Tuesday, April 4, 2017

The four global forces breaking all the trends

Human civilization has undergone several radical changes in the past like the invention of the wheel and the industrial revolution. These changes have disrupted the long existing trends and had significant impact on the economies. According to the paper in the present day there are four disruptive trends all happening at the same time and at a scale and pace not seen before. These can have a significant impact on the economies of the world if a careful attention is not paid.

The first one among these is rapid urbanization. Urban population is growing at a pace of 65 Million annually. Between 2010 and 2025 440 medium to small sized cities would contribute to 95% of the World’s GDP. The impact of this would be a change in the center of the economic activity. Many of the developing nations like china would take the place of developed nations like United States and UK that are at the center of the economic activity today. In a decade majority of the fortune 500 companies would have their headquarters in china. One of the fundamental reasons for this change is higher annual growth rate of developing nations like china. China has an annual growth rate above 6% much higher than the united states. The GDP of Tianjin in china was around $130 billion, by 2025, the GDP of Tianjin will be around $625 billion. Every major organization that aims at maximizing profits would put its best efforts to benefit from such a growth.

The rapid pace with which the technology is growing is another concern. In 2007 before the introduction of the i-phone the total population that owned smart phones is around 122 million. By 2016 this increased to around 1.495 Billion almost twelve times the initial ownership [1].  New advances in artificial intelligence and machine learning, will have a significant impact on the economies. We are in the initial stages of seeing the impact of machine learning and artificial intelligence on automation. Uber’s driver less cars and Amazon Go are examples of these. After a certain stage, they have the potential to outperform humans and they can be scaled easily with massive production, which can quickly put millions of drivers out of jobs.

The third reason is that of aging population. The world’s population is getting older with reducing fertility rates. A fertility rate of 2.1 children per woman is needed to replace every generation. Most of the countries are below this threshold as of 2013. Japan and Russia are seeing a decrease in population, a trend which is expected to be observed in china and Latin America. Germany’s population is expected to fall by 20% by 2060. The alarming observation is that the working population during the same time is expected to fall by 36%, which is much higher than the reduction in population. Economies rely on the working population to support its aged population. This disproportionate decrease means that every young man or woman in Germany in 2060 would have to support more aged people compared to today. This reduction in work force would also reduce productivity and slows down the economy.

The fourth and final disrupter is the increasing connectivity among the nations of the world. The connectivity has increased by 25 times between 1980 and 2007, resulting in a much more complex interaction between the economies and unprecedented impacts on one another in case of a crisis. The financial meltdown of 2008 is an example of this. Thailand a nation which has no role to play in the crisis is severely impacted. Thailand’s major source of income is tourism and due to the melt down, the exports and imports were reduced by 26% and 20% respectively causing the airports to shut down and wide spread protests across the nation due to loss of livelihood [2].

The key issue is the interaction of all these four forces which is easily possible and could have catastrophic impact on the economies. Think of a developed nation which is the center of today’s world economy. In a generation’s time, the major economic activity would move away to a developing nation, the wide spread technology would put more people out of jobs and makes it difficult to find new jobs, decreasing fertility results in a less working population and reduces productivity. Adding to this situation would be a financial meltdown somewhere in the highly interconnected world resulting in a crisis in this nation. This could result in a nightmare and hence it is for this reason that we need to pay high attention to these disruptive forces and act quickly before things get out of control.

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