades, no single country
will be able to dominate the balance of payments as the U.S. has for 70 years.
The last time something like this happened
was at the end of World War II, and it was catalyzed by the Bretton Woods
Conference in 1944. At that session and in its aftermath, the United States
brokered international agreements to keep financial affairs running smoothly.
It has embraced a global leadership role ever since. The multilateral
institutions that emerged then, such as the World Bank, the World Trade
Organization, and the International Monetary Fund (IMF), were subject to strong
U.S. influence, and they worked fairly well for a long time. That isn’t to say
the sailing was always smooth. When the U.S. unilaterally abandoned the gold
peg in 1971, for example, the “Nixon Shock” set off two years of negotiations
before major economies agreed to float their currencies against the dollar. But
throughout the postwar period, the U.S. generally sat at the head of the table
with other large economies in making key decisions, with the intent of mutual
gain among friendly, mostly democratic, liberalized economies.
During the 70 years after Bretton Woods, the
economic prominence of the United States was based on four strong pillars. The
first two were its burgeoning postwar economy and the trade networks that the
U.S. established and dominated. These were also the engines of global growth.
The other two pillars were the dollar’s status as a global reserve currency and
the U.S. influence over multilateral institutions. These provided stability to
the global economy and a platform for international cooperation.
Today, emerging economies are challenging all
four pillars. The most notable among the challengers is China, whose global
economic influence has emerged rapidly over the past decade. In 2014, China
became the largest economy in the world, in terms of purchasing power. It was
then the fastest-growing G20 economy. One indication of China’s substantial
economic influence is the fact that its recent slowdown has rippled
across global markets. This influence has already weakened the first pillar,
the strength of the postwar U.S. economy.
China is also now the world’s largest
exporter. Its rapid move into this role has given it enormous leverage in
developing and influencing trade networks, which has weakened the second
pillar. Not coincidentally, the effectiveness of multilateral trade agreements
is deteriorating; witness the fading momentum of the World Trade Organization.
In their place, regional agreements have begun to dominate. The ongoing
negotiations over the China-backed Free Trade Area of the Asia-Pacific (FTAAP)
and Regional Comprehensive Economic Partnership (RCEP) are pitted against the
recently completed Trans-Pacific Partnership (TPP), backed by the United
States. These regional deals represent an erosion of the U.S.’s ability to set
the rules for the whole world, and of any nation to oversee a global
“consensus” that favors its trade agenda alone.
China’s progress on establishing the renminbi
(RMB) as an international trade-settlement currency, which has undermined the
third pillar, has been even more rapid. The RMB’s status as an elite global
currency was enshrined in November 2015, when the IMF decided to include the
RMB in the basket of currencies that make up the IMF’s special drawing rights
(SDRs). The RMB will have a larger weight in the five-currency SDR basket than
the Japanese yen and the British pound sterling. Over time, the RMB’s reserve
currency status will create an alternative to the dollar, with support from the
many nations that see an advantage in having a multipolar global economic
order.
As for
the fourth pillar, China is pushing hard to expand its presence in existing
multilateral institutions and to build new ones of its own. According
to the Economist,
China’s contribution to the United Nations budget doubled between 2010 and
2015, and now represents 5 percent of total U.N. contributions. China is
increasingly engaged with U.N. efforts in peacekeeping, climate change
mitigation, and poverty reduction.
China
also led the creation of the Beijing-based Asian Infrastructure Investment Bank
(AIIB), which began operations on January 16, 2016. While cooperating with its
counterparts to promote and support sustainable development in the Asia-Pacific
region, this bank will operate on a model designed for the new global economic
order — “lean, clean, and green,”according
to its website. A total of 57 nations, which have committed
US$100 billion in capital, are members of the AIIB. Despite the skepticism of
the U.S. government, the signatories included four of the United States’ G7
partners — Germany, France, Italy, and the United Kingdom. China also joined
with Russia, India, Brazil, and South Africa to form the Shanghai-based New
Development Bank. Beyond highlighting the institutional underpinning of the new
global economic order, these two multilateral development banks will amplify
China’s influence on global development finance.
How
will that financing be deployed? Chinese president Xi Jinping, as quoted
by the state-sponsored Xinhua News Agency in
February 2015, said that the AIIB will finance China’s ambitious “One Belt, One
Road” initiative to build overland and maritime infrastructure linking East
Asia, the Middle East, Africa, and Europe. The resulting New Silk Road, as it
has been dubbed, will help develop emerging economies, increase trade between
China and the rest of the world, and make use of excess capacity in the Chinese
domestic economy. It will also support China’s political and economic interests
around the world.
