The sooner we accept the realities of our fragmented world and start tackling the real issues, the better we can work towards a sustainable future, says Arturo Bris, Professor of Finance and...
In business you hear a lot about “the win-win”, and in everyday conversation too – especially when there is a lot at stake, and even more so when people don’t want to face up to an uncomfortable reality. In discussions about economics, as well, it can be tempting to turn a blind eye to the hard facts. Well, if that’s what you like – stop reading right now. Honestly, go switch the TV on and put your feet up. There’s nothing for you here.
But if you want to know what’s actually going on in the global economy right now, I’ll tell you. Sit down first if you don’t handle bad news well. Deep breath. Ready? We are entering a zero-sum economy. It is happening now. Companies and countries alike want to be profitable and to grow and expand and to lead prosperity for people. That is not possible. There will be hard choices to make. There will be winners – but it’s not who you think. And for every winner, there will be a loser.
So far, so good, you might be thinking – especially if you live in Denmark, Ireland, or Switzerland – the countries that topped this year’s IMD World Competitiveness Ranking. Ah, but here comes the twist. Those countries that look like winners now could be the losers of tomorrow. And today’s losers might just be on their way to a big winning streak.
If you look at total factor productivity, which takes into account labor and capital, we are now – crisis after crisis later – at the same level as in 1977. What does that mean? It means that when you translate productivity into salaries, and then you translate salaries into prosperity and competitiveness, we are as well off globally as we were 40 years ago. This is not good news, because it means that we have lost a generation. The world that we are giving to our grandchildren is similar to the world our grandparents left to us. Our salaries are lower, and our children will be worse off than we are.
Technology is not making the world a better place. We constantly strive for digital transformation without recognizing this. Sure, we might be having fun on social media or driving faster in an electric vehicle without noise, but overall, the impact of tech is not so positive. At the individual company level, it is obvious that we should become more digital – but we ignore the fact that tech has negative indirect consequences. At the global level, we are going to have to cope with millions more people in low-salary, low-productivity jobs. In Switzerland, one of the most technologically advanced economies in the world, salaries have declined significantly over the past 15 years.
“We can’t reduce our carbon footprint and enjoy the same level of prosperity we’re used to.”
Tech is also exacerbating some of the social problems that already existed, making our economies less sustainable. Look at the digital disparities – not just between developed and developing countries, but within countries – between men and women, and between rich and poor. This is made even worse by “greedflation”: as inflation increases, corporate profits increase. The most productive sectors in an economy tend to be large companies, but the ones who create most of the employment tend to be small and medium ones – and because they cannot increase productivity as fast, they pay lower salaries. And so, the gap between rich and poor gets bigger.
The carbon crisis is costly. We can’t reduce our carbon footprint and enjoy the same level of prosperity we’re used to. When you read that economic growth no longer requires rising emissions – do not believe it. We should work to reduce emissions and we must accept that this will be costly for the economy. Germany chose growth and it required consuming more coal. It has been estimated that a ban on all new coal, gas, and oil in Australia would trigger a loss of 3.6% of that country’s workforce.
Geopolitics is fueling a return to protectionism. Economists like myself were trained in Competitive Advantage Theory, which holds that when two countries produce too much, they can sell goods and services to each other and both win. But that does not apply anymore. What we’re already starting to see, and what will only increase over the next few months, is a return to each country looking after itself – a reverse globalization which I think of as fragmentation.
We’re seeing the return to protectionism already. Brazil, India, Singapore, Saudi Arabia, and Indonesia have increased their barriers to trade massively to protect their economies. The war in Ukraine has divided the world in a strange way as well, with countries that didn’t belong to the traditional blocs deciding who to back. So, we’ve seen Turkey and India, for example, making trade agreements with the US.
Now here comes the really interesting part. When you take all of the above into account and view the latest World Competitiveness Ranking – which ranks on economic performance, government, business efficiency, and infrastructure – through a different lens, the countries at the top look worrisome. And it’s the countries at the bottom that look promising.
The world is increasingly divided between protectionist and open-trade economies
The “losers” – Mexico, Indonesia, Turkey, Nigeria, India – are winning. They are the countries of the future. The “winners” – the UK, Germany, Japan, Switzerland – have had their day. Those economies that have had it so good for so long are undoubtedly facing decline. The good news is that others are on the rise. Africa is having its time. Nigeria is booming, both in business development and people. It will be interesting to see what the ranking looks like five or 10 years from now.
But economists never make predictions, so I’ll conclude with something that’s plain to see right now: the world needs an international economic system that works for our wage earners, for our industries, for our climate, for our national security, and that works for the poorest and most vulnerable. This is the challenge – and we must confront it courageously, with our eyes open.
This article is inspired by a keynote session at IMD’s signature Orchestrating Winning Performance program, which brings together executives from diverse sectors and geographies for a week of intense learning and sharing with IMD faculty and business experts.
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