Five poison pills: Trends that threaten the global economic recovery

That there is opportunity in a crisis – even an intractable global crisis such as the one now paralyzing world economic growth – may sound trite. But as this author points out, smart leaders who think creatively will lift their nations out of the quagmire, to sustained if not spectacular growth. As he writes, smart execution conquers all.

Just when you thought the world had recovered from the financial crisis of 2008, Europe happened. Somehow, while we were busy salvaging what we could from the credit meltdown that followed the failure of Lehman Brothers and the U.S. subprime market implosion, the Greeks were presented with their bill for letting tax collections go, well – uncollected . Those of us who hadn’t read a Greek tragedy since high school suddenly saw one served up daily on CNN and the front pages of the financial media. As one Eurozone citizen decried on a tweet to BBC World: “Greece up in revolt, Italy near collapse – welcome to 400 BC!”

While Greece has in a grim way amused Europe and the rest of the world for the past three years, we have now moved from crisis mode to what seems to be a less digestible – and perhaps what will prove to be chronic — malaise of the world financial system. Greece’s problems are minute compared to the cost of a Spanish bailout or of Italy’s down the road. Once France enters the operating room, there might be no salve left with which to heal the patient. Combine this Euro-flu with the looming U.S. fiscal cliff, the slowdown of the Chinese economy or the multiplying conflicts in the Middle East and you have a perfect recipe for a geopolitical-financial meltdown that might make the descent into darkness of the 1930s seem like a minor event

In my book Creative Execution, I identified five “poison pills” that are feeding this global insecurity, and with which we need to come to terms in order to make the world – and our complex global economy – stable. Those five are: 1) economic uncertainty; 2) global demographic changes; 3) the semi-paralysis of democratic governments; 4) war and terrorism; and 5) climate change. Together, these trends are likely to either choke or shock the global economy in the 21st century. Understanding these mega-trends is therefore not just a requirement for the UN and world leaders, but for every business and community leader.


1.     Economic uncertainty

The financial meltdown of 2008 and high unemployment are the twin evils that we can’t seem to make disappear. The U.S. lost 2.6 million jobs in 2008 – the worst year for unemployment since the end of World War II. Other industries have been impacted, but none more than manufacturing, which in the U.S. represented 28 percent of all jobs in 1970. Today, that’s down to a meager 18 percent, and falling fast. Unemployment is as high as 20 percent in some of the Iberian countries. Half of the entire population of Africa lives in poverty. Other than sputtering growth in China, India and Brazil, the world economy is getting by on life support. The Conference Board’s Consumer Confidence Index fell back to 2008 levels at the end of 2011, dropping sharply from 46.4 to 39.8 in just one month. The Measure of CEO Confidence fell 17 points in July 2012, according to the Conference Board. The spent Occupy Wall Street protests are a bleak reminder that many people in North America are very much on the outside looking in at the celebrations of top wage earners. According to Thomson Reuters ASET 4 data, the average CEO earns 142 times what an employee earns in the United States; this compares to 69 times in the UK and a more tolerable 34 times in Sweden.

There are a thousand data points that support the catastrophic decline of the North American and European economies since 2008 – but of them chronic unemployment is the most worrisome, particularly for the younger population. The U.S. is saddled with 8 percent unemployment, after cresting at 10 percent in October 2009 (compared to a healthy 4.5 percent in 2007). In Europe, approximately 17 million men and women are unemployed, with hard-hit countries like Greece and Spain topping the chart at 22 and 24 percent. Youth unemployment rose to 22 percent in the euro area in 2012, but this is where it gets scary: youth unemployment hovers just above 52 percent in Spain and Greece. In other words roughly half of Greece and Spain’s young, educated people under the age of 25 are unable to find jobs. In the United States, youth unemployment shot up from 11 percent in 2008 to 17 percent in 2012, according to the U.S. Bureau of Labor Statistics. These unemployment trends are feeding the malaise that affects us all. After all, how can you feel good about yourself when you see that a quarter or half of your peers are on the street, with no decent prospects for employment? As Michael Lewis wrote in his book on the global financial crisis, Boomerang, the United States “might organize itself increasingly into zones of financial security and zones of financial crisis”.[i]

The problem, as we see in the unemployment data, is that the recovery that started in July 2009 was mostly a jobless recovery. Without housing construction and manufacturing to power and sustain the recovery in the United States, and with the Eurozone in a state of shock, there is a real possibility that the West will face the same “lost decade” that afflicted Japan in the 1990s – when the weight of its bad debts and the implosion of its banking sector lead to ten years of zero growth. 


