Top Risks and Ethical Decisions 2010

January 13, 2010


DEVIN STEWART: Today's topic is "Top Risks and Ethical Decisions 2010."

I'm Devin Stewart from Carnegie Council.

We have Haiti; China-U.S., Google possibly pulling out of China; we have Iran; we have a new government in Japan. Talk about a week for top risks and ethical decisions! A lot to talk about here today.

I want to turn it over real quick to Tom Stewart, chief marketing officer of Booz & Company, who is a fantastic moderator. I'm really happy and honored that he's going to take the helm today.

We're a little bit late today, so I think I'm just going to go right to him, over to Tom.

Thanks very much, Tom.

THOMAS STEWART: Devin, thank you a lot.

Contrary to popular belief, Devin and I are not cousins, but we do come from the same robust stock. It's good to be here.

Actually, I did want to begin by saying the group of us on the panel had lunch before you all are having your lunch and we did pause for a moment just to take note of the catastrophe in Haiti last night and this morning, and to recognize that we can talk about top risks, we can talk about ethical decisions, we can talk about all of these things, and sometimes terrible stuff happens, and this catastrophe in Haiti coming out of the blue, out of the earth, is one of these things that has to remind us that the world changes around us in ways that are unpredictable, sometimes wonderful and sometimes quite horrific, and that we have to be aware that the best-laid plans of mice and men "gang aft agley", as our countrymen would say.

I'm going to quickly introduce the panel.

Before I do that, the way this is going to work is Ian is going to begin, talking a little bit about what he has seen as Eurasia Group's Top Ten Risks. I'm going to then move down the panel, let each person say his or her piece to that or other risks that they see. We're going to talk a little bit amongst ourselves, and then, giving plenty of time, I'm then going to turn it over to questions and conversation with you.

So quickly moving from my left down the dais here, Ian Bremmer is the president of the Eurasia Group, the author of a couple of really well-received books, two brilliant articles that appeared in the Harvard Business Review when I was running that. He's got a forthcoming book in June, or something like that, that he is also working on. If you are a fan of the Eurasia Group on Facebook, you know all about his top ten political risks. The Eurasia Group is really an extraordinary political risk consultancy, headquartered here, with offices in many other places around the world.

Michele Wucker is the executive director of the World Policy Institute, based in New York. She is an expert on Latin America and an expert on migration and was on this panel when we did it last year. She is a Guggenheim Fellow, and also has, as I said, a considerable background not only in Latin American expertise but also as a former ink-stained wretch from journalism, just as I am.

Art Kleiner is my colleague. He is the editor-in-chief of strategy+business magazine and the editor-in-chief of Booz & Company as well, so he wears two hats on one very extraordinary head. Art is the author of a wonderful book, called The Age of Heretics, which is a history of some of the best and most innovative and sometimes disruptive management ideas, and it is a book to which I commend you mightily. I also commend to you strategy+business. Art is also an expert on scenario planning and worked a lot with Peter Senge in the development of some of his ideas too. So he's got an interesting background in the ideas of emergence in organizations and in society.

And finally, Georg Kell is the executive director of the United Nations Global Compact. The UN Global Compact, as you may know, is one of the important initiatives of the United Nations and, in particular, has set forth ten, I wouldn't call them commandments, but very strong suggestions, about the kinds of behaviors that corporations should take in their interaction with the world, four of them I think having to do with human rights, two with labor, three with the environment, and one anti-corruption standards. He maintains that and does an awful lot of work with all of the UN organizations around the world.

So we have an extraordinary panel with a wide range of experience and expertise, and we have an extraordinary audience, so as quickly as possible I'd like to get that oil and that vinegar mixing together to see what kind of intellectual salad we can create.

Let me start with Ian and your view of the top risks that we face as we come into 2010.


IAN BREMMER: Thank you very much, Tom. I'm delighted to be here. Second time we've run this panel. Last year went real well, so my buddy Joeland Devin suggested that we try to make this an annual thing. I'm always happy to be at the Carnegie Council.

Three things I'd like to do in my brief time before we open it up.

First, very briefly, what do I mean when I talk about risks and relative importance of risks? We're looking at 2010, the likely impact of that risk globally, relative nearness of the risk to today, and likelihood of the risk occurring. Put those three things together, you get a general sense of why Haiti isn't on it, for example, and wouldn't be even after this morning.

You will be forgiven for going through 2009 and thinking that the world geopolitically hadn't changed very much, because of course overwhelmingly we were all dealing with domestic politics, overwhelmingly we were all dealing with our domestic economies. That was true. 2009 was—in a sense, we didn't have a lot of, thank God, big natural disasters, big terrorist incidents; we didn't have any major foreign policy crises that anyone really had to deal with—2009 was overwhelmingly digging out from the financial and economic crisis that began in September 2008.

You would be forgiven for believing that the G20 was a relatively effectively run organization, simply because everyone was involved in making sure that the meetings went okay, they signed whatever they needed to sign, then they went home and did whatever they needed to do irrespective of that. And similar things can be said, though perhaps not as easily because it was later in the year, of Copenhagen and climate change, of nuclear proliferation issues, and the like.

2010 will not reflect the same capacity to fool ourselves about big changes that are afoot in the world, and those changes have sped up very dramatically because of the economic shakedown that's occurred in the last 15 months. Three that I would point to sped up dramatically:

    • First, developing versus developed: the fact that China is leading the world out of the recession, and the emerging markets across the board, with some vigorous exceptions, are doing so. Developed states are anemic and flat. I'm not hugely negative on the dollar because, to paraphrase Winston Churchill, it's the worst developed currency out there except for all the others. It happens to be the largest. But let's be clear. Four percent global growth, as is projected in 2010, is not coming from the developed world; it's coming from everywhere else.


  • Secondly, this growing, very clear challenge between a free market economic system more or less regulated and a state capital system where states are the principal actors and arbiters in the economy.



  • And third, the growing discord between the U.S.-led unipolar world and a non-polar world where there is an absence of international leadership.



Now, with that as the backdrop, I don't want to go through all of the ten risks by numbers. You guys can get them on online or get copies. I do want to focus on a few of those that I think are particularly important.

Number one, without any question, in terms of likelihood, severity, and nearness to January 1—and in the first couple weeks of January I think we're already seeing it—is U.S.-China.

My view is the tipping point on the U.S.-China relationship was the Hu Jintao-Obama summit that occurred towards the end of 2009. The meeting actually went pretty well, but you wouldn't have known that from the reaction of the international media.

To put it very simply, 10 percent U.S. unemployment and 10 percent Chinese growth do not add up to 20. There are lots and lots and lots of reasons why, despite the best efforts of Obama and Hu Jintao not to have the relationship get derailed or have to spend lots and lots of time on it, that we are going to see very big structural discord—issues of currency, issues of Chinese exports (they are now, of course, the leading world exporter, taking over from Germany just a week ago), issues how the Chinese are going to grow their economy, and their belief that they are unhappy being as linked, as coupled, to the American economy as they have been historically, combined with things like cyber security and cyber terrorism, combined with things like climate change.

Functionally speaking, the Chinese will not be able to be both a part of the G2 and run the G77, which is the role they tried to have at Copenhagen. Lots of folks want to work with them, but at the same time structurally that is going to be seen as an impossibility in 2010.

This Google China issue is one I suspect we will be talking about on the panel. I think the big question is going to be not is this going to contribute to a marked deterioration of the relations between the two countries—it will. The real question is: Will this be the issue that Americans decide that they are really going to get up in arms about? It's possible.

Demographically, it touches on lots of different tropes. You've got the technology guys, you've got the free-market/pro-business guys, you've got the human rights and civil liberties guys. You've got a lot of people in the United States who are likely to be very upset that one of the world's top brands, after Tiger Woods, is not able to participate in the Chinese economy.

What's interesting to me, and then I'll move along, is that I don't see this as a human rights issue. The great firewall of China is not enormously effective. People who want to get on Google can. It looks more like the great crumbling dyke of China. But the fact is that there are state corporations in China that are very interested in having much larger market share. Historically, those are the sorts of things we've seen in the oil sector, for example. Now we're seeing it in the automotive sector; we're seeing it in the technology sector and other places.

