World Economic Forum Annual Meeting 2006

The Creative Imperative Davos, Switzerland 25-29 January

INSIGHTS

WORLD ECONOMIC FORUM

Annual Meeting 2006

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Contents

Preface

3

Foreword

4

The Emergence of China and India

7

The Changing Economic Landscape

10

New Mindsets and Changing Attitudes

14

Creating Future Jobs

16

Regional Identities and Struggles

18

Responding to Global Challenges

20

The Creative Imperative – Responses

23

Acknowledgements

25

World Economic Forum Annual Meeting 2006

1

Preface

The World Economic Forum Annual Meeting 2006 offered participants a great opportunity to better understand those issues influencing society and business over the year ahead – and beyond. Starting from the premise that the world community is at a turning point given the pace of change, the global nature of the challenges we face and the need for new responses, the theme “The Creative Imperative” provided this Annual Meeting with a solutions-driven impetus. Participants discussed how the assumptions, tools and frameworks that business, government and civil society leaders have employed to make decisions over the past decades now appear inadequate. Be it to address income disparities, climate change, job creation or to build design strategy in organizations, discussions centred on how leaders and their institutions can adopt more collaborative approaches to resolving issues – and the need to improve the capacity to adapt to a new emerging environment. Moreover, it was agreed that to successfully meet the challenges we face will require greater emphasis on human imagination, innovation and creativity. Once again, the Meeting drew leaders from business, government, international institutions, non-governmental organizations, universities and other communities. This year’s Meeting also saw valuable and innovative contributions from a strong contingent of Young Global Leaders. Together with our Members and Partners, we look forward to continuing to drive the Global Agenda forward in a creative and constructive fashion, taking up the findings from Davos in our regional meetings, through Forum initiatives and industry activities over the coming year.

Klaus Schwab Founder and Executive Chairman

The Forum would once again like to take this opportunity to thank the Annual Meeting Co-Chairs, each of whom provided invaluable support to the proceedings, bringing a distinguished background in business and public service to the discussions. They were: Mukesh D. Ambani, Chairman, Reliance Industries Limited, India Peter Brabeck-Letmathe, Chairman and Chief Executive Officer, Nestlé, Switzerland; Member of the Foundation Board of the World Economic Forum Sir Martin Sorrell, Group Chief Executive, WPP, United Kingdom Lawrence H. Summers, President, Harvard University, USA

World Economic Forum Annual Meeting 2006

3

Foreword – The Creative Imperative

“We need to remove obstacles. We have to open the windows; we have to breathe deeply the fresh air. And we have to seize the opportunities.” Angela Merkel, Federal Chancellor of Germany

The confluence of mood and world events, made discussions at this year’s Annual Meeting even more focused than usual. With over 240 sessions covering eight subthemes and involving leaders from business, government, international organizations and many other communities, participants sought to apply fresh thinking to pressing global challenges. The eight sub-themes of the Annual Meeting 2006 comprised five challenges and three responses. The challenges include the Emergence of China and India, the Challenging Economic Landscape, New Mindsets and Changing Attitudes, Creating Future Jobs, and Regional Identities and Struggles. The responses include Building Trust in Public and Private Institutions, Effective Leadership in Managing Global Risks and Creativity, Design Strategy. In this foreword, we highlight key messages emerging from participants on these eight sub-themes. Following this, we further delve into each theme concerning each of the five challenges and then separately consider the three responses.

The Emergence of China and India

The Changing Economic Landscape

“The story has moved

“Two things move the world, and

beyond GDP growth rates…

two things move economies: hope

the emergence of China and

and fear. In the short run in financial

India gives the world an

markets I fear that we have too

opportunity to experiment

much hope and too little fear.”

and make sure that there is

Lawrence H. Summers, President,

equitable wealth

Harvard University

generation.” Mukesh D. Ambani, Chairman and Managing Director, Reliance Industries Limited

These two very different, yet rapidly growing countries face enormous challenges as they restructure and integrate their economies into the global system. For China to continue to grow it must expand domestic demand, reduce its reliance on exports and foreign direct investment for growth and further reform financial systems so consumers can spend some of their savings and privately held businesses can finance their growth. Consequently, the government will need to find a balance between structural reforms, social equity and statist control. India continues to face poor infrastructure, deregulation and bureaucratic corruption. It may be the “fastest growing free market democracy” the world has ever known, but its leadership must respond rapidly to create jobs and reduce income disparities. 4

Given US influence on the global economy, its current account deficit of 5.7% of GDP in 2004 or US$ 666 billion, continues to concern policy-makers in Washington DC and abroad. China’s economy is still too small to counter a possible US slowdown, and Europe and Japan, while perhaps improving, are currently too slowgrowing to drive the global economy forward. Moreover, the major economies are struggling to keep fiscal promises as their pension and healthcare bills grow. Inequities in trade and increased competition for natural resources mean risk is rising – especially to the environment. While the world economy has proven resilient enough to absorb a sustained US$ 60 a barrel for oil, participants were quick to agree, if prices rise further and stay high, the effects will hurt.

World Economic Forum Annual Meeting 2006

Foreword – The Creative Imperative

New Mindsets and Changing Attitudes “I have been seeking to change … the mindset that international relations are nothing more than relations between states, and the United Nations is little more than a trade union for governments.” Kofi Annan, SecretaryGeneral, United Nations

The 21st century will be about managing the implications of a shrinking yet more fragmented and complex world. Individual states have less influence than in the past and are subject to the wider interests of regional or economic groupings. Institutional frameworks designed to respond to cold war threats are not appropriate to deal with global warming, international terrorism or poverty reduction. Leaders themselves will need to learn or re-learn skills if they are to drive organizations to innovate and adopt new ideas. For policymakers in the developed and developing world the challenge will be to create educational curricula that will provide today’s youth with the tools they will need tomorrow.

The challenge for many countries is not only what new jobs they create, but also how these jobs translate into livelihoods. And with the total global workforce having doubled over the last five years, pressure on wages is likely to continue. So where are the jobs of the future? With fiscal budgets already stretched, they are unlikely to come from the public sector. But policy-makers can play an important role in providing the environment for the private sector to create jobs. More generally, both developed and developing countries will need to re-examine education strategies to build the skills necessary for the future.