2.     Demographic Shifts

Joblessness, manufacturing and housing bubbles come and go, but population growth – or the lack whereof – is more difficult to control. Take the Chinese, who in 1979 implemented the one-child policy to slow population growth. In 1960, when the world’s population was just three billion, China had a population of 650 million. This grew to one billion in the 1980s, and to 1.3 billion in 2012 – a doubling of the country’s population in those fifty years. Now that the one-child policy is paying off, China’s birth rate is slowing down and India is set to become the world’s most populous country by 2040. Let’s try to simplify this by comparing what the world might look like in 2050 to what it looks like today:

The World in 2012

The World in 2050

Total population: 7 billion

Total population: 9 billion

Asia’s population: 4 billion:
China: 1.3 billion
India: 1.2 billion
Japan: 126 million

Asia’s population: 5.2 billion:
China: 1.4 billion
India: 1.6 billion
Japan: 101 million

North America: 351 million

North America: 448 million

Europe: 733 million

Europe: 691 million

Russia: 140 million

Russia: 116 million

Africa: 1 billion

Africa: 2 billion

Brazil: 195 million

Brazil: 218 million

You might have done the math already, but this chart reveals a staggering fact: over the next 40 years, only 3 percent of global population growth will come from the West. The extra two billion souls will come almost exclusively from Asia and Africa. North America and Europe will be increasingly populated by older people, whereas Asia and Africa will be dancing to the beat of a younger generation. Already, 50 percent of Africans are under the age of 18. For soccer’s 2050 World Cup (the actual year it will be played), teams representing countries in Asia and Africa will have drawn from a talent pool of 1.75 billion people aged between 20 and 29. This will be more than the total expected, combined population of Europe and North America. Now, if you were running Adidas or Nike, where would you set up shop over the next four decades?

If you peel the onion back a little more on North America and Europe, you quickly realize that there are two big winners in the shrinking population-growth pie: the United States, which will see its population increase from 317 million to 403 million by 2050, and the United Kingdom, which will grow by a healthy ten million, from 62 to 72 million. Germany will lose an astonishing 12 million, by contrast, falling from 82 million to 70 million, due to its rapidly declining birth rate. Spain and Italy will add a few million, but nothing that compares with the wild swings in Britain and Germany. Canada will add another ten million, growing to 44 million, and Mexico will add a whopping 20 million. The real losers, whose governments are desperately trying to save face, are Russia and Japan, which together will lose close to 50 million people. How do you lose 50 million people? By being a relatively closed and chauvinistic society, one which doesn’t attract immigrants in significant numbers. For Russia and Japan, pride in national culture and identity has had a strangulating effect on growth.


3.Political paralysis

This one isn’t pretty. The horrific display of partisanship in the U.S. Congress during the Debt Ceiling debate in 2011 brought home a startling new reality, namely that democracy, by default, isn’t perfect. The system of checks and balances created by the Founding Fathers in the United States, conceived as an honest bulwark against the despotic powers of a strong executive or legislature, has led to a political impasse with humbling consequences. The same reality has been brought home in a number of Western countries where coalition governments have tried to work together, in utter frustration, or in newly formed democracies like Iraq, where forming a national government is like an endless game of chess. To make things worse, economic crises seem to further divide – as opposed to unite – political parties. The Tea Party in the United States has gained so much influence that its 62 members made it nearly impossible for the Republican members of the House to forge a compromise with President Obama during the Debt Ceiling debate. The result? Congress had an abysmal 10 ten percent approval rating in 2012.

It seems that we have lost our trust in politicians to do the right thing once in office. Former President G. W. Bush left office with an approval rating of 25 percent, the lowest rating since President Truman in 1952. President Obama started on a high, with a giddy 69 percent rating in January 2009, his first month in office. It didn’t take him long to slide precipitously to 38 percent. Even celebrities like Arnold Schwarzenegger aren’t immune. The iconic Hollywood star began his term as California governor with an approval rating of 70 percent in 2003, and exited in 2011 with less than 25 percent approval. The United States is not alone in this democratic funk. Look what happened to the former Greek Prime Minister, or to Italy’s Silvio Berlusconi – both of whom had to resign after their country’s mounting debt crisis in 2011. And in Japan, which elected no less than seven Prime Ministers in the decade starting in 2000, the democratic process has been torpedoed by scandals, misplaced trust and the absence of any true leader.

