Economic Shift Information Technology Impact

COMMITTED TO IMPROVING THE STATE OF THE WORLD

Global Growth@Risk 2008

A Report of the Global Risk Network in collaboration with PricewaterhouseCoopers

All the figures are prepared by PricewaterhouseCoopers for the Global Risk Network of the World Economic Forum. © 2008 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is as separate and independent legal entity.

World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: [email protected] www.weforum.org © 2008 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system.

REF: 200908

Contents

Page 4 Executive Summary Page 5 From Global Risk to Business Risk Page 6 The Current Economic Landscape Page 8 The Financial Crisis and Access to Capital Page 10 Demands on Resources Page 12 The Next Drivers of Growth Page 15 Acknowledgements Page 16 Bibliography

Executive Summary The convergence of the sub-prime crisis and the ensuing credit crunch, concerns about inflation and a possible slowdown in 2009 have engendered a great deal of uncertainty about the short-term outlook for global economic growth. Looking beyond the immediate problems, three trends are emerging as influential for future growth prospects at the corporate, national and global level: first is the emergence of fast-growing economies, with large populations and rising middle classes; second is the increased demand – and competition for the inputs, capital, energy, commodities and skills necessary to sustain economic growth; and third is the growing importance being placed on innovation and technology as sources of solutions to a range of global problems. The intersection of these trends will offer opportunities to business and society, but will also present fresh challenges and risks to be managed. This report explores these future drivers of growth, as well as the risks and opportunities emanating from three issues identified in the World Economic Forum’s Global Risk Report 2008, i.e. financial risk, energy and food security. Our conclusions all point to a critical need to achieve a balance between economic growth and resource sustainability. Market regulation alone cannot prescribe this, as tensions exist across markets and between longand short-term strategies. Companies with the vision to connect global trends and risks with their own strengths and market knowledge, and to participate in collaborative efforts to manage those risks accordingly, will be better prepared for global growth.

4 | Global Growth@Risk 2008

Key conclusions Key conclusions • Global growth forecasts reflect a shift of economic power to high growth, highly populated economies and wealthy oil producing nations • Emerging market growth appears less susceptible to a slowdown in the US but low-income countries face risks from inflation in the form of loss of domestic market growth, wage increase pressures, and greater societal and political instability • Central banks and regulatory institutions are facing a policy paradox: trying to restore confidence while managing both recessionary and inflationary pressures • Uncertainty abounds about further losses from the financial crisis and the extent to which it will impact the real economy, both in the US and globally • Financial regulation must avoid placing further pressure on the financial system through high compliance costs and decreased competitiveness and innovation • Sovereign wealth funds, private equity and financial institutions of high-growth markets are significant sources of capital but may face regulatory barriers or even economic nationalism • Population growth and the economic shift to middle-income economies, are giving rise to a rapidly growing global middle class. While their spending power will drive growth, governments and business need to create ways to make this coming boom in consumption sustainable • Innovation and technology are drivers of growth for businesses and economies but require significant investment and support to develop the human and financial capital

From Global Risk to Business Risk The nature of global risks implies that no single company, industry or state can successfully mitigate them on their own. Nonetheless, it should not be assumed that nothing can be done to address them. A selection of global risks below highlights how they can routinely have direct implications for business. It can also be seen as a way for business to frame these issues for discussions with governments and other stakeholders across a number of regions.

Global Trends

Related Risks

Implications for Business Growth

Increasingly integrated global financial systems

Contagion of financial markets instability to the real economy

• Increased cost of capital • Slowdown in growth of business to business and consumer sales in some sectors

Rise in protectionism

• Increased barriers to entry and to trade among countries • Higher duties and compliance costs • Difficulties in entering joint ventures or seeking mergers and acquisitions across borders

Disparities in underlying approach to financial regulation

• Barriers to accessing certain capital markets • Assuming high legal and compliance costs across differing regulatory regimes • Greater due diligence required for deals

Increasing pressure on physical infrastructure

Lack of capital/insufficient funding for existing and new infrastructure

• Choice of and competition for well-serviced locations intensifies • In extreme cases, companies have to bear the costs of assuring critical infrastructure (local generators, water, sanitation, etc.) • Increased insurance and potentially liability costs

Reconfiguration of global power

Difficulty in reaching consensus on global issues and prolonged delays in the process

• Lack of transparency and certainty regulation, e.g. future emissions and environmental standards • Higher compliance costs • Time lost in obtaining clear guidelines on standards