Regional Identities and Struggles “The challenge that has dominated the headlines is … a minority group of extremist Muslims who have taken upon themselves to distort Islam in order to justify violent action… And I think this has led the Muslim world to a very critical crossroads of self-evaluation and selfdefinition and to really look at what it is that we stand for. And this has led to a

Creating Future Jobs

reaffirmation of the basic principles of Islam.” H.M. Queen Rania of the Hashemite Kingdom of Jordan “Cities like Shanghai are saying, ‘We need 20,000 experts right now and if you can find them abroad, we’ll give them work permits’. They are doing the first – that I’ve seen worldwide – rigorous forecasting of skill requirements and … channelling people into the right vocational skill lines for future requirements.”

David Arkless, Executive Board Member, Manpower

World Economic Forum Annual Meeting 2006

Closing regional income gaps will require regional cooperation, coordination and compromise. Trade is key but targeted investment in infrastructure, education and easier access to capital are also important concerns. But, without geopolitical stability, regional cooperation efforts will be hampered. The Hamas election victory sparked reactions from many, though some saw this as a moment to trigger change. However, Iran, whose absence from the meeting served to accentuate the gravity of the current situation, drew most attention. Experts warned that, whatever the outcome, the consequences for the region and the international community will be significant.

5

Foreword – The Creative Imperative

And from Where Will Responses Come?

“Do we need to worry? Of course we need to worry ...

… Through Building Trust in Public and Private Institutions

We know that terrorists are highly sophisticated and are interested in acquiring

“The unfortunate thing is

nuclear weapons or nuclear

that companies haven’t

material ... What you have to

done a good job of building

do is simply to cross your

the [public’s] trust by

fingers and prioritize.”

managing themselves in a

Mohamed M. ElBaradei, Director-

positive way.”

General, International Atomic

Michael E. Porter, Bishop

Energy Agency

William Lawrence University Professor, Harvard Business School

Evidence shows public disenchantment and mistrust of institutions and business is growing. In the developing world, corruption and inefficiency threaten to overwhelm trust. In industrial countries, economic change spurs fears of a broken social contract. If not addressed through truly collaborative solutions, global leaders face a potential political backlash.

… Through Effective Leadership in Managing Global Risks “The basic ingredient of a leader, I personally feel, is that he should never panic… whatever the problems, whatever the circumstances…” Pervez Musharraf, President of Pakistan

In a globalized world, risks cannot be dealt with in isolation. Despite increased attention and some success in mitigating, if not preventing calamity, new risk frameworks are still in their infancy. Recent natural disasters in Asia or the US and public concern about pandemics, are further proof that today’s international institutions and frameworks are not designed to respond to the nature, or the frequency, of the risks that lie ahead. What is clear is that the way in which organizations mitigate, manage and respond to risk is a source of differentiation. 6

… Through Innovation, Creativity and Design Strategy “Today, if you don’t innovate, you’re just going to die.” Barry S. Sternlicht, Chairman and Chief Executive Officer, Starwood Capital Group

Finally, the frameworks and assumptions upon which leaders in business and government have long depended to make decisions are no longer adequate. The economic and political context in which businesses and government institutions seek to compete or otherwise serve their constituents has fundamentally altered; new models, new leaders and new mindsets are necessary. As the world reacts to a new emerging architecture and creativity increasingly drives the economy, tomorrow’s leading companies and institutions will be those who seize the courage and capability to adapt.

World Economic Forum Annual Meeting 2006

The Emergence of China and India

“China cannot achieve development in isolation of the rest of the world, and the world needs China for development.” Zeng Peiyan Vice-Premier of the People’s Republic of China

China and India are at inflection points in their development requiring them to sustain economic development, in particular to manage natural resource consumption and environmental degradation. • China is focusing more on stimulating domestic demand and reducing its reliance on exports and foreign direct investment to drive growth. • India must deal with structural problems such as poor infrastructure, deregulation and bureaucratic tangles that could hamper its ambitions to achieve growth at par with China. • Retail and manufacturing sectors are in need of attention. • Failure to address obstacles to sustainability, stability and global integration will not only set China and India back but will also aggravate global imbalances.

That China and India have emerged as drivers of global growth is nothing new. These economies each with one-billion-plus populations are set to grow by over 6% and 8% a year respectively for the near to medium term. China is already an integral part of the global supply chain; India has become a dominant player in outsourcing services.

World Economic Forum Annual Meeting 2006

Participants went beyond conventional wisdom to consider long-term problems for China and India that require innovative solutions, namely the quality and sustainability of growth models, creating jobs, maintaining stability, eradicating corruption and better integrating into the global system. These issues are closely connected. Better integration with the rest of the world will enable both to achieve more balanced, diversified growth and transform them into more efficient economies, more inclusive societies, and more responsible and responsive members of the international community. Adopting sustainable development policies to promote social equity, a cleaner environment and economic stability will naturally deepen their integration with the global economy. “China cannot achieve development in isolation of the rest of the world, and the world needs China for development,” said China’s Vice-Premier Zeng Peiyan. His statement could equally apply to India. Comparing China and India, however, pits apples against oranges. Yes, they have similarities, but there are even more crucial differences that are widely recognized – the makeup of their economies; depth of integration with global supply chains; share of global trade, notably exports (see Figure 1); and workforce skill levels, not to mention obvious and significant divergences in their political system, rule of law, infrastructure and level of development.

7

The Emergence of China and India

Figure 1: China and India Exports to the Rest of the World US$ TN

US$ TN

Source: Thomson Datastream

In China, domestic consumption must increase; China must lower its reliance on exports and foreign direct investment (FDI) to drive growth. Chinese officials including Vice-Premier Zeng emphasized that the new five-year plan to be approved in March should set a “moderate” growth target of 8% to allow for greater focus on social programmes and initiatives for sustainable development. India’s delegation delivered its own stark message: While India has arrived on the world stage, it has a raft of urgent problems to tackle, including poor infrastructure, widespread poverty and widening income disparities particularly between urban and rural areas, limited manufacturing capabilities and deficiencies in education. The self-styled “fastest growing free market democracy in the world” is proving that pluralism and growth are compatible. “Democracy is going to be a source of competitive advantage for us,” predicted Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies. Indian Minister of Commerce and Industry Kamal Nath added: “As the world’s perception of India changes, India’s perception of itself changes. The Indian electorate is realizing more and more that a more liberalized economy is what is driving growth.”

