Competition and crisis

IMD’s Arturo Bris is alternatively optimistic and pessimistic about the global economy

Competitiveness is an essential need for any economic entity, and in today’s global context it is a core qualifier for countries. Having reported on the measurements of competitiveness regularly over the past few years, Executive followed an invitation to visit one of the two institutions dedicated to measuring the competitiveness of nations in order to investigate what this institution is all about and what it plans.

Gloom and boom

A joke from the Soviet era has East German school kids answer their teacher’s question about the competitive situation in the divided country. When asked about the situation in the capitalist German Federal Republic (the state that won the 1974 World Cup) the kids say: “The exploitative West German political creation of the US imperialists has stagnated in its economic development and today is heading over the edge of an abyss.”

“Bravo,” replies the teacher. “And what is the state of the People’s Republic?”

“The glorious socialist republic of the German workers and peasants is racing to move ahead of the capitalist Federal Republic and will very soon overtake it in every respect,” chant the children.

Hearing Arturo Bris, a wiry, self-deprecating and hyper-communicative academic at the Swiss private business school IMD talk about the global economy and the ambitions of his institution to enhance the competitiveness of countries generates a slightly similar feeling of bipolar disorder, in the sense of contradicting orientations toward gloom and boom.

Delivering an evening presentation as IMD professor of finance and strategy to business decisionmakers assembled at a weeklong leadership program this summer, Bris spews fire and brimstone, outlining eight risks that could produce the next global economic meltdown (see box). Any of these risks, he warns, could trigger a geoeconomic crisis, and all eight have the potential to interact in a disaster spiral, tripping each other like proverbial dominos.

Global Competitiveness Challenge: Something for every doomsday

When he lectures on what he calls “The Global Competitiveness Challenge”, Arturo Bris’ catalogue of eight risk potentials offers a flavor of world-changing doom for every taste. That does not mean the risks are fictitious; they are all too real.

A stock market crisis
For skeptics on the ability of investors and markets to overcome patterns of value destruction: long term trends suggest that the next stock market crisis is due to start in April 2015 and last for 11 months, with the usual negative impacts on economies all around, says Bris.

A Chinese banking crisis
For critics of the globalized financial system and of banks that are believed to be too big to fail: if you remember Lehman Brothers’ contribution to the 2008 global financial crisis, compare its size as a $50 billion bank to the size of the Industrial and Commercial Bank of China, which is China’s and the world’s largest bank at $1.3 trillion, Bris says. A critical problem in any single Chinese banking behemoth would force their sale of euro securities, leading to massive inflation in the United States and a massive drop in the dollar exchange rate. This scenario, which could lead to the collapse of the US economy, is Bris’ personal favorite. “The next banking crisis will come from China,” he says.

An energy crisis
For those who think that energy is a key factor in every global crisis of the past and present: Bris sees the global energy equation as changing radically due to the rise of the US as a highly price competitive producer with capacity to use energy exports for political power gains. He says if the US starts exporting gas, the Americans will have such price advantages that they could challenge Russia’s vital revenues. Enormous crisis potentials.

A real estate bubble
For those who don’t buy the idea that real estate makes for history’s safest investments: developed markets’ property prices are again moving into irrational territory. Skyrocketing real estate prices and ballooning mortgages are always good for translating into an economic crisis. It doesn’t help when developers in a place such as Dubai insist that there is no bubble.

A corporate crisis
For those who don’t like shaky companies: the number of S&P 500 companies with zero debt has gone down while triple-A ratings of companies (and sovereigns) are becoming exceedingly rare. This means increased vulnerability of economically important companies to bankruptcy. Significant crisis potential.

A war or major geopolitical incident
For those who don’t turn a blind eye on the eve of destruction: with an overall increase in tensions, the global risk map points to the next geopolitical crisis, but with huge elements of unpredictability. Even seven months ago, we could not have pointed to Ukraine as the stage for the next geopolitical incident, Bris admits. Any geopolitical crisis can escalate and trigger a market crisis. Ignoring that risk is not helpful at all.

A poverty or wealth distribution crisis
For those who fear populist knee jerking in response to real economic impediments: even as absolute poverty has been reduced, the number of poor people has increased. But if high risk attempts to control inequality become policies, Bris foresees economic disaster. Any ill conceived battle against inequality will hinder innovation and growth, he says, resulting in detriments for competitiveness and for entire countries.

A cash crisis
For those who want to tax cash: in Bris’ view, banks have an obligation to lend into the financial system. Banks and companies that hoard cash behave immorally, but currently the world is faced with financial enterprises such as Citigroup that have enough cash to buy a majority stake in a country such as Italy (if both so chose). There is a vicious circle of the European Central Bank printing more cash and banks depositing this cash in turn as reserves at the ECB. Companies have too much cash and too much power, but there is no way to solve these problems in a reasonable manner. “Cash piles are mounting and that is at the expense of society,” Bris says. He proposes taxation on cash holdings as a remedial measure, however, telling companies, “If you don’t distribute profits, you will get double taxation.”

When Bris delivers his presentation on the global competitiveness challenge at the IMD program called “Orchestrating Winning Performance”, one regular participant walks up to the dais afterwards and comments, “This is almost the same to what you said in 2008.”
“Yes,” Bris replies, “but in 2008 the crisis was already there. Now it has not happened yet.” One of these eight crises — with enough potential to trigger a global event — in his opinion is bound to tear down upon us. But to him the worst of it and a factor that could turn the next global crisis into a collective Cassandra dilemma or universal Titanic experience is that “we may see it coming but not be able to do anything about it.”