Increasingly, the problem that Google is having right now in China, which is one of revenues, advertising, market share, is one that lots of American corporates are going to be dealing with in a serious way. That, of course, is a risk that is going to prove much harder to simply talk away.

The second one I would talk about is Iran. The big story for me on Iran is that, boy, the last six months have changed their position in the region an awful lot. Since the Iraq war had started, Iran was becoming more geopolitically powerful in the region, more influence in Iraq with the Shia in the south, more influence with the Arab street, more influence with Shia populations in the region.

After the elections went badly for the Iranians, a lot of other things happened in the region.

    • Dubai blew up, and almost 95-97 percent, according to some estimates, of all their illicit financial transactions from the Revolutionary Guard go through Dubai, with Abu Dhabi in charge. That's a real hit to them.


    • Elections in Lebanon. Hezbollah performed quite badly. That's a real hit to them.


  • Elections coming up in Iraq. The Iraqis, increasingly with a more secular nationalist outlook, may not be very stable, but not playing ball nicely with Iran—which is one of the reasons you've seen Iranians go across the border and take a little oil well just a couple weeks ago there.


So the Iranians are being hit very badly domestically, with a salient and strong opposition, and internationally, as they are losing a lot of influence. And by the way, bigger sanctions are coming against the Iranians on the nuclear front. I think it's unlikely we'll see Israeli strikes against Iran. But the combination of these three factors making Iran feel like a cornered animal and increasingly likely to see them provoke internationally as a consequence—and we can talk about what they might do—is a very serious risk that I think should be on all of our screens for 2010.

I'll mention a couple of others.

Last year, we went back and said we thought the single top risk for the world in 2009 was Congress, the likely impact Congress was going to have in terms of the massive stimulus, the money that was going to be spent, the regulatory authority, and what that was going to mean for the U.S. economy and for the world.

When Obama says that we face catastrophe economically if Washington doesn't get it right, that tells you it doesn't matter what the private sector is doing, that you better make sure that you're getting the legislation passed that needs to. There were some major risks there, and there was some major money that was spent as well.

I don't see that in 2010 in the United States. It's an election year. You won't have as many big policy issues on the agenda, and those that are are going to get watered down significantly.

The one that I think is big is financial regulation. We've already seen this with the Obama Administration coming out and talking up the fact that these big bonuses that are coming out as the American taxpayers have supported these banks are unacceptable. So I think from a U.S. regulatory perspective—and let's keep in mind the United States is the world's largest economy—policies passed in Washington resonate not just in the United States but globally.

The big policy risk is going to be that financial regulation sees over-stretch, it becomes less competitive, it impacts the banking sectors and perhaps others, but they don't put in the kind of fixes that people like Volcker are suggesting, that would ensure that long term you don't have the next bubble from all sorts of over-investment and hyper-liquidity.

A couple of other things I would just mention.

I don't usually talk much about Japan. But frankly, Japan has just gone through a revolution. They had a one-party state for the last several decades, and that party has lost office. They are left with a zero-party state. You have the Democratic Party of Japan that has no connections with the bureaucrats, no connections with the industrialists, which means they can and may well put policies into place in a massively constrained fiscal environment that's going to seriously hurt the ability of the Japanese economy to maintain a level of competitiveness. We're not just talking about anemic growth; we're talking about a real possibility of strong double dip there.

At the same time, from a foreign policy perspective, they have been unable to make decisions. That has had an impact negatively for just about all of the major international relations that they have. So Hatoyama may not last even until July. With the Upper House elections, there's a good chance he gets forced out before then. But either way there's actually, for the first time in a long time, a lot of policy risk around Japan.

I think there's some down-side risk in Brazil this year, both with the elections and with the strengthening of the state. I think that's really only a 2010 issue. They will be back with a generally very strong perspective going forward after that, and there's probably going to be some over-shoot as people get more nervous with rhetoric of a growing state before the elections come up.

I'm very worried about Turkey, which of course never gets into the European Union, but also, from a diplomatic perspective, has lost a lot of good relations, and there's a huge fight between secularists and Islamists that is growing and stopping them from doing the things they desperately need to do at the International Monetary Fund and other economic reforms to get their economy back on track. Erdogan's AK party is down to about 30 percent approval ratings right now and no real way to pick that up. Going into the 2011 elections, it's going to be tough.

A couple of points briefly on things I don't see as a particular risk.

I did not mention Yemen. Frankly, I see Yemen in some ways as an opportunity for the United States. Obama's worst relations out there, in terms of trajectory from where the Bush Administration was, was probably Saudi Arabia. Obama doesn't have close relations with the U.S. oil CEOs (those are the guys who are closest to the Saudis), hasn't focused much on the defense industry, and basically snubbed the Saudis, instead giving his big speech to the Arab street in Cairo. The Saudis have been very, very defensive about that, as well as the likelihood the United States might pull out of Iraq to a greater degree and have less influence in the Middle East.

But on Yemen the Saudis are absolutely on point with the Obama Administration. My understanding is that's one of the major reasons that Gates decided to actually say that he was going to stay for an additional year. We're going to see lots of trips by him to the kingdom, lots of trips by Petraeus. And, unlike the Pakistan situation versus Afghanistan, where they don't really want to help the United States very much and they'd much rather focus on the traditional enemy, India, in the case of Saudi Arabia they are, in effect, serving as a proxy for the United States in the region. It will actually help that relationship.

So, on balance, Yemen is teetering to becoming a failed state, but the risks, at least for the next 12 months, are relatively low.

Afghanistan: No question, if the United States has to lose a war, that's probably the one to lose. They are at least in good company. They probably will lose it, but not in 2010. I do believe that the difficult policies that were put forward to get the surge going means that the big issues that Obama is going to have to deal with are going to be pushed out for another year. So yes, we'll see headlines, especially when American casualties get over 1,000, as they are very close to, within just a couple dozen at this point, but, on balance, I don't think that's going to be a significant issue in 2010.

And finally, Iraq. Despite all of the security problems in Iraq—and there's no question, it's not a place we want to vacation—the fact is that Iraq in 2010 is going to be much more of an investment story than it is an instability story. They will have their elections in March, and there is a level of legitimacy, despite weakness, of the Iraqi parliament, of the Iraqi ministries. A very different situation from a place like Afghanistan or Yemen. The likelihood of Iraq becoming a failed state I think is off the table now, where just six to twelve months ago it was a real possibility. So in terms of trajectory there, a story that we can actually be a little optimistic about.

We can go on for hours on this, but I just wanted to throw out enough that we can really get into a conversation. Thank you.

THOMAS STEWART: One of the things I love about Ian is that he throws red meat on the table for people to discuss. He's sort of the Sweeny Todd of panel discussions, because there's lots there to dig into, and the ingredients come from all over. Sorry, I just had to do it. You start these metaphors, the metaphoric train starts, and it just goes off, and then at some point it derails.

Michele, react to that and/or tell me how you see the world and how you see this question of risks that we face and ethical decisions that we have to face.

MICHELE WUCKER: Okay. I should do a little bit of both.

Devin had asked me to speak in particular towards migration, that being what I talk about, but also I was with Devin last month in Japan at a very, very interesting meeting discussing the ethics of migration in Japan.

I went to one restaurant, a Korean restaurant, where my waitress was a Burmese refugee. Here we hear a lot about Japan being a homogeneous society—you go to Tokyo and you think, "Wait a minute." My last trip there I ate at a Turkish restaurant, a Pakistani restaurant. The streets were full of all sorts of groups. Several Japanese said to me, "Look, it's not a question about whether we're going to become a country of immigrants. There are already immigrants here."

I'll speak in more detail about migration in a couple of minutes, because it also I think really does touch on all of the other issues that we are looking at. We've seen a lot of discussion about health care has to do with development, has to do with climate change.

But before I do that, I wanted to just elaborate a little bit more on some of the points that Ian has brought up, particularly this relationship between the G77 and the G20 and where the different countries fit in.

This past year, 2009, we saw a shift from the G8 to the G20, representing a real shift in this transition from the supreme United States to a scenario where—Ian calls it "no-polar," but I think that there are more poles that are starting to coalesce around there.

