Structural Problems in the World Economy: A Corporate Survival Kit

Special High-Level Meeting of the Economic and Social

Council With the Bretton Woods Institutions, the World

Trade Organization and the United Nations Conference

On Trade and Development

New York, 22 April 2013

Mr. President, Your Excellencies, Ladies and Gentlemen:

In the U.S. we have an expression: “All politics are local.” In our interconnected world, one might very well adapt this by saying: “All economics are global.”

China’s future economic growth is likely to be far slower than in recent decades. The often recommended rebalancing of China’s export-driven growth model to a more domestic-demand driven one is easier said than done.

Yet, slower expansion in China will drive down growth prospects for commodity-exporting countries, largely dependent on strong Chinese demand.

Japan’s revolutionary monetary policy shift to quantitative easing may come fifteen years too late as the country’s sharply deteriorating demographics cast a dark shadow over its growth prospects.

Discoveries of huge shale oil and gas reserves in the United States and elsewhere will fundamentally change the basic business model of many countries, which have primarily depended on hydrocarbon revenues.

U.S. growth will remain suboptimal as long as growing income inequalities and underinvestment in physical and human infrastructure are not effectively corrected.

Yet, by far the biggest threat to global economic stability comes from the Eurozone. While the crisis may have originated in policy mistakes by the affected countries, its trigger lies in the construct of the monetary union, with little hope that the EMU’s shortcomings will be rectified. Instead, an unbearable dose of austerity has been imposed on the so-called peripheral countries accelerating economic and social decline.

The peripheral countries of the Eurozone are experiencing political, social and economic distress much like Argentina in the 1990s, when that country experimented with a fixed exchange rate regime; a project, which ended in tears. What’s more, the Eurozone’s periphery is constantly expanding.

The effects of a controlled unwinding of the Eurozone will have vast implications for the global economy. However, failure to act swiftly will likely lead to an uncontrolled and uncontrollable unraveling with unpredictable consequences.

In the meantime, businesses all over the world must plan for these contingencies. There are four ingredients to their corporate survival kit:

1)         No matter, how politically incorrect the assumptions, they must be assessed.

2)         Not only the likelihood of an adverse event must be assessed, but most importantly the severity of its impact.

3)         Large corporations and financial institutions must evaluate how they would be directly or indirectly affected by each crisis scenario.

4)         For each scenario, businesses have to determine how to optimally protect their assets.

Finally, proactive risk management leads to effective crisis management. No crisis evolves as expected, but the corporate survival kit will give businesses the tools to mitigate its impact.

Thank you.

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