Global integration outpacing global governance

Corruption and transnational crime

• Lack of rule of law and corrupt environments expose companies to political and reputational risk • Poor or unsupported IP regimes render protecting IP and combating piracy difficult and costly • Lack of clarity about local procedures and rules adds time and costs to projects

Decreasing air quality

• Poor air quality leads to increased incidence of acute respiratory conditions, and related loss of productivity and increased health costs • Poor environmental conditions make it harder to attract talent and entail higher premiums

Spread of liability regimes

• US liability-type regimes spread to other countries increasing the cost of insurance of operations, and directors and officers

Increasing dependency on large-scale data storage and security

• Potential losses from business disruption • Major accidental loss of data or case of fraud inflicts financial and reputational damage

Increasingly interdependent critical information infrastructure

Global Growth@Risk 2008

COMMITTED TO IMPROVING THE STATE OF THE WORLD

The Current Economic Landscape Figure 1. Global Growth Forecast Growth among oil exporters, along with China, India and Russia, expected to dwarf growth in developed markets 10%

2008 2009

Forecast GDP growth

8

6

4

2

Norway

Venezuela

Algeria

Nigeria

Saudi Arabia

United Arab Emirates

Iran

Kuwait

Eurozone

Japan

United States

India

Russia

China

0

Oil exporters Source: PwC; IMF

The latest International Monetary Fund (IMF) forecasts for GDP growth for 2008-2009 present an interesting picture of how the world is now divided in terms of growth economies (see Figure 1). Overall, the IMF forecasts global GDP growth of 4.1% (year on year) for 2008, down from 5% in 2007 but still in line with the average of 4.2% realized over the past five years. When this is broken down, the figures show three groups of countries: the leading emerging economies; the US, eurozone economies and Japan; and the oil exporting nations. Each of these groups, and indeed each of the individual countries, has very different growth stories and challenges, but the picture is indicative of the shift that is happening in terms of economic growth – and power – moving from the traditional leading economies to emerging ones.

higher than anticipated exports (with annual growth forecasted at 13.2%) and a decline in imports. These stronger growth figures also show that the US Federal Reserve Bank’s approach of focusing on growth rather than inflation is bringing results. The decision to intervene rapidly in the cases of Fannie Mae and Freddie Mac, and to allow banks to draw on foreign sources of capital has also allayed some of the pressures on the US financial sector. However, while the chances of a protracted slowdown may now appear decreased, concerns remain about further losses, in particular in the area of credit card debt default and in the US$ 62 trillion credit derivative markets. The US financial sector has already written off more than US$ 400 billion. Given the current lack of trust in its outlook, the collapse of another major bank could have implications for the speed of the recovery of global financial systems.

Europe and Japan Prospects for growth in Japan and the eurozone are also weaker. Both have to digest higher energy and commodity prices, with inflation proving a drag on consumer spending. They are also both faced with the fiscal challenges of ageing populations and pensions; these are longer term issues but ones which already require unpopular reforms that may prove even harder to push through in a downturn. Figure 2. Contributions to Global Growth in 2008 China to represent one quarter of global GDP growth this year

The US Other countries

Though this year’s IMF forecasts were for very low US growth, actual figures for second-quarter US GDP growth, released just as this report was going to press, showed an annualized rate of GDP growth at 3.3% for 2008, higher than the US government’s own July estimate of 1.9% or economists’ estimate of 2.7%. The government’s tax incentives and a drop in oil prices helped consumer spending, while the weaker dollar led to

6 | Global Growth@Risk 2008

China

France Korea UK

United States

Japan Brazil

Russia Germany

Source: PwC forecasts

India

Emerging Markets and Oil Producing Nations While US GDP still accounts for almost one-quarter of global GDP, the prospect of a two-speed global economy has reignited the debate on economic coupling, decoupling and re-coupling. The total value of US imports is almost US$ 2 trillion (WTO’s International Trade Statistics 2007), 40% of which comes from Asia, and predominantly from China. (Europe, Canada and Mexico produce 20%, 15% and 10% of US imports respectively.) Hence, should a significant slowdown occur in the US or, as currently looks more likely in Europe, some sectors in emerging markets may be affected. Figure 3. Inflation in Emerging Markets Inflation rate in China expected to triple from 2006 to 2008 14%

