Leading economist Stephane Garelli at #OBL12: "I have never seen a world economy that is so desynchronised."
Many of the biggest disruptors of the past decade - such as Facebook, the iPhone, Wikipedia and the human genome project - have been born in one of the world's most indebted regions, California. It's one of the ironies of the current global economic situation.
Professor Stephane Garelli, leading economist at the University of Lausanne business school and keynote presenter at Orange Business Live, argued that while governments and civic authorities wallow in debt, many global brands are in a rude state of health. Some even have a seemingly bottomless cash reserve.
And yet their immediate future is uncertain: from one side they are buffeted by the nervousness in capital, bond and equities markets. And on the other, they have to adapt to massive social, economic, environmental and regulatory challenges, not least in the area of taxation.
"I've never seen a world economy that is so desynchronised," said Garelli, former head of the World Economic Forum. "Some countries are struggling with inflation, others with deflation, others in recession."
So if a CEO were to ask, where are we headed, the answer from Garelli would be to paraphrase JK Galbraith: ''the only function of economic forecasting is to make astrology respectable". In other words, don't wait for everything to become crystal clear, leap now. Global economic uncertainty is not going away.
how to stimulate the global economy
Governments obviously cannot leap without looking. They have to find "$10.5 trillion dollars this year to operate", and they will need every tool at their disposal. The only question is which is the best approach?
You call your central bank to print some more cash. Great at the national level, particularly in the US where your currency is the world's currency. But that does not help California ($375bn in debt), Illinois ($280bn debt), New York ($282 billion in debt) or many other municipal authorities who do not have quantitative easing as a tool. Sub-sovereign debt is becoming a problem the world over.
Ask your banks to lend you some money. But they can't as they have gone from lenders to borrowers. And don't expect the financial services sector to recover any time soon as overregulation from Basel III and Dodd-Frank Act (all 848 pages of it) will stifle the sector, according to Garelli.
Borrow from a wealthy friend. Emerging markets countries hold $6.4 billion in foreign currency reserves. China alone has $1.1 billion of US treasury loans and €590 billion euro treasury bonds. But you have to be very nice to these countries if you want to keep borrowing from them.
Try spending your new money. But if you invest in government bonds, you face currency volatility. You can't invest in real estate because of bubbles, and buying up assets in other markets, e.g. a port or an airport, has massive political sensitivity. Garelli believes a lot of the new money being created will be invested in creating national champions to take on the rest of the world. Haier, in China for instance, has become the largest household appliance manufacturer in the world. It currently does not have a global brand but that's not to say it won't be able to take to the world's stage.
Spend less. But austerity is like shutting the gate when the horse has already bolted, and it doesn't help global businesses who need an increase in consumer spending.
Raise taxes. Greece has a well publicised problem with raising tax revenues, but according to Garelli, the US tax revenues as a proportion of GDP are even lower. He predicts that there will be a massive overhaul in the tax system in the US.
Hope. There is hope that the customer will wake up and one day start spending again and this will reignite the global economy. The problem with this is that in the Western markets, much of what we buy is because we want it to replace something (a replacement economy) rather than we need it (e.g. buying a refrigerator for the first time ). We can afford to slow down the replacement cycle for goods we want, by a year or more, and it will not affect our quality of life. Consumer confidence is poor, and we do not fear inflation, so we hold back on spending. Emerging markets, on the other hand, are embarking on a new wave of consumerism, driven by "I need it". Cars, refrigerators and air-conditioning are bought for the first time.
And to purchase these items, there has been a boom in consumer credit. In India, for instance, credit is 60% of GDP, in China it is 140% of GDP. And they are buying low-cost goods, designed for their economies (for instance the $2000 car). Credit + consumerism leads to inflation. Inflation fuelled by hot air leads to balloons bursting. And it simply does not sit in a world of austerity.
preparing for tomorrow's world
We are building up a host of problems by pursuing austerity, growth in consumer spending and making "I want it" products. Unemployment is growing in European markets, and yet more and more jobs leave Europe and the US for overseas. There are huge trade deficits in the US, but the irony is, the majority of products imported are manufactured overseas for US companies.
Garelli believes that companies and countries must look to reshoring, bringing many of the jobs back into their domestic markets.
"It's a pity that UK is now only famous for manufacturing aircraft engines as (the UK) is the home of the Industrial Revolution". He posits that Germany and Sweden's buoyancy lies in their desire to keep manufacturing. Copy that by reshoring will require government policies such as tax breaks, and collaboration between employers and employee councils to agree productivity goals in return for bringing jobs home.
So how do you reindustrialize economies that have been beating a path to the information economy (and therefore de-industrialized)? Garelli believes robotics and 3D printing will help create small scale manufacturing at competitve prices. So companies could design and build for specific market needs e.g. a $2000 car in India and a $200,000 car in the US. This may be anathema to companies that want to act on a global scale but may hold the key to understanding and fulfiling customers in diverse markets with different economic drivers (inflation, austerity, "I need it").
And finally, Garelli also believes that it is important for Western brands to rediscover innovation. Currently, innovation is best harnessed by smaller companies who can access the oodles of capital tha is floating around in searching of the next big thing (particularly as government bonds and blue chip equities don't appear to be any less risky). To compete with start-ups, Garelli believes that enterprises need to farm off innovation into a unit that is free of P&L. "How do you let people with new ideas go further? Give them enough money to develop a product, test it, and maybe launch it in a market. And be prepared to lose money. That's the best way to learn."
June 26, 2012Thanks Philip, I am sure we can. I'm not sure we even live in a world where mass production is necessary. Just look at the success of Amazon and mobile apps - it's a Long Tail. If manufacturing can also deliver in the Long Tail, at low cost (not just crap products that most people don't want), then we can localise manufacturing. Then we just to reeducate the (potential) workforce. As long as we don't create new Dark Satanic Mills, and that new fab plants are fun, friendly places to work, with mimimal environmental emissions, then I would be happy to have a factory in my street.
June 26, 2012PhilipVery good blog. Informative and entertaining. The good news is that re-shoring is already happening. But I think what we need is a new idea about industrialization. Today we still live in the XIX century model of large production schemes made profitable through economies of scale, huge investments and market ubiquity. Is the model sustainable though? Can we not come up with different strategies that would change our conception of production and perhaps, in its wake, even resurrect the old virtue of solidarity...