8

The complacent and fearless may cling to onedimensional high-growth stories. But it is time to take in the bigger picture. The tricky shifts that China and India are trying to pull off as they implement complex reforms will prove more painful than anything they have so far achieved. Turning an economy driven by exports and FDI into a consumption-led one cannot be easy for a society still nominally steeped in central planning. Moreover, China must create a system of rationally allocating finance (i.e. reform the banking system) so long constrained by political interference. As Morgan Stanley Chief Economist Stephen Roach said, “switching from an investment-led economy to a consumer-led one is more art than science. A consumer culture is the DNA of market-based capitalism and this is not in the experience set of China’s macroeconomic managers.” While China must balance bold structural reforms with statist controls to avoid destabilizing social tensions, India inches forward gingerly, its revolutionary reform ambitions tempered by a much admired, yet constraining devotion to democracy and social heritage. Bridging significant gaps of poverty, empowering women through education and addressing infrastructure deficiency are enormous tasks that lie ahead.

World Economic Forum Annual Meeting 2006

The Emergence of China and India

“As the world’s perception of India changes, India’s perception of itself changes. The Indian electorate is realizing more and more that a more liberalized economy is what is driving growth.” Kamal Nath Minister of Commerce and Industry of India

All this suggests that China and India could each hit a wall, forcing them to scramble to generate new models of growth. And in the case of China, we need no reminders that not a single country in the post-World War II period has undertaken banking reform the likes of which China is attempting absent a significant financial crisis. There are many plausible negative scenarios: rising protectionism stemming from disillusionment with multilateral trade negotiations, social tensions resulting from rising expectations and uneven development, disputes with rivals over natural resources, diplomatic friction over ties to potentially destabilizing regimes such as Iran, and falling FDI due to frustration with the shaky rule of law and thin profit margins in China or India’s infrastructure deficiencies and bureaucratic bottlenecks. Business must consider the implications of the transformations underway and adopt risk strategies accordingly. At the same time, Chinese companies are venturing overseas to acquire management expertise, technology and brand-building savvy to apply them at home. Boardrooms in Europe and the US are having to consider new potential emerging competition.

rights including intellectual property protection through available legal channels, adhering to transparent and ethical conduct, and requiring the same of partners and contractors. The leaderships of both countries are struggling to stay far enough ahead on the reform curve to prevent human resources and infrastructure constraints from damaging critical labour cost advantages. China and India’s developments are unparalleled transitions with profound consequences and opportunities for the world at large. Conditions change quickly; objectives once considered incongruent can swiftly turn into complements. Environmental protection and economic growth are a prime example. As US architect William McDonough, Chairman, William McDonough + Partners Architecture and Community Design / MBDC, who is designing cutting edge ecofriendly cities in China, concluded: “The Chinese have the ability to go to scale with velocity.” While India may move more slowly, its impact on the global economy is likely to be as great as China’s, particularly as life sciences and other services are outsourced to India. As many participants put it, as go China and India, so goes the world.

Chinese and, to a lesser extent, Indian firms are building resource supply networks and strategic business relationships in Africa, Latin America and other emerging markets. Global companies that source products from China and India are beginning to apply environmental best practices standards to suppliers. Companies are bolstering the rule of law by asserting their commercial

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The Changing Economic Landscape

• The global economy is beset with inefficiencies and imbalances that threaten to derail growth and halt efforts to bring prosperity to the world’s poorest corners. • Massive US deficits and yawning Asian surpluses, inequities in trade and the increasingly heated race for natural resources pose risks.

10

news for the penguins and, it turns out, for humans too: thanks to overfishing in the world’s oceans, mankind has moved right down to the bottom of the food chain to harvest krill alongside the seals.

• The brunt of these imbalances, however, is being borne by the environment, which looms above all else as a risk to the well-being of the planet.

The same inefficiencies and imbalances that economists say imperil trade and markets are hastening the depletion of natural resources and environmental destruction. These imbalances have so far not derailed global economic growth, but the slow destruction of our own habitat belies the conclusion that the situation is sustainable.

No one drills for oil or assembles iPods at the South Pole. But evidence that the global economy is dangerously out of kilter can be found swimming under the ice nearby. There in the frigid Antarctic seawater, tiny shrimp-like crustaceans – called krill – eke out an existence eating plankton and algae until they are eaten by seabirds, whales and other animals. Global warming is melting polar ice and reducing the krill’s habitat, causing by some estimates a 90% drop in krill populations in the past 20 years. Bad

The most fundamental imbalance has long been the disparity of wealth between developed nations and undeveloped nations. This disparity is being slowly reduced now in what some call the most dramatic shift of wealth ever witnessed. While erosion of Socialist orthodoxy catalysed the re-emergence of China and India, their impact stems largely from their massive ranks of young workers, which have helped double the global workforce since 1990. But discrimination against women in both nations has helped give

World Economic Forum Annual Meeting 2006

The Changing Economic Landscape

rise to vast gender disparities that are deepening emerging shortages of skilled labour. “In the developing world, there are 100 million women ‘missing’,” said Lawrence H. Summers, President, Harvard University, USA; Co-Chair of the Annual Meeting 2006. The developed economies, by contrast, face increasingly aged, unproductive populations. Persistently high demand for consumer products in the US and Europe has enabled developing economies such as China to use manufactured exports as an engine of growth. The emerging skilled labour shortages in China and India have largely dispelled fears that they would export deflation. Instead, a potentially precipitous paradox has emerged in which the developing nations of Asia finance consumption of their exports by the world’s richest nation.

Min Zhu, Executive Assistant President, Bank of China; Laura D. Tyson, Dean, London Business School; Peter Gumbel, Senior Writer, Business, Time Magazine; Michael J. Elliott, Editor, Time International; Stephen S. Roach, Chief Economist, Morgan Stanley; and Jacob A. Frenkel, Vice-Chairman, American International Group (AIG), during the session “Update 2006: Global Economy”

Asian purchases of US government bonds enable the US to run an ever-widening trade deficit, consuming more than is financially sound, without depreciation of the dollar or significantly higher inflation. US debt is rising close to 50% of GDP (See Figure 2), with US savings rates at their lowest since the Great Depression.

