The four different scenarios laid out by the World Economic Forum in 2009 paint distinctly different visions of the development of global financial markets. The four scenarios are financial regionalism, re-engineered Western centralism, fragmented protectionism and rebalanced multilateralism (Wyman, 2009). Of these four different scenarios, there is evidence late in 2010 that would support the evolution of two of these different scenarios. These scenarios, in particular the one with the most support, will be given primary consideration in this paper. The implications for these scenarios for my chosen company, an IT firm with a local focus, will also be discussed in this paper.
The WEF scenario that fits the world best as of late 2010 is the first scenario, financial regionalism. This scenario relies on post-crisis blame-shifting, something that can be seen in the global political environment at present. The United States has raised serious issues about China's currency manipulation policies, viewing those policies as a significant contributor to global economic recovery (Chan & Ewing, 2010). China takes the same view of the United States, with its efforts at spurring inflation through bond buybacks (Peng, 2010). Germany has also been critical of the U.S. And some of its fellow EU members for their role in the ongoing financial crisis, which some of those members have blamed Germany and its proposals for a credit resolution mechanism for (Euro Intelligence, 2010). Mutual blame among the three major economic regions is one of the key antecedents for the financial regionalism scenario.
One of the other key antecedents is a particular pattern of economic performance in the different regions. For this scenario to arise, emerging market economies would have to have recovered to see growth of around 9%, while Europe and the U.S. remain in a low growth scenario at around 1.2% annual growth. The current estimates for 2011 GDP growth for China, India and Brazil are 11.7%, 11.7% and 8.4% respectively. For the U.S., 2011 growth is estimated to be 3.6% and for the EU 2.1% (IMF, 2010). These figures compare strongly to the ones needed to bring about a financial regionalism scenario, with strong emerging market growth and sluggish growth in Western economies. In addition, China has emerged as a leader among Asian economies, and Asia in general is fast becoming an economically dominant region with most major Asian economies continuing to record strong growth. China has repeatedly rejected, both in terms of politics and economics, the liberalist ideals of democracy, openness, human rights, and free trade. For example, its banking system remains largely state-owned, and therefore to a significant degree immune from the financial crises that have hit the U.S. And European banking systems.
There is no evidence that the U.S. And Euro are no longer going to be reserve currencies. In Asia, the yen has failed to gain traction as a world currency and the yuan cannot be a reserve currency because it is not free-floating. The Euro, however, does face crisis in light of the financial crisis in its peripheral countries. There is also no strong evidence to suggest that the EU is beginning to regulate financial institutions heavily. Most major European nations have for some reason rejected the lessons of Canada and Australia with respect to the value of strong bank regulation.
There is also some evidence to support fragmented protectionism. This scenario describes a world characterized by division, conflict, currency controls and race-to-the-bottom dynamics (Wyman, 2009). The current divisions outlined above, between the U.S., China and Germany in particular, serve as evidence of these divisions. China in particular is engaged in currency controls as a means to provide its export-based economy with competitive advantage. The relationship between the U.S. And China, once mutually beneficial, may be becoming mutually destructive and will lead to increased conflict in the coming years (Garrett, 2010). There is also evidence that the Eurozone could disintegrate under the pressure of public debt -- at least this is a scenario that Paul Krugman (2010) can envision.
However, global growth predictions are not in line with current reality, as China and other major emerging economies have recovered quickly and strongly from the economic crisis. Economic stagnation is limited primarily to the U.S. And Europe. There are elements of protectionism creeping into political rhetoric, but thus far this has not resulted in any significant protectionist trade policies. We have yet to see significant resource conflicts but one could easily envision that nationalism is increasing, especially among key economic players like the U.S. And Germany.
Re-engineered Western-centrism is rejected because the economic antecedents for this scenario simply do not exist. This scenario relies on slow growth in emerging economies, but that is not the case. There is no evidence of productivity increases and indeed most Western nations are still subject to significant overcapacity. Rebalanced multilateralism is an interest idea, and the underlying economic performance of the U.S. And Europe fits with this scenario. However, the negativity in the current dialogue between the world's major trading nations does not imply that the "global economy will learn from its mistakes through sharing." This scenario could come to pass over time, but for the moment it appears unlikely because it relies too heavily on the world's major economies setting aside ego and working collectively.
Of the four scenarios, the one that is most likely is financial regionalism. The implications of this scenario are that global economic power is going to shift eastward to Asia, with China as the region's leader rather than Japan. Each region is currently seeking its champions. The U.S. will be the default champion of its region even if its growth and governance lag, simply by virtue of its size. Germany looks to be the leader of Europe, and there is evidence that it is acting strongly to ensure that its policies hold the most sway in Europe (Lindsey, 2010). Europe is becoming increasingly inward-looking (Ibid) and is seeking tighter controls on its markets, particularly in light of the debt crisis along its periphery. For its part, the U.S. is maintaining its market democracy paradigm, highlighted by the passage of a relatively toothless financial reform bill.
Eastern markets will be strongest under this scenario with the BRIC nations in particular recording strong growth and building global GDP share to 27%. North America and Europe will see their share of GDP shrink under this scenario. For a local IT company, this means that the domestic market will not offer significant growth. The overcapacity and unemployment that characterize the U.S. economy today will remain a threat going forward. This will put pressure on the company to find innovative ways to grow in a sluggish market.
There are two main strategic options to achieve growth under a no-growth scenario. The first is to find a high growth domestic sector. This option is a challenge because such sectors are few and rely on innovation to attain opportunities. However, if the firm can innovate and find new markets for its IT products and services by introducing new products and services, then the company can attain growth even in a persistently weak economy.
Another option is to expand geographically. Growth is going to be focused on BRIC nations in the coming years. Expanding into these countries is challenging under this scenario, however, as trade flows outside of energy and tourism are reduced. The banking systems in the different blocs are going to be relatively incompatible, which again will make significant expansion into BRIC nations difficult. However, if these challenges can be overcome, possibly through a joint venture or a local partner, then this would be a viable option for growth even in the face of slumping domestic demand.
A final -- and decidedly less attractive -- option, is to scale the business back to reflect a no-growth scenario in the…