MICPABursa Malaysia Forum 2008 Global Business Trends Developments

MICPA-Bursa Malaysia Forum 2008 Global Business Trends: Developments & Responses Steven C. M. Wong Assistant Director General Institute of Strategic and International Studies (ISIS) Malaysia steve@isis. org. my The views and opinions expressed are the speaker’s.

Central Themes Macro Proposition #1: The global financial crisis today reflects issues that go beyond sub-prime mortgages, collateral debt obligations, credit default swaps, etc. The crisis manifests the problems in the way that the world economy is organised, powered and managed - and of global capitalism itself.

Central Themes Macro Proposition #2: Economic and business success will come from pragmatically negotiating the realities of the changing situation and not clinging to ideology and concepts. Countries (and companies) are likely to respond by (1) doing the same things, (2) doing same things but testing out new ideas, (3) changing course and taking bold decisions.

Central Themes Macro Proposition #3: How countries and businesses respond is based on incentives and penalties for performance and risk-taking, and how these are changed (reformed). The appropriate responses will therefore depend on strengthening micro social, legal and political foundations, in addition to the economic.

Central Themes Macro Proposition #3 (A): Reforming political, economic and social incentives and disincentives requires: • Understanding the full consequences (cause-and-effect) of policies and actions • Ensuring that there are no rewards for undesirable, and no penalties for desirable, behaviour • Making it politically and socially unacceptable, in addition to legal sanctions.

Central Themes Macro Proposition #3 (B): There must be consistency between the practices of political, social and economic institutions. Where there is conflict, virtuous behaviour cannot be assumed. Institutions are only as effective as public confidence and social cohesion allow them to be. Distrust and non-cooperation are deadly for good governance.

Message 1 In the short- to medium-term, the world economy appears to be in for a trying time. Main stresses expected are: - Falling real incomes - Low/no employment creation - Negative wealth accumulation - Worsening income distribution Real interest rates will eventually have to rise to compensate for the low productivity of capital.

Message 1 Suppliers of capital will continue to be dominant but more cautious. Focus will still be on more under-valued investments though not necessarily productive capacity. Pursuit for greater performance, productivity and standards will continue to demand organisational change.

Message 2 The world economy comprises multiple interacting components that cannot be isolated from one another. Example: US housing prices → private wealth → consumption → imports. . . Etc. / → subprime mortgages → ABS → CDO → CDS, . . . Etc. Governance of these components is nonexistent, loose or fragmented. They are largely based on non-harmonised national laws and regulations.

Components Goods Services Investme nt GLOBA L ECONO MY Human Resourc es Currenci es Credit

Message 2 Governments need to take a more integrative approach in formulating economic policies. Slips through the cracks can be very costly. -Tensions and trade-offs among the components need to be explicitly taken into account. Mindsets and methods (the software) need to upgraded. Not as easy as putting under the catch-all of human resource

Message 3 The world economy is not “flat” but it is flattening. The end result is very likely to one with fewer national barriers but still undulating and uneven. Reason? Economic and business may have gone global but politics (and society) is still local. National interest is not dead by any means. Differences in political and social capacities will give rise to competitive

Message 3 Expect a rise in regulation as response to recent market ‘excesses’ and renewed governmental pressures and new forms of protectionism Expect more linkages with the environment, corporate social responsibility, human rights, democracy, etc. The temptation to de-link and turn inwards will have to be constantly avoided.

Message 4 Now more than ever, creating interestbased strategic alliances and networking is the name of the game. Global corporations are now the primary change agents and cultivating them will be a major challenge. The aim must be to integrate into global value/supply chains and not just goods but also services and investment.

Message 4 As global corporations become more dominant, competition intensifies but so do opportunities for collusion. Economic partnership arrangements need to be rethought. The idea of regions producing more of the products they consume has become of less relevance. Business convergence and integration will further accelerate with e-business (“cloud computing”? ) platforms.

Message 5 Despite the emergence of new economic centres, the risk of being consigned to the periphery still remains very real. There is a race-to-the-top for some knowledge-dominant economies and a race -to-the-bottom for many. Renewed importance of economic geography and the art of growing innovation clusters.

Message 5 Labour’s share of national income has fallen to very low levels in most countries especially if top executive pay is stripped off. This has serious welfare, macroeconomic and productivity implications.