Globalization What’s next?

As protectionism gains popularity in the United States and other Western countries, globalization is under intense scrutiny. Will this international order that shaped our world for the last 75 years suddenly vanish? Not according to Dominic Barton, for-mer head of the management consulting firm McKinsey & Company who strongly believes that our current economic system will change and evolve but, ultimately, prevail. For this Canadian leader who spent twelve years in Asia, if we want to know what’s next, we simply have to look east.

By Karl Rettino-Parazelli

You spent almost ten years as head of McKinsey. What strikes you the most about the evolution of the global market in the last decade?

I think the most significant thing was the pace and scale of change. The world’s clock speed has gone up and, for big organizations, that means there are a lot of changes that must be accomplished quickly. One chart I always kept on my wall, and I still look at in my London office, is the average life of an S&P 500 company. In 1935, the average life of an S&P 500 company was 90 years. Today, it’s about 15 years. This is indicative of the speed of change.

Technology is a very big driver, but I think another factor explaining those changes is the economic power shift from the West to the East, which is happening faster and on a broader scale than people had expected. China now has more companies on the Fortune Global 500 than the United States. Ten years ago, people wouldn’t have believed that could happen, but it did.

Talking about Asia, what is happening on that continent these days and how will it change our world in the next few years?

Between China, Japan, South Korea and India, there’s a lot going on in Asia right now. All these countries have their own dynamics and their own importance. But, at the macro level, we have seen the middle class rise extremely quickly in that region in the last ten years. China and India are clearly the drivers of that change, and the new consumers living in those countries create a lot of growth. Related to that is the rise of cities. That’s where the growth is coming from, because we have seen a rising middle class leave their rural life and go to the cities. In China, for example, a little more than half the country is urbanized, so it still has a way to go and it’s obviously developing rapidly.

India is at an earlier stage but it’s becoming a very significant economy. Japan is in a different mode, given its aging population, but I think we underestimate its technology capabilities, especially concerning the Internet of things. And, although we may hear about protectionism, all these countries are and will represent very big markets.

Do you think this shift towards Asia will affect the way Western countries do commerce, politics, etc.?

Yes, it’s going to change everything. Young leaders coming into this system have to start thinking about doing business and developing a network in that part of the world, because it has become a much more significant market that offers big opportunities, especially for an economy like ours in Canada. It represents a real opportunity, but a lot of competition is also going to come from there. If you think about the top 1,000 companies in the world, you would normally think they would come from the United States and Europe, but that will change too. A lot of the big players and “attackers”, if you will, will come from that part of the world.

I think a lot of innovation is also going to come from the East. It already is, especially from China. If you think of places that are generating inspiring and radically different business models, most people think of Silicon Valley, but the place I would focus on is Shenzhen, near Hong Kong. From a geopolitical point of view, there has to be a change. In the past decades, the geopolitical situation was very much based in the West, but now we are moving back to what the world looked like 500 years ago, when it was actually dominated by Asia. I’m not trying to say that the world will be dominated by Asia, but I think there will be a very significant change in the world’s geopolitical structure.

Do you think globalization as we knew it in previous decades has come to an end, considering the shift you are talking about, but also the fact that protectionism seems to be gaining popularity around the world?

I’m definitely worried but, in the end, I think that for the prosperity of the middle class in Asia, and also in North America and Europe, a “we trade or no trade” policy will only make things worse. The middle class income in some parts of the world has remained flat for the past 15 years so I don’t underestimate those protectionist forces but I think that, with technology, with a lot of the trade being in data flow, we are now seeing a different kind of movement that will be difficult to stop.

The change that I expect will be more permanent is that, with technology, you don’t have to outsource everything. You can count on localized manufacturing that has been reinforced by trade wars. Your production systems can be closer to the consumer, which allows you to act faster. I think that part of globalization has changed, but I would argue it has more to do with technology, increased by protectionism.

Another factor to consider is the future of two key resources: energy and water. An important reason for the revival of domestic US manufacturing has been the significant increase in the American energy supply. When your energy costs less, you can produce for less. And I think, eventually, water will be a big factor. It’s a critical resource for all countries.

Are you saying that because of technology, certain countries can now produce more goods locally, but that these countries will still need each other for some key resources like energy and water, for example?

Yes. Technology actually enables us to do more locally. I think energy costs enhance that. Energy, water, some critical minerals: these are going to be very important in the future. It’s like the David Ricardo-type thinking: you can’t be good at everything so when you’re good at something, you focus on that and you trade. I still believe in that idea, but I think the parameters will change because whole new industries will be created.

The current situation reminds me of the beginning of the last century. It was a time of emerging globalization, there was an emerging power – Germany – you had a massive technology disruption, rising income inequalities ... My only concern is that it didn’t turn out so well. I think we should look to that period of time for lessons.

As you say, with globalization came the problem of inequalities. Do you think capitalism is still a good economic system, even with the inequalities it has produced?

I am a strong believer that it’s the best vehicle we have. China relied on it and raised the largest number of people out of poverty in world history. But I think it has to change, we have to improve it or modernize it. In the last forty years, unfortunately, it has become much more short-term and less inclusive. I think we are moving the other way, with more long-term investing.

Capitalism has never been about equality. I don’t make any apology for the fact that there are going to be inequalities. What I worry about is inequality of opportunities. Everyone should have a chance to work hard, to get educated, and to have the opportunity to thrive. That opportunity seems to have diminished, particularly over the past ten years. We have to work on fixing that.

Are you saying that capitalism is okay, as long as everybody has a chance to climb the ladder?

I am not happy about inequalities, but an inherent part of capitalism is that there are inequalities. The principle is that if you work hard and study hard, you can move ahead. What I am saying is that we must focus on fixing the unequal distribution of opportunities. Everyone should have a chance to thrive in this system, and I’m concerned that this aspect of capitalism, of this social contract, has fallen away.

Why do you think it happened?

There are a couple of reasons. First: technology, which is leading to increased returns. Five people can get together and create a multi-billion dollar business. But not everyone can go to the right school, and if you don’t have the right opportunities in terms of education, it becomes difficult to succeed. I think the global education system has become more stratified, especially when you think about parts of China, where people are paying $50,000 a year to send their kids to kindergarten. Education systems will have to change.

One thing I also worry about is the reskilling challenge. The whole idea that we are going to have a truck driver become a software engineer is something that will require a lot of effort. We cannot simply tell a whole group of unemployed people: “Don’t worry, a lot of new jobs will be created.” The question is: how do we get from A to B?

It goes back to what Adam Smith said: entrepreneurs have a duty to take care of the society in which they operate.

So do you think these changes towards inclusive capitalism must come mostly from businesses, or also from governments?

I think businesses have to play a lead role, and we are beginning to see them play this role. For example, Blackrock now asks what the purpose of a company is and doesn’t only look at its objective of profitability. A number of people are pushing in that direction, but we have to push harder because, otherwise, rising forces like populism could challenge the entire system.

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