In the period after World War II, three drivers of change served humanity well by typically delivering both economic growth and social progress over many years.
- Globalization: the building out of worldwide economic institutions, facilitating the cross-border migration of people, goods, capital, and information, and ultimately driving significant increases in international trade
- Technological advances: spurred by the computer and Internet, but also encompassing communications generally, biotech, and healthcare, leading ultimately to robotics and artificial intelligence
- “Financialization”: a view of value based on financial metrics, primarily GDP at a macro level and shareholder value at a corporate level
Together these drivers and the institutions that embody them had an extraordinarily positive impact on society. They lifted billions of people out of poverty and raised the quality of life around the world in unprecedented ways. However, as the three drivers evolved, they began to accelerate and change, not only in their essential nature but especially in their compound effect. Each driver has influenced and reinforced the others, ultimately combining to cause a divergence between economic growth and social progress that has placed the current system under a significant strain.
[…]The Long Growth Wave, 1945–89
With the end of World War II, a virtuous cycle began that lasted for nearly 45 years, and that continues to affect the way we think about business, economies, and society. The virtuous cycle represented an unprecedented alignment of economic growth with social progress, resulting from the three drivers: globalization, technological advances, and financialization.
[…]The economic engine worked exceptionally well and in alignment with the communities and societies within which it operated. Rising tides lifted all boats.
This was also a period of significant technological progress. […] Meanwhile, a globally interconnected economy took shape, featuring increasing levels of international trade.
[…]This pattern of global economic growth is often taken for granted today, but at the time, it contributed to a general perception of progress and prosperity, with enough to go around. There was a sense that this progress, underpinned by healthy market economies trading with each other, was the natural order of things in the postwar world — at least for the citizens of those countries that globalization had reached.
At the same time, policymakers grew accustomed to using GDP as the primary measure of national success. Drawn from agricultural and manufacturing statistics, it did not directly capture quality of life, but this did not matter so long as GDP and social progress rose together. A society full of promise was a natural outcome, it seemed, of the burgeoning financial world.
Business leaders, for their part, gradually returned to the concept that a company’s main objective should be to maximize shareholder value. This had been the prevailing point of view before the 1930s (Henry Ford had famously lost a lawsuit in 1919 to shareholders who objected to his paying workers $5 per day). But during the Great Depression and the War, American companies had adopted the view that they should work “in the balanced best interests of all,” a phrase used in the 1953 General Electric annual report. Starting around 1970, economists such as Milton Friedman, Michael Jensen, and William Meckling argued that this multifaceted approach created inefficiency and waste. Management could make more intelligent decisions with the single financial goal of shareholder value; in the view of these economists, this would automatically lead to better decisions for employees, customers, creditors, and the community as well.
[…]Accelerated Success and Misalignment, 1989–2008
How reasonable it seemed by 1989 to think that this virtuous cycle represented the natural order of things. Humanity appeared to be moving to a world without borders, in which virtually every major nation relied upon market economies to make life better at a societal level, and now in an increasingly interconnected fashion.
[…]…the years between 1990 and 2010 were marked by a plethora of free trade agreements of one kind or another. This helped streamline bureaucracies and spawned greater overall economic integration. Billions of potential workers and therefore consumers became accessible globally.
Over a short time, these developments brought about a significant change in how the three drivers all behaved. Previously, international trade had been dominated by countries with relatively equivalent wage rates, legal structures, and technological development. Now, the international trade system was connected to countries with massive populations, low wage rates, immature capital markets, and nascent market-based legal processes. This contributed to a form of trade that was quite different from that of the previous period. In particular, large-scale labor arbitrage — the movement of work from high-labor-cost countries to those with low labor costs — became commonplace, facilitated by financialization and technology.
[…]These business decisions, shifting activities and employment from one part of the world to another, were rational. In fact, they represented the only way for an MNC to stay competitive. Collectively, on a huge scale over time, they contributed to huge global progress by spreading income and employment into new markets. But this also inevitably impacted the advanced economies that had often been the original homes of these now truly international businesses. Already high levels of unemployment in some communities were further raised by increases in automation, particularly in manufacturing. Although the economic engine was delivering as planned in macro terms, this unemployment was a sign that not everyone was benefiting and all was not well.
[…]Global Progress, Local Disharmony
The Great Recession of the late 2000s exposed these weaknesses. The financial crisis itself was less a cause than an indicator, revealing a misalignment within the system as a whole that had been growing for years. In a more globalized, technology-enabled world, the recession’s impact was felt at unparalleled speed.