I think it has to do with this emergence of some of the bigger emerging countries that are now being included at the table, particularly the BRIC countries, although we were discussing at lunch what to call them now. Some of us feel that Russia doesn't necessarily quite fit with the other ones. I've been calling them the BICs for the past few months, and we're discussing maybe whether Indonesia might be one of them. So do we call them the BIICs or the BICIs? That's a whole other conversation.

But I think that we are going to start seeing some tensions, some questions, between what are the interests of the countries that are now starting to reach toward a modified version of Western consumption values.

I've been in a number of discussions recently where people from China, from Brazil, from other countries, are concerned with how their countries can increase demand, how they can satisfy some of their citizens' yearnings for economic improvement while not making the same mistakes that the United States has made, with everybody wanting plasma TVs and SUVs and overpriced tennis shoes and things like that. I think that's going to be an ongoing discussion over the course not only of the next year but going forward, looking at how the global economy shifts from one in which it has been driven largely by Americans buying a whole bunch of stuff we don't need.

I think that Americans paying down debt and starting to move away from that model is a good thing for our country and for the rest of the world. But what's that going to be replaced with? What's the kind of world we would like to see? What are the policies that get us there? And what will be the role of the BICs and the other emerging countries in shaping some of those global economic policies?

This ties in very closely to the climate change discussions, which Ian has included among his Top Ten. How do you switch to a low-carbon economy that's more efficient, that's cleaner, that is more productive, but also doesn't penalize growing countries for the mistakes that the rich world made?

I think that those are very important points to follow up on.

Also, the G77 has come out very strongly and said that Copenhagen was a real disaster. I think some of the reactions in the rest of the world have been more mixed.

I was at an event last night that the World Policy Institute hosted jointly with Demos on the aftermath of the aftermath of Copenhagen. A representative of the G77 said, "You know, there was a lot of discussion that this should be an agreement between the United States and China, that what they said and decided would shape the whole trajectory of things"—which I think is true in some ways, but I think there's a lot of resentment from a lot of the other countries that these two countries have such a large amount of sway.

That actually segues nicely back to the question of migration. One of the topics that we discussed in Japan last month was the question of climate change refugees. The countries that are most affected by climate change are, in general, the countries that contributed the least to it.

I think particularly about Haiti, not just in the context of the disaster of yesterday, but the fact that the last few years they've had increasing numbers of devastating tropical storms. They also were affected very, very badly by the food crisis. When the use of biofuels helped drive world food prices way up, you saw food riots and the fall of the government in Haiti—not just in Haiti, but in other countries around the world. So that makes the tragedy of yesterday that much more upsetting, in that an earthquake is something that nobody other than the tectonic plates is to be blamed for. But it drives home the need to really step up to the need to help countries who are experiencing problems that were not their fault.

When it comes to climate change refugees, people who are being forced to leave where they live, who are the victims of natural disasters that are the result of rising sea temperatures, of droughts, of changing climate patterns, what do you do about that? Whose responsibility is it? I think there is a very large responsibility of the countries who created these problems, which means the United States, which means Europe, which increasingly means China. There has been some discussion among migration experts about finding some way of representing collective global responsibility for these people who have to leave and where are they going to go.

China is a very interesting case, in particular, because internal migration is a very, very large political issue in China. A lot of the internal migration so far has been driven by economic disruptions, and also by government policy hoping to bring people from rural areas into the city. Of course, when the economy collapsed in 2008 and 2009, people who had been going to cities to work and went back home for their vacations didn't go back to the cities, or for other reasons left the cities.

So I think you are seeing huge internal migration issues in China. We've seen ethnic conflict in China. We've seen lots of debate over what their migration policies are going to be.

China is, of course, both a country that sends many migrants and it's also a country that contributes heavily to global warming, and I think increasingly in the future climate will be more closely related to the reasons that people migrate there.

In the United States for quite some time, the Obama Administration has been promising immigration reform. That's something that I've been following quite closely and am very keen to see happen. I am not holding my breath, but I'm also not clearing it completely off the table as many people have.

A lot of Americans in polls show consistently an increasing receptiveness to a legalization program that involves some sort of a fine, paying back taxes, security check, an earned legalization program. In 2007, when the Senate bill died, I remember looking at the polls regularly, and most of them were two-thirds or more majorities in favor of that. One of them—and it was a CBS News poll—that did not show a majority, it was 49 percent, earlier this year actually swung above 60 percent in favor.

So I think that there's an increasing feeling among Americans that this needs to happen.

We've also seen a lot of stories about nursing mothers separated from their babies as a result of detention policies. There was the horrific story in The Times a few days ago about the deaths in detention centers. I think the more we see these kinds of stories, the more momentum we will gain towards making something happen.

Politically, a lot of the people who opposed immigration reform either did not run again or were voted out of office. So I think we've got better political odds. At the same time, our lawmakers are being asked to make a lot of tough decisions. If they're looking at health care, if they're looking at climate change, looking at the budget, it's going to be hard to ask people who are in vulnerable districts to make what might be a tough decision. Even though the national majority is in favor of it, politics, as you know, is very local.

I think another issue that involves a lot of ethical discussions when we do immigration reform is who gets admitted. Not just to the United States but also to other countries, it's an ongoing, probably the biggest, question at the center of debates over migration, who gets admitted and why, whether it's refugees (for example, the crisis in Haiti), whether it's natural disaster refugees or political refugees. There has been a longstanding precedent for giving some sort of preference to those sorts of situations, which I think we should be doing for Haiti.

There's the question of family reunification, which is incredibly important. In the United States, unfortunately, what we call family reunification policies when combined with the bigger situation has resulted in someone's adult aunt or uncle getting in line ahead of a spouse or a minor child, which doesn't sound to me like a very good way of doing family reunification.

There's also the question of skills and job-based visas. A lot of migration is driven by economic reasons. In Mexico and other countries, there is often a very, very difficult dilemma, in that countries have a lot of incentives to let people migrate so that they can send remittances back. But that provides a disincentive in many cases to invest in education, which over the long term actually generates more migration.

I've heard several stories over the last year of small towns in Mexico where there was an actual concerted effort to build high schools, to get people going to school, and an apple grower from Washington State comes down and says, "I've got these jobs paying many times more than what you could make even with a high school degree here," and they pick up and go.

I think that our admissions criteria should reflect much more a concern with the impact on sending countries, whether that involves nurses and doctors from the Philippines, from Africa, coming to the United States and not providing enough personnel who are skilled in health care in those countries. In other cases, seeing health care systems that have different standards, so that someone who comes to the United States and learns a lot of skills can't necessarily apply those skills if they were to go back to their country of origin, which would be the ideal way to circulate technology transfer/skills transfer among countries.

There has also been some interesting research. Particularly, a Center for Global Development study on Fiji, which was an interesting case, because there was a lot of political upheaval at the same time that Australia had changed some of its migration entry criteria to put much more emphasis on skills. This study found that not only was there more investment in education by the government and by individuals, but the stock of educated people with college-university degrees increased, not only including the people who left to get jobs in other places, but also actually among those who stayed home, that when there is an incentive to increase your education, even skilled migration out of a country can leave that country better off. I think that that's an element that has often been left out of some of the entry criteria.

The biggest problem in the United States, I think, is that we don't have fair, workable, and consistent criteria for people to come in. I think the answer to that is a much more expansive set of criteria that allow people to come in, but also a much clearer set of reasons.

Finally, briefly, something that wasn't in Ian's list that I think is quite important has to do with resource issues, with access to water, also very closely tied to agriculture.

We've seen a lot of stories about China buying up land in Africa being quite controversial. In the Middle East, they've had very, very strong concerns about food security, food availability.

That also ties in to the failure of the Doha Round of trade talks, which collapsed precisely over the issue of agricultural subsidies. I think this is an issue that really needs to come up again, to look at some of the unsustainable agricultural practices in the United States, in Europe, in some of the other wealthier countries.

This also has an impact on migration. Look at the corn markets between the United States and Mexico. Look at our corn subsidies. There are a lot of arguments that that has actually increased migration.

So I think that we should be making a much more concerted effort to address food security issues, sustainable agricultural practices, and also looking at food prices.

There have been some indications that we may start seeing food prices going up again. During the economic crisis, unfortunately, food prices in most cases didn't fall as much as they had risen before, so people were really getting a double whammy. So that's going to be important.