Inflation rate

12 10

Russia

8

Turkey

6

India Brazil China Mexico

4 2 0 2005

2006

2007

2008F

2009F

Source: Brazilian Central Bank; Mexican National Institute of Statistics, Geography and Data Processsing; IMF; Eurostat; Indian Office of the Economic Adviser; Chinese National Bureau of Statistics; PricewaterhouseCoopers forecasts

Figure 4. Food Inflation and CPI Poor countries assign relatively high weight to food expenditures in consumer price indices 70 Nigeria

Percentage share of food expenditure in CPI

On the political front, Russia’s recent actions in Georgia and South Ossetia, and the response of several EU states, could have implications for energy agreements as Europe heads into the highdemand winter period. Europe has also experienced falling asset prices, inflation and the impact of the sub-prime crisis. The effects of the crisis on several major European banks have also led to credit tightening and a loss of consumer confidence that is affecting demand in some sectors. Unlike the US Fed, the European Central Bank has pursued its policy of managing inflation rather than targeting growth. Currently, the outlook for European economies seems less positive than the US, and recent business confidence figures for the United Kingdom and Germany have decreased sharply, with figures for the second quarter of 2008 showing German business confidence at its lowest since 2003. European exporters have to manage increased costs due to higher oil and commodity prices, as well as the strength of the euro against the dollar and dollar-pegged Asian currencies. On the other hand, the region as a whole still has growth in the newer economies, and a relatively flexible and skilled labour market is also an advantage. A decrease in inflationary pressures and a strengthening of the dollar against the euro would improve the outlook for eurozone growth.

60 Ghana

50 Jordan

40 Pakistan

Hong Kong

Ecuador

30

Japan Indonesia

20

Ireland

US

Thailand Korea

10

Germany

Switzerland

Norway

0 0

5

10

15

20

25

30

35

40

GDP per capita in constant PPP international dollars (thousands)

Source: UN FAO, "Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required" (June 2008)

However, the biggest emerging markets, China and India, have both seen strong growth in domestic consumption, and have also improved productivity and diversified their trading partners to neighbouring and other economies, making them less reliant on US demand than in the past. The IMF outlook for 2009 (see Figure 2) still forecasts strong growth in almost all the major emerging markets, with China still set to grow at 10% in 2009 and India expected to achieve year-on-year growth of 8%. Rising inflation, set to be at double digit rates in most emerging markets by the end of this year has been cause for concern. However, as energy and food prices have fallen over the past months, headline inflation rates are expected to drop in early 2009 (see Figure 3). However, even with recent price decreases, both food and energy remain far more expensive then they were 12 to 18 months ago. With food accounting for 30-40% or more of the consumption basket in many emerging countries (see Figure 4), versus 15% in G7 economies, higher food prices have a greater adverse effect on lower income populations and could remain a source not only of economic but also of political risk. One of the most striking features of recent times is how fast-growing economies, and in particular the oil producing nations, have been able to accumulate foreign currency reserves from export profits and investment inflows. Rising surpluses have enabled them to use these accessible resources to stimulate domestic growth and decrease dependency on Western consumer spending – and lending. The rise in these reserves is accompanied by rapid growth in savings and in private investment sources native to these markets. With high savings rates and a healthy stock of capital, both public and private, emerging market money is looking for investment opportunities at home and abroad. Although investment flows from emerging markets still only account for 10% of the global total (UNCTAD’s World Investment Report 2007), the potential for growth in this area is strong. 7 | Global Growth@Risk 2008

Global Growth@Risk 2008

COMMITTED TO IMPROVING THE STATE OF THE WORLD

The Financial Crisis and Access to Capital The financial market crisis that began in early 2007 has not only resulted in losses in markets and financial institutions, over US$ 500 billion have been written off by banks since January 2007. The crisis has triggered a major loss of trust and confidence both in the financial sector and among the institutions (see Figure 5). The extent of this credit crunch and the persistent lack of confidence in and among banks are unprecedented. The US Federal Deposit Insurance Corporation, has now 117 institutions on its “problem list”, representing combined assets of US$ 78 billion. Financial institutions became more cautious and cut credit lines and margins on other financial intermediaries; central banks responded quickly by providing easy access to short-term funds but with mixed success; and concerns still abound about further credit risks. Moreover, hedge funds and other highly leveraged institutions are facing severe complications as banks increase margin calls on their credit lines. Figure 5. Short-term Interbank Lending Spread Three-month LIBOR spread is nearly four times wider than at the start of 2007 6% USD 3-month LIBOR 5

