Globalization Trends and the World Economy

Stephen DeAngelis

March 15, 2011

A little less than a year ago, analysts from the McKinsey Quarterly identified what they considered to be the five most important forces shaping the global economy [“Five forces reshaping the global economy: McKinsey Global Survey results,” May 2010]. Their analysis begins:

“An ongoing shift in global economic activity from developed to developing economies, accompanied by growth in the number of consumers in emerging markets, are the global developments that executives around the world view as the most important for business and the most positive for their own companies’ profits over the next five years. Executives also identify two other critical positive aspects of globalization: technologies that enable a free flow of information worldwide and, increasingly, global labor markets. These four trends, of the ten we asked about, also are the ones that the biggest share of respondents—around half—say their companies have taken active steps to address.”

I have discussed these topics in some of my past posts. I wrote, for example, about the “ongoing shift in global economic activity” in a post entitled Emerging Markets and Global Rebalancing. “Growth in the numbers of consumers in emerging markets” was discussed in a post entitled The Emerging Global Middle Class. I touched on the subject of “technologies that enable a free flow of information worldwide” in a post entitled Is Globalization Retreating? Finally, I discussed “global labor markets” in posts entitled Updates on the Global Commute, More Stories About the Global Commute, and India Outsourcing to the U.S. Since a number of analysts have been writing on these subjects, It comes as no surprise, that these are topics occupying discussions in the boardrooms of large multinational corporations. The McKinsey analysts note that their survey “explores for the first time five interconnected themes that highlight the opportunities and challenges faced by global economic integration itself and by companies seeking to profit from it: growth in emerging markets; labor productivity and talent management; the global flow of goods, information, and capital; natural-resource management; and the increasing role of governments.” Let’s look at what they had to say about each of those topics, beginning with “growth in emerging markets.”

 

Growth and risk management in emerging markets

 

The analysts report:

“Emerging markets, with populations that are young and growing, will increasingly become not only the focus of rising consumption and production but also major providers of capital, talent, and innovation. This will make it imperative for most companies to succeed in emerging markets. However, no more than 40 percent of executives at companies headquartered in developed economies expect a quarter or more of revenues over the next five years to come from emerging markets—and 10 percent expect none.”

With markets in developed countries mostly saturated, it makes sense that companies would look to places where markets have room to grow. The market of choice right now seems to be China. But as a number of analysts have pointed out, China is aging as it is growing. My colleague Tom Barnett has remarked that the question for China is: Will it get rich before it gets old? There are a number of emerging market countries, however, that can be labeled “young and growing.” They are countries to watch.

 

Labor productivity and talent management

 

Although having a young and growing population is now considered a potential boon for emerging market countries, to be an asset, the workforce must be educated and healthy. In yesterday’s post entitled Intelligence and Disease, I discussed how poor health conditions can significantly reduce a society’s potential by lowering the learning capacity of its children. The McKinsey analysts have this to say about labor productivity and talent management:

“Low birth rates and graying workforces in most developed economies will make it hard for them to achieve steady growth unless they continue to make sizable gains in labor productivity. … Nonetheless, developed and developing economies alike must become more innovative at sourcing talented employees, whether by tapping global labor markets or making better use of older workers. … Notably, respondents at companies based in developing markets largely share the same views as those from developed markets on this point. The greatest projected talent shortfalls are in three functions—management, R&D, and strategy—with significant variations between executives in different regions. Interestingly, executives in China are much more concerned about a shortage of management talent than they are about R&D specialists. For India, it is the reverse.”

Global flows of goods, information, and capital

 

The traditional view of globalization is that it involves the flow of goods, capital, and people. Nowadays you often see the flow of ideas and information added as a significant characteristic of globalization. Those are additions I with which I agree. On this subject, the McKinsey analysts write:

“Executives are generally optimistic that the relatively free flow of goods and capital—two core drivers of globalization—will [continue]. However, few see much further progress occurring in the next five years, a finding that is consistent with the modest hopes for multilateral cooperation also seen in this survey. … The free global flow of information has already resulted in radical pricing transparency and new networks of engaged consumers, and this probably is only the beginning. Disruptive changes in consumer behavior could have great impact on business over the next five years. Executives expect that the most powerful effects on their companies will be increased innovation, greater consumer awareness and knowledge, and increased product and service customization.”