To be sure, these efforts may be tempered by
the recent decrease in the rate of Chinese economic growth. The U.S. economy
remains strong, and the legacy of its postwar economic dominance continues to
influence the behavior of many globally focused multinational companies and
investors. Investors are also waiting for China’s capital account to open
further before they adopt the RMB. Capital market investors are also cautious
about China because they don’t yet see its business environment as friendly
enough to their interests.
Nonetheless,
the creation of a new global economic order is inevitable. Although China will
not replace the United States, the U.S. will find it increasingly difficult to
regain its position of global economic dominance. Don’t forget that other
economies are building their power and influence, too. India, the world’s
third-largest economy by purchasing power, is forecast
by the IMF to grow fastest among G20 economies in
2016. It will emerge as an influential economic actor with its own interests.
In
this world of dispersed economic power, stability will be more prized than
ever. But the nature of that stability will not be dictated by one or two major
players. It will depend on the quality of economic relationships among leading
nations, even those that have different economic systems. A good example of the
new type of relationship is the natural resource investments made recently by a
few countries, including China, in frontier nations. These have caused some
concern over the potential for exploitation. Yet China’s investments in Africa
(as scholars Wenjie Chen and Heiwai Tang have pointed out)
are more diverse than is widely acknowledged. China is popular in many parts of
Africa, and exploitation concerns may be overblown. The ultimate fate of these
investments depends on the ability of the outsiders to build mutual trust with
the local communities where they invest.
Trend 2: The State-Directed Model Evolves
This current shift in global economic power
will be different in one important respect from the last major shift, in 1944.
Then, the baton of global economic influence was passed from the U.K. to the
U.S., two countries that shared a similar world view. Even so, it had taken 40
years for economic polarity to move across the Atlantic; that shift had begun
in the early 20th century.
Today, in contrast, we’re seeing a much
faster rebalancing among disparate economic and political systems, each with a
different level of reliance on markets and state direction. China’s
state-directed model has delivered significant growth over the past decade,
making it clear that the state-directed model will not be superseded by a
traditional form of capitalism any time soon.
Some argue that any state-directed economy,
be it China or another country, will by definition become stagnant. But
stagnation is not inevitable. As with the effective management of a large
corporation, success requires the ability to adapt to evolving economic
pressures. One example is China’s liberalization of state-owned enterprises,
which included measures allowing partial privatization. This has lessened state
control in sectors categorized as “competitive” (such as retail and
manufacturing) and concentrated state influence in “public interest” sectors
(such as energy, rail, shipping, and telecom).
The state-directed approach remains popular,
because it is associated with robust growth in emerging economies. Governments
in Latin America and Russia, among other areas, have exerted a stronger guiding
hand in their national champions in recent years. Major infrastructure projects
will further diffuse China’s model of state-driven investment to countries
along the New Silk Road. Some governments will manage this process better than
others, and the collapse of oil prices will stress state-directed energy
exporters. But some are responding by streamlining state-owned enterprises and
strengthening the quality of their management; there will be enough of these to
sustain the state-directed growth model. Indeed, the more it is stressed, the
more it is likely to evolve.
Similarly, there will probably be more forms
of welfare-oriented capitalism, as well as hybrid systems, emerging during the
next decade, as each country and region addresses the challenges of the
turbulent global economy. Although it is possible for these different economic
systems to coexist harmoniously, the new multipolar global economic order will
add friction to multinational business operations.
The dispersion of economic power, and the
resulting incompatibilities, will be most evident in the areas of logistics,
telecommunications, software, and infrastructure. With parallel systems in
competitive spheres of influence, the movement of supplies, goods, services,
capital, and talent from one sphere of influence to another will be less
aligned. Businesses can expect periodic disruptions and obstacles, including
transaction payment settlement delays and trade tariffs.