The final thing having to do with the middle-income countries that have been doing so well, surprisingly to many people, over the last year, I think as the developed country economies start to improve, there's going to be more and more talk about interest rates increasing in those countries again. When that happens, I think you're going to start seeing a real snapback in some of the emerging market countries that have been doing so well. I think we need to be thinking ahead to how to cushion against that when it does happen.

So I'll leave you with those thoughts and turn it over to you.

THOMAS STEWART: I love this juxtaposition, because of course Ian was very rigorously focused on what's going to happen in the next 12 months, and what Michele has reminded us about is the long waves.

One of the things that I love about the Michelin Guides and also about Fernand Braudel's  histories, if you know them, is that they all start with sort of what's the geology, what's the climate, what's the this, and these big, slow-moving things. Those of us who are in policy circles think that the votes in Congress matter, but if you think about human migration and issues like that, people who vote with their feet then start affecting things that affect the people who vote with their hands in Washington or in Brussels or wherever else they vote in very profound ways.

Sometimes, like a lot of demographic changes, we don't notice them until we suddenly are in the middle of a new reality. So it's very interesting to have this long-wave and short-wave view here of these two things.

Art, what do you see?

ART KLEINER: Well, is there a middle wave? It's more like meta-risks that I'm interested in. In other words, risks that how they play out will affect the ability of institutions and individuals to manage the crises that inevitably are coming to us. I can see three.

Thinking about the first one really started with the underwear bomber. I'm sure I'm not alone in the room in that when the news came, my first thought was, "Oh no, this again?" And I wasn't thinking about terrorism. I was thinking about no more laptops on flights, I was thinking about no more getting up to use the bathroom in the last hour of a flight, I was thinking about checking luggage and waiting at the carousel no matter what. Please, let me take my chances with the terrorists instead.

But there's a broader kind of risk associated with this, which is the question: Can governments everywhere, not just in the United States, master the kind of management improvement that they need to deal with the challenges facing them? Policymakers yes, but really what we're talking about is policy executors, the agencies and organizations that are within government, that have essentially gotten a free pass over the last ten to 15 years in terms of their capability of managing problems.

So here's another transportation security agency example, since they're so easy to come by, and this one's a little personal. I flew back here to New York from Chicago Midway about three or four weeks ago. The security lanes were all crowded. But there was a special lane marked "high-priority experienced travelers only." It didn't say "fast lane," but that was clearly the implication. All of the anxious, rushed, late, overbearing, and obsessive travelers, all the people who thought they deserved special attention, went into that lane. And somehow I ended up there as well.

All the other lanes were visible. You could see where they were going. This one snaked around the corner out of sight. So you naturally thought, "Well, the gate is right there as soon as I turn the corner." Instead, if you were on this lane, when you turned the corner you would notice that the line was in fact three times as long as all of the visible lines. It was as if the TSA had decided to take all of its anxious, rushed, late, overbearing, and obsessive travelers and perform a psychology experiment on them.

I won't describe the peculiarly charged, the emotionally poignant experience of standing in the lane. But as we were there, one of the TSA employees came by and he said, "Don't complain to me. Complain to the managers in that little glass booth in the corner when you get through." Very few people did this of course, because by the time they got through they were rushing for their flight.

But I actually had some extra time. I went to the glass booth and I started talking to the supervisor there. I said the things that experts on business always say, which is, "Why can't you run TSA more like a business? Why can't you put up a sign that says 'This line is full'? Why can't you put up a mirror so we know before we turn the corner what's going to be there?"

The guy said, smiling, "Well, we're not allowed to do that."

I said, "If you were a business, you'd be thinking about your customers first."

He said, "Well, we're not a business. We're the government."

I happen to be one of those people who like government. When David Burns sang, "Some civil servants are just like my loved ones," I sang along. I have a lot of friends who were very dedicated people in a lot of very difficult and moribund agencies.

The stakes have been raised much higher for government now than they ever have been before. It's not just the bailouts. It's the fact that governments are running companies, or in many countries will be running companies for a long time. It's not just the rules of health care reform, but the necessary task of making the efficiencies and synergies work. It's not just China's intentions, which are questionable enough, but its capacity to handle the challenges like Google and the environment and the corruption that one hears about. It's not just nuclear weapons, but the increasing sophistication of predator drones, cyber-techs, and other weapons that are going to render nuclear weapons obsolete within a few years.

And it's not just deficit reduction. The U.S. government could probably erase the national debt—well, I don't know this, but I will baldly guess that the U.S. government could erase a great deal of the national debt without raising taxes if they were able to change their oversight, RFP, and management practices—in other words, if, like James Q. Wilson once wrote, they were able to deregulate the government. Of course, they'd have to do that while also preventing themselves from becoming abusive in their exercise of power.

One of the risks that we now face is that governments are called upon to make this work, and it's not clear that, no matter how bright, committed, and well-trained the people in positions of authority are, that they're going to have the capacity to do it. I think that's a tremendous risk.

I think there's a second risk on the business side, which you could call the risk of transitional capability.

We've just hit the tenth anniversary of the Y2K rescue. Now, there was a risk. I'm really nostalgic about Y2K. It was simple, it had a solid deadline, there was something you could do about it. It was a great risk. And it had some really interesting ancillary effects: computer systems were basically refurbished; there was a huge global systems housecleaning. Businesses, without subsidies or tax breaks and with a relatively small amount of government coordination, spent $300 billion fixing the problem. Along the way they got rid of outmoded systems, they put in place new types of computer and communications networks, they set up sophisticated data mining and customer management, they developed emergency response mechanisms which were then held up as models for the financial services institution, and they had a lot of unintended consequences, great ones and bad ones.

For instance—now I'm going to make some assertions that can be quibbled with, and no doubt people here will quibble with them, but here they come—when 9/11 came a year later, the financial systems of the world rebounded fairly quickly, arguably because backed-up computers and emergency response systems were in place that hadn't been there before. If the terrorists' attack had come on September 11, 1999, arguably it could have done a lot more damage.

At the same time, Y2K hired tens of thousands of programmers, driving up the price of software engineering. And is it a coincidence that the dot-com bubble burst in April 2000, four months after those programmers were no longer needed?

Finally, is it possible that these highly sophisticated computer systems enabled the rise of social media, thereby helping to create the crisis in the print and broadcast advertising? And is it possible that they created a much more capable and fast-moving financial services infrastructure, thereby helping to enable the financial meltdown?

As C.S. Lewis said, you never know what would have happened. But at least it's worth thinking about that, because if it's true, then the inherent risk around business has less to do with greed, or even competence, than it has to do with the speed of evolution. In other words, slow is beautiful in business; speed is risky if it leads to huge acceleration of capabilities without the time to develop the practices that can lead to careful and excellent management of those capabilities.

If that's true, then we have some really interesting issues coming up around global climate change. You know, there has been a visible backlash against the idea that global temperature increase is caused by human activity, especially since the Climategate memos and a little bit since Copenhagen.

I think it's much riskier if it's not caused by human activity, because if it's caused by carbon, then at least you can do something about it. If it's sunspots, then what?

I buy the argument that Tom Friedman and so many others make that the most profitable path forward in many industries is a rapid growth in new forms of energy, new types of eco-innovation. Whoever masters this will have great competitive advantage.

But are the industries that are going to move in this direction—(a) do they have the capability to really change their practices, to be transparent about their intentions, to work with competitors in sourcing, et cetera, to be accountable to the external groups that now depend on them?; and (b) if they actually accelerate this, are they prepared to recognize and deal with the unintended consequences, the energy shortages, the misallocations, that inevitably will occur as they jump on the bandwagon?

So that's two.

And then there's the rest of us.

Last semester I taught a scenario planning course at New York University's Interactive Telecommunications Program. We look at scenarios for new media. We do a public presentation at the end. There were five scenarios, five relatively uncheerful scenarios: They were the migration of privilege from the United States and Europe to China and India; the complete failure of intellectual property laws; the end of privacy; a long, drawn-out future of economic decline in which the value of a college education diminishes because there are no jobs for the graduates; and a pandemic.

The presenters were all students in their 20s and 30s. The people in the audience were older.

One of them said, "You know, these are pretty bleak. Don't you have any hopeful scenarios?"

