By Annalisa Filomena
The North American economy is highly diverse and complex, both in the range of regional ecosystems and in terms of industry clusters and global supply chains. On top of that complexity, North America includes three national economies--Canada, the US, and Mexico. Each nation, region, and each different industry sector face distinct challenges, and so generalizations must be taken with a grain of salt. To simplify to some extent, my comments will relate mostly to the US economy.
With that said, let me suggest five general challenges. First, many industry sectors have been affected severely by COVID over the past year, such as the hospitality, food, and entertainment sectors, with major disruptions for real estate starting to emerge. For those sectors, it is still unclear how to quantify the damage and how quickly they will recover or be transformed.
More generally, I would suggest that a macro challenge for North American economic performance relates to increasing competition at the top end of the value chain emerging from other nations. The US led the push toward globalization over the last 50 years, largely on the assumption that the US would maintain the premier spot in the value chain as the source of innovation and high-value additions to the economy. The assumption was grounded in a belief that the UC could radically transform its educational system to train a highly creative and innovative workforce, while continuing to invest in research and innovation. The US also made commitments, which went largely unfulfilled, to retrain its mature workforce whose jobs were being transferred to low wage workers around the globe. The idea was that the loss of lower and middle-skill jobs by offshoring would be compensated by increased skills and increased value captured by that singular competitive position.
Not all went according to plan. While the current phase of globalization created many of the economic growth gains anticipated and helped to lift millions out of poverty in emerging markets, the gains were not shared as broadly as hoped. The promise of radical education reform of the US public schools remains unfulfilled, as well as promises to displaced middle-class workers. At the same time, globalization created competition at all levels of the value chain, not simply at the lower levels. What happened is that we have created competition and disruption at all levels of the value chain. In particular, there is growing concern about China emerging as a major competitor in cutting edge technology and innovation industries that the US and EU have dominated in the past.
A third challenge is the intensification of the speed with which companies can be created, gain scale, and compete with established firms and businesses. This intensification of churning creates a new set of challenges that established US businesses have not had to deal with in the past.
Fourth, the intense pressures coming from the financial markets on managers to improve revenues, profitability, and payouts to shareholders often lead to short-term strategic thinking and investment for immediate gains. The pressure is counterproductive in the long run.
Finally, there are challenges related to the escalation in the number and scale of multinational companies. A company like Facebook, with almost a third of the world’s population on its platform, is larger than any nation. These vast multinational companies are super-nations in themselves. They have an enormous impact on government policies, the competitive landscape, and on companies based in local communities. Yet they also operate above these governing structures and systems. Local companies and businesses are more involved in their local communities and make more direct contributions to community welfare, whereas multinationals have commitments that span the globe and don’t have the responsibilities that other, more local/national companies have.
In summary, I would identify five macro challenges facing the North American economy—1) dealing with uneven economic recovery from COVID, 2) increased competition at the highest end of the value chain, 3) intensification of business churning, 4) pressures from financial markets favoring short-term strategies, and 5) managing the supra-national power of multinationals.
Again, it is difficult to generalize. For example, there is no single type of response or overarching strategy for business recovery from COVID. The industries that were badly impacted by COVID are looking to the third quarter of this year for a rebound. Projections are that the travel and entertainment industry, for example, are going to have a huge surge in business as fall arrives. At the same time, the financial sector seems to have weathered COVID quite well. Savings are up, debts reduced, investments are up; so, the financial sector seems to be well-positioned to come out of COVID in a strong position. Real estate, especially commercial real estate, is bracing for a major loss of revenues and loss of property values as companies make work from home a new standard.
As for China, both the European Union and the US are grappling with a broad range of policy and corporate competitive issues. There are emerging pushbacks from governments and companies against multinationals, including recent ideas about the creation of a global baseline corporate tax rate, but these strategies are still emerging and evolving.
Post-COVID, there’s certainly interest in new ways to look at healthcare. Within the US, the focus of healthcare in the past has largely been narrow focused, siloed chronic disease management—sometimes called “sick-care.” Whereas, coming out of COVID, there’s a marked shift toward wellness and wellbeing, a recognition that we need more services, products, companies, and solutions that are based on the social determinants of health (SDH). For instance, how do we integrate economic stability, jobs, food, nutrition, exercise, childcare, education—the full range of social determinants--that contribute to health? There is also a marked shift toward new solutions and companies that address health inequities and the needs of minority communities whose vulnerabilities COVID highlighted. Further, the need to create global health infrastructure also represents an important emerging trend. Wellness cannot be hermetically sealed within nations, and as the COVID pandemic revealed, we do not have the global health infrastructure to respond as robustly as we should at this point. New health technologies for health literacy, AI enabled, rapid response research technologies that leverage health data, and platforms that connect community-based organizations into shared data and SDH strategies are emerging industries that address these issues and create new health cluster businesses.
A second major trend is the increasing integration of AI across all sectors of the economy. This will happen even in those industries that have been principally driven by human expertise like law, finance, healthcare (as noted above), and education. AI will reshape those sectors and replace many jobs that are more routinized knowledge work.
Third, capital markets will be significantly reconstructed in the coming years as digital blockchain financial platforms are created. All the institutions that have been part of the transfer and holding of capital are going to be flattered by blockchain ledgers and digital assets, just as new technologies flattened the music industry. There will be a range of new, low cost or free services that will make capital available to more people all over the world. The “Uberization of capital”, as I call it, will make capital ubiquitous and increase innovation and business formation around the world.
Finally, I will mention an increasing focus on social impact. As we continue to recover from COVID, we will observe an increased emphasis on the importance of social impact investing and upon businesses having a clear, positive social impact as part of their core strategy.
Stable policy frameworks and high levels of trust in government are key enablers of competitiveness. However, both of these factors are facing increasing challenges in the US and EU. The political brinkmanship, distrust, and radical shifts in policy that have emerged in the past decade show few signs of abating and that weakens competitiveness. Both the US and EU need to move through this period toward a new stage of stable policymaking, rational compromise, and frameworks governing public policy and the economy.
Of course, governments are always in the process of negotiating policies intended to be conducive to economic growth and investment without creating unstable income disparities and other unintended consequences. The United States has been extremely successful at creating highly competitive, profitable, successful, and productive companies. However, the benefits of US economic growth have not been as broadly shared as intended and opportunities to expand access to the benefits of increased productivity have not been realized. Addressing those shortcomings needs to be a priority.
From a technical point of view, competitiveness is driven by productivity gains, and we have seen them flattening in recent years. Breakthroughs in new technologies are likely to start mitigating that trend and creating new levels of productivity gains in the next round of corporate strategic planning and investments in upgrades.
Beyond the technical productivity gains, there is growing attention to competition of another type, namely, the geopolitical-economic competition between the Western economic model integrated with democratic government and human rights and a statist, authoritarian model being promoted by China as an alternative. There is a fear that China is a growing threat to the competitiveness of the American and European corporations and economies. The fear is that China will use its vast domestic market, state funded investment, and its ability to close its markets to outside companies to create an unfair economic playing field. Harnessing economic dominance with political dominance could pose a serious threat, both to the competitiveness of North American companies and to democratic societies. So, at a macro-political level, how to respond to the “Made in China” policy is a major driver affecting the competitiveness of North American economies.
Copy and past the following link for the video interview: https://youtu.be/2YEU8_suNE0