26 basis points US 3-month T-bill

Interest rate

4

3 93 basis points 2

1

0 Jan-07

Apr-07

Jul-07

Source: British Bankers' Association; IMF

8 | Global Growth@Risk 2008

Oct-07

Jan-08

Apr-08

Innovation in capital markets appears to have been responsible for both the enormous growth of the past six years and the vast losses witnessed over the past 12 months. But, in reality, capital market innovation was perhaps less at fault than insufficient capital reserves, the lack of transparency on the number of intermediaries and the scale of interdependency of today’s markets. Key to restoring confidence is to build (or rebuild) trust in financial and monetary institutions. However, an inappropriate regulatory response would trigger further problems. The challenge for regulators is three-fold: to ensure that regulatory changes do not incur large compliance costs; that they do not reduce the competitiveness of the financial markets and territories they cover; and that they do not stifle innovation. If capital has become more expensive, it is because of uncertainty, and perceived and real risk, rather than a global lack of funds. The financial instability seen in developed economies can and will generate opportunities for emerging countries with capital surpluses. Tighter credit conditions in the West, combined with the lack of trust that the subprime crisis and its fallout have engendered in banks and institutions, might provide the appropriate scenario for capital-rich economies to develop their financial hubs, improve their governance systems and promote the rise of new financial institutions capable of competing globally. Capital accumulation during the past years (see Figure 6) and high savings rates will allow emerging countries to provide credit to enterprises, making the economies more resilient. Therefore, increasing financial activity in these economies would stimulate financial market growth and sophistication.

Figure 6. Foreign Reserves Chinese and Russian currency reserves each surpass those of the US and Europe combined

Foreign reserves, excluding gold (standard dollar reserves, billions)

$1,000

800

China

600

400 Russia US, UK and Eurozone 200 India Brazil

0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: IMF

However, just as capital may flow from emerging markets, large capital inflows seeking quick profits are also reaching emerging economies. Entering these economies through various channels, “hot money” and its potential impact on national economies has generated substantial debate. Capital inflows in emerging countries that contributed to the expansion in the last few years may now become more unstable if there is an increase in speculative inflows. Hot money tends to follow pro-cyclical patterns and the risk of a sudden halt to capital inflows and/or the risk of massive capital outflows in a short period of time poses risks to the financial system and to the real economy.

9 | Global Growth@Risk 2008

Global Growth@Risk 2008

COMMITTED TO IMPROVING THE STATE OF THE WORLD

Demands on Resources

Global energy demand has not been slowed by sustained high oil prices. Given that global energy consumption is set to double from 2005 to 2030 (International Energy Agency’s “World Energy Prospects and Challenges 2006”), the dilemma of how to balance growth with sustainability must be faced. As economies industrialize, develop infrastructure and increasing incomes lead to greater energy needs, energy supply will struggle to keep pace. The energy landscape will be very different 10 years from now. How this evolution will unfold in the fields of regulation, policy-making and technological change remains highly uncertain. What is sure is that the increased cost of all fossil fuels, not just oil, is driving another surge in R&D and investment into renewables. In the very short term, high prices at petrol stations have had an immediate effect on automobile use in the US and Europe.

10 | Global Growth@Risk 2008

Figure 7. Commodity Prices of Energy and Metals Prices for most major extracted commodities have risen more than three-fold in real terms since 2003 600

Real price index (100=January 2003)

Since the beginning of 2002, crude oil prices (in dollars) have increased six-fold, coal and scrap steel prices have increased five-fold and the price of chemicals has quadrupled. A critical force behind the price surge is the emerging market boom in demand: China’s demand for oil has more than doubled since 1995, Poland’s demand for these products increased more than 40% and India’s more than 35%. Gas consumption will also keep growing: the International Energy Outlook 2008 prepared by the Energy Information Administration (EIA, US Government) estimates worldwide gas consumption will increase 64% from 2005 to 2030, replacing oil wherever possible. The industrial sector and electricity generation are the largest consumers of natural gas and they are expected to account for more than 75% of total gas consumption by 2030. As gas combustion produces less carbon dioxide than petroleum or coal, governments may encourage its use to decrease greenhouse gas emissions.

