4 key takeaways from Davos: Mastering the 4th Industrial Revolution

4 key takeaways from Davos: Mastering the 4th Industrial Revolution
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The 46th annual World Economic Forum (WEF) in Davos, Switzerland took place last week and brought a gaggle of high-powered figures together to discuss current global challenges.

Among its 2,500 guests were VIPs from diverse fields, including Microsoft founder Bill Gates, IMF MD Christine Lagarde, NYU professor Nouriel Roubini, Canadian PM Justin Trudeau, and actor Leonardo DiCaprio, all gathered in one small ski resort.

It seems that this eclectic guest list inspires a much more candid and earnest debate than what is common in international forums. Possibly the lack of pressure to actually present any agreement keeps an abundance of ideas free and floating. Although a cynic might say that Davos is all talk, such talk should not be discounted — it has, for example, prevented a war between Turkey and Greece in the 1980’s, thanks to the two heads of state meeting and troubleshooting their strife in Switzerland. After all, talk is not “just talk”.

Here are the four biggest takeaways from Davos 2016.

The internet of everything: An opportunity and a risk

It is estimated that by 2020, 50bn connected devices will revolutionise everything in our environment: Self-driving cars, smart homes, and sensors monitoring physical (and mental?) wellbeing, are just a few innovations likely to blur the boundaries between the physical, the biological, and the digital.

According to a McKinsey analysis, the economic impact of this could amount to $11 trillion annually by 2025. The pace of development is astonishing, and unsurprisingly it leaves many issues unresolved, as policy, lawmaking and industry come to grips with the bounty brought to being by pioneering tech cowboys. But what happens to privacy, to legal liability, health and safety?

Apart from a host of novel challenges, exposing the anachronism of regulation and law and challenging definitions, a wide-ranging, social consequence could be loss of jobs on a major scale.

Davos founder, Klaus Schwab, expects 20m jobs to disappear in the coming years on account of technological innovation. The potential for job creation is present too, of course, but likely on a much smaller scale. Schwab fears a “hollowing out of the middle class” which he dubs a “pillar of our democracies”. Political decision-makers need to address the potential issue of a permanently high structural rate of unemployment, and how to deal with it.   

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Source: Gartner as found via World Economic Forum

No solution in sight to the European migration crisis

It created headlines and hefty clashes in the EU and elsewhere in 2015, but the ongoing migration crisis in unlikely to solve itself; on the contrary, it is likely to get worse.

In the first three weeks of this year, 35,000 people crossed the sea from Turkey to Greece. Dutch PM Mark Rutte expects that number to quadruple as winter turns to spring, making the crossing less lethal.

European countries are increasingly experiencing difficulties coping with the influx. Further, events like the mass harassment of German women in Cologne on New Years Eve, the massacre of 130 people in Paris in November, and the murder of a woman and her son in an IKEA in Sweden, provide already popular anti-immigration parties across Europe further impetus.

The migration crisis is not just a consequence of wars and unrest; it is also intermingled with the commodity bust and climate change. As the livelihood of people depending on oil exports or farming are endangered by these trends, the migration crisis only exacerbates.

A long-term solution would require not just efforts for peace in the Middle East and Syria specifically, but the titanic task of stabilising the climate and creating sustainable livelihoods in otherwise commodity-reliant countries. Realistically, the door to Europe will slam shut before peace and economic opportunities at home have made the motivation for risking lives in the Aegean Sea an absurdity.

Debt and worries over China endanger post-recession recovery

Stock markets across the world started 2016 deep in the red, as share prices climbed down from their historically elevated levels.

The correction inspired lots of questions regarding the economic and financial state of China, the prospects for growth in developed countries and possible risk of another recession looming. Professor Nouriel Roubini, who won credence for warning against the impending financial cataclysm in 2006, asserts that he does not believe we are back to 2008, and that China is in for a bumpy, albeit not hard, landing. However, he also does not believe the Fed will hike four times in 2016 as expected, and a March hike is off the table.

The emerging consensus from Davos seems to support this view, and underscores how financial markets tend to be “manic depressive”: Overreacting to good news, and underreacting to bad.

However, amassed debt over the past 8 years is a source of risk and uncertainty, as it is unlikely that all will be repaid. The magnitude of this “debt tsunami” dwarfs 2007, according to economist William White. European creditors are at the highest risk, as an estimated $1tn outstanding bad loans are stuck in European banks, while all macroeconomic ammunition has been used up.

New model for growth needed

Several attendees at WEF 2016, including Christine Lagarde, Nobel Laureate Joseph Stiglitz, OECD’s Secretary General Ángel Gurría and MIT professor Erik Brynjolfsson, recognised the inadequacy of GDP in measuring economic progress.

Brynjolfsson even remarked how the originator of the GDP measure, Simon Kuznets, discouraged using GDP to gauge economic performance, seeing as the total value of everything we buy and sell says is at best derivative of welfare, and may even run counter to it.

While GDP is improving, the gains are extremely unevenly distributed. Inequality is increasing, and the post-war era of prospering middle classes, social mobility and diminishing Gini-coefficients look less like the beginning of a modern trend and more like an unusual blip on the radar.

According to a report by UK-based NGO Oxfam, published just before WEF 2016, the wealthiest 62 persons own as much as the poorest 3.6 billion people. Each of these groups – the 62 individuals and the 3.6bn people – represent ownership of $1760bn. Stiglitz noted how our current economic system is simply not working for most people, and encouraged adopting alternative ways of measuring how well we are doing economically.

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Source: Oxfam

Categories: Economics, International

About Author

Mikala Sorenson

Mikala Sorensen is an Economist with regional expertise in Europe. She holds a first class honours degree in Philosophy, Politics and Economics from the University of York and a Masters in Economics from the University of Copenhagen. Having interned at the Danish OECD-delegation in Paris and currently working at the Danish Ministry of Finance, she specialises in politics and macroeconomics. Analysis for GRI is an expression of her own views.