Figure 2: US Debt and Budget Balance

Source: Thomson Datastream

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The Changing Economic Landscape

This artificial support for US deficits fuels assetprice inflation, particularly housing prices. US housing prices and those around the globe have risen sharply, by 85% since 1997 (see Figure 3) leading some commentators to believe this is the largest bubble in history. Economists say rising home values are largely behind the illusion of wealth that inspires US consumers to spend more than they earn. Many predict that housing prices may stop rising soon, which could chill US consumer demand for Asian exports.

With the dollar artificially overvalued and global inflation kept low, the world is flush with cash. Interest rates paid by borrowers once considered relatively risky compared to governments are historically low, making it harder for investors to earn the kind of returns needed to finance the world’s growing pension liabilities.

Percentages

Figure 3: Global House Price Rises (1997-2005)

Source: The Economist

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World Economic Forum Annual Meeting 2006

The Changing Economic Landscape

“Consider the dynamic that 73% of tariffs paid by developing countries are paid to other developing countries.” Peter Mandelson Commissioner, Trade, European Commission

Growing trade imbalances also increase the risk that politicians will grasp for protectionist solutions and halt efforts to make trade fairer through the World Trade Organization. Tariffs designed to protect agriculture in Europe and the US hinder the ability of developing nations to export their way out of poverty. But not all such barriers are from developed countries. “Consider the dynamic that 73% of tariffs paid by developing countries are paid to other developing countries,” said Peter Mandelson, Commissioner, Trade, European Commission, Brussels. Aside from feeding extremism, such inequities in global trade distort the cost of resources. Tariffs and subsidies encourage the wasteful use of land, water and oil.

”It’s actually an economic necessity, if we’re going to have enough capacity on earth to give China and India and other countries the growth which they rightfully claim is theirs.” William J. Clinton Founder, William Jefferson Clinton Foundation; President of the United States (19932001)

Policy-makers need to take steps to redress these imbalances. In particular, prices for goods and services should reflect their real cost, not only in terms of labour and capital, but also their impact on natural resources and the environment. “It’s actually an economic necessity,” said William J. Clinton, Founder, William Jefferson Clinton Foundation; President of the United States (1993-2001). “If we’re going to have enough capacity on earth to give China and India and other countries the growth which they rightfully claim is theirs, and revive the American economy, and provide an opportunity for Europe to continue to grow and prosper, I think we have to deal with [preserving the environment].”

Oil, and our over-reliance on it as our principle source of energy, remains a problem. With China and India leading a new surge in demand, the global economy is susceptible to shocks such as those triggered by the terrorist attack on gas pipelines in Georgia, or Hurricane Katrina.

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New Mindsets and Changing Attitudes

“Adaptation of technology, along with economic growth and education, is one of the essential components of modernism.” Hamid Karzai President of Afghanistan

• With technology advancing rapidly and globalization a fact of life, “new mindsets” inevitably collide with old ways of thinking. Government, business and civil society all play a role in ensuring that these new mindsets bring the greatest good to the greatest number of people. • The most critical goals involve fortifying and expanding educational systems to spread the benefits of growth and to stem extremism, harnessing new technologies to solve old problems – particularly poverty, unaccountability of public and private sector officials, and health crises – and creating constructive synergy between governments, NGOs and businesses.

programmes to encourage tolerance and diversity and prevent growing extremism that can lead to terrorism. Besides, economies that aim for a fully functioning modern democracy will need to foster critical thinking, knowledge of the market economy, gender acceptance and racial diversity. More focused education programmes will make such attributes more likely, especially if combined with the intelligent use of technology. “Adaptation of technology, along with economic growth and education, is one of the essential components of modernism”, said Hamid Karzai, President of Afghanistan. But new technology also poses critical challenges for businesses and governments alike. Will these new technologies advance accountability, destroy privacy, or both? How will old brands weather the storm of new media? In the fields of marketing and news media, the Internet has been nothing short of a sea change. Consumers of news, an essential pillar of a

Expanding education to benefit the largest number of people remains a critical challenge. Participants voted a “global educational framework that fosters inclusivity” – a priority for several well-established reasons. For example, educated societies tend to be more productive, rich and happy. As Jiro Nemoto, Honorary Chairman, Nippon Yusen Kabushiki Kaisha, Japan put it, “Human development must be the foundation for economic development.” Educated societies also tend to be healthier; combating ignorance – in the form of testing and information on prevention – is an essential weapon in the fight against diseases such as HIV/AIDS. However, participants also recognized that in today’s society, education is important to tackle some of the world’s more pressing issues, like extremism. For example, many understand that generally exchanging knowledge prevents ignorance and alienation. Nations with significant immigrant populations or large ethnic, religious or linguistic sub-communities need proactive education 14

World Economic Forum Annual Meeting 2006

New Mindsets and Changing Attitudes

functioning democracy, increasingly rely on blogs or online versions of print newspapers. Many in the media expressed concern that such trends would mean the erosion of responsible journalism, but publishers such as Arthur Sulzberger Jr, Chairman and Publisher, The New York Times, USA, expressed guarded optimism “that the need and desire for quality, trustworthy journalism would keep the old media brands afloat.” But change is undeniable. “The consumer has been empowered,” said Frederick Kempe, Assistant Managing Editor and Columnist, Wall Street Journal, USA, “the Internet is a democratizing force.” Privacy issues such as ID theft and government intrusion loom large, and striking the right balance between regulation and freedom will be a critical challenge in the next decade. But with new problems also comes new opportunities. Technology, like education, is vital to the war on terror, as it can facilitate the collection and sharing of information among nations and international security organizations.