500 Coal 400 Copper 300 Iron Ore 200

Oil* Aluminium

100

0 Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

* West Texas Intermediate crude oil

Source: IMF; US Bureau of Labor Statistics; PwC analysis

The current commodity boom is at the centre of the interaction of several factors occurring simultaneously in the global economy. Commodity market prices have reached record levels over past years (see Figure 7) and the origins of the increase in prices go beyond supply-side shocks: since 2002, emerging economies account for over 90% of the rise in global consumption of oil and metals; oil production since 2005 from OPEC (Organization of the Petroleum Exporting Countries) has remained broadly stagnant; and the costs of oil exploration are rising. This situation is aggravated by the current financial situation, weakening dollar, market speculation and low interest rate landscape and, in some cases, by low inventory levels.

The future – the slow shift to renewables According to current estimates, supplies of easily accessible oil and natural gas will probably no longer keep up with demand after 2015. To close this gap, the world will have no choice but to use energy more efficiently and increase its use of alternative sources of energy. This means more renewable energy, more nuclear energy and more oil and natural gas from difficult-to-reach locations. Despite the growing presence of nuclear power and large-scale hydro and wind plants, oil, gas and coal remain the principal energy sources for most countries and industries. High oil and gas prices will encourage more research and development of previously uneconomical alternative energy sources and renewable fuels. Investment in clean energy has climbed to almost US$ 140 billion in 2007 from US$ 33 billion in 2002. In 2005, 30% of global investment in power generation was in renewable energy. But oil-based fuels will remain the predominant choice for transportation of both goods and people for the next decade, even if alternative energy sources are becoming more prevalent. Oil and gas are also key raw materials for the petrochemical and agrichemical industries, two industries whose growth is also driven by rising demand from emerging markets.

technologies that are feasible in terms of cost and scale and second, a concentrated effort to improve both energy productivity and efficiency from existing sources. Innovative companies willing to improve energy efficiency and invest the necessary capital to undertake and implement projects of fuel efficient technologies clearly have a role to play in the coming years.

Several factors will drive corporations to move towards an energy-efficient production and supply chain. The reduction of energy costs must be a priority for many businesses today; aside from direct costs, other costs such as emissions reduction, regulatory compliance and pressures to improve their environmental footprint are all driving factors. A high energy price environment will force firms to rethink their processes, achieve savings and seek innovation in the way products are made and delivered; the outcome should be positive for both the companies themselves and their customers. Today, the existence of market-distorting subsides, booming energy prices and misaligned incentives undermine energy productivity. A holistic approach to energy costing and consumption – factoring in direct costs and associated costs, such as the carbon footprint of the business’ value chain – is fundamental to the development of energy strategy. With oil prices set to remain high for several years to come, a two-pronged approach to energy may emerge: first, an acceleration of investment and research and development of alternative energy

11 | Global Growth@Risk 2008

Global Growth@Risk 2008

COMMITTED TO IMPROVING THE STATE OF THE WORLD

The Next Drivers of Growth A demographic and economic shift By 2012, the world’s population is expected to grow by almost 7% to 6.8 billion, and by 2050 to 9 billion. Central America, North Africa and SouthEast Asia are the regions with the highest expected population growth for 2007-2012. By 2012, International Monetary Fund population growth projections show Asia and the Pacific region as the most populated with more then 4 billion people, over one-quarter of whom live in China. Between 2007 and 2012, 40 countries are projected to increase their GDP per capita by more than 50%. Unfortunately, as illustrated below (see Figure 8), population increase and GDP per capita growth are not always aligned. But, even when they are, as in the case of Asia, on average annual GDP per capita in these countries will still remain below US$ 10,000 (International Monetary Fund, World Economic Outlook Database, April 2008). Nonetheless, the past decade has illustrated how population growth can translate into economic growth if it is accompanied by investment in development, higher entrepreneurial activity and higher income per capita. If questions abound about decoupling, and the demand for energy and commodities is growing exponentially, it is because the global economy is feeling the first effects of an historic shift in economic and demographic power. Power is shifting to middle-income economies, with a growing middle class. This “global middle class”, as it is labelled in a recent McKinsey report, is defined as those earning between US$ 6,000 and US$ 30,000 per annum in purchasing power parity (PPP) terms. Such a global middle class will result in hundreds of millions of people changing dietary habits and seeking better housing and education, adopting more sophisticated technology and financial services.

