2023 is off to an uncertain start, as forecasts confirm. The war between Russia and Ukraine and its devastating consequences, the energy shortages associated with the conflict, and the growing international inflation resulting from these geopolitical contingencies are all dominating the news and flooding the organizations involved with concerns about how to navigate this landscape.
A backdrop of a war with unpredictable consequences and constant ups and downs that affect the global economy and shake business optimism. In addition, the shortage of raw materials, which mainly affects the production of microchips, and the growing sensitivity to climate change and its potential solutions are causing organizations to rethink their way of operating. Innovation is no longer seen as a mechanism to generate new products, but as a tool to face potential crises and emerge from them stronger.
Global economic recession, the greatest risk
Thus, the Global Risks Report 2023, presented in January at the World Economic Forum (WEF), predicts some of the most pressing challenges for international society this year and, unsurprisingly, inflation and the associated increase in the cost of living have topped the list of ‘concerns’.
Some of the opinions heard at the Forum contrasted with this unanimity, and while some were more convinced of a global recession and, with it, a scenario of worrying uncertainty, others, such as Christine Lagarde, President of the European Central Bank (ECB), saw “a slight improvement, since the situation is not as bad as had been feared“. Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), also spoke along the same lines of contained optimism in her talk World Economic Outlook: Is it the end of an era? assuring that “we are doing better, but this does not mean that we are doing well: we have suffered the third lowest growth in ten years and there is a permanent risk to confidence“.
The possibility of a global recession and the prospect of an uncertain future are the perfect breeding ground for another major risk that, according to the WEF, we may have to face soon: 'polycrisis'.
The 'end' of globalization?
These poly-crises, or the risk of multiple simultaneous crises, is determined by the profound interconnection of different aspects of economic and social life that globalization has brought to these times. Thus, the war between Russia and Ukraine has highlighted the difficulty many countries have in accessing certain raw materials and the energy dependence some of them have on certain exogenous regions.
As a result, some powers are now opting for national protectionist policies that could jeopardize the path of globalization followed so far, according to experts from various organizations such as the Barcelona Center for International Affairs https://www.cidob.org/es/prensa/cidob_2022_claves_para_interpretar_la_agenda_global (CIDOB). This line of thinking was also discussed in the WEF's ‘Global economic outlook: is it the end of an era?’.
In this regard, the Biden Administration has recently put forward its 'green subsidy plan' to companies (just over 340 billion euros) on the grounds of the Inflation Reduction Act, passed in August 2022, which aims to create massive investments for energy transition and considerable subsidies for US-produced electric vehicles, batteries and renewables for energy transition.
A plan that could start a 'trade war' between the US and companies from the old continent, leading the latter to suffer discrimination that Europe does not seem to want to permit.
If the Spanish Prime Minister, Pedro Sánchez, and his French counterpart, Emmanuel Macron, agreed a few days ago on the need for a united European reaction on this matter, Brussels has expressed the same concern with the conviction that these policies could be unfair and violate the rules of the World Trade Organization.
“To maintain the European industry's appeal, it needs to be competitive with offers and incentives currently available outside of the EU,” argued Ursula von der Leyen, President of the European Commission, in Davos. As such, Brussels will present a temporary reform plan in a few weeks' time for the national state aid provided to counteract this type of policy. This will be achieved, “through simple tax relief models. With selective aid for production plants in strategic clean-tech value chains, to counteract the risk of relocation caused by foreign subsidies,” Von der Leyen pointed out.
A growing inequality gap
According to the Global Risks Report 2023, the food and fuel crises and the increasingly high cost of living are some of the factors that are expected to continue to accentuate this inequality gap and its impact worldwide. Thus, the most fragile and vulnerable economies face severe risks such as growing public debt, the consequences of climate change or the lack of food security among their populations.
Graphic source: United Nations Food and Agriculture Organization (© FAO).
