Giant global economic convergence is changing the world as we know it

Stephane Garelli
THE last 25 years saw a historic shift from a divided world to a global one. Communism collapsed, and states representing nearly half the world’s population turned to free market principles. But while the world economy became more open, countries remained diverse.

Today there are over 1,000 companies in emerging economies with revenues above $1bn. This massive shift in industrial activities was initially driven by lower labour costs. And while emerging economies exported, richer countries faced deindustrialisation and rising structural unemployment. In the last 20 years, the US, Britain and Japan have each lost about 20 per cent of their industry in terms of its share of GDP.

And now very few places remain closed to competition. Obvious candidates include North Korea, Cuba and Iran but, even if they opened up, none could reshape the world. Future growth will depend on technological innovation and skills, not accessing cheap factors of production in uncharted lands.

As such, over the next 25 years global economic and social differences will narrow dramatically. We’re about to witness a great convergence of wages, living standards and mindsets.

In fact, it’s already started. Chinese and Indian wages are rising by 20 to 25 per cent a year, with most emerging nations following a similar path. It may take 20 years before wages match those in the richer economies, but the comparative advantage of cheap labour is becoming less relevant. Taxes and labour laws are also converging, and if productivity does not follow the trend, some nations may price themselves out the market. Reshoring has become fashionable, with General Electric moving production from China to a plant in Kentucky. But few jobs will be created as plants will be highly automated.

Consumer aspirations are also converging. Emerging markets are already moving from “first buy” economies (that satisfy basic needs) to “replacement economies”, where new products update older ones. In short, consumers will increasingly evolve from a mindset of “I need it” to one of “I want it.” In parallel, the world is becoming ever more urbanised, with some 40 mega-regions accounting for two-thirds of global GDP and 75 per cent of the technology. This world of cities will call for new management competencies to face similar issues like security and congestion.

Finally, resources are becoming more evenly distributed as new exploitation techniques (such as fracking) and new reserves of oil, gas and renewable energy become available. In 2015, the US is expected to produce more gas than Russia and in 2020, more oil than Saudi Arabia. The question moves from “do we have resources?” to “do we want them?”, while accepting the environmental and social consequences.

As access to education also expands, cheap brainpower will replace cheap manpower as a competitive advantage. Aging will also transform society. Until 1800, average life expectancy remained steady at around 32 to 35 years. The average lifespan has since increased by about five hours a day and is now over 80 in much of the developed world. The success of science has presented a huge challenge: how to pay for it? Emerging economies will introduce pension systems, seeded with state money. Retirement ages will rise everywhere.

And as societies become more affluent, the pressure on leadership will increase. Transparency will become an international standard. Better management of key resources, such as energy, food and water, will move up the agenda. Information on policies and people will become increasingly available, driven by the internet.

Finally, this convergence will make changes in mindsets more noticeable than before. Fast-growing economies still have a collective value systems where success is defined by a sense of belonging to a group. In China, 65 per cent of people polled believe in a “work hard, get rich” mindset. On the contrary, in the US and Europe, value systems have evolved and now attach greater weight to the self and to work-life balance. Some call it “meism.”

Over time, all collective value systems converge to a more individualistic approach. But watch out for a new development, as supranational networks gradually increase in significance. These networks will pursue a range of societal problems from bribery to climate change. Thriving on social networks, they will prepare the ground for a more global set of values that will sustain a world of convergence. For the first time, global companies will confront a global society.

Professor Stephane Garelli is the director of IMD Business School’s World Competitiveness Centre.