Breaking down the barriers between governments, NGOs and businesses holds the potential to foster cooperation and growth within and between nations. “My objective has been to persuade both the member states and my colleagues in the Secretariat that the United Nations needs to engage not only with governments, but with people,” said Kofi Annan, Secretary-General, United Nations, New York. How private-public engagements occur remains an essential question. Generally, business is better than government at changing the behaviour of individuals. “Where there is opportunity for more profit,” said Bill Owens, Governor of Colorado, USA, “companies are increasingly moving towards what is good for the public.” The role of government in balancing business interests with those of the nation is a tendentious issue as was demonstrated by the CNOOC Limited bid to acquire Unocal Corporation, and the American political climate which sunk the deal.

Christopher Murray, Director, Global Health Initiative, Harvard University; Jens Stoltenberg, Prime Minister of Norway; William H. Gates III, Chairman and Chief Software Architect, Microsoft Corporation; Gordon Brown, Chancellor of the Exchequer of the United Kingdom; Olusegun Obasanjo, President of Nigeria; Fareed Zakaria, Editor, Newsweek International; Giulio Tremonti, Vice-President of the Council of Ministers and Minister of Economy and Finance of Italy, during the session “Not Gone, but Almost Forgotten”

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Creating Future Jobs

“In my 30 years experience I have never seen such an incredible shortage of talented people – whether it is in Germany, Brazil, China, India or Kansas.” Samuel A. DiPiazza Jr Global Chief Executive Officer, PricewaterhouseCoopers

• Hundreds of millions of new jobs will be needed over the next 20 years to avoid massive increases in global unemployment. • This requires new attitudes towards supporting innovation, entrepreneurship, risk taking and encouraging creativity. • The ability to start a business will need to be made much simpler, quicker and cheaper in many countries and the benefits of entrepreneurship widely publicized and taught formally. • Numerous educational systems will need to be restructured if they are to meet future skill requirements and must include broad-based skills so that future workers find it far easier to switch between different occupations.

A time bomb relating to work is ticking. Registered world unemployment reached 187.7 million in 2004, according to the International Labour Organization. Over 80 million new jobs will be needed by 2020 to keep the Arab world alone at its current level of 16% unemployment. The entry of so many workers into the global market economy will have a dramatic effect on the worldwide ratio of labour to capital with a consequent downward pressure on wages. This situation can be expected to last for at least 25 years and will require fresh, collaborative ideas to provide solutions.

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“The focus is on training people to be adaptable, flexible and able to change quickly with the times, because it is impossible to predict what we will need in the future.” Nandan M. Nilekani President, Chief Executive Officer and Managing Director, Infosys Technologies

Business in the developed and developing world could not face more divergent labour markets. “In developed countries, the question is not where the jobs will come from but where will the workers come from,” said Donald J. Johnston, Secretary-General, Organisation for Economic Co-operation and Development (OECD), Paris. Min Zhu, Executive Assistant President, Bank of China, People’s Republic of China, has no such problem: “We have to understand that labour is a resource not a burden. So it is labour-intensive manufacturing which makes China a powerhouse in the world with a 10% growth rate.” In developed countries with ageing populations there will clearly be a boom in healthcare employment. Companies which understand the added consequences, such as a sharp boost in the number of people who are time rich and cash poor, will be able to create further jobs. “The implications of people getting older means a complete shift in consumerism as people will buy differently,” insisted Sir Digby Jones, Director-General, Confederation of British Industry (CBI), United Kingdom. “Where they go, the need to heat their homes more, and they will want to pay lower prices.” Businesses in the Middle East, however, will only be able to start creating the work needed by tens of millions of Arab youths if, at the very least, there is a far greater regional openness in the trade of goods, services and labour. Ahmed Mahmoud Nazif, Prime Minister of Egypt, for

World Economic Forum Annual Meeting 2006

Creating Future Jobs example, needs to create 750,000 jobs a year to keep unemployment at the same levels. “Part of the answer is related to growth, particularly in tourism which is important to Egypt and creates more jobs than industry.” For much of commerce, the way to create new jobs is globalization, although this is being restricted by skill shortages at the white collar level. “In my 30 years experience I have never seen such an incredible shortage of talented people – whether it is in Germany, Brazil, China, India or Kansas,” said Samuel A. DiPiazza Jr, Global Chief Executive Officer, PricewaterhouseCoopers, USA. “There is this war for talent and we are not just talking about the top 5%. It is an issue even in countries with good population growth and education.” These skill shortages need to be tackled with increased efforts by business to release underutilized assets into the labour market through improved childcare services, wage equality and greater education opportunities. ”We do not have enough urgency about innovation,” declared Ben J. Verwaayen, Chief Executive Officer, BT, United Kingdom, “not in the R&D sense, but in terms of job creation, getting women involved, getting minorities involved.” The success of such initiatives can provide further new opportunities for employment as unpaid work becomes paid work. “In Scandinavia so many of the workforce are now in employment that a lot of housework has effectively become paid work as others are paid to do it,” said Neil Kearney, General Secretary, International Textile, Garment and Leather Workers’ Federation, Brussels. Creating new jobs that are needed on the massive scale means that most will have to come from the private sector and will require a fundamental change in attitude to business and public sector support for innovation, entrepreneurship and risk taking. Indices of competitiveness, which look at the cost and difficulties of starting a business in various countries, should be expanded and used to praise the best and “name and shame” the worst nations while examining in depth each

World Economic Forum Annual Meeting 2006

country’s regulations, the availability of funding, employment, taxation, and the time and cost of starting a new business. Crucially policy-makers should also emphasize the importance of changing mindsets in those countries where entrepreneurial failure is considered unacceptable and which effectively disqualify risk takers from making further attempts. Educational systems in many countries need overhauling to overcome a fundamental mismatch between the skills taught and the future skills needed. This disparity is increased in developed countries by students’ perceptions of what constitute worthwhile occupations. “We have to persuade children that, in the future, getting a vocational degree will be as important as getting a university qualification,” insisted David Arkless, Executive Board Member, Manpower, USA. “We need electricians, plumbers, infrastructure workers and higher-level production workers. We have to make these sorts of jobs, which make cities work, look valuable and feel valuable.” At the same time, educational systems will need to become more broad-based so that people find it easier to switch between jobs. “Trying to plan for specific shortages in the long term is not that useful,” declared Jagdish Bhagwati, Professor, Columbia University, USA. “Uncertainty comes in no matter how hard you try. You can only make broad statements like skill shortages will happen.” This is also the view of Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India, who finds that college recruits do not have the right skills. “We have our own finishing school to get them ready for our business. The focus is on training people to be adaptable, flexible and able to change quickly with the times, because it is impossible to predict what we will need in the future.” Equally important is that educational systems recognize that 85% of job skills are not specific to a particular task but include work habits, project management, teamwork, communication, time management and punctuality.