Talking in an exclusive interview with Executive on the same day, Bris puts on his Dr. Boom hat and enthuses about immense opportunities that lie in consulting with governments and corporations for improving their competitiveness. The activity, which implies assuming overall rather positive development prospects for the world economy, is part of Bris’ new day job as the director of the World Competitiveness Center (WCC), an IMD research facility which compiles and evaluates information on 60 economies from around the world.

The competitive angle

As its flagship product, the WCC produces an annual ranking and detailed assessments of competitiveness factors, called the World Competitiveness Yearbook (WCY). The WCY is the oldest and, apart from the World Economic Forum’s Global Competitiveness Report, the only systematic compilation of per country competitiveness rankings. In the 2014 edition, which was released in May, the United States took top spot as the world’s most competitive economy, unchanged from the previous year, followed by Switzerland, also in a repeat ranking.

While the WCY illuminates weaknesses in nations’ competitiveness from a mix of hard economic data and surveyed opinions of business leaders, the annual tome’s baseline assumption is one of emphasizing opportunities and potentials rather than focusing with gloomy intensity on downside risks. 

There are generally no large changes among the positions of the WCY’s most competitive countries, but the lack of movement at the top is not what disconcerts Bris. His concerns rather are where the WCC’s insights on competitiveness can make the most impact and how the provision of those insights can be financed.

Gold digger

The US, with its large and highly developed economy, “doesn’t care about the competitiveness report,” he says. According to Bris, the WCY findings are most needed in countries who can least afford to pay for such research. “I am trying to find a business model where someone — it could be a company or an international organization — would finance a report, because the countries that need us the most are the countries that can pay the least. I am not so much interested in helping Switzerland, and I told the dean that one of my key performance indicators is to incorporate new countries like Oman, Egypt, Middle East economies, African economies [and] some Latin American countries,” which are not currently part of the report.

Although the WCY has been in production for 25 years, it was never monetized and the publication format has become outdated, Bris adds. “To date, the business model of the WCC was to produce a statistical report and sell a book. That is an obsolete business model.”

As data has become a commodity and tomes weighing three kilograms are nobody’s shopping priority, the WCC director, who was appointed to this post earlier in 2014, argues that the center has to migrate to a business model that is centered on advisory services. “You have to do something with the data, you cannot just sell it,” Bris says. “We will keep on producing and generating the report but we want to use it as a means to help governments and companies to improve their competitiveness.”

He describes the WCC’s mission as “making people more prosperous,” but puts a spin on this high objective. “You have to realize I am an academic, so I never had any mission in life other than enjoying my thinking. Now for the first time I have a mission, which is to improve prosperity.”

His new role is founded solidly on years of experience in contributing to the WCC as an IMD professor and he is very familiar with the center’s methodology, Bris explains, adding that his objective is to maintain his teaching role, which makes the WCC “a part time job” for him.

Expanding reach

This also sounds ironic but the professed part time nature of Bris’ job does not stop him from brimming with plans to expand the WCC’s role and reach. A modification of the methodology by adding more survey based perspectives to the WCY is one of his aims. This entails measures to adjust for biases more effectively by asking executives “the right questions,” Bris says, adding that he also wants to expand the surveying beyond querying business leaders about their evaluation of the status quo in their countries. 

Asking questions about people’s expectations for the coming year could yield confidence indications, the WCC director reasons. For example, a simple question to business leaders such as ‘How do you think the financial markets will behave in your country in the coming year?’ might supply data for construction of a stock market confidence gauge. Following the example of confidence indices created by Yale economist Robert Shiller, Bris wants to test if such a product could be commercially viable. “I want to have a confidence index for stock markets worldwide. The question is to what extent you can make money [out] of it,” he explains.

Expanding the WCC coverage to more countries and deepening the advisory element are core targets where the center faces resource barriers, from a budget that is a fraction of what some global leading institutions and universities command to a staff size of less than 10. The upside is that the operation is “extremely frugal,” he notes.

This frugality could help Bris extend the WCC’s advisory to more of the countries with the greatest need for such analysis and which would be able to reap the greatest benefits.

But another condition for such expansion is finding partner institutes which are able to collect and provide reliable data from each country under coverage. This is an operational formula that the WCC relies on for every country, and Bris concedes that poor availability or absence of verifiable data would be a massive barrier against assessing the competitiveness of a country, such as the case in Lebanon.

Strategic pause

This warrants dipping for a moment into one of Bris’ strategic lessons on finance. Enterprises are either growth ventures or value ventures, he elaborates in one of his presentations to business leaders. Growth stocks sport high price to earnings ratios and increasing stock prices but pay less in dividends; value stocks generate high present returns but do not reinvest earnings for future growth, which makes them riskier from a financial perspective. By Bris’ reckoning, neither state can be sustained in permanence and thus growth stocks must become value stocks and value stocks must become growth stocks.

In this sense, the WCC has been delivering a steady value for the past 25 years and is now poised to transform into a growth enterprise with, if things go according to Bris’ plans, a steep trajectory of expanding consulting activities on the competitiveness of nations.

It could be a most opportune time for countries to have competitiveness enhancing consultancies available, in view of the accumulating risks that Bris speaks about in his ‘other’ job as IMD professor (see box). But even the best advisory capability may not suffice if Bris is correct in his assessments of interrelating global risks — and he is by far not the only serious economist who sees the current situation as fertile soil for a new world-engulfing crisis.

Shiller, the Yale economist and 2013 Nobel laureate in economics, wrote earlier this year, “If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated. Not only does effective crisis prevention require overhauling our financial institutions through creative application of the principles of good finance; it also requires that politicians and their constituents have a shared understanding of these principles.”

Such an understanding is missing, Shiller says, “unfortunately.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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