One of the students looked at him and said, "Well, these are the hopeful ones actually," or, more precisely, said, "We didn't think these were hopeless."

What he meant by that was that every one of these scenarios would represent a challenge, but in every one of the stories there were ways for the individuals to rise to the challenge. But they all involved changes in the way people live.

I believe that there is a plausible scenario in which there is a rapid economic recovery, but even under that plausible scenario—it's not definite, but it's plausible—as a scenario planner, you don't worry about probabilities; you say, "Is there a plausible one?—yes; is there a plausible scenario that things get much worse?—yes."

Either way, joblessness is an issue—not just because of lack of credit and protectionism and all the other reasons, but simply because of automation and productivity and the ability to do more work with fewer people.

There is going to be, therefore, a rise in the underground economy. There is going to be a lot of tension around services. There is going to be a huge amount of stress on people. We've been in future shock so long that for many of us it looks like stability. Many of us are still trying to remain normal, have children, raise children, have homes, feel accomplished, keep to a normal way of life.

Michele talked about plasma TVs and overpriced tennis shoes. I think that's true to an extent. There was a certain amount of indulgence. But I actually don't think most of the using homes like ATMs came out of self-indulgence. Especially for people with children, I think it was spent trying to maintain the increasingly difficult task of leading a normal life, especially when things like college tuition costs have doubled every nine years.

In the face of all this, people cope in one of two ways: either they take the remaining three hours of sleep that they have each night and they cut that in half in order to cover the time for the third job; or they change the way they live—they move further away, they find a form of work that involves less commuting, they look for more flexible work, they set up different relationships, they create different kinds of lifestyles inside and outside the United States, they change the way they live to make migration easier, to deal with new forms of credit, if they're women they change the way they live and work, if they're in agriculture they change the way they take products to markets, if they are facing pandemics and disasters they are forced into types of communities and types of living situations that they didn't plan for.

Different lifestyles are nothing new. But to the extent that survival requires choosing different lifestyles, there's a real question around how many people, how much of the time, are prepared to make that transition. Will enough of them, enough of the time, be prepared to make it that we can manage those risks? I think the answer is maybe.

A lot of these risks are slow, we won't know how risky they are for a couple of years, but the activity has started already and will start now.

I am very much with Thornton Wilder. I always think there's a way through by the skin of our teeth. And I also think that humanity has faced some risks that are at least as tricky as ours, but maybe not in as many places where there's global consequence.

It would be nice to know that there's a way of avoiding the future in which we can keep from saying, "Not again."

THOMAS STEWART: Well, sometimes it would be nice to know if there were a way of avoiding the future altogether.

One of the things that I think is interesting about what you said there, Art, is if you think about some of these issues about jobs, joblessness, and so on and so forth, they also present themselves in different ways in different places.

If you take a look at India, India is in a situation now where with urbanization, increasing agricultural productivity, and so on and so forth, that is a country that is, I think, basically going to have to find—and by the way, a country in a relatively good position—that is going to have to find a way to increase its urban work force by something like 300 million people, which is approximately the population of the United States. It puts real strain, for instance, on the educational system in India, what you do about women, et cetera. But these are getting people a way to live a normal life. However you define the new "normal" is a really interesting set of questions that presents itself in different ways in different places.

Georg, you have the unenviable task of cleaning up after this before we start the even more unenviable task of trying to make sense of all these different ideas.

So let's hear from you and then we'll start mixing it up.

GEORG KELL: I was fascinated and carried away by Ian's opening and by the two subsequent refinements. What I probably want to do in five minutes or a little bit more is to add onto this and probably strike a balance in between, because my own mind is more about the global, systemic aspects of much of what you mentioned. There I think one has to have a point of departure somewhere.

Everybody has somewhere an experience or a belief system or a model or a scenario baseline where to start from. I think that, while I'm not a historian, I like to make the point that in the past three decades or so we have lived in an extraordinary phase of deregulation and enthusiasm of integration, the European Union and other parts, and all of a sudden we see this huge shift towards the East, growth has totally migrated, and much of the old systems are under stress and don't seem to work anymore.

I think we have also seen, not just through Copenhagen but through other classic multilateral efforts, that as global interdependence in so many ways has grown so rapidly in the past decades, we have not really learned how to cope with it and how to safeguard the future and face the risks that come with it.

I would subscribe to Ian's political hit list to a large extent. I would add that on the economic market side I think we face the real risk that the collective willingness to sustain openness is increasingly being questioned. I am actually frightened myself, as a former trade economist, that fundamental principles such as nondiscrimination are no longer heard anywhere, nobody seems to understand the meaning of it anymore.

The drive towards national self-interest and the shift towards government ownership obviously has accelerated all this, and it poses a whole set of new issues. There is a risk of populism, of national inward orientation. There is a real risk of even less paying attention to what some call the global public good in its widest sense. Climate was mentioned extensively, and the still-prevailing scientific consensus by and large that it is inevitable and denial is not the answer, we have to face that issue at some point. So I see it more from a market perspective in that angle.

I am extremely worried. I think that the catchphrase I would throw out there is we have moved into a new era of uncertainty, and the dimensions of uncertainties have taken on both systemic and country-specific articulations. But they seem to go in certain waves that are almost a reaction to the past couple of decades.

Now, from a business perspective, I think it raises enormously important questions, because most corporations we have been working with—we have now 5,000 corporations from 135 countries organized in 70 country networks—were all attracted to the idea of integrating globally. They all wanted to become as successful as IBM or GE. They have understood that non-financial issues are important on this journey. If you want to be on top of the food chain in the competitive landscape, you not only have to be best in class in your products and services, you also have to know how to deal with non-financial risks—environmental, social governance or ESG, a term we coined through one of our workstreams.

Now, I think most corporate leaders are actually sleeping at the wheel currently, because they assume that the next decade will unfold like the past two decades have, with access to markets, with multilateral support behind the scenes, and so forth. But most corporations have gone down that pathway so far already on global integration that I would argue the future viability of markets to perform and to diffuse solutions which are considered absolutely important on the climate front and on everything else that comes with it is actually at risk, because if this system of openness is not sustained in its broadest sense, then all your old models, including at the micro level, of integration obviously may not work anymore.

Already you hear catchphrases and new tactical moves that go back more to safe concepts approaches, which is a partial reaction. But I don't think the issues as such have been faced head-on yet.

So I would argue there is a need for a big wake-up call to consider really what have been the big achievements of the past decades. How can we make sure that the positive aspects of the achievements can be carried forward? I think we need a rallying cry for the WTO in its broadest sense. I think we need to spur innovation and accelerate the shift towards the solutions so badly needed on so many fronts.

Make no mistake, human ingenuity and innovation at the end of the day will of course hopefully provide the answers. But if the mindset is not put towards it, if the innovation potential is not given the space to unfold, that may not happen fast enough.

Now, where do ethics and values in all of this come in? I'm totally convinced that it's the very fundamental floor of everything in this, because going global ultimately means going local, because you have to accommodate and learn with and work with and partner with, and it means to have an understanding around common understanding. In a way, globalization/integration is the human test case of can we live with each other and can we establish a shared understanding and a rule-based concept where everybody somehow feels to have a place in?

This is where I believe the ethical dimension, the non-financial dimension, of business success is increasingly important. Here the good news is the following: I think in the space of corporate or business responsibility a long journey has been done. Initially it was more a moral imperative. Today it is actually a risk-driven business by and large. Most successful progressive business leaders understand that being proactive on human rights, on workplace issues, on the environment in particular, but also on anti-corruption, an issue which I feel because of increasing state ownership is now becoming more severe, that this is not just morally the right thing but it is the only way to strategically manage smartly into the future. That message is increasingly understood.

It hasn't reached the board level sufficiently yet. Survey after survey confirm that only 10, 15, maximum 20 percent of global corporations actually deal with these issues strategically at board level and have the organizational capacity to translate insights into strategies and operations. I think that needs to be accelerated rapidly, rapidly.

We make an effort to open up national networks, including our Chinese, which has 200 state-owned companies, to encourage them to integrate foreign subsidiaries.

We have a hit list of global companies, including from this country, who want to be there. We urge them now to open up.