We take democracy for granted, along with the joys and disappointments that come with it. But we need to remember that the longest running democracies, in classical Athens and in the United States (closely followed by France), have only lasted or been around for 200 years. As Donald Kagan reminds us, “Optimists may believe that democracy is the inevitable and final form of human society, but the historical record shows that up to now it has been the rare exception.”[ii] Indeed, while the Arab Spring protesters were busy overthrowing despotic governments across North Africa, there was an event in Russia that received a lot less media attention. In September 2011, President Dmitry Medvedev announced to a startled audience at the United Russia Party’s annual congress that Vladimir Putin would once again stand for election as President in 2012. This despite the fact that the Russian constitution bars individuals from serving more than two terms as president. This also reminds us that democracies are fragile institutions and that newly democratic states in the former Eastern Europe, the Middle East, South America and Asia are not guaranteed eternal survival. We are no longer in the post-World War One euphoria of President Wilson’s 14 points, or the New World Order which President Bush greeted with much fanfare after the break up (emasculation is too strong and not quite accurate) of the Soviet Union. Our democracies survive, but the political impasses and economic mess we have created on both sides of the Atlantic and in Japan are black eyes on our collective soul.


4. War and terror

With the last remaining U.S. forces out of Iraq, and NATO’s retreat from Afghanistan to be completed by the end of 2014, it seems like the War on Terror has come to a numbing close, leaving behind just as many frustrations and unanswered questions as the 10,000-day Vietnam War. The only differences between the Vietnam War and the War on Terror are twofold: one is the human cost, which was much higher in Vietnam, where the U.S. lost 55,000 men. By contrast, coalition casualties in Iraq and Afghanistan combined stand at just over 7,600 as of September 2012. This is due in large part to the use of smart weapons and counter-insurgency tactics adopted by a small cadre of Pentagon officers who prevailed with radical new ideas in 2006 and 2007. The second salient point is that Iraq and Afghanistan cost a combined one trillion dollars for U.S. taxpayers, adding a huge burden on the U.S. national deficit. The political impact is that just like after Vietnam, the United States is entering a post-war lull where it will be reluctant to deploy armed forces abroad – as President Obama demonstrated when he let Europeans take the lead in supporting the Libyan uprising. In the renewed world order, military and financial restraint is in vogue.

While the U.S. seems increasingly reluctant to suffer any additional casualties in remote war theaters such as the Middle East or South West Asia, China is slowly asserting itself as a military power, and signaling its intention to use this power. China recently commissioned its first aircraft carrier (which was originally built by the Soviet Union) and unveiled its new stealth fighter, the J20. Observers were shocked by the J20’s size and likeness to the American F-22 Raptor, suggesting that China, like the Soviet Union during the Cold War, is avidly absorbing U.S. technology. The row over the South China Sea island chain claimed by Japan, while unlikely to escalate into a full-scale war, is nonetheless a fascinating piece of brinkmanship: for the first time in modern history, China is capable of challenging an advanced power. The fact that this power is Japan, which subjugated China in the 1930s, hasn’t been lost on anyone. China has a bone to pick with some of its neighbors, and ultimately with the U.S. Navy – which, defiantly, stands between the mainland and China’s ultimate prize: Taiwan.

Saber-rattling and military conflicts will continue to erupt in certain regions, but for the most part the wars of the 21st century will be fought on a new battlefield: the Internet. Already the U.S. fends off 40,000 computer attacks from China every day. The GhostNet virus, discovered in 2009, has infected thousands of embassy and government computers worldwide. The description of GhostNet on Wikipedia is rather chilling: “This Trojan connects back to a control server, usually located in China, to receive commands… and allows attackers to gain complete, real-time control of computers running Microsoft Windows. Such a computer can be controlled or inspected by attackers, and even has the ability to turn on camera and audio-recording functions of infected computers, enabling monitors to perform surveillance.”