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Regional Identities and Struggles

“Right now, no one knows if Iran is trying to cross the weapons threshold.” Kenneth M. Pollack Director of Research, Saban Center for Middle East Policy, The Brookings Institution

• Empowering poorer countries to close the income gap with the rich, thus boosting their potential as consumer markets, is in the longterm interests of industrialized nations. Regional cooperation agreements, targeted infrastructure investment, easier access to capital and removing farm subsidies in the richer nations can help achieve this end. • Iran’s nuclear ambitions are the biggest immediate concern for the international community in the Middle East region, overshadowing Iraq and the Israel-Palestine conflict despite the election victory of Hamas. While there is no consensus on whether Tehran really wants nuclear weaponry, highpressure diplomacy is the only effective way to handle the issue. A military attack would be dangerously counterproductive for the West.

Despite the fact that hundreds of millions have been lifted out of abject poverty over the past decades, income disparities between world regions and within nations are growing. “Global imbalances are deepening, and that has serious consequences for developing countries like India,” warns Palaniappan Chidambaram, Minister of Finance of India. Yet, it is in the longer term interests of the richer powers, and their business communities, to narrow the divide and help create populations of consumers within the poorer countries rather than see armies of the desperate surging across borders in the hope of finding a better life. “The integration of the fourfifths of the world that is poor with the one-fifth that is wealthy has the potential to be one of the two or three most important economic developments of the past millennium, along with the Renaissance and the Industrial Revolution,” 18

“Regionalism is the right way forward for the mutually-beneficial advance of the states involved, as the EU and ASEAN have showed.” Pervez Musharraf President of Pakistan

argued Lawrence H. Summers, President, Harvard University, USA; Co-Chair of the Annual Meeting 2006. Formal regional agreements on trade, like NAFTA, and political-commercial pacts underpinning groupings like the EU and ASEAN, have raised living standards in their member states. However, non-formal cooperation between countries through free movement of capital and goods are achieving similar ends. “Regionalism is the right way forward for the mutually-beneficial advance of the states involved, as the EU and ASEAN have showed,” said President Pervez Musharraf of Pakistan. Helping Africa, and other poorer regions, to help themselves by developing infrastructure can be inspiring. “Making money and doing real cool stuff at the same time is a magical formula. Business needs to talk less and do more,” commented Hugh Grant, Chairman, President and Chief Executive Officer, Monsanto Company, USA. “There are a billion people who cannot be business consumers unless they are helped to climb out of poverty,” argued Antony Burgmans, Chairman, Unilever, Netherlands. But as Chidambaram warned, “Developed countries must show much more concern for the capital requirements of developing countries.” Certainly, business can more actively press major governments to remove trade barriers with poorer countries, and especially to remove farm subsidies. Africa “can only grow when it is allowed to trade freely and openly and fairly. That means these trade-distorting subsidies must be removed by 2010,” said Niall Fitzgerald, Chairman, Reuters, United Kingdom; Member of the Foundation Board of the World Economic Forum. World Economic Forum Annual Meeting 2006

Regional Identities and Struggles

Jack Straw, Secretary of State for Foreign and Commonwealth Affairs of the United Kingdom; Barham Salih, Minister of Planning and Development Cooperation of Iraq; Ahmed Chalabi, Deputy Prime Minister of Iraq; Robert B. Zoellick, US Deputy Secretary of State; Hajim Alhasani, President of the Iraq National Assembly; John McCain, Senator from Arizona (Republican), USA; Sheikh Hamam Hammoudi, President, Constitutional Drafting Council, Iraq; and Amre Moussa, Secretary-General, League of Arab States, during the session “What Is at Stake in Iraq?”

But the greatest will in the world to remove trade barriers will fail if the global geopolitical environment remains volatile. The West’s nuclear stand-off with Iran bears the seeds of a grave crisis affecting much of the world. If Tehran halts oil exports, or they are halted by Western military action, prices will likely soar well beyond their current highs and the repercussion on key Western economies, and global markets, will be dramatic. The real aims of Iran’s nuclear programme are unclear. One view is that serious economic problems and a rapidly growing population are pushing it towards diversifying its energy resources. Others think differently. “Right now, no one knows if Iran is trying to cross the weapons threshold,” said Kenneth M. Pollack, Director of Research, Saban Center for Middle East Policy, The Brookings Institution, USA. “But it is prudent to believe that they are developing a nuclear weapons capacity,” said Jack Straw, Secretary of State for Foreign and Commonwealth Affairs of the United Kingdom. “There is no threat (to Iran) from anyone in that region,” argued Saxby Chambliss, Senator from Georgia (Republican), USA. Motivation for any weapon development could therefore only be offensive.

World Economic Forum Annual Meeting 2006

There is consensus that the response should be “carrot-and-stick” diplomacy. However, the West may have to make more generous offers – including economic cooperation that involves investment and trade – to persuade Tehran to play ball. Richard N. Haass, President, Council on Foreign Relations, USA, said: “I don’t see that there is enough on the (negotiating) table at the moment.” Certainly, there is little enthusiasm for an attack on Iran’s nuclear centres. A common view is that this would spark a huge geopolitical crisis in the region and far beyond, and only delay Iranian arms development while pushing the population to more radical political positions. The electoral victory by Hamas, seen as linked to Iran and viewed officially as a terrorist organization by many Western governments, adds a further complicating factor. Should the reaction of the West be to isolate or engage? “We all have a difficult time managing risk. We live in a polarized world in which the risks have increased colossally,” said 2005 Nobel Peace Prize winner Mohamed M. ElBaradei, DirectorGeneral, International Atomic Energy Agency, Vienna. “If you fix the Middle East, North Korea and South Asia, you would fix 90% of our problems.”