We think the concept of global integration means above all learning how to work with and live together, and that means being open at very clear levels and not being discriminatory above all. These basic principles and values need to be elevated again.

The moral dimension, the ethical dimension, is also very much alive again. I hate to say it, but the financial crisis has reinforced some of our core messages and they are much better understood today than two years ago.

First, the need not to be obsessed just with quarterly profits but to focus genuinely on long-term value creation. This shift in time horizon is so fundamental in investment analysis decision-making.

Secondly, the absolute importance of integrating non-financial issues into decision-making. ESG, I talked a little bit about its issues.

And thirdly, of course, ethics as such and how people treat each other and what kind of value system is underpinning organizational entities, are back in full force.

Here the good news, my personal observation from all countries, in essence there is a universal appreciation of the fundamental rights and wrongs. It is understood irrespective of where cultures or people come from. There is a genuine sense of justice, fairness, and appreciation for each other at a very fundamental level, which has found many articulations, not just in religious thinking and ethical thinking, and ultimately also in UN frameworks that are universally recognized. I think giving uplift to such ethical approaches and concepts is increasingly important for successful stewardship, but also to inspire hope and to unleash much more innovation.

On the issue specifics, I share the view that the demographic change, the growth change, the many predictions that have been made by the International Energy Agency and others on energy and natural resources, the stress is not only there, it will not go away, and it will get much worse before it is getting better.

So the need for a whole new set of innovation on anything that has to do with nature-provided inputs and values across the board is imperative. We are lagging behind so far on so many.

It's a funny situation, it's kind of human nature, that usually we only act when we are forced to act. We are phlegmatic, lazy in principle, we hate to change. We hate to get up early in the morning when we have to. But ultimately I am quite confident that public opinion will shift. I hope it won't take too many external interferences.

The voice of reason certainly does not prevail in the current context. We have to continue working on the voice of reason and, above all, focus on the long-term perspectives.

I think business in principle is perfectly positioned to become a very proactive voice. The bad news here is that we have done extensive analysis on, for example, the climate side, and the stories are well known.

Two years ago, when we started a climate platform, only 200 global companies were ready to engage. I thought initially it should be easy to win over 1,000. But no, we got stuck at the number 250, 300, until we realized that most corporations of course play a double game and most of course make double investments, playing the short-term game while at the same time investing for the long term.

I think this game has to change. I think there we need to move much more towards the long term and we have to translate the 20 percent currently that are for Climate Action Principles into 30, 40, 50 percent to achieve tipping point rather sooner than later. That I think would be one conclusion from this.

The other one would be to re-support traditional values that have made the marketplace work in the first place, which we tend to forget in the current scenario thinking, and really mobilize support for anything that supports cooperation, because states, let's face it, are very local, governments are local, and most of the issues we are facing today are globally interdependent, and we just don't have the right mechanism in place to deal with them.

Global business is exposed to all these issues. I think there is a plausible case to be made for being proactive and not asleep at the wheel.


We have actually a tremendous amount of early statements here, which leaves us with less time than I had hoped for conversation on the panel, because I certainly want to get you guys in on this. But there's one or two themes that were teed up, connections that actually I'd love to hear a couple of points about.

What Georg just said about the value of markets, the value of what you might call a sort of stateless view of the world. I remember a few years ago at Davos hearing Deryck Maughan talking about currency. He was then at Morgan Stanley. He was talking about participating in currency markets.

Somebody from a government timorously raised his hand and said, "What do you think about the role of government in all of these currency markets and currency exchanges?"

He said, with this wonderful arrogance, "Oh, if we've gotten them taught to buy and sell in the market, they may do so too."

We now have, as we were talking about earlier, a much stronger sense of government in the market.

We have with the Google story this morning a question. I think many of us here think, "Yes, good, finally Google is not only doing no evil, it actually may be doing good." There is some sort of sense of state champions with companies, and we think maybe Google will act like a state champion. Or, of course, the French have always had state champion companies. You can go back. There have always been state champions. And the Chinese have state champion companies and state-owned enterprises.

Are we entering an era where we are going to go globally to a more Franco-Chinese model, where there will be more pressure on corporations to be state champions, and will they do it? Or will they say, "Heavens no, we are indeed citizens of the world irrespective of the problems of getting through borders at airports," and will they resist that and go for markets?

Ian, what do you see? Let's move quickly on this question so we can come to another one.

IAN BREMMER: I think the answer is we've been through this once. We've been through this on oil. Of course, there used to be a lot of international oil corporations that did exploration and production. Today, 80 percent of the world's oil resources are being tapped by national oil corporations.

Now, international oil corporations still exist, but they aren't doing exploration and production. Exxon-Mobil today is one of the world's best technology companies. They're a great management company. They're getting more into gas, which is much more decentralized. But they're not doing oil.

Now, I suspect that two things are going to happen: First, in lots of different sectors the same thing will happen to Western firms that has happened to Western firms in oil, which means they will either adapt and they will find ways to be value-added that are higher or more flexible on the chain so that state corporations still need them, or they will die.

Now, the third option is that in some of these cases states will provide huge subsidies. Forty percent of all EU cash goes to agriculture. It is not clear to me, with 8 percent of Europeans working on farms, that that's particularly smart. You know, you could end up with—we know—these mountains of butter and lakes of milk that go unconsumed. Now, in the United States, given Detroit, we might well end up with mountains of SUVs and lakes of ethanol.

But I do not believe that ultimately U.S. state champions across the board in lots of different sectors is the model we're going to see. I think what we're going to see is two increasingly competing models. We'll see more regionalization. The G2 won't work, but we will start to see a G3. We're already seeing that with tighter cooperation among the Fed, the European Central Bank, and the Bank of Japan. That's easy to do on the financial side because these are relatively independent organizations that are pretty hierarchical, with people on top that can make decisions. Increasingly, we will see G3-type cooperation as a reaction to these state champions in places like Commerce and Treasury.

I suspect that's not a 2010 issue. Though we'll start to see the beginnings of it, it's a longer-term issue. But that's to react to what's going to be a much harder time with profitability being depressed by these sorts of things.

THOMAS STEWART: Let me stop it there simply so we can get one more opinion on this before I get another one.

Georg, it's your question, so I'm not going to let you answer it, but I'll get you another one that isn't your question.

Michele, why don't you take it? I'd like to hear your thoughts.

MICHELE WUCKER: Yes, I agree. I think there will be some one-off instances, particularly in strategic industries, whether emotionally, like the cars, or physically and security-wise like oil.

But talking about this, I'm realizing that I can't remember the last time I heard anyone talk about something we were talking about a lot a year and a half ago: sovereign wealth funds. It has been months. It has completely gone off the radar. I think a lot of those funds were already trying to be very low-key about what they were investing in, understanding the very good principle that there's nervousness about states doing too much investing. So I have to agree with Ian on that.

THOMAS STEWART: It's interesting, because in a bunch of places you hear a capitalist national pride in my companies. The Indians are just bursting at the seams with pride about their companies. There really is a nationalist capitalism and capitalist nationalism in some of these places. China I think is to some extent the same way. But that attitude you don't hear much in the United States. It's just sort of popular-speak. Although 100 years ago, boy, we were proud of our great companies.

So a question I want to ask to the other end of the table here has to do with one of the things that both Ian and Michele teed up, which is that the economic crisis accelerated, and dramatically accelerated in a cyclical way, the secular shift of economic power and heft from the OECD to the Arc of Growth, the BRICs, the whatever you want to call it.

This puts all kinds of interesting pressures on companies. A few years ago, we saw Halliburton moving its headquarters to Dubai, which I think maybe had more to do with other issues, getting close to government customers, than to do with the real center of mass of demand. But Siemens has put some of its most sophisticated laboratories in China because that's where their best customers, the most demanding customers, are.

If you move the center of mass of demand or the center of gravity of demand in various places, what are the kinds of ways in which organizations have to respond, and what does this do for their ability to manage and capture and think about the risks that they face?

Art, do you want to take a stab at that?


Well, I think it's dangerous at this point to assume that companies are going to do anything as a group. I think the range of responses is going to be huge. C.K. Prahalad and Hrishi Bhattacharyya published an article in strategy+business about a year and a half ago, called "Twenty Hugs and No HQ," with the idea that companies increasingly could find a model where they don't have a home, they have what amounts to a moving network, and that this would be a more coherent and effective way to run.

