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Business community to prepare for ‘multipolar’ world economy, says McKinsey

Business community to prepare for ‘multipolar’ world economy, says McKinsey

25 Apr 2023

IN a post-pandemic world, perhaps the question that springs to mind in the business community is whether the current geopolitical and economic upheaval will usher in a new era of progress.

Corporate leaders are expected to address a plethora of risks while looking for opportunities in a digitally disrupted economy and amid geopolitical uncertainties. Striking a balance in all these areas, however, may not be as easy as it seems, says Sven Smit, senior partner and chairman of McKinsey Global Institute, the business and economics research arm of the global consulting firm.

He notes that there is a fundamental difference between the global crises of today and those that happened in the past three decades.

“In the last 30 years, the market was dominated by the force of the dotcom boom, the Asian financial crisis and the Covid-19 pandemic. These problems disrupted the demand cycle, where we just stopped spending. However, we managed to see a return in our optimism and grew again. The world typically loses one or two quarters,” Smit tells The Edge in an interview.

“But the next challenge looks different … It has created a supply shortage. We have a very different dynamic now.”

Today, the world sees a combination of supply shortage and geopolitical tensions that has resulted in inflation and the spectre of inflationary recession, he says.

“CEOs didn’t need to have this in mind 20 years ago. You order and somebody will ship at a reasonable price. But now you need to think about where your supply chain is from. Today, we face a supply-side crisis, inherently physical rather than psychological, against a backdrop of a shifting geopolitical landscape in which the crisis needs to be resolved,” says Smit.

It is against this backdrop that McKinsey published its discussion paper titled “On the cusp of a new era?” that extensively discusses the future of global trends, particularly geopolitical orders.

In the paper, McKinsey says the once-familiar unipolar and settled world order is fast becoming multipolar in recent times, particularly among economic superpower countries such as the US, China, India, the UK, Europe, Russia and Ukraine.

“In February 2022, China’s rise as an economic power reached a crossroads as its gross domestic product (GDP) overtook that of the European Union; at the end of March 2022, India [overtook] the UK to become the world’s fifth-largest economy by GDP.

“At the same time, peace in Europe — along with the global economy — was rocked by Russia’s invasion of Ukraine. Western-led condemnation was swift, but China, India and 33 other states abstained from a UN resolution to condemn Russia,” the report states.

Smit says besides economic competition, years of political differences may give way to more political polarisation, both internally and between blocs, affecting cross-border businesses.

“Internationally, a persistent gap separates liberal democracies and some more autocratic regimes. All this occurred against a backdrop of increasing strain between people and institutions, particularly in the West.

“Citizens’ protests are on the rise. Liberal democracy faces not only increasing internal tensions but also opposition from rising powers with alternative ideologies,” the report states, adding that an increasingly multipolar global economy is likely to change the way the world conducts international business.

McKinsey notes that at one end of the spectrum, there could be a gradual transition to a multipolar order, where blocs develop autonomous control over limited, strategically important resources and capabilities — such as energy systems and semiconductor manufacturing — while global collaboration continues more generally.

At the other end, there could be a more abrupt transition with much more limited collaboration between blocs across all dimensions, combined with heightened geopolitical tensions.

Smit says, however, that global institutions could play a powerful and pivotal role in managing an orderly transition.

“The hard work for us is to find and maintain collaboration that is to the benefit of all, while we also navigate the geo-competition that takes place. I do know that, somewhere, materials need to flow across the world if we want this world to work.

“If that fails, global institutions could be sidelined by international blocs while, domestically, shortsighted decision-making leads to a misallocation of resources, exacerbating the strain on society,” he says.

Technology may move to the forefront of geopolitical competition, power

Technology is permeating virtually every sector of the economy, determining competitive dynamics. As geopolitics shift in unpredictable and potentially challenging ways, strategic autonomy on critical technologies are becoming an ever more salient topic, says McKinsey.

“A race for artificial intelligence primacy between major powers is under way, with many recently questioning the belief that the US leads its peers in AI capabilities.

“There is competition for influence in global standard-setting bodies; consider, for example, China’s ambition to take a more leading role through the China Standards 2035 strategy, ” it states.

Smit says, however, AI technologies will present both opportunities and challenges to the nature of society and work, the balance between digital and physical domains, the financial system, and the interplay between humans and machines.

On how technology, institutions and geopolitics interact, Smit says depending on the choices made, a smooth transition to an AI-augmented world could be engineered, or technology could fracture the social order. “Potential future paths range from healthy competition between powers under a broad framework of shared standards and breakthroughs to a decoupled world with a concentration of technological power held within blocs.” 

Source: The Edge Markets