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Responding to Global Challenges

Responding to the five challenges that were the focus of the Annual Meeting 2006 will require global policy-makers and stakeholders to develop solutions in three broad, interrelated areas:

Rebuilding trust in public and private institutions: In virtually every region and country, opinion surveys reveal declining public confidence in governments, corporations and multinational organizations.

Effective leadership in managing global risks: New mechanisms need to identify and – where possible – mitigate threats such as terrorism, environmental degradation, natural disaster and economic instability.

Innovation, creativity and design strategy: The obsolescence of many 20th century structures compels leaders to develop fresh concepts, new institutional models and more flexible processes for serving diverse populations. While all three responses are crucial, the last one may hold the key to the first two. Numerous sessions and workshops highlighted the need to reward innovation, encourage unconventional thinking and promote cultural cross-fertilization in every region and at every level of society. Change – both sweeping and fundamental – appears to be the one constant as the world moves deeper into the 21st century. Political, corporate and social leaders no longer have the option (if they ever did) of relying on inertia and habit to carry them through the currents of global integration. They must respond – often in real time – to powerful forces that cut not just across national borders, but across cultures, markets and technologies.

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The Three Responses Describing the specific policies required to manage these forces of change is a task of almost hopeless complexity. However, the agenda for this year’s Annual Meeting reflected an assumption that global leaders must articulate and implement policy responses in three broad areas: • Rebuilding trust in public and private institutions: There is growing awareness among elites and publics alike that the institutions of the post-World War II order – national governments, multinational corporations, international organizations – no longer function well. In the developing world, corruption and inefficiency threaten to overwhelm trust (and institutions) altogether. In the industrial countries, economic change spurs fears of a broken social contract. Unless these trends are reversed, global leaders face the prospect of a political backlash that could wreck decades of prosperity, integration and global accommodation. • Effective leadership in managing global risks: Theory holds that as markets become more flexible and barriers reduce, economic systems gain stability. However, unwise policies or incomplete adjustments can produce unexpected volatility. Likewise, modern infrastructures offer unparalleled speed and convenience – but may be vulnerable to terrorism or natural disaster. Leaders must improve early warning systems, and develop better tools for defining, controlling and – not least – allocating risk. • Innovation, creativity and design strategy: In a “flat” world – one approximating the textbook definition of market efficiency – constant innovation is the only guarantee of competitive advantage. This applies as much to institutional cultures and structures as to new technologies and products. But the sources of innovation are not well understood and financial markets are often unprepared to reward long-term innovation strategies as opposed to short-term gain. This position requires leaders to experiment boldly with incentives and work life arrangements.

World Economic Forum Annual Meeting 2006

Responding to Global Challenges

“But the process [of global integration] doesn’t have to be smooth. Along with integration we face the risk of disintegration – failed states, struggling middle classes caught in binds everywhere. These forces are of equal importance.” Lawrence H. Summers President, Harvard University

These key themes become vital when considering the growing importance of the world’s great cities as incubators for innovation, or creating new markets for pricing and trading insurance risks – including personal economic risks such as unemployment or loss of income. This gives rise to growing awareness that globalization has reached a crossroads, one that could determine whether the integration process continues, or gives way to a new era of regional fragmentation and conflict.

To avoid being trapped in a zero sum game, companies and societies alike will need to use their increased productivity to create new products, anticipate new needs, new markets, new technologies and – most of all – new jobs to replace those that have been lost. Populations that until now have been excluded from the progress of globalization – or made more vulnerable by it – will need to be brought into the mainstream, in ways that respect their human dignity and worth. “We won’t have a creative and flourishing world without bringing everyone into the global economy,” contended Jacqueline Novogratz, Founder and Chief Executive Officer, Acumen Fund, USA. However, such ambitions can only be realized if existing leadership institutions – the massive public and private bureaucracies inherited from the hierarchical 20th century – can be renovated. Here, too, though, progress is being made, albeit often too slowly (see Figure 4). Daniel Vasella, Chairman and Chief Executive Officer, Novartis, Switzerland, noted the growing consensus in the corporate world on the need for greater transparency and accountability. Now business leaders need to take that message to their employees, shareholders and customers. “We need to make an effort to communicate what we do and how we do it,” he said.

“But the process [of global integration] doesn’t have to be smooth. Along with integration we face the risk of disintegration – failed states, struggling middle classes caught in binds everywhere. These forces are of equal importance,” noted Lawrence H. Summers, President, Harvard University, USA; Co-Chair of the Annual Meeting 2006.

Figure 4: Trust in Institutions Trust

The Next Wave Until now, globalization has been about economic efficiency – expanding trade, slashing labour costs and maximizing comparative advantage through the creation of global production chains. These strategies, however, have reached the point of diminishing returns and “knowledge” is rapidly becoming a commodity. Cost efficiencies are now easily replicable, meaning they provide no lasting advantage. They have become a necessary, but not sufficient, condition for success.

World Economic Forum Annual Meeting 2006

Distrust

Average of 14 Tracking countries - based on a global public opinion poll involving a total of 20,791 interviews conducted between June and August 2005

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Responding to Global Challenges

A World of Opportunities It would be a mistake, however, to view the next phase simply in terms of risks and looming crises. Tremendous opportunities are also on the horizon – not least for the global business community. For example, the demand for environmentally-sensitive, energy-efficient products and services: While some anxiously watch the rise of China and foresee a resource catastrophe, architects, engineers and urban planners are already at work designing the Chinese cities of tomorrow, featuring rooftop farms, sewage treatment plants that produce more energy than they consume and the construction of solar power collectors on a massive scale. “We believe it is possible to create a virtuous cycle in both our ecological and our social systems,” said William McDonough, Chairman, William McDonough + Partners Architecture and Community Design / MBDC, USA.

also to inhabitants of the informal shanty towns that surround it. “We wanted the poor to see that we were building the nicest public buildings in the poorest neighbourhoods,” he explained. “The message we are trying to send is that there is hope.” Can the creative imperative win the race with the spectres of political disintegration, economic dislocation and ecological collapse? Thinkers have been arguing the question at least since Thomas Malthus and David Ricardo debated the future of the industrial revolution. There is no guarantee that mankind’s ingenuity will continue to trump its knack for self-destructive behaviour. But given the innovative thinking on display at this year’s Annual Meeting, it still looks like the smart bet.

