The global system is changing—here's what business leaders need to know

Fast Company

4 days ago

Recent volatility in the markets is raising concerns around the globe about the emergence of a possible new world order with unclear consequences. The current rules-based system has been the dominant force that has shaped geopolitics and economics since the end of World War II.
This system, developed largely by the U.S. and its allies, has been based on a set of rules for trade and commerce conceived at the Bretton Woods conference in 1944. They created a fixed currency exchange system and international organizations such as the World Bank and the International Monetary Fund. These entities were designed to promote economic cooperation and stability.
In this system, the dollar has been the dominant reserve currency, English the de facto international language, and the US a stalwart of economic stability. Under this system, the world has experienced strong economic growth and increased prosperity. The world GDP by 1960 was less than $1.5 trillion, but today it's over $106 trillion!
Any wholesale changes to this system that may result from the current economic upheaval will have major implications for today's business leaders, as it could mean slower economic growth, more inflation, and lower consumer purchasing power.
Countries that thrived in this system shared common elements such as democratic governments with the rule of law, primarily free market economies that openly trade with other countries, stable and transparent policy environment, high rates of education, social safety net systems, robust infrastructures, and more.
If there is a disruption of any of these pillars, such as open trade, today's executives can face an entirely new business environment. As the recent slide in the dollar shows, unpredictable economic policy can result in currency devaluation, higher prices of inputs, and squeezed profit margins. In this situation, business leaders can either raise prices and lose some of their customers or be less profitable. Neither scenario sounds appealing.
THE DECLINE OF MIDDLE-CLASS STABILITY
Given the progress over the last 80 years, how, then, can we explain the current wave of discontent and upheaval in many of the advanced nations that is threatening this system? Much has to do with the economic developments of the past few decades. While advancements in technologies such as personal computers and the internet created whole new industries that led to economic growth and wealth creation, it also resulted in major displacements such as globalization, leading to offshoring and the disappearance of a large number of jobs.
This, along with high rates of immigration, which led to lower wages, made a middle-class life less possible for millions in advanced economies. These major economic shifts have happened previously (e.g., the transition from farming to manufacturing), but this time, there has not been as much support from governments and the private sector for the transition of the displaced workers into new jobs.
The reasons for this lower level of support are numerous, but there has been a troubling trend of fewer public sector investments in advanced economies over the last few decades. These investments were critical to the formation of a middle class in the first place.
Take the U.S. as an example: The federal government used to invest over 2% of its annual GDP in basic R&D. That number is now closer to 0.5%. The same thing has happened with investments in upskilling and reskilling of the workforce and upgrading the country's infrastructure. These lower investment rates have major implications for the employment and earning power of the workforce. For example, declining infrastructure means that workers could be less productive and earn less per hour of work, which could lead to a widening income inequality.
Why are the advanced economies making lower investments in these critical areas? One key reason is the sociodemographic trends of the past few decades and how those are squeezing the government budgets.
When retirement systems such as Social Security or health care programs like Medicare were created, the U.S. population was much younger. The anticipated number of years that people would receive retirement payments and health care benefits was much shorter. As medical science resulted in amazing innovations like antibiotics, vaccines, and other advancements, life expectancy increased from around 59 in the 1930s, when Social Security launched, to around 79 by 2020.
One other key culprit for lower public sector investments is tax revenues that have not kept up with this increased spending. Starting in the 1950s, corporate income tax revenues as a share of GDP have declined due to a combination of lower rates and increased loopholes. The resulting budget deficits from this disparity of growth between spending and revenues has led to lower public sector investment rates.
As any business leader can attest, planning over the last few months has been a roller coaster. Until the final fate of the tariffs and fiscal policies is determined, making long-term plans for capital expenditures or expansion will be difficult.
Even then, the long-term forces such as lower public sector investments may mean greater challenges in achieving business objectives due to lower innovation rates, an under-skilled workforce, or deteriorating infrastructure. Any long-term planning will need to account for the impact of these factors on that business.
For example, a severe shortage of doctors and nurses will mean that medical centers will need to rely on technologies like AI to automate many of the activities performed by those roles today.
Priority one for corporate leaders will be adjusting business strategy and operations to respond to the new realities of increased volatility from an uncertain trade policy and squeezed profit margins. However, they should be mindful of the bigger picture, as no business can thrive in a crumbling economy, no matter how great the strategy.
As such, it's time for America's business leaders to use their platforms and influence to advocate for the sound policies that created the prosperity of the last 80 years. These policies include public sector investments, predictable trade policies, support for our research institutions, and respect for the rule of law.