5. Climate Change, energy and natural resources

Of the five poison pills, this one might be the most costly and difficult to reject or at least avoid. While governments continue to argue about the validity of the scientific data of global warming, you might notice, in the newer atlases, that Greenland has a lot more ice-free coastline than it had 10 or 20 years ago. There are 195 countries that are laboring under the United Nations’ Framework Convention on Climate Change to limit the CO2 emissions that contribute to global warming. The Kyoto Protocol, if you were wondering, expired in 2012. So the world now needs to negotiate, in the wake of the financial and economic crisis, a follow-up agreement to cover the next 10 to 20 years, and to convince countries that they need to invest their dwindling infrastructure budgets in green energy.

The climate change debate is closely intertwined with the issue of sustainability and the use of the world’s natural resources. The total value of the world’s natural resources, including all the forests, lakes, oceans, oil and gas, is about $44 trillion. Of this, $29 trillion belongs to developing nations. There is a global tug-of-war happening right now, between energy-hungry nations and developed countries such as Japan without access to oil and gas resources, to figure out who gets to control that $29 trillion. China, of course, is a major energy consumer, one that is actively pursuing energy markets in Africa. Who do you think the single largest investor in the Libyan oil market is post-Gadhafi? The Europeans or Americans, who pushed through the UN mandate for military intervention when Gadhafi’s forces looked poised to crush Benghazi and the budding revolution? Or China, which opposed the UN resolution? As you might have guessed, it is China. Why did Russia, in 2011, announce the formation of two Arctic army brigades? To stake its claim to the large reserves of gas and oil that sit idle under the Arctic Ocean. But we should not worry, because Prime Minister Putin took the opportunity to announce that Russia would ensure that while it is deploying several thousand troops to the Arctic, it would take great care to preserve the region’s “vulnerable ecology.” This is a bit like an armed bank robber calming the crowds by announcing that he will hand out free cookies.

More violent tsunamis, tornadoes, the melting ice shelf and global warming are all warning signals that we’re doing too little too late to prevent large-scale climate change. The question is: Do we have the wherewithal to manage the world’s resources as a global community without getting into another Cold War with China or other energy-hungry nations? This race is on too.


The ascent of bold thinking and creativity

These five bitter challenges may seem insurmountable, but they are not. What is needed – in order to fix economic imbalances, unemployment, global warming and the financial stagnation that threatens our democratic societies – is a surge of innovation and bold action similar to what the United States accomplished in the 1960s to win the race to the moon. Even though we’re experiencing systemic challenges, our motto needs to be, like the Apollo XIII astronauts, “failure is no option.” Creativity and innovation are antidotes for the poison coursing through the world’s veins, which is why despite the economic uncertainty and austerity measures introduced in Europe and North America, R&D spending on innovation is on the rise. According to a Booz & Company report, the companies it tracks in its Global Innovation 1000 study increased R&D spending from $521 billion in 2008 to $550 billion in 2011. We might have lost some faith in our governments and banks, but companies are betting that innovation is the key to growth. More importantly, we need new kinds of leaders who won’t be afraid to think boldly, collaborate and embrace the global matrix we find ourselves woven into.

We all remember the stodgy Five Year plans which the Soviet state designed with great fanfare during the 80 years of Communist rule in Russia. These Five Year plans were supposed to provide a strategic framework for the entire Soviet economy, prescribing everything from who would produce coal to the number of fridges and tanks the country’s factories would roll out. These Five Year plans became a straightjacket that stanched creativity and innovation, leading to the semi-paralysis of the Soviet economy, which eventually collapsed under its own weight. And so whether your organization is still reeling from the shock of the global financial crisis, or you are starting a new venture or leading a government agency, hospital or not-for-profit organization, you are in the same boat that the hundreds of leaders from Alexander the Great to Toyota’s founders have faced in history.

Your job is to avoid creating a grand strategy or Five Year plan that limits creative thinking and innovation, and to focus instead on mobilizing the forces of Creative Execution that exist all around you. You can embrace change and turn the multitude of crises that dot the global playing field into phenomenal opportunities. Or, dig your head in the sand and hope that the crises will go away.


[i] Michael Lewis, Boomerang, p177

[ii] Donald Kagan, Perciles of Athens and the Birth of Democracy, p. 2