12 | Global Growth@Risk 2008

Figure 8. Worldwide Population Growth Much of Europe set to decline in population

Population growth, 2000-2050 (CAGR) Greater than 2% Between 1 and 2% Between 0 and 1% Less than 0%

Source: UN Population Division, World Population Prospects (2006)

This shift will bring opportunities and risks. Population increase poses risks and challenges in terms of food and energy production, and consumption and environmental impact. Food and energy consumption will increase as a higher percentage of the population increases its income, which will require an expansion of the current capacity to produce them. Many of these middle class populations are clustered in large and rapidly expanding cities. They are part of the biggest shifts of population to urban areas since the industrial revolution. This, in itself, raises risks from the concentration of millions in areas lacking in the appropriate infrastructure, from roads and housing to sanitation and health. The biggest opportunity, and perhaps challenge, is for governments and companies to work together to create the necessary infrastructure and serve these markets with more sustainable products and models. If presented with the right products, these consumers could leapfrog Western consumers in choosing a more sustainable consumption path.

Natural resources – strategic sustainability Population growth and the spread of a Western consumption model mean ever greater pressure on resources. Resource-rich developing countries have already experienced high growth rates in recent years due to rising international commodity prices. These countries could partially finance their development using their natural wealth, although historical evidence has often indicated the reverse. The phenomenon of Dutch disease, over-reliance on one source of wealth, combined with macroeconomic volatility, political instability and weak governance are the challenges that some of these countries face. Improvement in their resource management is crucial to formulate growth-oriented policies and corporate strategies that would trigger further economic development. Although oil and minerals usually come to mind first when discussing natural resources, growing pressure on the environment, through climate change or the impact of dense urban populations, may force a rethinking of the value and definition of natural resources. As the global population grows, consumes and produces more waste, “natural capital”, energy, fertile land, air quality and, most importantly perhaps, water will be of strategic importance – both economically and geopolitically. Figure 9. Oil, Gas and Water Endowments Russia among the top-10 countries in all three resources

10 countries with the largest reserves of: Proven oil reserves (including oil sands) Proven gas reserves Annual renewable water resources

Sources: BP; Pacific Institute

influenced by shifts in supply and demand, and in exploring ways they can innovate when it comes to serving new markets or developing new goods and services.

Innovation and Technology What unites all of the above is the extent to which innovation is key to managing these trends and mitigating, even preventing, related risks. Policymakers will need to find innovative solutions to promote sustainable behaviour, improve the efficient use of resources and maximize gains from current resources to expand other areas of the economy. For business, the opportunity is to innovate to generate growth through new services and better processes. A number of elements are required to create the environment for innovation and the technological breakthroughs on which so many hopes are pinned. More work is necessary to scale up those breakthroughs and distribute their advantages while protecting the value of the patents and intellectual rights necessary to return on investment. Corporations and governments have to collaborate to close skills gaps, whether for engineers, designers or financial experts. Today both established and fast-growing companies complain of a talent shortage, either regionally or within certain professions and vocations. As populations grow, countries and companies have a relatively short window of opportunity to develop a strategy that creates a culture of innovation that ensures training and education are focused on future growth needs. While there may not be a direct correlation between innovation and technology, it is clear that the most innovative countries in the world invest in and know how to leverage technology for innovation (see Figure 10). The same can be said for companies. It is surely no coincidence that the US, Japan, Finland and South Korea consistently appear at the Figure 10. The World’s Most Innovative Countries

The demands being placed on resources needed to drive growth, such as fertile soil, clean air and biodiversity, are accelerating. The role of, and policies for, sectors linked to the deploying of resources, whether energy related, agricultural or technology driven, is key. A country’s natural resource endowment is an important aspect that will determine its independency to develop and finance its growth in the near future. For companies, the opportunity is both in understanding how their costs are likely to be

Most innovative potential Above average innovators Below average innovators Least innovative potential Source: World Business / INSEAD Global Innovation Index (2007)

13 | Global Growth@Risk 2008

top of rankings for innovation capacity, including that of the World Economic Forum’s Global Information Technology Report. They also top the rankings for patents granted and company spending on R&D. A culture of innovation clearly thrives in an environment where its value is recognized and its results protected. Intellectual property regimes are not perfect – the debate on how to improve them continues – but their traditional role of rewarding innovation is more important than ever. Weak intellectual property regimes, or those not adequately supported by the rule of law, will not drive innovation. Furthermore, if technology is really to drive solutions for energy alternatives, water usage and agricultural productivity, it will have to be made available to many countries, which currently do not offer sufficient, if any, IP protection. As has happened with crucial drugs for diseases in the health sector in the developing world, new models will need to be developed to enable the necessary technology transfer, while providing incentives to business and governments to make the necessary investments. Public and private sector collaboration to support technological progress and create incentives to encourage innovation is a key factor in building the foundations of sustainable growth models and providing solutions to global challenges.

