In the idling engine room of the global economy, chastened
consumers in the United States have begun saving prodigiously,
mirroring their counterparts in other Western countries, and
businesses have not been investing much despite historically low
real interest rates. State governments obliged to run balanced
budgets have reduced spending and Washington is not moving to fill
the gap. The picture looks similar now in many other Western
economies.
John Maynard Keynes would certainly recognize the raging debates
over the need for fiscal stimulus. Many political leaders talk of
the imperative for governments to retrench. Yet economists see no
evidence of a spike in interest rates. In fact, they are still
close to zero. Among countries that control their currencies,
governments can borrow at exceptionally low rates. Even Japan,
which has the highest ratio of government debt to GDP, has no
problem borrowing yen.
In the US, some argue that inflation remains low and that
deflation, rather than inflation, appears to pose a greater risk
for the time being. Yet oil and food prices are rising globally,
creating conditions that can lead to unrest in some countries.
Meanwhile, many of the emerging market economies seem to be
doing fine, particularly China. Or is it? Thanks to a huge
government stimulus plan, China's economy has returned to rapid
growth. But plenty of people in Davos will point out that China's
current economic health depends on a massive trade surplus,
principally with the US. That will not continue if the American
economy remains depressed. To hedge its risk, China has been buying
a basket of currencies besides the dollar and investing massively
in mines and other natural resources worldwide. It has also been
trying hard to suppress tremendous inflationary pressure. But
China, too, will soon need some other source of aggregate demand
and may have to turn to internal markets.
Another issue likely to come up at Davos that business leaders
need to track is the convergence of two demographic challenges: the
developing world's population is growing while the developed
world's population is ageing. Japan and Western Europe are already
reckoning with the effects, of course, but countries such as China
can see it on the horizon. The politically uncontroversial answer
is to encourage "more babies". But that has the obvious drawback of
making global overcrowding worse. The real solution is labor
mobility and the continuing integration of the global economy.
That, however, poses formidable political issues, requiring some
real leadership.
Business leaders are also beginning to realize that we are
approaching a global water emergency. Indeed, today's water
consumption gap is estimated at 300 cubic kilometers. That's 79
trillion missing gallons for a global population of about 6.8
billion. By 2050 that population could hit 10.5 billion, by some
estimates. But there will be no more fresh water than today, and
probably a lot less.
The world needs more than conservation to meet this crisis.
Today there are few economic incentives for carefully managing
irreplaceable water. As a result, the West is exporting a
meat-eater's diet when a calorie of rice takes one sixth of the
water requirement of a calorie of beef. Without an accurate cost,
how can water be better allocated? Maybe some answers will start to
emerge at Davos around low-cost technologies to capture more. But
we also need the kind of global pricing mechanisms that govern
another increasingly scarce commodity: oil.
Even though business leaders cannot control fiscal policies,
demographics or resources, part of the job is to stay close to
these issues and anticipate the necessary adjustments required of
the business. As they prepare for an economic recovery, however,
there is another set of decisions that senior executives can make
now.
For instance, the cost of capital, especially debt capital, is
historically low and many corporations are sitting on substantial
reserves of cash. Every chief executive should have a clear and
well-developed set of priorities for strategic investment and the
right criteria to move quickly when the opportunity arises. As many
studies have shown, those with the confidence to invest before
their peers will do far better.
Another factor that businesses can manage is the risk of trade
barriers rising. If you have demand for a product manufactured
exclusively in another country, do not assume that you will be able
to respond to that demand in the same way as you did in the past.
Equally, companies need to build more robust supply chains with
multiple paths. Business leaders must ask themselves what would
happen if political considerations broke one of the links. What
alternatives have you prepared? If the answer is "none", you have
not been doing your job.
Given the uncertainty regarding exchange rates, leaders should
also seek to manage a worldwide business so that value added is
distributed in a way that reflects local shares of sales or
profitability. In other words, companies should manage their
currency footprint. To some extent this is a currency hedge. But,
more important, it reduces the risk of becoming a political
football in a place where a company makes a great deal of money but
adds little to the local economy.
The biggest decisions affecting the recovery will be made, or
not made, by governments. Business leaders need to be able to
anticipate those choices and respond quickly to them as they
unfold.
Orit Gadiesh is the chairman of Bain & Company.