One potential example involves the global
payment system. The Society for Worldwide Interbank Financial Telecommunication
(SWIFT) network, which exchanges global payment information among more than
9,000 financial institutions around the world, is heavily influenced by
American and European banks. In 2015, the China-backed Cross-Border
Inter-Bank Payments System (CIPS) was announced as an alternative to SWIFT. If
it proceeds as planned, CIPS will process cross-border payments denominated in
RMB. It will not replace SWIFT, because 45 percent of cross-border transactions
are dollar-denominated. Every international bank will still need access to the
U.S. banking system. Yet with a well-functioning CIPS on the horizon, some
international banks could decide to operate without a U.S. banking license, and
the U.S. would be less able to exert its banking rules over non-U.S. banks.
This would affect the interoperability of transaction payment systems, making
global business harder to conduct.
Nations will have to choose their levels of
exposure to and interaction with different spheres of influence. For
businesses, however, rationalizing operations and finance among environments
with different approaches to market direction and state direction will be more
challenging than tax and regulatory compliance. And those alignments will
change over time, requiring companies to develop a more adaptive approach to
cross-border business.
Trend 3: Technological Disruption Accelerates
Technology has always been a disruptive
force. After 1945, governments invested heavily in military and space research.
Game-changing technologies such as satellite-based navigation and the Internet
were products of these investments.
Today, a variety of new technologies are
emerging, including potentially dramatic breakthroughs in robotics,
nanotechnology, and medicine. All of these will affect our societies and
businesses. But from the perspective of economic influence, three developments
stand out. They are not technologies themselves. They are political and
commercial reactions to technology disruption.
The
first involves cybersecurity, which is required as Internet hackers continue to
gain access to intellectual property, intimidate adversaries, and disrupt
public and private affairs. The number of attacks on industrial control systems
worldwide rose fourfold from 2013 to 2014, according to a Dell Security reportcited
by the New York Times in
October 2015. This level of malfeasance ensures cybersecurity’s presence on
every business’s agenda. A global defense against cyber-threats may not be
feasible, because it would require an unprecedented and ongoing level of
international cooperation.
The alternative, however, may lead to
draconian measures that constrain business. It has been widely reported that
many governments have intervened in their country’s cyber-activity, to the
point where it affects the use of the Internet. Regardless of the motive, these
actions can also limit the potential for economic growth. Accordingly,
governments will have to calibrate their actions, much as they have with
foreign exchange markets in the past, to balance the intended objectives of
intervention with the potential impact on economic growth.
The
second technology-related development is the shifting geopolitics of energy.
The power of oil-producing nations has been evident at least as far back as the
oil crisis of 1973. Now, technologies designed to recover unconventional
sources of oil and gas have overturned the balance of supply and demand.
The U.S. Energy
Information Administration estimates that
the U.S. could become a net exporter of energy as early as 2019, on the
strength of the fracking revolution. Even if oil prices rebound somewhat, the
increasing use of renewables will reduce the geopolitical importance of oil
producers.
It
should come as no surprise that the two largest oil-consuming nations, the U.S.
and China, are also the biggest investors in renewable energy. Another sign of
the shift in fortunes is the Breakthrough Energy Coalition announced
by Microsoft cofounder Bill Gates and Facebook CEO Mark Zuckerberg in November 2015. This multibillion-dollar research
partnership between the public and private sectors is not just a “war on
climate change.” It is an effort by information technology industry leaders,
including Gates; Zuckerberg; Amazon CEO Jeff Bezos; Salesforce.com founder Marc
Benioff; Hewlett-Packard CEO Meg Whitman; and venture capitalists John Doerr,
Vinod Khosla, and Reid Hoffman, to carve a position of influence over the
energy supply for the technology industry.
The
third important technology-related trend is the geographic distribution of
technological developments, which are no longer limited to developed economies.
Technology innovators are more distributed around the world today, and capital
seeks them out wherever they live. For example, according to the Global
Innovation 1000 study conducted by Strategy&, PwC’s
strategy consulting business, 94 percent of large publicly held companies
conduct research and development outside their home country. Moreover, those
with a more global R&D footprint tend to outperform their less-globalized competitors
financially.
Important
technologies are emerging where they are needed the most. For mobile payments,
that's in Africa, where millions of people have no access to standard banking
or landline telecommunications. In the industrialized world, financial
institutions are scrambling to study blockchain, a technology for automated verification that
enables digital currencies, such as bitcoin. If the right mix of new financial
technologies emerges on a global scale, it could dramatically change the
structure of the financial-services industry. Indeed, “game changers” in any
industry can come from anywhere. This creates unpredictability and makes it
even harder to rely on the established sources of geopolitical power and
stability.