An economic crisis that could become a humanitarian crisis in many cases, posing an unprecedented challenge to the world powers as a whole. According to this report, in the next 10 years, fewer and fewer countries will be able to invest in growth for the future, green technologies, education or healthcare systems. If this inequality gap continues, it says, the capacity to cushion this 'global shock' will shrink considerably.
According to the United Nations Food and Agriculture Organization (FAO), 222 million people in the world are experiencing high levels of acute food insecurity and almost one in five has difficulty accessing sufficient food on a daily basis, situations accentuated by conflicts and international political instability.
Economic inequalities that also have to do with the development of emerging technologies (AI, quantum computing, biotechnology, etc.), projects that only countries with greater wealth and investment capacity could afford while, for those who cannot, inequalities would continue to grow.
The mitigation of climate change and its consequences remain one of the greatest challenges in the short and long term. According to the report, and as confirmed at the World Economic Forum meeting, the environmental aspect holds global challenges for the next 10 years for which we are not particularly well prepared.
The lack of progress on climate targets highlights compelling evidence of the quantum leap between the scientific indications of how action should be taken, as opposed to what is politically feasible to achieve.
In this regard, the Paris Agreement has set a target of a maximum of 1.5°C or 2°C of global warming to keep the effects of climate change within an acceptable threshold. This means that, by 2030, global emissions must be reduced by 45% compared to 2010 levels. Indications that, according to a report presented at the last Climate Summit (COP27), held in November 2022 in Egypt, are not achievable even if the emission reduction plans presented by the signatory countries were fully complied with since, on the current path, we would be on track for a 10.6% increase in emissions by 2030. Hence why the United Nations (UN) concludes that these 'efforts' are still insufficient.
Source: United Nations, 'Nationally determined contributions under the Paris Agreement'.
Along the same lines, the International Panel on Climate Change (IPCC), in its latest report, estimates that we could reach an increase of up to 4.4°C by the end of the century, which could increase the intensity and severity of extreme meteorological phenomena, according to the worst forecasts.
As warned at the WEF meeting and in the report on global risks presented by the organization, the demand for public-private resources to alleviate the effects of other crises, such as the current war being waged on European soil, would reduce the speed of mitigation and the efforts of countries to combat climate change by focusing their attention on other fronts.
The word heard most at Davos: resilience
An ever more fragmented and volatile world is on the horizon in this declaration of risks, but if there is one word that has been heard the most at this meeting, it is undoubtedly 'resilience'.
Global resilience, European resilience, innovation for business resilience… it is clear that if the outbreak of Covid-19 and the concatenation of successive international events, such as the invasion of Ukraine, have demonstrated anything, it is that society, governments and companies must develop their resilience in a constantly changing world.
This word even had its own panel discussion at the Davos Forum under the title Rewiring the Globe for Resilience. The concern is how to face or be able to foresee certain adverse situations and how these different social actors can cope with them and recover as quickly as possible.
According to the WEF, the cost of not developing proper resilience in the face of possible crises is between 1% and 5% of annual global GDP growth. The Resilience Consortium, created by the same organization in August 2022, points out that “in the face of continuous cycles of disruption, countries and companies have begun to design resilience plans, and investment in infrastructure in this aspect emerges as essential to drive the economic and climate agendas”.
More and more companies are betting on innovation based on organizational resilience, improvement processes and change adaptation that could increase resistance and even growth in adverse conditions of those companies that implement them.
In terms of human capital, reskilling and upskilling (continuous improvement of employees' training and capabilities) are basic processes for achieving the desired resilience, but this must be implemented in an integrated manner throughout the organization's structure at a corporate level.
In this sense, investment in infrastructure, intelligent systems, green technologies, education and training are the basic pillars that a company or enterprise should promote to increase its organizational resilience, thus facilitating inclusive and sustainable growth.
Those companies that, in the face of change or disruption, stand still while others continue to innovate and advance in resilience, will become obsolete sooner rather than later. The drive for continuous innovation is becoming unstoppable.