Globalization: Time for a rethink?


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Seeing the dots
March and the first days of April have seen momentous events ranging from the Cyprus crisis to threats of nuclear war. This briefing argues that we should take time out to review these and other events to see if they are providing us with early warning signals that a new and very different world is about to be thrust upon us. But to interpret these early warning signals we will have to ‘join up the dots’ in a different way.

We can start the process of ‘joining up the dots’ by casting our minds back to the latter half of March. We of course had the Cyprus bailout crisis with its unexpectedly bitter medicine. News that the ‘cure’ would hit savers (initially even small savers), push unemployment to 25% and reduce GDP by 10%, all within a period of months[1], came as a shock to many, especially the ‘man in the street’. But as the bailout formula emerged, other events were bubbling to the surface elsewhere in the world.

In Portugal, we had the news that GDP was going to be wildly off-course. The government announced that the economy would contract by 2.3% (twice the earlier forecast)[2] and that youth unemployment could reach 30%. On top of this, on 5th April, the constitutional court rejected Portugal’s austerity plans[3]. The government’s position looks increasingly perilous as its two-year deep austerity programme has not produced the promised growth – only contraction.

At the same time, we had the news from France that unemployment levels were scheduled to hit a 16-year high[4] and that unemployment in the Eurozone itself had reached 19m[5] (over four times the population of Ireland). Youth unemployment in the Eurozone looked even more worrying – increasing by 188,000 in a year – well over the size of the French Army.

Spain too looked set to spend another year in recession.

All of this of course, raises again the question of the efficacy of austerity-based programmes, following the IMF’s late 2012 admission that the relationship between government spending cutbacks and GDP contraction may not be known[6]. Many thought that economists and national leaders were running out of ideas[7] and that a crisis of legitimacy beckoned[8].

But whilst all this was going on, other economies appeared, at least superficially, to face a far brighter future. The fifth BRICs summit was taking place in Durban and ideas were announced to set up a BRICs development bank and an investment fund[9]. But to counter this, we had emerging doubts regarding China’s economy[10].

Things were not too rosy elsewhere. As April opened, we had the renewed threat of conflict in Asia with Kim Jong-un, apparently authorising the use of nuclear weapons against US interests and, in the Middle East, the collapse of the Iranian nuclear talks.

Joining up the dots (in a different way)
We could of course dismiss all this as a few bad weeks for the globalisation project. For many, we can still create our business plans in the confident light of a bright, more equal future ahead[11]. We will get back onto the consumer-fuelled globalisation flight path sooner or later. And I do hope that we do face a more prosperous, equal world.

But we might not, and if we start joining up the dots in a less conventional way, then the odds of us making it through to that prosperous, unified world, might not be so good.

My role is to help both clients and their staff to see the future in different, less-conventional ways, so that they can spot the opportunities that others cannot see and be better prepared for the upsets that do not even appear on the radar screens of their competitors.

So, we must take a less conventional approach and see if these dots point us in the opposite direction to globalisation – regionalisation, fragmentation and even the collapse of nation states. A considerable amount of research was invested into identifying the preconditions for the collapse of the system of nation states in the 1970s[12]. We can draw and elaborate upon this work to produce a list of signals that can give us advance warning when major geo-political shifts may be on the horizon.

There are five tests or ‘check boxes’ that I look at:

Test #1: Broken Borders. When I am talking about ‘broken borders’ I have in mind the degree to which national borders reflect the interests of the citizens living inside them. We have several current examples of pushes for fragmentation including Scotland and Catalonia, both planning to hold independence referenda in 2014. We also see similar pressures in the Middle East. But division of interests can take other potentially more important forms. Local levels of unemployment are an important indicator and if we take the Eurozone as a ‘state’, then the divisions are extreme; unemployment in February 2013 ranged from 4.8% in Austria to 26.4% in Greece[5]. Then we have ‘within state’ inequality, with some saying that the stuttering recovery in the West is driving a bigger gap between the ‘haves’ and the ‘have nots’[13].