All of those concerns are passed one way or another end up as supply chain challenges. This is especially true for “product customization.” When it comes to innovation, determining when to jump in is a critical, if difficult, decision. To learn more, read my post entitled First to Market vs. Late to the Game.

 

Natural-resource management

 

There are two sides to natural resource management — supply and demand. As you will see from analyst comments below, where you sit determines what you see. Consumers of natural resources are slightly more worried about the future than the suppliers — who apparently see flush times ahead. The survey was undoubtedly disappointing to environmentalists, because it reveals a lack of concern on the part of corporate executives that is stunning considering the attention such issues garner in the press. The analysts write:

“Executives’ concerns about the impact that increasing constraints on the supply or usage of natural resources will have on their companies’ profits appear to be subsiding despite the prominence of these issues in the public debate today. Twenty-five percent of respondents now expect this trend to have a negative effect on their company’s profits, down from 28 percent in last year’s survey and 33 percent two years ago. Energy and manufacturing continue to be outliers. Forty-five percent of manufacturing-sector executives expect negative effects on profits. Among energy executives, few are indifferent: 34 percent expect a negative impact, but a much larger share—59 percent—see a positive impact on profits. Only one-third of all respondents—and four out of ten in North America—profess not to consider natural-resource constraints to have a significant role in their strategies. When executives select the actions their companies are taking to ensure access to the resources they need, the most common response is that they are conserving energy to reduce the need for natural resources.”

My first thought after reading that analysis is that it was too shallow — as were the concerns of corporate executives. In past posts on supply chain risk management, I have discussed how interconnected things have become and how unexpected, and seemingly trivial, events can have significant downstream effects. I had to remind myself that this survey was taken a while ago and that things like a concern over the availability of rare earth minerals hadn’t yet made international headlines. For more on the subject of rare earth minerals, read my posts entitled The Future of Rare Minerals and China and the Rare Earths Conundrum. The final area discussed in the McKinsey report is the role of governments.

 

The increasing role of governments

 

Considering that the survey, which is the focus of this analysis, was conducted during the height of the Great Recession and amidst billion-dollar government bailouts, it was no surprise to read that “executives in Europe and North America are haunted by the perception of crippling public-debt levels: 54 and 61 percent, respectively, think that public-debt levels will have a ‘significant’ or ‘severely negative’ impact on GDP growth in their home markets.” That same haunting feeling apparently fell like a pall over U.S. voters as well since they voted a phalanx of fiscal conservatives into office last November. The analysts continue:

“In contrast, 45 percent of respondents in China and 24 percent in India expect that the level of public debt will have a ‘positive’ impact or ‘no impact’ in their home markets. In a pattern consistent across nearly all regions, executives view government’s role in their companies’ home markets over the next five years somewhat differently than do executives from other regions. For instance, 64 percent of all respondents characterize the Chinese government as the principal actor in that country’s economy, compared with only 49 percent of respondents based in China. Respondents were also asked whether government actions in the previous 12 to 18 months have increased the likelihood of companies to invest in certain countries. China scored highest, with 27 percent of all respondents saying their companies are ‘more’ or ‘much more likely’ to invest there. Smaller groups of respondents say the same for India (25 percent), Brazil (24 percent), and the United States (21 percent). Russia fares the worst, with only 9 percent saying their companies are ‘more likely’ to invest there; 25 percent say their companies are ‘less likely’ to invest.”

Most governments around the world are going to find themselves walking a policy tightrope. Lean too far in one direction (like in regulatory oversight and taxation) and they could risk stifling economic growth as companies look elsewhere to set up business. Lean too far in the other direction and they risk rising consumer anger as product safety issues emerge or corporate corruption results in lost consumer savings and investments or social services are significantly curtailed that affect the quality of voters’ lives. One thing that we do know is that government policies do make a difference. Countries that do well in the annual World Bank’s Doing Business Index are able to attract more investment than those that do poorly. As a result, there have been a number of government reforms around the world that have fostered economic growth. For more on that topic, read my post entitled Doing Business 2010. The bottom line that I drew from the McKinsey report is that globalization and the flows it embodies remain crucial to globe’s economic future.