14 | Global Growth@Risk 2008

Acknowledgements This report was prepared by Irene Casanova and Sheana Tambourgi of the Global Risk Team of the World Economic Forum. Global Risk Team, World Economic Forum Irene Casanova, Associate Director Viktoria Ivarsson, Project Manager Johanna Lanitis, Research Analyst Pearl Samandari, Team Coordinator Sheana Tambourgi, Director, Head of the Global Risk Network In consultation with the World Economic Forum’s Global Competitiveness Network: Irene Mia, Director and Senior Economist Eva Trujillo-Herrera, Research Assistant Thierry Geiger, Global Leadership Fellow, Senior Manager and Economist PricewaterhouseCoopers Catherine Jourdan, Director, US Advisory Sophie Lambin, Director, Global Thought Leadership Christopher Michaelson, Director, US Advisory Material for the report was gathered through interviews with leading experts and representatives from business and academia. In particular, we would like to thank the following individuals for their time and valuable contributions which shaped the content of this report: Tim Brown, President, Chief Executive Officer and Partner, Ideo Inc. Frances Cairncross, Rector, Exeter College Marcelo Claure, Chairman of the Board, Brightstar Corp. Bulent Goktuna, Chairman, Mineks International James Hogan, Chief Executive Officer, Etihad Airways Madhu Koneru, Executive Director, RAK Minerals & Metals Investments, TRIMEX Group Margery Kraus, President and Chief Executive Officer, Apco Worldwide Anil Kumar, President, Ransat Group Yoko Ishikura, Professor, Graduate School of International Corporate Strategy (ICS), Hitotsubashi University Moisés Naím, Editor-in-Chief, Foreign Policy Magazine Deepak Puri, Chairman and Managing Director, Moser Baer James H. Quigley, Global Chief Executive Officer, Deloitte Vivek Ranadivé, Chairman and Chief Executive Officer, TIBCO Software William Rhodes, Senior Vice-Chairman, Citigroup; Chairman, President and Chief Executive Officer, Citibank North America Anthony Scaramucci, Managing Partner, Skybridge Capital Martin Wolf, Associate Editor and Chief Economics Commentator, Financial Times

15 | Global Growth@Risk 2008

Bibliography “An Old Enemy Rears Its Head”. The Economist, http://economist.com, 2008 Anthony S., Battra D. “The Art of Acquiring Growth”. Forbes, http://www.forbes.com/2008/01/04/pfizer-geeksquad -ibm-leadclayton_in_sa_0103claytonchristensen_inl.html, 2008 Asian Development Bank. Asian Development Outlook 2007. Hong Kong, 2007 Becker W, Freeman V. “Going From Global Trends to Corporate Strategy”. The McKinsey Quarterly, http://www.mckinseyquarterly.com/Going_from_glo bal_trends_to_corporate_strategy_ 1830_abstract, 2008 “Building BRICs of Growth”. The Economist, http://economist.com, 2008 China Quarterly Update. June 2008. Washington DC: World Bank

Carneiro F. “Development Challenges of ResourceRich Countries: the Case of Oil Exporters” in Proceedings: VI International Colloquium, 2007, 115-140 Commission on Growth and Development. The Growth Report: Strategies for Sustained Growth and Inclusive Development. Washington DC, 2008 Dohmen T., Falk A., Huffman D. et al. “The Intergenerational Transmission of Risk and Trust Attitudes”. Vox, http://www.voxeu.eu/index.php?q=node/1367, 2008 Farrell D., Fölster C., Lund S. “Long-term Trends in the Global Capital Markets”. The McKinsey Quarterly, http://www.mckinseyquarterly.com/Longterm_trends_in_ the_global_capital_markets_2100_abstract, 2008 Farrell D., Nyquist S., Rogers M. “Curbing the Growth of Global Energy Demand” in The McKinsey Quarterly, 2007, 1:21-55

Christensen C, Raynor M. “Buying Resources, Process and Values”. Forbes, http://www.forbes.com/2008/05/05/microsoftyahoo-google-leadclayton_in_cc_0505claytonchristensen_inl.html, 2008

Farrell D., Nyquist S., Rogers M. “Making the Most of the World’s Energy Resources” in The McKinsey Quarterly, 2007, July Web exclusive: 1-12

