Multiple forces are changing the world dramatically.
Individually, each one of these forces ranks among the greatest disruptions the global economy has ever seen. Collectively, they present us with great challenges – and big opportunities. Understanding these forces will help you play a leading role as your organisation gets to grips with this ever-evolving landscape.
The changing world
The pace of change across the world today is many times greater than that seen during the Industrial Revolution. And, while most people know these changes are happening, few understand the impact they could have as they coincide, interact and influence one another.
While each force will have profound consequences for the global economy, they also represent immense opportunities for those organisations ready to grasp them.Let’s look at some of these forces.
Demographics
Population size and demographics are major drivers of national economic power. Over the last 1,000 years, population has grown in all regions of the world. In the coming decades, growth rates will reduce.
Fertility is falling globally. In many countries it’s now below replacement rates. Russia’s and Japan’s populations have declined in the past decade and the European Commission expects Germany’s population to shrink by over 20% by 2060.In Asia, each woman had, on average, five babies in the 1970s. Today, they have two. China has repealed its one child policy and population decline is soon forecast to reach Latin America. The exception to this trend is Africa, where a “youth bulge” in Nigeria and other countries, will make the continent the world’s fastest growing region.
Alongside this trend, people are living longer. The real-life expectancy of a girl born today in most advanced countries is now over 100.
The declining ratio of working age people to the retired has profound consequences for the affordability of public services and government finances. Clearly, a smaller workforce will have to increase productivity, which may lead us to rethink economic potential.
Resources
Even at reduced growth rate, the world’s population will soon reach nine billion. This prospect combined with climate change, will affect the abundance and availability of food, water and energy. In a recent report, professional services firm PwC, estimates that the world will need 35% more food, 40% more water and 50% more energy by 2030.
Food
Agriculture, industry and economic growth are inter-connected. The Industrial Revolution was preceded by an agricultural revolution that led to a surplus of food in Western Europe. This allowed people to migrate to urban areas and participate in industrial output.
Challenges in food production today are not about quantity, but sustainability. Globally, arable land is being lost at an alarming rate to pollution, urbanisation and climate change. Furthermore, modern farming is dependent on fertilisers and supplements derived from increasingly costly and elusive fossil fuels.
Water
As well as crucial to human health, water is central to processes such as energy production, steel manufacturing and textile fabrication.
The problem with water is, paradoxically, both its abundance and its scarcity. Sea level rises mean floods happen more frequently. And these floods are fuelling the migration of populations. Simultaneously, climate change-driven droughts and rising populations are increasing demand for water. And, as people get richer, their demand for water increases, while the supply of water on the planet declines. The World Bank estimates that the amount of water available in major cities could decline by two thirds by 2050.
Energy
Most scientists agree that, to minimise climate change and meet rising global demand, energy production will have to move from fossil fuels to renewable sources such as solar, wind and tidal.
This is already happening. Germany generates more than 25% of its electricity from renewable sources. In California that figure is 40%. While governments prevaricate, multinational corporations are setting ambitious renewable energy targets. Experts predict that solar, in particular, will be crucial to economic development in the rural regions of poor countries. Putting a reliable energy source into a village expands commerce. However, it also increases demand for commodities such as mobile phones, televisions and refrigerators. As countries step up to meet these challenges, conflicts may arise over resources, especially those shared across national boundaries. The inter-connected nature of ecology, economics and social stability is increasingly apparent. Food shortages, for example, were cited as one of the drivers of the Arab Spring.
Opportunities
While these forces certainly present challenges, there are also opportunities for new technologies and social innovations to emerge.
Globalisation and urbanisation
In economic terms, power is moving East and South from the traditional West and North. The McKinsey Global Institute (MGI) forecasts that nearly half of all companies with annual revenues in excess of $1bn will, in future, be headquartered in what we today call emerging markets. Growth in Asia, Latin America, Africa and the Middle East is creating a new global middle class whose tastes and spending power are similar to those of people in America and Western Europe.
More than 50% of the global population now lives in cities as people migrate to a better life. However, this migration is not just to the usual suspects such as Shanghai, Mumbai and Sao Paulo. MGI estimates that between 2010 and 2025, 600 million people will live in just 440 cities in emerging markets. Of these cities, 95% are currently small or medium sized and little known to most Westerners. Nevertheless, Tanjin in China, Pune in India and Santa Catarina in Brazil will be the epicentres of the next wave of globalisation.
Unleashing exponential power
The tumbling costs of computer storage and internet bandwidth is has produced exponential improvements in the capability of computing devices.
This means that any problem that can be turned into an information processing problem can be addressed as never before. When the first genome was sequenced in April 2003, for example, it involved banks of supercomputers, took years and cost more than $3bn. Today the same process can be performed by a device the size of a laser-printer within a day and cost less than $1,000. Now, the race is on to make it possible with a thumb drive size device for less than $100. This would enable all patients to have their genomes sequenced in many countries.
Education to the people
It’s widely accepted that people living on less than $5 a day are incapable of doing knowledge work and participating in the modern economy. Network technology, however, is overturning this assumption.
Until recently, one had to be born in a rich country or into a rich family to access a good education. Now, almost anyone can access world-class educational resources because so much more of humanity is connected to the world’s knowledge. In India, a non-profit project is installing solar panels and power storage batteries on top of schools in rural villages. This reliable power supply allows the schools to open longer and teach more subjects to more children. These schools have cell phone connectivity and LCD projectors, giving pupils the benefit of online educational videos. The project is also working with the prestigious Indian Institutes of Technology, (which supplies many of Silicon Valley’s top engineers) to create custom educational material to further expand the students’ horizons. Another example is Duolingo, the world’s most popular software for learning a second language. It’s freely available for download to a smartphone and is widely used by schools and individuals to learn English. This is no trivial matter. Economists estimate that in many countries, especially emerging markets, the ability to speak fluent English can increase incomes by 25 to 75%.
Winner takes all
The raw power of technology, globally distributed, will increase the supply and accessibility of talent. In turn, truly world class expertise will increase and be lavishly rewarded (witness the salaries top footballers can command in China). At the same time, however, mid and low level expertise will become further commoditised, potentially increasing inequality.
The end of benign finance
Most advanced economies have seen sharp declines in medium term growth rates compared to historic post-war rates. Economist Robert Gordon of Northwest University notes that American productivity has systematically declined since the 1970s. It is also clear that many of the traditional policy levers for stimulating growth have reached their limits. We’ve seen, for example that: Much of the global economy has been fuelled by historically low interest rates and, in many regions, quantitative easing over the last decade. Yields on benchmark 10-year government bonds have declined markedly and, in some countries, central banks have turned to negative interest rates;
- Government Debt-to-GDP ratios in most advanced economies have risen significantly over the past 20 years and now stand at historically high levels. Household debt has also risen sharply; and
- Governments have tried other stimuli. These include helicopter money, debt mutualisation (Europe), debt monetisation (Japan), guaranteed minimum income (Brazil), and massive stimulus programs combined with a regulatory easing (the United States). None yet has been an unequivocal success.
Conclusion
Changing demographics and the increasing demand on dwindling natural resources are forcing governments, scientists and multinational organisations to think hard about how we provide for ourselves in the coming decades. Alongside these challenges, however are some great opportunities for organisations that understand the power of technology, the potential of education and the trend towards globalisation and urbanisation.