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Cash rich, investment poor – A look at today’s volatile world

IMD Professor Stéphane Garelli raises alert on key issues of globalization

June 22, 2015

The 2015 edition of IMD's Orchestrating Winning Performance in Lausanne got off to a flying start with a look at the global financial situation. A full house of participants from 41 countries and six continents, representing a total of 167 companies, was given an entertaining presentation on the world economy by IMD Professor Stéphane Garelli.

Based on the research of the IMD World Competitiveness Center, which is conducted yearly in 61 economies and takes into account 342 criteria, OWP's first keynote speaker delivered an analysis of the novel issues that have arisen in the wake of globalization.

"The situation is volatile, but not unpredictable," he said. Following a brief account of the annual GDPs, which show progress in the US, UK, India and Mexico, among others, with China still growing, but slowing down, and a mild recession in Russia, Garelli used meteorological references to expand on the first quarterly results that give a more recent picture. Weather in the US is going to improve, in Europe it will be a bit of a mix, Japan remains in contrary winds and South America is stormy.

Results must however always be taken with a pinch of salt, he warned, because statistics can be used in "innovative" ways. For some inexplicable reason, Nigeria has increased its GDP by 84%. The UK, by including gambling and prostitution, has also shown some improvement?

According to Garelli, a great recession is being followed by a great stagnation. "The economy is like riding a bike. First you go full speed, then you fall off, you pick yourself up and ride full speed again," he explained, adding that soft growth will always be interrupted by periods of strong growth.

Reversal of deindustrialization

Regarding the deindustrialization that occurred due to lower labor costs in emerging economies, Garelli stated that the trend has reversed as the gap has narrowed. Labor costs in Singapore, for instance, have increased by 220%.

"The fear that we had gone too far triggered a rethink." Furthermore, the jobs that have been repatriated have changed, with a larger proportion going to creating white collar jobs, since robots have to a large extent replaced blue collar ones.

A mountain of liquidities

Garelli pointed out that there is "a mountain of liquidities" in the world economy. He indicated that the 50 top US companies detain $1.3 trillion in cash on their balance sheets, led by Apple, Microsoft and CISCO. 58% to 90% of these revenues are however offshore.

"$2,000 billion are floating around the world," he said, although a fiscal clampdown, with the obligation to declare revenues where they are generated and not where they are registered is creating a major revolution.

A further $6.4 trillion are in the hands of emerging countries such as China, Saudi Arabia, Brazil, India, Taiwan and Korea. "These are liquidities looking for investments," he observed.

The problem, however, is that the money is being used for dividends, share buybacks and mergers and acquisitions, not for capital investment. The role of banks has changed dramatically, with many of them having to resort to borrowing instead of lending. As a result small companies turn to shadow banking. The professor estimates that loans of $76,000 billion are made outside regulation. "This is a real issue for the future," he said.

He warned against the cascading effect of debt. "Even when central governments are doing well, one level down, states and cities are swimming in debt." California, for example, has a debt of $777 billion.

The changing face of a globalized economy

Garelli then outlined the changing structure of ownership. There are now more than a 1,000 companies in emerging countries with revenues in excess of $1 billion, many of them family-run (approximately 37%), and of which we know very little. The explosion of new brands has a capacity to grow globally, he explained.

New markets and a new middle class, or the emergence of the "less poor" - who represent a fantastic potential for business development because their needs have yet to be satisfied ? are part of the key developments.

Another issue in the coming years will be the cost of energy, which anywhere below $80/barrel for oil is non-sustainable for a majority of producers, who could soon be driven out of business. It is currently priced at $61/barrel, which favors countries like the US with its cheap production of shale oil, which in turn drives down manufacturing costs, giving it a competitive edge.

60 percent of the world's population now lives in urban environments, which poses new challenges, but none as great as that of the unemployment of the young. Even in Finland, considered to have the best educational system in the world, youth unemployment is above 20%. In Spain, it is above 50%.

He attributes this to over-qualification. From 56%, the student population attending university has grown to 90%. "At university, you learn a science. As an apprentice, you learn a job! Learning a job is critical for the future," he said.

An explosion of complexity

Ending on an optimistic note, Garelli mused on becoming a society of exchange. We have gone from an economy of "I need it," to a society of "I want it," with an unprecedented explosion of material goods. But instead of waiting for them to break, we just get rid of them. Rather than recycle, why not exchange those goods?

Garelli also insisted on a positive mindset. "No company is built on dreams, but no company is built without dreams." We must remember that competent people are not necessarily competitive.

Orchestrating Winning Performance on Twitter: #IMDglobalLeaders

See photos from OWP on flickr

Created with flickr slideshow.

St?phane Garelli is a professor of World Competitiveness at IMD and founder of the IMD World Competitiveness Center.

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