Test #2: Loss of Control. We are talking here about the erosion of governments’ abilities to control the destinies of their nation states. This has been an area of flux in the decades that followed the Second World War. In addition to the emergence of organisations such as the UN and the IMF, we have of course the rising power of the financial markets that arguably now have a greater influence over national economic policy than democratically elected governments. The Internet too, has punctured the borders of nation states.

Test #3: Individual Empowerment. We tend to think of a world where only nation states have the power to tumble the leadership of other nation states. It is important to note that the empowerment of the individual has been one of the hallmarks (or unintended consequences), of the onward march of both globalisation and technology in recent decades. As the political scientist Joseph Nye has noted[14], on 11th September 2001 a group of individuals killed more US citizens than a nation state did on 7th December 1941, when Japan attacked Pearl Harbor. The Arab Spring too is a frequently cited example of the power of a technology-enabled youth.

Test #4: The Empire Builders. Here we are looking for those who have aspirations beyond their borders. Putin’s ambitions to build a Eurasian Union[15] is one example. China’s use of soft power to create a globally dispersed sphere of influence would be another. But empire builders can go beyond leaders of nation states. We have to look at faith and other interest groups, who may develop the capacity to wrestle influence away from the two most influential of our current global architects – powerful nation states (up until now the US) and of course, the financial markets.

Test #5: Dissonance. This is the final test. When I talk about dissonance, I am referring to two issues. The first is the support for free market capitalism and democracy, that we frequently refer to as ‘the Washington Consensus’[16]. The globalisation project has historically been underpinned by the subliminal assumption that the world will adhere, and agree to, one way of doing things, or one set of the ‘rules of the game’. Up until the Great Recession, we thought that the Washington Consensus would be that one way of doing things. It was assumed that all states, including China, would gradually come around to the Western way. That assumption needs now to be tested. For example, recent research[17] is worrying, showing that public support for free market capitalism has, in many countries, tumbled. In Italy 73% stated, six years ago, that they felt better off under free market capitalism. This figure has now plummeted to 50%. In Japan, only 40% feel that they are better off in a free market economy. Even in the UK, support is not as high as one would believe. Around 30% may not think that free market capitalism is the way ahead. But when we consider ‘dissonance’, there is a second issue that we must examine. This relates to the perceived legitimacy of governments, in short, the confidence that citizens have in the ability of their leaders both to protect them and solve their problems. Thinking about dissonance, in these two dimensions, is important when considering the future. Research and history tell us that in times of economic hardship, the electorate is prepared to forego even democracy for the promises of a strong leader[18], [19].

These five tests provide a good framework, or even an early warning system, that tells us when we might have to rethink the future pathway of globalisation. As I have inferred when presenting these five tests, there may be a case that many or even all now apply. It is therefore proposed that readers debate these tests within their own leadership teams.

What next?
The five tests can provide a useful debating agenda for any leadership team that wants to rethink the future. Other steps that can be taken include:

• Building two alternative scenarios, one that assumes that the world economy recovers and that globalisation continues, the other illustrating a world where growth stumbles and new divisions appear.
• Building a tracking mechanism. You will need at least two opposing scenarios to do complete this task. Traditional business plans are based on just one view of the future. Only having one such future view is limiting in times of ambiguity. Without at least one alternative scenario, it is difficult, if not impossible, to group disparate events together to see the real direction of change.
• Addressing ‘what would we do if?’ questions. This was the classic approach used by Shell Oil that helped them to react quickly when the 1970s oil crisis erupted[20], [21].
• Using innovation experiments to explore marketplaces that might be changing. This is an approach that works well during times of upheaval and was used by the successful organisations that I studied when they tried to struggle through the trauma of the early 1990s recession. A series of innovation experiments can inform the strategy-making process during times of ambiguity and provides an excellent foundation to build new competences. It also ensures that your business remains close to its customers and the marketplace. To do this well, you need to think about innovation in new and very broad terms. My briefing Creative Destruction and the Innovation Imperative (http://bit.ly/WH3HH4) provides a six-dimensional innovation framework that can help you.

