Davos_westmountmag

The World Economic Forum
at Davos 2019

“Globalization 4.0” discussed the Fourth Industrial Revolution and business as usual

By Jean-Luc Burlone

Where we stand

The environmental issue pervaded the World Economic Forum (WEF) all week. Climate change was given visibility from day one by honouring with the Cristal Award Sir David Attenborough, the 92-year-old environmentalist and by ending the week with the allocution of Greta Thunberg, the 16-year-old Swedish climate activist. The message was clear, humanity is “sleepwalking its way to catastrophe” as stated by the 2019 Global Risk Report.

The International Monetary Fund has warned the Davos audience that the world economic growth (GWP) is weakening. In its second downward revision in a few months, the IMF projects the GWP growth at 3.5% in 2019. China’s economy is slowing; at 6.6%, its slowest growth rate since 1990. The Euro zone is once again on the brink of a recession with 1.2% economic growth and the United States’ GDP was lowered at 2.5% from 2.9%.

The message was clear, humanity is “sleepwalking its way to catastrophe” as stated by the 2019 Global Risk Report.

Uncertainty is rising in the midst of a repositioning from a global system based on international trade under the aegis of the United States, to the emergence of regional trading blocks (North America, Europe and Asia) under their respective hegemon. Regardless of political feuds however, international trade is currently reaching a saturation point by itself as business activities are becoming more regional and supply chains are established closer to home.

With the exception of some technology services, such as IT that is often subcontracted to Indians in Bangalore, most services can hardly be exported and international sales of the thousand largest American digital companies from all fields represent less than 1% of all exports in 2017. The pros and cons of a regional blocks system are discussed without a definite geopolitical outcome at hand.

The discussions

Listening to a panel of mainly business people, one would conclude that their main interest is how to best serve the growing market of Asian consumers, notably in India. Of course, they are concerned whether a recession is likely in the next 24 months. A political shock, like a hard Brexit, or an economic blunder, like an interest rate hike, are feared as triggers to a downturn.

To answer their concern, J.P. Morgan’s model, based on the historical predictive power of the stock market, the credit spread and the yield curve, concludes that the probability of a US recession in 2019 is 91%. On the other hand, their other model based on car sales, building permits and the unemployment rate, concludes that the probability of a US recession in 2019 is 26%.

‘… it was clear that business leaders were aware that the old business model, which neglects social and environmental issues, erodes the private sector’s ability to operate.’

Be that as it may, business people remain optimistic about the United States as the world largest economy. The tax cut, deregulation, consumers’ confidence, the ending of the government shutdown and the low unemployment are all positive factors. Indeed, the business elite feels that the US is stronger today that it was two years ago.

The unions representative was a notable dissension within the group. She anticipates a gloomier future where the imbalance of power between workers and employers still favours employers to the detriment of workers (as with the consequences of deregulation). Moreover, the distribution of wealth (the tax cuts for one) keeps favouring the wealthy, feeds inequalities and constrains workers’ access to services, such as health care.

Although business discussions were reminiscences of the past in their pursuit of new markets and profitability, it was clear that business leaders were aware that the old business model, which neglects social and environmental issues, erodes the private sector’s ability to operate. The issue of inequality and inclusive economic growth could not be only lip served at a meeting of the minds such as the WEF.

The Fourth Industrial Revolution

Indeed, the WEF recognizes that the business model for profit only is outdated as it fails to answer today’s popular frustrations. Hybrid business structures, that deliver social and environmental benefits as well as financial returns, represent a growing segment of GDP and create more jobs than the traditional for profit only model.

After the steam, the electricity, the computer and the digital technology revolution, the Fourth Industrial Revolution (FIR) combines digital, physical and biological changes that affect not only what we do but also who we are. Our identity, our privacy, our values, our sense of ownership, our consumption, our relationships to life, our skills, our activities… they all change.

‘Hybrid business structures, that deliver social and environmental benefits as well as financial returns, represent a growing segment of GDP and create more jobs than the traditional for profit only model.’

AI, additive manufacturing (3D printing) and other technologies allow for circular production processes where used material are recycled and re-integrated in the process, decoupling production output from limited resources. The flexibility allows the “agile” approach to integrate stakeholders and consumers to the production process from the drawing board to the distribution. At the production as well as at the macro level, individuals have more power.

The FIR supplies the flexibility needed to shift the economic system in line with today’s basic social and environmental needs. To maximize human well being within the planet’s resources rather than maximizing growth per se, the Fourth Industrial Revolution brings to the fore new possibilities — that were unthinkable before — on how we want to live on the planet.

Technology is the main reason why incomes have stagnated in developed economies for the past forty years. As technology replaces workers (it is expected that five million jobs will be eliminated by 2020), the main beneficiaries are those who provide the knowledge and the capital. It explains the higher return of capital compared to the return of labour. Clearly, technology increases inequality, which remains the main challenge to the Fourth Industrial Revolution.

The FIR has the ability to change the outcome. It makes inequality visible and thus, unacceptable. It empowers people to demand appropriate decisions. New education and training are obvious answers but the jobs of the future are still unknown. Nonetheless, technology opens a world of learning and one approach is to start with young kids (third grade, 8 years old) and give them the incentive to freely develop their ability, to adapt rapidly and to improve whatever activity they enjoy.

‘To maximise human well being within the planet’s ressources rather than maximizing growth per se, the Fourth Industrial Revolution brings to the fore new possibilities — that were unthinkable before — on how we want to live on the planet.’

Wealth distribution is a necessary and immediate solution to reduce inequalities. One option is a guaranteed minimum revenue to all. Some critics warn that it is a socialist concept that induces complacency and hence reduces motivation. However, the guaranteed minimum revenue has been tested in Finland, of a socialist inclination, for some years and the Finns are enjoying a higher degree of social mobility than the Americans. Moreover, the concept was promoted by Richard Nixon and the economists Friedrich Hayek and Milton Friedman, all pro market protagonists.

In a fictitious story, Henry Ford II was touring his assembly plant with Walter Reuther, the head of the union. Playfully, Henry Ford stopped and asked, “Tell me, Walter, how will you get those robots to pay their union dues?” and Walter Reuther retorted, “Well Henry, how will you get them to buy your cars?” Indeed, we want all people to be included in the economy.

Feature image: World Economic Forum [CC BY-SA 2.0], via Wikimedia Commons 

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Read also: other articles by Jean-Luc Burlone


jean-luc_burlone

Jean-Luc Burlone, Ms. Sc. Economy, FCSI (1996)
Opinion Writer
Economic Analysis & Financial Strategies
jlb@jlburlone.com

The text above is my personal view, based on a review of the economic and financial press following Davos World Economic Forum, January 2019. February 1, 2019. – JLB

Fellow of the Canadian Securities Institute (FCSI), Jean-Luc Burlone has an excellent knowledge of financial product management and holds a Master’s degree in economics from the Université de Montréal with a dual specialization in development economics and International economy – finance and trade.

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