Prescription for Business
Trends don’t exist in isolation. They
interact with one another to create patterns of change. Although you can’t
predict the ways they will combine, you can prepare for the types of
uncertainty you know lie ahead. For example, some energy industry observers
recognized that fracking would combine with geopolitical tension to disrupt the
established oil production system, leading to a long slump in energy prices. They
saw that this would reduce the value of investments in clean energy production
and upend the economies of oil-rich emerging markets.
Combine
this shift in oil price with the dispersion of economic power, and you have a
potential global economic crisis, as the Economist suggested in a scenario published in October 2015. But such a
crisis could yield significant benefits. With no dominant economy calling
the shots, a crisis of this type would give Asian government-owned banks and
large U.S.-based commercial banks a stronger awareness of their common
interest. They might then seek to establish, with their governments’ approval,
a global lender of last resort.
With
luck, it won’t take a global crisis like the one the Economist imagined
to spur mutual recognition of common interests in a world of dispersed economic
power. But even crises are not necessarily bad. In fact, all this
uncertainty can lead to great opportunities for companies that can learn to be
appropriately competitive.
The new environment is unfamiliar, even to
experienced decision makers. If you are in a position to make major decisions
for an enterprise, we believe you should focus on six key areas.
1.Develop
a cyber-focused center of excellence. Cyber-attacks
are a reality. Like all other major risks, they demand that you closely examine
your risk appetite, revisit business processes to minimize their impact, and
align your infrastructure and talent to address the technical and business
challenges involved. You will need, at a minimum, to be able to respond
effectively to attacks and breaches — ideally knowing what you will do before
the attack occurs. (See “Safety in the
Cloud,” by David Burg and Tom Archer.)
2.
Master the RMB. Economic weakness and government
intervention in the U.S. and Europe, combined with China’s economic growth and
liberalization, have broadly legitimized use of the RMB as both a trade and a
reserve currency. One source of competitive advantage in the coming years will
be access to the RMB. Another will be cost-effective correspondent banking and
clearing arrangements, which enable banks to conduct cross-border transactions
on each others’ behalf, You will need to stay current on the changing economic
landscape and integrate your treasury capabilities — such as capital
forecasting, foreign exchange, and liquidity management — with the rest of the
business.
3.
Recognize government relations as a key competency. As power devolves to regional, national, and local
levels, and trade agreements are regionalized, the ability to legitimately
influence government stakeholders will often mean the difference between
success and failure. This no longer applies solely to regulated industries such
as banks and utilities, but to all organizations. Geopolitical risk management,
government stakeholder management, and the ability to master public–private
partnerships will become requirements for companies that want to prosper on a
global basis.
4.
Effectively manage in a multipolar world. Organizations
will need to assess how their business or policy objectives are affected by the
economic and political power shift to a multipolar world, particularly in Asia,
where China will increasingly compete for dominance and India is rapidly
evolving. They will also need to prepare their logistics capabilities, so that
they can move supplies, goods, services, capital, and talent across spheres of
influence.
5.
Cultivate talent wherever you do business. The
local knowledge and language skills of the workforce, particularly the
management team, must reflect your business footprint and opportunities around
the globe. Although global rotations will still be valuable, differences
between markets under various spheres of influence will require more local or
regional talent development. In addition, governance models will need to adapt,
carefully balancing local decision making with regional and global
considerations and requirements.
6.
Nurture innovation everywhere. Competitive
dynamics in this rapidly evolving world could easily be disrupted by upstart
companies whose leaders anticipate trends and get ahead of them. To fight back,
every organization will need to establish an innovation culture that spans the
globe. The savviest companies will establish innovation centers with a
relatively open-ended brief, to keep the company thinking ahead, regularly
looking five years into the future. These efforts will extend beyond simple
technological disruptors. Companies will work together to develop complex new
industrial ecosystems.
As you put all these practices into place,
maintain an intense focus on your own distinctive goals — in part to balance
the pressures of near-term volatility. Be mindful that it takes time to build
institutions — and even longer to build trust in them. Yet those institutions
do exist in most countries, the markets learn to embrace them, and they develop
staying power. It has happened in every country that has made the transition to
a global industrialized economy. Today’s volatility doesn’t change any of that.
There may never be a “new normal” of stability, but the institutions of
stability will continue to use their influence to promote sustained growth and
resilience, the kind that can support business — because they need it. The most
farsighted leaders of these institutions are beginning to realize how they can
play this role.
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