Likewise, the problems of poverty and marginalization, while formidable, are not deterring local leaders from inventing – or emulating – solutions. Sergio Fajardo Valderrama, Mayor of Medellin, Columbia, explained how his city is delivering educational and cultural services to the poor, following trailblazing urban planning efforts in the Brazilian city of Curitiba. Medellin, he noted, recently built five large cultural complexes on the outskirts of the city, each combining a public library, an outdoor movie theatre and a public park. These centres are accessible not only to city residents, but

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World Economic Forum Annual Meeting 2006

The Creative Imperative – Responses

“... it's important for you, as business leaders, to say where do you think the responsibility lies? Perhaps the responsibility for education and training lies with the government. What about the responsibility for pensions and healthcare? What about the responsibility of paying a living wage?”

“The Forum is here to help us to find out what the main issues are and then it is up to us to act individually.” Peter Brabeck-Letmathe Chairman and Chief Executive Officer, Nestlé

Laura D. Tyson Dean, London Business School

This year at the Annual Meeting 2006, participants prioritized 11 questions during the Big Debate. They continued to gather knowledge, opinions and data during 240 sessions, including the CEO series, and culminated in a targeted workshop to consider the priorities for the coming year. This vast array

World Economic Forum Annual Meeting 2006

of knowledge sharing through discussion helped launch new initiatives and expanded current ones to continue addressing some of the world’s most pressing issues and further will help shape the agenda for the Forum’s regional and industry events during 2006.

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The Creative Imperative – Responses

The World Economic Forum Annual Meeting 2006 closed with participants supporting the project expansions in health, education, hunger and public-private partnerships as well as recommending broad action areas that private and public institutions should undertake. 1. Health Initiative launches global Stop TB campaign The Forum’s Global Health Initiative helps companies design workplace health programmes for prevention and treatment of HIV/AIDS, TB and malaria. Having reached over 10 million employees with such programmes, the initiative continues to expand efforts to assist companies extend programmes throughout their supply chains, targeting rapidly growing economies like China and India. During the Annual Meeting, the global Stop TB campaign was launched with US$ 1.2 billion committed by core partners. 2. Global Education Initiative expands to Palestinian Territories and Egypt The Global Education Initiative launches collaborative public-private partnerships to improve education systems. In Jordan, with the direct support of the King and Queen, it has engaged over 45 public and private partners to transform curricula, teaching and IT infrastructure for 50,000 schoolchildren. The programme is now underway in Rajasthan, focusing on 100 girls’ schools, and during the Annual Meeting work was initiated in the Palestinian Authority and Egypt.

Recommendations from the Annual Meeting: • Prepare for future jobs: Realign the global education system to meet future demand for skill sets, particularly in vocational occupations • Restore balance in the global economy: Develop policies for greater savings in the US and consumption-led growth in China • Sustain growth in China and India: Build support for business education and entrepreneurship • Protect the environment through better resource management: Expand water management initiatives to address urban and agricultural use, especially in developing markets • Mitigate the impact of an increasingly fluid labour market: Improve social security when changing jobs • Manage disruption: Develop models to design, build and implement more quickly

3. Disaster relief platform formed Following the major natural disasters of 2005, the Forum was asked to serve as a major platform for engaging private sector support for relief efforts, building on and expanding its Disaster Resource Network through planning that took place at the Annual Meeting. 4. New Hunger Initiative launched Under the leadership of the Forum’s food and beverage company members, business and public leaders developed a business-led action plan to help reduce hunger in Africa and discussed it with UN Secretary-General Kofi Annan. The group has recommended that the Forum serve as a platform for putting this plan into action during 2006.

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World Economic Forum Annual Meeting 2006

Acknowledgements The World Economic Forum would like to thank its Partners for their valuable support of the World Economic Forum Annual Meeting 2006

Strategic Partners ABB Accel Partners Accenture AMD Apax Partners Audi Avaya Bain & Company Barclays Bombardier Booz Allen Hamilton BT CA Cisco Systems Citigroup The Coca-Cola Company Credit Suisse Deloitte Deutsche Bank Deutsche Post World Net Deutsche Telekom Dubai Holding Economic Development Board of Bahrain Ernst & Young Fluor Corporation Goldman Sachs Google HP Infosys Technologies Intel Investcorp JPMorgan Chase & Co. KPMG Kudelski Group Lehman Brothers McKinsey & Company Manpower Marsh & McLennan Companies Merck & Co. Merrill Lynch

World Economic Forum Annual Meeting 2006

Microsoft Corporation Nakheel NASDAQ Nestlé New York Stock Exchange Nike PepsiCo Pfizer PricewaterhouseCoopers Qatar Airways Reliance Industries Saudi Basic Industries Corporation (SABIC) Siemens Swiss Re Volkswagen WPP Zurich Financial Services

Annual Meeting Partners ABN AMRO Bank Akamai American International Group (AIG) Bank for Foreign Trade Vneshtorgbank Barco BP Burda Media DuPont Invest in France Agency LUKOIL Oil Company MasterCard International Metro Mittal Steel Company Moore Capital Management Morgan Stanley Nomura Holdings Reuters SICPA Swiss International Air Lines Unilever

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Contributors Ged Davis is Managing Director, Annual Meeting Programme. Jonathan Schmidt is Director, Global Agenda. Stephanie Janet is Associate Director, Annual Meeting Programme. Sheana Tambourgi is Associate Director, Global Agenda. Vidhi Tambiah is Associate Director, Business Insight, at the World Economic Forum. He worked with Wayne Arnold, Robert Evans, Matthew May, William Montague, Alejandro Reyes and Benjamin Skinner to produce this report. The World Economic Forum would like to express its appreciation to the summary writers for their work at the Annual Meeting 2006. Session summaries are available at: www.weforum.org/annualmeeting/summaries2006

Alicia Bramlett, Action Communities Workshop design Associate Director, Editing: Nancy Tranchet Design and Layout: Kamal Kimaoui, Associate Director, Production and Design

Photographs: swiss-image.ch Richard Kalvar / Magnum

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World Economic Forum Annual Meeting 2006

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)