The End of the Economic Model
Photo Credit: Elle Neill
“If something cannot go on forever, it will stop”
– Herbert Stein’s Law
The 2nd half of 2015 has proven to be remarkably challenging for the global economy. Many countries have found that the economic model that has sustained them for decades is running out of steam.
But most troubling is not that the model has run its course. After all, everything eventually passes – the apex of a life, or a company, or a movement is also the beginning of the end. What is troubling is that so many countries in 2015 seem singularly ill-prepared for what is happening. So at a fundamental level, the economic leaders of the country have failed. After all, you don’t expect the average worker to look into the future to make sure the economy is resilient and able to weather the changes and shocks that will inevitably come. But you should expect this of the people to whom we entrust the economy. If they’re not looking out for how the economy has to evolve, what are they doing?
Here are a few countries that are facing massive challenges as what has sustained them for a long period of time looks like it is coming to an end:
- Canada and Australia: both these countries have been huge beneficiaries of the resource super-cycle, with Australia in particular racking up an incredible record of 24 successive years of economic growth.1)Australian Government Report Promoting Investment, 2015. Accessed July 13, 2020. Of course, both these countries have advanced, diversified economies, and re-balancing has already begun with currency depreciation, but they still seem unprepared for a world where commodities are much less expensive, let alone a world where we keep carbon in the ground, making tar sands and coal assets become worthless.2)Also see the discussion by Heather Stewart, Calla Wahlquist, and Jared Lindzon in The Guardian, September 5, 2015: Canada and Australia Feel Squeeze in Wake of Chinese Economic Slowdown. Accessed July 10, 2020.
- China is of course the corollary to Canada and Australia; dependent on massive export and investment spending, an aging population in its core markets (the US and Europe), and an aging population who save too much at home mean that their extraordinary economic model is starting to crack.
- The UK has ridden a financial boom since the 1980s, with London becoming the pre-eminent global financial centre, indeed the pre-eminent global city. But there is a limit to how many asset managers, insurance companies, and banks the developed world needs – and we seem to have reached that limit. The Northeast of England continues to stagnate, and the re-elected Conservative government policy seems to be one of creating a permanent low-wage, low-productivity working underclass.
- Europe overall is aging rapidly, with the consequent and inevitable reduction in aggregate demand and an inability to deal with a fixed debt load in a no-growth economy.
- Nigeria is a high-population country that was completely and utterly unprepared for what seems inevitable – volatility in the price of oil. All oil producing countries have suffered as a result of the decline in the price of oil, but during the period of the highest oil prices, Nigeria was actually borrowing (rather than saving via a Sovereign Wealth Fund). So if they were borrowing at $110 oil, the inevitable has now happened, with most of its 36 states effectively insolvent, with unpaid wages for months to civil servants, and with massive payables and debts. Of course, it is seems on the surface that Venezuela and Russia were no better prepared for the oil price decline.
Overall, our leaders are failing us in their forward-looking management.
Can they do better? We think they can.
Anyone familiar with ice hockey will know who is greatest player of all time – Wayne Gretzky.3)Sports enthusiasts like to debate who the greatest players are in any given sport, but Gretzky leads his sport in so many arenas, so to speak, that it is difficult to deny his dominance. A few links to his stats and style will help make the case: see Ken Klavon in the Bleacher Report, January 2014, Why Wayne Gretzky is the Greatest Athlete Ever. Accessed July 10, 2020. His statistical dominance is astonishing and it is difficult to think of any other major sport where one person is so much better than anyone else. He couldn’t skate better than the best skaters. He couldn’t shoot better. And he was not particularly big by the standards of professional ice hockey players.
When asked why he was so much better, he said the answer was simple – ‘I go to where the puck will be, not where it is …’
And this is what our economic leaders must do. The reality is that the world is undergoing an unprecedented amount of change – nanotechnology, 3-D printing, shifts in demographics, gene splicing, social media, self-driving cars, advanced analytics, cyber-threats… the list of major forces impacting an economy is long, and the pace of change is accelerating.
To take a simple example – how realistic is it to suppose that we will be using oil energy for anything apart from aviation fuel by 2050? Cars will be electric. Energy will almost certainly be close to 100% renewable at that time. So what are the implications of this type of change? If you are reliant on oil as the major engine of economy, then your major engine will shut down. The story is similar for coal.
2050 seems a long way away. And if you’re 50 now, you’ll be long-retired. But your children will be in their prime working years, so the structure of the world economy certainly matters to them. Moreover, longevity and health keep improving. So someone who is 30 or even 50 today could have a huge stake in the next 30, 40, even 50 years.
As a young Management Consultant, Andrew had the privilege to serve Ron Oberlander, the CEO of Abitibi-Price, the world’s largest newsprint company at the time. Their team office was near the CEO suite and Oberlander would often ask Andrew to accompany him when he went outside to smoke.4)Sadly, Ron died of lung cancer over a decade ago.
Ron took a puff of his cigarette. ‘Andrew, do you watch Star Trek?’. ‘Yes, of course.’ ‘Have you ever noticed, there are no newspapers on Star Trek?’. ‘I hadn’t really noticed, but I guess you’re right… there certainly are no newspapers on Star Trek.’ Ron took another puff of his cigarette. I shivered in the -5C sunshine, as Ron had been moving so fast that I had no time for a coat.’ ‘Andrew, I am in the business of making and selling newsprint… sometime between today and Star Trek, this company is going to disappear… can you guys figure out when?’
We did in fact do the work and, if I recall correctly, predicted that after 2008 the total quantity of newsprint demanded would decline, which did happen. And, sadly, Abitibi-Price went bankrupt as we all moved onto the Internet for our news.
Ron Oberlander had the courage to look ahead and see that major changes were coming to the industry. And despite the bankruptcy, Ron and Abitibi-Price did prepare as well as possible for the future that was coming.
And to this day, I use Star Trek as the litmus test for thinking about the future. Do they use oil on Star Trek? No. Do they use paper currency on Star Trek? No. Do they use traditional books on Star Trek? No.
Our Leaders owe our children – and grandchildren – more economic foresight than they are showing at the moment. They need be more like Ron Oberlander.
Unfortunately, today we don’t have that.
Footnotes
1. | ↑ | Australian Government Report Promoting Investment, 2015. Accessed July 13, 2020. |
2. | ↑ | Also see the discussion by Heather Stewart, Calla Wahlquist, and Jared Lindzon in The Guardian, September 5, 2015: Canada and Australia Feel Squeeze in Wake of Chinese Economic Slowdown. Accessed July 10, 2020. |
3. | ↑ | Sports enthusiasts like to debate who the greatest players are in any given sport, but Gretzky leads his sport in so many arenas, so to speak, that it is difficult to deny his dominance. A few links to his stats and style will help make the case: see Ken Klavon in the Bleacher Report, January 2014, Why Wayne Gretzky is the Greatest Athlete Ever. Accessed July 10, 2020. |
4. | ↑ | Sadly, Ron died of lung cancer over a decade ago. |