Five trends that will shape the global economy

Jiri Maly is a principal in the Toronto office of McKinsey & Co.

As the aftershocks of the credit crisis reverberate throughout Europe, and the United States faces unprecedented fiscal challenges of its own, business leaders are speculating about the "new normal" of the world economic order.

More than ever before, Canadian companies are affected by global economic trends beyond their traditional markets in the United States, Europe and Japan. Understanding the trends that will shape the next decade is crucial if Canadian businesses are to grow and remain profitable.

A recent report, What Happens Next? Five Crucibles of Innovation That Will Shape the Coming Decade, written by my McKinsey colleagues Peter Bisson, Rik Kirkland, Elizabeth Stephenson and Patrick Viguerie, identifies five momentous trends, or crucibles, that are forging the new global economy, and explores how companies will need to compete in this complex, fast-moving and highly interconnected world.

The key to survival and prosperity, the authors argue, will be continuous innovation - developing new products, attracting new customers and finding better ways to operate.

The first of these crucibles is "the great rebalancing" - a shift in the economic centre of gravity away from North America, Europe and Japan toward developing countries in Asia, Latin America and pockets of Eastern Europe, the Middle East and Africa.

The growing economic significance of these regions results from a jump in labour productivity driven by tidal demographic flows such as massive urbanization.

There is also a growing appetite for consumer goods. This has created a demand for products uniquely tailored to the needs of these places, in terms of both price and utility, such as a $43 (U.S.) water purifier made by Hindustan Lever Ltd., the Indian subsidiary of Unilever, used to provide clean drinking water in rural areas lacking water sanitation, or the $69 ChotuKool refrigerator, the world's cheapest fridge used in regions where there are frequent interruptions of electrical power.

In fact, the report's authors believe that the low-cost, high-growth countries that spawn products like these are where tomorrow's corporate champions are honing their long-term competitiveness.

"The productivity imperative" is the second crucible. Although developing countries are seeing productivity improvements because of a growing industrial labour force, Europe and Japan are stuck with 20th-century, factory-based economies that show very little productivity improvement. This is because they have a stagnant labour force that lacks the skills needed to support more rapid growth of highly productive, knowledge-based industries.

In the United States, by contrast, productivity has grown continuously over the past decade, because the vast majority of new jobs created applied advanced cognitive and analytical skills instead of the mechanical skills cultivated during the previous century.

For Canadian companies hoping to successfully compete in the race for ever-improving productivity, this will mean not only attracting top talent with the right analytical skills, but also finding better ways to develop and deploy the talent they already have, as well as be innovative about how these people interact with each other and gain access to critical data.

"The global grid" is the third crucible identified by the report, noting the rise of complex global networks of capital, products, data and people. Despite recent protectionist policies, economies, institutions and individuals are becoming ever more interconnected through digital media that blur traditional definitions of markets and companies. The flow of physical goods is also realigning in new ways, such as the rapidly growing trade links between China and Africa.

A more interconnected world will mean rethinking how businesses pursue the new opportunities created. For example, companies will need to rethink the role of advertising in a world where millions of customers can instantly share product reviews and opinions.

"Pricing the planet" is the fourth crucible, reflecting the growing importance of environmental sustainability. As economic growth meets physical supply constraints for natural resources, the report's authors expect rising and highly volatile prices for key commodities - such as energy, metals and food - to continue, even as new social and regulatory expectations constrain how companies operate. Innovations that boost energy efficiency and resource productivity will become just as important as those that improve the productivity of labour and capital.

"The market state" is the final crucible, focusing on policy makers. To cope with the aftereffects of the financial crisis and meet the demands of dissatisfied citizens, many governments are tightening controls on businesses and markets. Governments will need to walk a fine line between sustaining economic growth and mitigating the most harmful consequences, such as widening income gaps, on their populations. Businesses will also need to work closely with governments to solve difficult challenges. For example, Adeslas, a health insurance provider in Spain, is teaming up with the state government of Valencia to run hospitals and clinics more efficiently.

In the coming years, Canadian companies must learn to thrive in these rapidly changing, highly interconnected global markets, which are teeming with new opportunities but also many new competitors. At the same time, they should not lose sight of the substantial opportunities that exist within their own borders - like delivering productivity improvements to areas of our own economy such as health care, education and government.