Devan J., Klusas M., Ruefli T. “The Elusive Goal of Corporate Outperformance” in The McKinsey Quarterly, 2007, May Web exclusive: 1-3

Global Financial Stability Report. October 2007. Washington DC: IMF

Dutta S., Mia I. (eds.) The Global Information Technology Report 2007-2008. New York: Palgrave Macmillan, 2008 11th Annual Global CEO Survey: Compete and Collaborate: What is Success in a Connected World? PricewaterhouseCoopers www.pwc.com\ceosurvey 11th Annual Global CEO Survey: Public and Private Global Risks, Roundtable Discussion - Davos World Economic Forum 2008, Briefing Paper. PricewaterhouseCoopers www.pwc.com\ceosurvey

16 | Global Growth@Risk 2008

“Follow the Money”. The Economist, http://economist.com, 2008

Global Risk, Reward, Business and Society: Collaborate or Collapse? Briefing Paper 2007, PricewaterhouseCoopers Greenspan A. “We Will Never Have a Perfect Model of Risk”. Financial Times, http://www.ft.com/cms/s/0/edbdbcf6-f360-11dcb6bc-0000779fd2ac.html, 2008 Grenon G., Martha J., Parry P. “The Energy-Efficient Supply Chain”. Booz & Company, http://www.strategy-business.com/ resiliencereport/resilience/rr00049, 2007

Hexter J., Woetzel J. “Bringing Best Practice to China”. The McKinsey Quarterly, http://www.mckinseyquarterly.com/ Operations/Performance/Bringing_best_practice_to _China_2044_abstract, 2007 International Energy Outlook 2008. June 2008. Washington DC: EIA Lockhart D. “Emerging Economies and Global Capital Flows”. Federal Bank Reserve of Atlanta, http://www.frbatlanta.org/invoke.cfm?objectid=F4B 1402D-5056-9F121246415BAB5E655E&method=display, 2008 Lorenz P., Pinner D., Seitz T. “The Economics of Solar Power”. The McKinsey Quarterly, http://www.mckinseyquarterly.com/The_economics_ of_solar _power_2161_abstract, 2008 “Managing Cost and Growth in Uncertain Times”. Towers Perrin, http://www.towersperrin.com/tp/getwebcachedoc? webc=USA/2008/200806/HCO_whitepaper_final62 3.pdf, 2008 “March 2008 McKinsey Quarterly Survey on Global Trends”. The McKinsey Quarterly, http://www.mckinseyquarterly.com, 2008 McKinsey Global Institute. Mapping Global Capital Markets: Fourth Annual Report, January 2008. San Francisco, 2008

Scherer R. “Credit Squeeze’s Potential Ripple Effects”. The Christian Science Monitor, http://www.csmonitor.com/2008/ 0219/p01s01usec.html, 2008. Shell International BV. Shell Energy Scenarios to 2050. The Hague, 2008 Victor D., Eskreis-Winkler S. “In the Tank” in Foreign Affairs, 2008, Volume 87, No. 4: 72-83 Wolf M. “The Cost of Growth”. Business Spectator, http://www.businessspectator.com.au/bs.nsf/Article /The-cost-of-growth-FGRGM?OpenDocument, 2008 World Bank. Global Economic Prospects 2008: Technology Diffusion in the Developing World. Washington DC, 2008 World Economic Outlook: Housing and the Business Cycle. April 2008. Washington DC: IMF Wypłosz C. “Subprime ‘Crisis’: Observations on the Emerging Debate”. Vox, http://www.voxeu.org/index.php?q=node/471, 2007 Wypłosz C. “Subprime Crisis: Second-Best Solutions”. Vox, http://www.voxeu.org/index.php?q=node/564, 2007

Münchau W. “Recession Is Not the Worst Possible Outcome”. Financial Times, http://www.ft.com/cms/s/0/9c760d54-4bc0-11dda490-000077b07658.html, 2008 Naím M. “Los milagrosos efectos del petróleo caro”. El País, http://www.elpais.com/articulo/internacional/milagro sos/ efectos/petroleo/caro/elpepiint/20080629elpepiint_ 8/Tes, 2008. Roberts J. “The Evolution of Natural Gas Markets”. Institute for Energy, Law & Enterprise, University of Texas at Austin, http://www.beg.utexas.edu/energyecon/thinkcorner /Natural_Gas.pdf

17 | Global Growth@Risk 2008

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)