He was probably right in the abstract, but I don't know if we actually know any single company that's operating that way, because people do have a place they want to go home to at night. And it turns out that it's even more difficult to live now as a globe-trotting chief executive or senior executive than it was in November.

So there is going to have to be on the corporate side a fairly innovative way. No company can ignore the imperative to grow internationally and no company can really manage it with the human beings and the way that they have. How they square that circle? I think many companies are going to find partial answers that work for them, and there may not be a lot of family resemblance across the board.

THOMAS STEWART: Yes, you do get different models, like Cisco with its two headquarters, with its Rome in San Jose and its Constantinople in Bangalore.

That's just one example, but you see a bunch of others.

GEORG KELL: I think the trend towards globalization has been going on for decades now, and most large, outward-oriented corporations have long anticipated many of these changes.

One big micro-indicator for actually putting the proof on it is foreign direct investment and its major motivation. Traditionally, it used to be about sourcing and getting inputs. About ten years ago, it switched towards market presence and market building, and that trend has manifested itself in many markets—not just China, which is always quoted first up the line, for good reasons. More recently, even the core functions of research and development, which traditionally are the ones most guarded, have actually migrated as well to where the cheapest engineers can be found.

So I think this trend has been going on for two decades, obviously at different trajectories. But even with small and medium enterprises, many very specialized niche producers have long gone down that pathway.

It requires, of course, hugely different management styles. Many boards have gone much more global, as we know, and various models are out there. Whether that trend will continue to unfold is partly in the context of our discussion of how big the backlash is against the last three decades or not. That, in turn, has to do with what I believe are the fundamentals of whether we can convince people everywhere and policymakers to uphold actually the positive enabling framework provider for innovation to evolve and to diffuse.

So I think the big issue in my mind has always been can that pathway continue or not. The models—I could name two companies. I wouldn't want to do it now here in public. But I think there are pretty advanced models out there in terms of global integration.

THOMAS STEWART: Many years ago, I talked to Dennis Encarnation, who is now a lecturer at Harvard Business School, who wrote a brilliant book called Rivals Beyond Trade. He argued that foreign direct investment and actually investing in and producing in different markets was becoming more important than trade. In my conversation with him, he said, "Ten years from now"—this was more than ten years ago—"I hope I'll be able to write a book called Trade Is Irrelevant, because investment was the more important issue."

But it actually raises an interesting question about whether, as we look at global risks and the ethical questions, whether we actually have raised to a sufficient and equal level the questions about trade regimes and investment regimes and whether we have equal consensus and equal ability to manage these on some sort of a global multilateral basis. I think we don't. I think fundamentally the trade regimes are more well developed, albeit imperfectly, than the investment regimes, which are much more susceptible to the whims of different government policies, whether they are those of openness or Hugo Chavez.

All right, questions?

QUESTION: I find it interesting that last year and this year nobody recognized or mentioned a revolution in energy costs in this country, which will spread all over the world, and that is tight gas and shale, and that this was done with no government help, or even no government recognition, and it was done without big oil, it was done by small companies. We end up with very low-priced gas, which we found 100 years of supply at 2007 costs. It's amazing that nobody pays attention to this.

THOMAS STEWART: Ian, you do. Do you want to take this up a little bit?

IAN BREMMER: I mentioned very briefly that one of the things Exxon-Mobil is getting into of course is gas.

QUESTIONER: They bought it.

IAN BREMMER: They bought it, yes. They didn't develop it, but they are now going to be more of a gas player than an oil player.

There's no question to me that what we've seen in shale gas technology is a game changer. Everyone I know that's serious in the energy field, that trades gas, for example, will say that.

I guess to the extent that I think it has broad geopolitical and geoeconomic implications in the near term, a couple things that I would mention.

First, boy, does this change the relationship between the world's biggest gas producers hitherto, Russia and Qatar and Iran. You know, they were talking just a couple of years ago about creating a gas OPEC [Organization of Petroleum Exporting Countries]. That's gone. Now what you're going to see is Qatar much more focused on markets that they think that they can get into and sell into, which is of course not the United States, because long term they understand that's going to be a harder market. They're looking more at getting into refineries in Asia, they're looking more at the European market, and they are therefore competing directly with Russia as opposed to coordinating with it.

I think that that is going to lead to more coordination of the GCC [Gulf Cooperation Council] in the Persian Gulf. The Saudis and the Qataris are improving their political relations, and gas is a part of that. We'll see infrastructure build as a consequence. But the geopolitical relations between Russia and the Middle East, in particular Qatar and also Iran, where there has been a lot of cooperation thus far, I think is going to become much more problematic. If you think of Russia as a place that's geopolitically relatively insecure, they already don't trust what's happening on their borders, this is probably a problematic geopolitical development from a stability perspective.

Those are just a couple of ruminations. But there's no question this is a huge issue over the medium to long term for the U.S. companies.

THOMAS STEWART: Anybody else have anything to add to that? Art?

ART KLEINER: There's a book forthcoming by a man named John Hofmeister, called Why We Hate the Oil Companies. In there he mentions the fact that just in the last couple of months the natural gas facilities for the New York area were turned down, they were not approved.

So I think one of the questions is, we've got this new technology. Assuming the environmental problems are feasible to work out, do we really have the capacity to build the infrastructure that is needed to make use of it? I assume we do, but I don't assume it's going to happen without some tension.

THOMAS STEWART: One further thought on this, which goes to the climate question. We have a competitor, whose name I won't mention, which sometimes talks about something that they call energy cost curves and talks about at a certain price other alternative energies might become more valuable or become more feasible. One of the problems with those cost curves is that they're not dynamic and they don't reflect as those prices go up that the profitability of some of the other things goes up too, and it really affects things. So there's a whole bunch of interesting questions about where investment goes as other new capacity comes online and as other kinds of energy prices go up. So there's a lot of—you know, the climate issue get morphed by this in a lot of complicated ways.

QUESTION: My question is for Ian. What do you think are some of the top ethical and social risks in relationship to your global political-economic risk forecasts for business?

IAN BREMMER: First of all, I thought there was a very interesting tension that was raised by Art and Michele about what we think about consumerism and what we think is an appropriate level of spending for Western societies, for Chinese societies. I mean let's face it, the Chinese want cars too, and they don't get them because there's 1.3 billion of them. It won't be sustainable. But at the same time consumption patterns that have been set out by the West are becoming globalized as well.

I think that the question of distribution in that regard and savings rate versus investment—it's not the Chinese consumer that's ultimately going to be replacing the American consumer for global growth in the short to medium term, in my view, it's Chinese investment. But the Chinese consumer would like to catch up really fast. I think that is an ethical question.

There is obviously a huge ethical question in terms of bearing the burden for climate change cost. The United States and Chinese are absolutely nowhere close to one another on that issue. And, frankly, lots of governments aren't.

I think denial is an answer. It's not a good answer, but it's the analytically correct answer probably for at least the next year or so, at which point we'll start talking a lot more about things like geoengineering.

Now, is geoengineering ethical, especially when it's not done globally but done by individual players on their own sovereign territory but has huge impact internationally? I suspect we'll all not care about that question in the same way that the Chinese don't care very much about whether or not Seattle's air quality goes down when they continue to dump. But that's another interesting one.

But the biggest one out there, the top risk we put out there in the world—and I think we're going to be borne out right on this one; I feel pretty confident about it—is U.S.-China. That's fundamentally a question of ethical systems. It's a question of values.

China is in a fundamentally different level of development than the United States is. Their institutions are less capable of doing the kinds of things globally that the United States can do in terms of diplomacy, in terms of humanitarian support. They also are under very different kinds of domestic political pressures in terms of what they have to do to prioritize their own internal investment and growth, at the expense perhaps of many other decisions. Those are decisions that the United States, if they wish to, would have a much greater flexibility on.  

How do we square that, because my point, and the reason I think this is such a clear risk, is that, as the world's number one and soon-to-be number two economies, these two economic systems are fundamentally incompatible, right? They are. And so we're going to have to—it doesn't mean that you can't find some form of uneasy compromise. But let's be clear, let's call them what they are, because the desire to have a strategic and economic dialogue is nice, but it doesn't obscure what's going to be increasingly a very obvious tension that at some level is an ethical question.