The two primary indicators of success for the previous 60 years, GDP at the macro level and shareholder value at the micro level, were now shown to be problematic. GDP did not reflect the negative effects of economic growth; people who dropped out of the job market, for example, were invisible to it. The GDP figures showed great global prosperity on average, while significant portions of the population were experiencing years of income stagnation and decline. GDP also ignored intangible factors such as environmental degradation, the low wage levels and insecurity associated with many of the remaining jobs, and the diminished quality of life in some communities.
Research conducted by World Bank economist Branko Milanović found that big earners and those in the bottom two-thirds of income levels (on average, globally) received major gains, but households in the 75th to 85th percentile of the global income distribution were scarcely better off economically in 2008 than they had been 20 years before. This group (represented by the dip in Exhibit 5) includes most of the middle class in industrialized countries.
[…]People who were affected by these challenges reacted in a variety of ways. Some moved from rural areas, while others took on additional employment when they could find it. Many households burdened themselves with unsustainable levels of debt to fund a standard of living that was no longer affordable, facilitated by lending practices that contributed to the financial crisis.
As for shareholder value, its sustained use as an indicator of commercial success had two significant consequences. First, companies retreated from their previously long-standing relationships with local communities. Second, businesses placed greater emphasis on short-term financial results. Since Alexis de Tocqueville published Democracy in America in 1835, economic success has been presumed to be linked to social progress. The shareholder–owner lived in the same town, went to the same market, and attended the same place of worship as the rest of the citizenry. Business success was intrinsically linked to the success of the community or society within which it operated. This linkage became far less important for a business operating on a global basis, which was not only expected but required to deliver competitive short-term financial returns, even as technology created an apparently endless range of competitive and disruptive threats and opportunities.
The nature of the three key drivers has now transformed so fundamentally that they will continue to behave differently. This has important implications for our future.
[…]The effects of globalization have been felt unequally by different countries. Thus, while still very interdependent, the world has begun to fracture along broad cultural lines — a point made prominently by political scientist Samuel Huntington. One consequence of this is that globalization is more difficult to sustain. Countries naturally tend to focus on those more like themselves. This is evident not only in the political arena, but also in the approach to business and the economy. More than one version of a market economy has emerged.
[…]Regions such as sub-Saharan Africa may be the hardest hit by the growing reliance on automation and robotics. They tend to have inadequate access to technology, particularly electricity and the Internet, and the further disadvantage of a late start (see Exhibit 9). By the time the African workforce is ready to adapt to industrialization, automation may have taken away industrial jobs that, in the past, have lifted other regions of the world out of poverty. Since many African countries have large youthful populations, the end result could be very challenging in civil terms, with the possibility of even larger movements of people, not just from Syria but migrating from a variety of Middle East and Central African countries.
[…]Together, these trends have led to the erosion of trust in mainstream global institutions, including government, business, the media, education, and nongovernmental organizations (NGOs). The 2017 Edelman Trust Barometer survey found that only 15 percent of the general-population respondents believe the present system is working; 53 percent do not and 32 percent are uncertain. Edelman argues that the trust collapse has now become a systemic threat. The claim that “elites are out of touch” has struck a chord. This rising polarization could add fuel to nationalist and populist movements. This may in turn lead to greater protectionist policies, which could exacerbate the root problems discussed here.
[…]We need to reframe the alignment of these forces, or face a challenging future. If we do not intervene, the risk is that many of the trends we see now will continue and even accelerate: slowing growth in advanced economies, continued erosion of the working and middle classes around the world, stagnant or declining pay to workers in advanced economies, unemployment in large sections of the world made worse by automation, Africa missing out on the benefits of globalization altogether, sustained harm to communities and our broader environment, and continued erosion of trust. These factors will feed increased political uncertainty and instability.
Addressing these issues will require realigning our economies and political systems so that they again better meet human needs.
[…]Observations for Achieving Realignment
As we reflect on this situation, it is critical not to lose sight of the progress and positive impact each of the three drivers has had. We should not throw the baby out with the bathwater. Well-managed market economies have consistently delivered economic growth and social progress more successfully than the alternatives, and can continue to do so.
A globalized world is a reality. Issues (and opportunities) will not respect national boundaries. Technology, disease, security, migration, ideas, and our environment are relevant for all countries; they require sustained engagement on a cross-border basis. GDP growth and financial performance are essential to provide the resources to address the needs of our broader society. And people will continue to demand the benefits of technology. We cannot romanticize about going back to a world before we were globally interdependent, financially intertwined, and technology enabled.
Instead, there is an urgent need to revisit the very purpose of the economy — an engine to match human needs and opportunities. At its best, an economy is a dynamic and evolving framework of rules, habits, agreements, behaviors, and practices that facilitates meeting the needs of people and their communities, and engages human skill and effort, as well as technology and capital, to do so. We also need to consider how emerging technologies can help us reimagine ways to meet human needs, those we have been incapable of addressing in a traditional manner.
Source: strategy+business (Autumn2017)
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