My area isn’t geopolitics. I’ve been hesitating to opine about the horrible situation in Ukraine. It took a lot of people by surprise because Russia’s invasion flew in the face of so many assumptions we had been making. Now would be a good time to revisit some of them.
Like it or not, we’re in a space now where our ratio of assumptions to knowledge is terribly high. Human beings are terrible about handling assumptions – either we forget them altogether or we turn them into facts in our minds. Now might be a good idea re-assess the assumptions we’ve been making … and what we will do if they no longer hold. Here are 10 to think about now, – said Rita McGrath, Professor at Columbia Business School, best-selling author, sought-after speaker on her Linkedin.
1. BRICS would be exciting sources of global growth
Back in 2001, Goldman Sachs’ Chief Economist Jim O’Neil predicted that four countries – Brazil, Russia, India and China – would provide rich rewards for those adventurous enough to invest in them. And you know what? He was right – for a while at least. The assumption that these four countries would be increasingly wealthy and westernized seemed to be working really well for the following decade. In 2010, South Africa was added to their number to have its acronym go from BRIC to BRICS.
While the end of the BRICS dominance has been clear for a while (Goldman Sachs shut down its BRICS fund in 2015), any lingering faith in the idea is gone for good.
2. Energy costs would remain fairly stable
Back in 2020 pundits were predicting fairly stable, even somewhat lower, energy costs. Now, oil prices are predicted to rise and depending on who you ask, potentially sharply. So can we imagine price increases in the 25%, 35% or even higher region? Higher gas prices annoy consumers and often have political ramifications.
3. Inflation? That’s so 1970’s
Amazingly, two entire generations of managers have never known a high-inflation environment. My colleague and co-author Ram Charan points out that the executive agenda in an inflation beset economy changes dramatically. Under inflation, cash is king and every mistake gets magnified. Ram is going to be presenting on his thesis at a virtual event sponsored by Chief Executive on March 24. Well worth it if you have never had the experience of living in inflationary times.
4. Cyber-attacks affect other people
This was already a troublesome assumption before February 24, but we can safely anticipate that the capability to create havoc that was already well developed in Russia is going to be exacerbated as it reacts to global sanctions.
5. “I’m not influenced by Russian-originated disinformation”
Sadly, meddling in events such as Brexit and Russian interference in elections worldwide has not gotten the attention and recognition it should. As Wired reporter Tom Southern observes, “it controlled much of the day-to-day narrative in multiple countries through online disinformation. And many people had no idea. While a few big events like the US’ 2016 election and the UK’s Brexit helped bring this meddling to light, many remained unaware or unwilling to accept that Putin’s disinformation machine was influencing them on a wide range of issues. Small groups of determined activists tried to convince the world that the Kremlin had infiltrated and manipulated the economies, politics, and psychology of much of the globe; these warnings were mostly met with silence or even ridicule.”
The good news? The Ukraine invasion has made a lot more people aware of the manipulation and more willing to stop it.
6. Infrastructure will be there and connectivity will be ongoing
It is one of the big negatives of the digital revolution – once you’ve created digital systems, which are marvels in many ways – you are increasingly dependent on them. Digital systems also lead to complexity with the consequence that they behave in far more unpredictable ways. So what is your plan B if some vital piece of infrastructure (water, energy, transport) gets disrupted or hijacked? How will you communicate when the cell towers are down? What will you do when the power goes out for an extended period?
7. Highly optimized supply chains will behave as planned
I thoroughly enjoyed Christopher Mims’ book “Arriving Today” but it is also a chilling reminder of how deeply interdependent we are. As well, how any little glitch anywhere along the complex sets of interactions that bring goods to our doorsteps can throw the whole system into disarray. The problem was already bad before the invasion; it isn’t about to get a whole lot better with disruptions of airspace and communication. You can watch my Friday Fireside Chat with Mims here.
8. Politics are politics and commerce is commerce
Business leaders have always tried to tread carefully when cultural and political issues arise. Most take the position that conflict over issues such as human rights, equality, the rule of law and other potential political issues belongs more to the public than the business sphere. After what was often years of investment (see BRICS, above) business leaders are now sparing no words to express their dismay at Russia’s actions and have moved to pull their companies out of the country.
9. Countries that trade together don’t go to war
This is an assumption that’s been with us for an enormously long time and has been used to justify the creation of commercial connections, often following conflicts. Author Steven Pinker offers a somewhat more nuanced explanation, and also notes that Putin was a clear exception to this maxim, even back in 2015. The idea of “capitalist peace” emerged as scholars made the observation that few democratically run countries go to war with one another. Among the reasons are that much of the value exchanged by those countries, at least in modern times, consists of intellectual property, knowledge and data, in the wonderful phrase of Erik Gartzke “factors that are more expediently enticed than conquered.”
10. Liberal democracy is the norm
For many of us, living in a relatively liberal society, even with its warts, is like a fish in water – “what water?” we might ask. We forget that this is not necessarily a given. Stanford historian Francis Fukuyama observes that “People really like being in liberal societies after they’ve gone through either horrible nationalist conflict (as in the two world wars of the 20th century) or they’ve had to live under authoritarian dictatorship (as people in Eastern Europe and the former Soviet Union did under communism). This generational cycle has turned, and you’ve got this whole generation of people who don’t appreciate liberal democracy because they haven’t really experienced the alternative.”
An even grimmer prognostication is offered by historian Peter Turchin, who suggests that war (and other major disruptions) are often the catalyst that sets forth the conditions under which societies can be peaceful and unified. Survivors of terrible conflicts and their children have vivid memories of how awful war was – those memories have faded by the time their children grow up.
Any bright spots?
Not many, but I’ll give it a try. Seeing the reality that an unprovoked attack on a peaceful country could actually happen in our time may be encouraging “the west” to unite in opposition to a common enemy. In the resistance to the invasion, we are witnessing daily acts of courage, grit and leadership. The Sunflower lady is already iconic. She cursed out Russian soldiers and asked them to put sunflower seeds in their pockets so that something would grow there when they die in Ukraine. That’s the stuff of which folklore is made. Ukraine’s President Zelensky has mastered the leadership and symbolism of legends.
If they were a little hesitant about speaking out after January 6, many Business leaders now seem to be realizing that undemocratic failed states and kleptocracies aren’t going to be great for business, let alone their shareholders.
An idea that I find fascinating, however, comes from economist Carlota Perez, who has developed a long-wave explanation of technological progress. For an overview, see here and here. Briefly, she describes capitalist technological progress as proceeding in waves. New technologies, such as railroads or methods of mass production emerge. They are long-odds bets and lure what she calls “investment capital” to put money and other resources behind them. Inequality dominates and frenzies emerge. Bubbles and irrational investments (from a probability of success point of view) characterize this period.
During a phase she calls the ‘turning point,’ this comes to an end with a crash or some other cataclysmic event that eventually redirects capital to what she calls ‘production capital’ as a new regime is installed, leveraging the over-investment in the previous regime. With thoughtful leadership on the part of governments (who play quite a heroic role in her narrative), all of this can create the potential for a completely rewired economy and the prospect of a new ‘golden age.’
I wonder if a crisis on our doorstep might create the conditions for a move in that direction.
Source: Rita McGrath