References
[1] “Cyprus, an island in despair,” The Sunday Times, 31-Mar-2013. [Online]. Available: http://www.thesundaytimes.co.uk/sto/business/Economy/article1238028.ece. [Accessed: 08-Apr-2013].
[2] P. Wise, “Portugal sharply cuts economic forecasts,” Financial Times, 15-Mar-2013.
[3] P. Wise, “Portugal court rules against austerity,” Financial Times, 05-Apr-2013.
[4] H. Carnegy, “French unemployment hits 16-year high,” Financial Times, 26-Mar-2013. [Online]. Available: http://www.ft.com/cms/s/0/0074b542-9632-11e2-9ab2-00144feabdc0.html#axzz2PsJ6R7t9. [Accessed: 08-Apr-2013].
[5] “Euro area unemployment rate at 12.0%,” Eurostat, Brussels, 50/2013, Apr. 2013.
[6] K. MacKenzie, “It’s (austerity) Multiplier Failure,” FT Alphaville, 09-Oct-2012. [Online]. Available: http://ftalphaville.ft.com/2012/10/09/1199151/its-austerity-multiplier-failure/. [Accessed: 09-Jan-2013].
[7] S. King, “Masters of money fail to convert hope into reality,” Financial Times, 02-Apr-2013. [Online]. Available: http://blogs.ft.com/the-a-list/2013/04/02/masters-of-money-fail-to-convert-hope-into-reality/. [Accessed: 02-Apr-2013].
[8] J. Torreblanca, “Europe has lost its citizens,” European Council on Foreign Relations, 13-Mar-2013. [Online]. Available: http://ecfr.eu/content/entry/commentary_europe_has_lost_its_citizens. [Accessed: 15-Mar-2013].
[9] “Joint statement of the BRICS Business Forum 2013,” Fifth BRICs Summit, 28-Mar-2013. [Online]. Available: http://www.brics5.co.za/joint-statement-of-the-brics-business-forum-2013/. [Accessed: 08-Apr-2013].
[10] J. Noble and S. Rabinovitch, “Fitch downgrades China’s credit rating,” Financial Times, 09-Apr-2013.
[11] A. Subramanian, “This is a golden age of global growth (yes, you read that right),” Financial Times, 07-Apr-2013.
[12] H. Bull, The Anarchical Society: A Study of Order in World Politics, 2nd ed. Houndmills: MacMillan, 1977.
[13] U. Dadush, K. Dervis, S. Milsom, and B. Stancil, “Can Income Inequality Destabilize the U.S. Economy? by U. Dadush, K. Dervis, S.P. Milsom and B. Stancil – The Globalist,” The Globalist, 28-Mar-2013. [Online]. Available: http://www.theglobalist.com/storyid.aspx?storyid=9946. [Accessed: 03-Apr-2013].
[14] J. Nye, The Future of Power. New York: Public Affairs, 2011.
[15] N. Buckley, “Putin sets sights on Eurasian economic union,” FT.com, 16-Aug-2011. [Online]. Available: http://www.ft.com/cms/s/0/a7db2310-b769-11e0-b95d-00144feabdc0.html#axzz1VNURHttF. [Accessed: 18-Aug-2011].
[16] J. Williamson, “A Short History of the Washington Consensus,” presented at the From the Washington Consensus towards a new Global Governance, Barcelona, 2004.
[17] “Pervasive Gloom About the World Economy,” Pew Global Attitudes Project, 12-Jul-2012. [Online]. Available: http://www.pewglobal.org/2012/07/12/pervasive-gloom-about-the-world-economy/. [Accessed: 10-Apr-2013].
[18] A. Kohut, R. Wike, J. Horowitz, J. Poushter, and C. Barker, “Twenty Years Later: Confidence in Democracy and Capitalism Wanes in Former Soviet Union,” Pew Research Center, Washington, 2011.
[19] Y. Chu, L. Diamond, A. Nathan, and D. Shin, “Asia’s Challenged Democracies,” The Washington Quarterly, vol. 31, no. 1, pp. 143–157, 2009.
[20] P. Wack, “Scenarios: uncharted waters ahead,” Harvard Business Review, September-October, pp. 73–89, 1985.
[21] P. Wack, “Scenarios: shooting the rapids,” Harvard Business Review, November-December, pp. 139–150, 1985.

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