Saturday, January 31, 2009

Davonomics - Rise of a New World Order

Having braved a 3-hour train-ride with two changes in the snow, I arrived in Davos. Mood isn’t quite as perky as it used to be at the world’s biggest conference, but a fair number of CEOs have made it here, perhaps flying commercial for the first time in 30 years. There is definitely a drop in the number of limos, and a significant rise in security. The current economic crisis has broadened geographic representation with countries like Azerbaijan, Armenia getting time in the spotlight, and Vladimir Putin and Wen Jibao ably positioning their countries. (Traveling with an entourage of 100+ does tend to amplify the presence.)

We hosted our annual Wipro-CII Bollywood music party last night. Amitabh Bachchan was in Davos with his wife, Jaya, to collect his Crystal Award from WEF and stayed at the same hotel and was invited to join the party. But while very gracious to fans asking for a photo or autograph, he decided not to join in. So we ended up with the slightly surreal situation of a roaring party with 250 people of all countries dancing to Bollywood numbers, while one of its biggest stars sat in the hotel lobby (the only spot with wireless access) and conscientiously cleared his email! Only in Davos.

The Chairman of Wipro is addressing the audience today on the global economic outlook. I was researching material that showed the linkage between economic wealth and geopolitical power when my friend Lan Lakshminarayan gave me a nifty framework “economics follows demography, and geo-politics follows economics”. So rather than just focus on the recent financial meltdown as just another recession, we could view it as a cross-border economic shift which could alter the world’s political and economic balance on the same scale as Industrialization, Rise of Britain as a colonizing sea-power, Germany’s land-based expansionism, America’s emergence as the sole global power, and the Bretton-Woods agreement.

Why do demographics matter? Historically ‘younger’ nations have been more dynamic and have created wealth at an accelerated pace, and today roughly one third of the 76 million people added to the world each year are in India – 22% and China – 11% (UN figures). Automation and productivity improvements have helped reduce the direct linkage somewhat, but the cost of supporting the aging population with a smaller base of workers tends to offset those gains. Also, governments will push more of their responsibilities (eg healthcare, transportation, security) and associated costs towards private enterprises and increase the cost of doing business in those countries. So we can assume that there will be a disruptive shift in riches towards those countries that maintain their populations at the replacement level either organically (birth-rates) or inorganically (immigration).

Economic growth rarely takes place without geo-political shifts. Growing economies embark on expansion to gain access to raw materials and ensure free flow of their goods and services (Similar to the vertical integration adopted by companies to secure their supply chains). For example, energy security is a key objective for many growing economies and they focus on securing adequate supplies and then safeguarding its transit. In the past, a country – or business enterprises like the East India Company or the South Sea Company – would have simply “annexed” the required territory for its pipelines or ships. But today, similar to the recent business trend of economic partnerships substituting absolute ownership, countries increasingly exercise soft power and economic clout to gain their strategic ends, rather than the military option. For example, China uses ASEAN as its platform for building a free trade zone, from which politically strong trading partners like US and India are excluded. China even offers IMF-style funding assistance to ASEAN members. Both China and India are actively investing in places as disparate as Bhutan and Africa.

This competition for resources, and the desire for prestige, will cause changes in the geo-political map. While America will continue as an economic powerhouse despite the current dip, the financial meltdown has reduced America’s premier status as the chief economist to the globe. China is currently larger than India in terms of output and trade, but the gap is expected to narrow over the coming five to 20 years. The bilateral relationship of India with China and of both these emerging ‘superstates” with the US, Japan, France, Germany and other economic powers will shape both geopolitics and economics in the years to come.

For business, there is an additional dimension to consider. And that is the transforming power of ubiquitous technology in enabling a world where the nature of work is increasingly services-oriented and digital, and where work can be done anywhere. The current economic cycle and the accompanying focus on reducing travel and increasing flexibility to ramp-up and ramp-down, could accelerate trends such as
· work-from-home which would cause a decline in the growth of mega-cities
· increasing use of teleconferencing/telepresence as a substitute for business travel
· temporary virtual aggregation of individuals on a project-basis eg crowdsourcing leading to a decline in full time employment

To summarize, when we come out of the current recessionary cycle, the world will look different politically, economically and technologically, and those who plan for those changes now, will not just survive but thrive.

And who knows? Maybe ten years from now, the axis will have shifted so far that WEF will up itself from its icy, inconvenient home and relocate to the equally picturesque town of Madikeri, Karnataka. It’s just as well connected!


manuscrypts said...

haha, loved the last line.. easy for us then.. but wait, I really cant say about 10 years from now :)
very interesting post, makes a lot of sense :) but i really wonder about the pace of change.. india is so diverse that there really is no benchmark or even, a parameter of reference... 4.5% is our internet penetration.. when really will we scale up? :|

shivangi said...

very interesting post! especially the funda on "economics follows demographics...."

Kunal Kant said...

great post with quick updates on the future economic scenario live from davos.What interests me the most is how are we going to increase our trade and relationship with countries like Japan, France or Germany where language is a major barrier ?