Man­ag­ing the age of dis­rup­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

Bold pre­dic­tions based on in­tu­ition are rarely a good idea. Mar­garet Thatcher, as Ed­u­ca­tion Sec­re­tary in 1973, fa­mously as­serted that the United King­dom would not have a woman prime min­is­ter in her life­time. IBM’s pres­i­dent, Thomas J. Wat­son, de­clared in 1943 that there was “a world mar­ket for per­haps five com­put­ers.” And, when movies with sound made their de­but in 1927, Warner Broth­ers’ Harry Warner asked, “Who the hell wants to hear ac­tors talk?”

At a time when four pow­er­ful forces are dis­rupt­ing the global econ­omy, up­end­ing most of our as­sump­tions, such pro­nounce­ments on the fu­ture, shaped by in­tu­itions based on the past, are even more likely to be wrong. Each of th­ese four “great dis­rup­tions” is trans­for­ma­tional on its own, and all are am­pli­fy­ing the ef­fects of the oth­ers, pro­duc­ing fun­da­men­tal and un­pre­dictable changes on a scale the world has never seen – and that will prove our in­tu­itions wrong.

The first great dis­rup­tion is the shift of eco­nomic ac­tiv­ity to emerg­ing-mar­ket cities. As re­cently as 2000, 95% of the For­tune Global 500 was head­quar­tered in de­vel­oped economies. By 2025, nearly half of the For­tune Global 500 com­pa­nies will be based in emerg­ing economies, with China home to more of them than the United States or Europe.

Cities are at the vanguard of this shift. Nearly half of global GDP growth from 2010 to 2025 will come from 440 emerg­ing­mar­ket cities, many of which West­ern ex­ec­u­tives may not even know ex­ist. They are places like Tian­jin, a city southeast of Bei­jing with a GDP that is prac­ti­cally on par with Stock­holm’s to­day – and could equal all of Swe­den’s by 2025.

The sec­ond great

dis­rup­tion

is

the ac­cel­er­a­tion of tech­no­log­i­cal change. While tech­nol­ogy has al­ways been trans­for­ma­tive, its im­pact is now ubiq­ui­tous, with dig­i­tal and mo­bile tech­nolo­gies be­ing adopted at an un­prece­dented rate. It took more than 50 years af­ter the tele­phone was in­vented for half of Amer­i­can homes to have one, but only 20 years for cell­phones to spread from less than 3% of the world’s pop­u­la­tion to more than two-thirds. Face­book had 6 mln users in 2006; to­day, it has 1.4 bln.

The mo­bile In­ter­net of­fers the prom­ise of eco­nomic progress for bil­lions of emergin­ge­con­omy cit­i­zens at a speed that would oth­er­wise be unimag­in­able. And it gives en­tre­pre­neur­ial up­starts a greater chance of com­pet­ing with es­tab­lished firms. But tech­no­log­i­cal change also car­ries risks, es­pe­cially for work­ers who lose their jobs to au­to­ma­tion or lack the skills to work in higher-tech fields.

The third dis­rup­tion is de­mo­graphic. For the first time in cen­turies, our pop­u­la­tion could plateau in most of the world. In­deed, pop­u­la­tion aging, which has been ev­i­dent in the de­vel­oped world for some time, is now spread­ing to China and soon will reach Latin Amer­ica.

Thirty years ago, only a few coun­tries, home to a small share of the global pop­u­la­tion, had fer­til­ity rates sub­stan­tially be­low the re­place­ment rate of 2.1 chil­dren per woman. In 2013, about 60% of the world’s pop­u­la­tion lived in coun­tries with sub-re­place­ment fer­til­ity rates. As the el­derly in­creas­ingly out­num­ber work­ing-age peo­ple, pres­sure is build­ing on the labour force, and tax rev­enues, needed to ser­vice gov­ern­ment debt and fund public ser­vices and pen­sion sys­tems, are di­min­ish­ing.

The fi­nal dis­rup­tion is the world’s in­creas­ing in­ter­con­nect­ed­ness, with goods, cap­i­tal, peo­ple, and in­for­ma­tion flow­ing ever more eas­ily across bor­ders. Not long ago, in­ter­na­tional links ex­isted pri­mar­ily among ma­jor trad­ing hubs in Europe and North Amer­ica; now, the web is in­tri­cate and sprawl­ing. Cap­i­tal flows among emerg­ing economies have dou­bled in just ten years, and more than one bil­lion peo­ple crossed bor­ders in 2009, over five times the fig­ure in 1980.

The re­sult­ing chal­lenges – a host of new and un­ex­pected com­peti­tors, volatil­ity stem­ming from far­away places, and the dis­ap­pear­ance of lo­cal jobs – are al­ready over­whelm­ing work­ers and com­pa­nies. Of course, this in­ter­con­nect­ed­ness also of­fers im­por­tant op­por­tu­ni­ties; but an im­plicit bias to­ward the familiar is im­ped­ing the abil­ity of work­ers, firms, and even gov­ern­ments to take full ad­van­tage of them.

This is es­pe­cially true for com­pa­nies. Ac­cord­ing to McKin­sey re­search, from 1990 to 2005, US com­pa­nies al­most al­ways al­lo­cated re­sources on the ba­sis of past, rather than fu­ture, op­por­tu­ni­ties. Firms that suc­cumb to such in­er­tia will prob­a­bly sink, rather than swim, in the new global econ­omy.

Some firms, how­ever, will adapt, tak­ing ad­van­tage of un­prece­dented op­por­tu­ni­ties to re­main ag­ile. In­stead of, say, build­ing a new head­quar­ters, rent­ing a store­front, or pur­chas­ing a restau­rant – tra­di­tional re­quire­ments that de­manded large amounts of up-front cap­i­tal – they can open a satel­lite sales of­fice, cre­ate an on­line store, or launch a food truck. Flex­i­bil­ity and re­spon­sive­ness will en­able such firms to thrive.

The pace and scale of the cur­rent eco­nomic trans­for­ma­tion is un­doubt­edly daunt­ing. But there is plenty of rea­son for op­ti­mism. In­equal­ity may be on the rise within coun­tries, but it has dropped dramatically among them. Nearly a bil­lion peo­ple were lifted out of ex­treme poverty from 1990 to 2010; an­other 3 bln will join the global mid­dle class in the next two decades.

In 1930, at the height of the Great De­pres­sion, John May­nard Keynes de­clared that the stan­dard of living in “pro­gres­sive economies” would in­crease 4-8 times over the sub­se­quent 100 years. His pre­dic­tion, which was re­garded as hope­lessly Pollyan­naish at the time, has turned out to be cor­rect, with the im­prove­ment likely to be at the top of his pro­jected range.

Keynes, un­like many of his con­tem­po­raries, recog­nised the forces at work in the econ­omy, ad­justed his think­ing, and, cru­cially, was not afraid to be op­ti­mistic. We must do the same.

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