THOMAS STEWART: So are you saying—and let me get an answer to this from somebody else on the panel—are you saying that a CEO is facing a Manichean choice: Are you going to participate in a Chinese-type environment or in a, for want of a better word, American or Western/OECD-type economic system? Is it Manichean choice between what type of company are you going to be? Georg?

GEORG KELL: I will distinguish here to add on—and I partly disagree, because I think there are two levels: there is the political level and there is the market-related level. In the market-related level, while in China state-owned companies are very important, you also have many privately owned companies with private equity ownership spread all over, including especially in this country. Consider just that in northern Europe half of the listed companies there are state-controlled. So the models at the market-related level are not necessarily as incompatible as potentially at the political level.

THOMAS STEWART: So somewhere between China and the United States is Norway?

GEORG KELL: Something like this.

But it's when half of the companies are state-owned at some level and are publicly listed and partially owned. I think China has shown an enormous amount of flexibility in adjusting its market-related activities over the past couple of years. Just what happened in the last couple of weeks—you know, there are cycles coming and going. But I think the options there are still open and the engagement approaches being taken at many levels are still at a fairly early stage.

Historically speaking, we should not forget that the whole experiment of introducing market concepts in China is still a fairly young experience. Just because we don't have a name for what is yet to come doesn't necessarily mean it is only in contrast to what we have or know. So I would leave open a third way there.

THOMAS STEWART: Before we go, we have time I think for one more question. No matter what the question is, I am going to direct it to either Art or Michele.

QUESTION: Going back to China and the United States, recently we're giving arms to Taiwan and there was a lot of commotion about that. But it seems to me the most important issue is the unfair advantage China has in the currency. Paul Krugman says that we're losing 1.4 million jobs. I think going back, when we talk about the "we" in this country, there is the we of the corporations, the international corporations, and there's the we of the millions of people without a job. I don't think we discuss enough how do you compete with other countries where the pay scale is a minute fraction of what it is here. How do we take care of our people? I think that should be an important focus.

THOMAS STEWART: And it's an important ethical focus as well as a policy focus.

Michele, do you want to take a first stab at that?

MICHELE WUCKER: I think the currency is such a complicated question, partly because of the consequences of, okay, what if China does respond to all of the U.S. complaining that the currency is there; what happens if they do sell those dollars? I think we would probably be pretty upset with those consequences as well. So I think it's a matter of degrees of bad consequences there that we are dealing with.

Absolutely, you're right about the differences in wage levels between countries. I think some of those, unfortunately—I'm not talking specifically about China, but there are any number of countries there—some of those are the result of an economic system that we have designed. So some of the relative underdevelopment or little wages in other countries are the result of some of our actions, which speaks to how we think about our self-interest.

If we're thinking about things as a zero-sum self-interest, if we're selling much more to that other country, which has been the case for a very long time because of the way the global trade system has been set up, at some point that's going to come back and bite us in the butt, because if other countries have a longstanding worse economic outlook than we do, that's going to mean that there are going to be lower wages and things like that. At some point there's got to be a reckoning. It's very, very sad that the reckoning is happening on the backs of many American workers.

So I think it's a question of how do you make some of those shifts in a way that's fair both to the people who need to be brought up around the world and how do you lessen the shock, make that transition less painful for American citizens. It's a longstanding historical problem that, you're very right, is incredibly difficult.

THOMAS STEWART: Art, are there a guideline or two that an American business leader might have in looking at that dilemma? Mindful of our time, be quick.

And also, everybody on the panel, be prepared. I'm going to ask you for a 30-second quick answer to a quick question once Art has answered this one and then we're going to wrap up.

ART KLEINER: The pressure is on.

I buy Joe Ellis' argument that a broad-based economy depends for its quality on a broad-based level of income. I buy that.

Having said that, the fact that we don't have as much of a broad-based middle class in this country as we used to—assuming that's true, and I think it is—that's a big problem with a lot of causes, of which labor arbitrage to low-wage nations is one, but perhaps not the biggest one. I'm sort of with Edwards Deming, that the quality of management has had much more of an effect on that than the transition of jobs.

So what can a business owner do? The first thing is develop the practices that allow you to thrive over the long term. What can a government do? Make it easy for businesses to do that. What can an individual do? Well, also think about as an individual there may well be unavoidable stress in the next few years. As a country, how responsible are we for the economic body politic?

I don't think until we actually phrase that question that way, as an aspiration as opposed to a debate—how responsible do we want to be for each other? It's easy in a small, close-knit country in Europe where everybody comes from, or a large number of people come from, a similar ethnic background. It's much more difficult in a more pluralistic country of immigrants to say, "How responsible are we going to be for each other?" I think that's the question we have to ask.

THOMAS STEWART: Let me first of all—I'm not quite ready to thank these people and turn it over to Devin—we had four big risks around the panel. You've heard Ian, the number one risk is U.S.-China; you heard Michele about the migration risk but also the emergence of the bigger emerging countries, the BRICs or the BICIs or the IBICs, or however you might call it; you heard Art talking about the question of whether with large public sector roles the public sector can handle, whether there is simply the ability of the government, also on the corporate side, whether there's a risk of insufficient managerial capacity; and you heard Georg talk about the risk of losing a belief or losing the power of markets to sort through issues and resolve problems to clear trades, in effect, of all different kinds of things.

Now we'd like to ask the panelists—you got 30 seconds each—what do you think is the toughest ethical decision or the most important ethical decision that you think a business leader is likely to face in the next 12 months? We've heard about the risks. What about the toughest ethical decision that you think you might come up against?

Who would like to go first? Sorry to spring it on you.

IAN BREMMER: Just because it's close to the U.S.-China thing, it's how to actually deal and balance with a world that's going to be changing so dramatically.

I want to end my 30 seconds with a quick point around this, which is that we are incredibly wealthy. We have an enormous standard of living. We are born here, but it's an accident of birth and it's an accident of the political system and all the rest. The Chinese have vastly lower quality of life on a per-capita basis. Those two things are going to change pretty dramatically over the course of the next ten years. In part it is because they have these enormous advantages in terms of labor; in part it's because they can actually spend lots of money in a focused way. Our political system can't. We just spent a trillion dollars that we didn't focus on big new infrastructure or on education.

We are going go to have to deal with that and our corporate leaders are going to have to deal with that. That's the answer. And so how we deal with that as a CEO I think is the big question.


MICHELE WUCKER: I think the biggest question really relates to some of this consumption question. Are you going for a very, very short-term gain or are you going for something that's going to create more sustainable profits over the longer term and that's also something that's a better investment?

Sort of Michael Pollan on food extended to the whole economy?

MICHELE WUCKER: Exactly, very much.


ART KLEINER: I'm with you, Michele. Georg, you mentioned the short-term model. I think inherent in the short-term model is a kind of zero-sum approach to life. If one person gains, another person loses. That's very hard to give up. Every type of responsibility that a corporate leader takes on means giving up if it's outside of the immediate concerns of quick return on investment. It means somehow giving up that model. How does one do that?

THOMAS STEWART: Georg, your 30 seconds.

GEORG KELL: Well, I made this point and I would like to reinforce it and I want to switch to another one.

I think also staying globally engaged means making a bet on the continued robustness of openness and systems to be capable to work with each other, especially China-U.S., but not only. That means having the long-term courage to make a forward-looking bet on market developments overall.


I tend to have this romantic view that if we can get the right people in the room there's a grand bargain to be struck—U.S. and China on coal or—they are grand. One of the things I've realized whenever we get into these discussions is there are no grand bargains, or if we strike a grand bargain in this room it's not going to survive the walk to the subway. Other people will come in there.

So I think I always come out of these discussions thinking one of the biggest ethical issues and risk issues is the risk to continue to have the sort of moral courage to kind of muddle through, which is not a glamorous moral courage but is the kind of moral courage I think we all need.

With that, Devin, I hand it over to you.

DEVIN STEWART: Thank you so much.

I want to ask the audience one challenging question, something for you to take home: Do ethics matter for you? And, if so, please join the Carnegie Council and support this program. It isn't free.

I thank your panel. Thank you very much.

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