A warning to heed at Davos

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THE world is undergoing major transformation. Advancing technology is changing our everyday personal and business lives.

And the emergence of the US as a major energy provider is changing the global supply equation, shifting the balance of power toward oil consumers and away from suppliers. Both should be seen as positives. But, without better global coordination, they could each prove to be a force for ill, rather than good.

The era of globalisation has provided a major boost to global growth and lifted hundreds of millions of people out of poverty.

In large part thanks to globalisation, the global extreme poverty rate has halved in the past 20 years. Yet today, integration and cooperation between countries and people around the world is slowing, or even reversing.

Global trade growth is only just keeping pace with economic growth when it ran twice as fast before the financial crisis. And the World Trade Organization has warned that the volume of protectionist policies among G20 economies is rising.

The financial sector has fragmented. We are seeing big differences emerge between globally agreed reforms and their implementation in the local regulatory frameworks. Even international migration has begun to slow.

Last year, we saw not only the beginning of divergence in central banks’ policies, but, in a more worrying turn, the dispute between Russia and the West left the geopolitical landscape fractured and more dangerous than before.

And the Organization of the Petroleum Exporting Countries’ (Opec) decision not to cut oil production will mean a number of already unstable countries are even closer to severe economic distress.

Without a change in the course of globalisation and cooperation, a number of potentially transformative developments could turn from being tailwinds into headwinds.

For example, the emergence of the US as a major energy supplier holds the promise of delivering energy security to the world’s largest economy, and is already acting to lower the “energy tax” on millions of consumers and businesses.

But it could leave two important voids. First, those emerging markets focused on low-end energy-intensive manufacturing could face more intense competition and potentially be left with excess capacity.

Second, US energy self-sufficiency could leave a security gap, in the Middle East in particular, as the US steps back from an active involvement in the region. The extent to which China and/or Russia step into this potential vacuum could lead to a more uncertain geopolitical landscape.

Equally, in the fields of digitalisation and robotics, technology is playing a major role in improving supply-chain efficiency. But, a world more connected through technology, but also more divided in geopolitics, is a potentially dangerous one.

We have already seen a worrying increase in the number of cyber-attacks, including state-sponsored incidents, with the critical energy and financial sectors both targeted. So technology-driven improvements in efficiency may be accompanied by a rise in instability.

Technological developments are also driving a divide in the labour market.

Organisational and structural changes as a result of technology usually make other skill sets or jobs redundant. Combined with ultra-loose monetary policies globally, this drives income inequality.

There is a threat that the resultant societal discord could lead to a rise in political populism that panders to voters by avoiding difficult reforms. Lack of reform could then drag on growth, offsetting both monetary policy stimulus and technology’s productivity gains.

The prospects for elevated geopolitical and societal volatility show that urgent action is required.

First, some emerging markets, especially those running large current account deficits, or those that are focused on low-end energy-intensive manufacturing, need to conduct economic reforms and/or move toward sophisticated, higher value-added production.

We should not trivialise how difficult and complex such a shift can be. But a few countries are making the right steps. For example, both India and Mexico’s recent reforms are encouraging greater inbound investment.

Second, stronger global frameworks will be required to manage a number of the world’s transformations, ranging from financial regulation to cyber-security.

Finally, to help address local and global inequalities, improving educational standards will be key, both in developed and developing markets. Business must play an active role here, and Switzerland’s dual-track system of apprenticeships alongside school training is a good example of how it can work.

Businesses are among the first to become aware of changing skills requirements in the labour market, but there are few countries where business has the close relationships with educators necessary to ensure that information is transferred.

As we convene at the World Economic Forum’s Annual Meeting 2015 in Davos, Switzerland to discuss this year’s theme, “The New Global Context,” policymakers will need to look to build a strong policy framework for global security, encompassing geopolitical, financial, physical, and digital.

To achieve this, greater cross-border governmental cooperation will be required than we have seen in recent years. — CNBC

Axel A Weber is chairman of UBS AG and Sergio P Ermotti is group chief executive officer at UBS. For more, visit www.cnbc.com

 

This article first appeared in The Edge Financial Daily, on January 22, 2015.