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How to Manage the Top Five Global Economic Challenges

The world’s economic system has been through a lot in recent years — from the challenge of the financial crisis to income inequality, the pressures of immigration, changing technologies and geographic shifts in production, to name a few. In this opinion piece, Kalin Anev Janse, secretary general and a member of the management board of the European Stability Mechanism (the eurozone’s lender of last resort), considers five major challenges and why international organizations offer the best hope for managing them.

A year ago, we were shaken by geopolitical shifts with unpredictable ripple effects. The situation looks no more stable today. The Brexit vote and the U.S. presidential election outcome signal dramatic changes in cooperation globally and a push for more protectionism. In practice, these votes called into question the multilateral institutions and international collaboration among countries that embody that cooperation. In autumn 2017, we gathered together a group of senior officials from the 13 largest international organizations to try to crack these problems.

What happened?

Exactly 10 years ago, in 2007, the first signs of the Great Recession emerged. By 2008, the U.S.-led subprime crisis evolved into a global financial crisis. By 2010, Europe had become engulfed in its own crisis, throwing financial markets into turmoil and several sovereigns into a downward spiral of debt and banking crises.

Despite the current ongoing recovery, and the successful economic rebound both in North America and Europe, worrying trends became apparent in 2016. Some major players demonstrated a reduced commitment to multilateral cooperation, criticism of open and free trade, and fading interest in climate change. This new landscape increased uncertainty and poses a threat to more buoyant macroeconomic and financial fundamentals. It also puts a strain on relations between major players internationally, as well as between citizens domestically. In countries like the U.S. and the UK, it abruptly split societies in half and threatened a reverse of seven decades of international cooperation.

All these elements are putting pressure on international organizations as well. International organizations are increasingly called upon to redefine their role to ensure that their programs and activities are still relevant in this evolving political and macroeconomic landscape. They are also pushed to show how they add value to citizens’ lives. At the same time, they need to maintain lean structures to minimize the burden on taxpayers, and enhance efficiency and effectiveness of their activities. So, what has changed?

Five Major Shifts that Rocked Our World

There are five trend shifts globally that by their nature call for international cooperation, but they have been underestimated, undervalued and under-addressed both nationally and internationally. The results shook our world with an unforeseeable force.

1. Growing Income Inequality

People have an age-old tendency to compare themselves to their neighbors, especially when it comes to wealth. We are less concerned about our absolute level of wealth, but look more at what we have and own in relative terms to the people around us. Global private wealth reached a record $166.5 trillion in 2016, an increase of 5.3% over the previous year, according to a report by the Boston Consulting Group (BCG).1 In 2015, the increase was 4.4%. Faster economic growth and stock price performance mainly drove the rapid increase.

But this growth is not spread equally. Private wealth in Asia-Pacific is likely to surpass that of Western Europe by as early as the end of this year, BCG’s analysis shows. This could be an economic shock for many citizens of traditional western powerhouses. Such changes need to be watched and managed carefully as they tilt economic and political power. British geographer and politician Sir Halford Mackinder used to say: “Unequal growth among nations tends to produce a hegemonic world war about every 100 years.” We can only hope he is wrong.

“Just eight men now own the same wealth as 3.6 billion people globally, more than half of humanity….”

Inequality is getting ever worse. A tipping point was reached in 2015, when the richest 1% in the world owned as much as the rest of humanity. This trend has continued and further accelerated. Just eight men now own the same wealth as 3.6 billion people globally, more than half of humanity, according to a January 2017 Oxfam report. Income inequality is on the rise as the affluent continue to accumulate wealth, often at the expense of the poorer.

Richard Reeves points out in his book Dream Hoarders, that we shouldn’t only be worried about the top 1% or 0.01%. More importantly, in some countries, like the U.S., there is a widening gap in society between the upper middle class and everyone else. (Reeves defines the upper middle class as those whose incomes are in the top 20% of U.S. society.) These growing disparities are reflected in family structure, neighborhoods, attitudes and lifestyle. The top income earners are becoming more effective at passing on their status to their children, thus reducing overall social mobility and increasing social divisions, along class as well as income lines.

And all this has an interesting twist: the inequality paradox. Despite the progress in reducing global poverty and reduction of inequality among countries since 1980s, income inequality within countries has been rising. These days, almost one-third of global inequality is attributable to in-country inequality (figure 1), making clear why many voters across the western world feel as they do.

2. Technology Driving Change in Jobs

How disruptive will the effect of globalization and technological advances be on labor markets? That is a key question today. Over the last three decades, advanced economies have seen labor-intensive sector jobs move to emerging markets. In other cases, new technologies have made certain occupations obsolete. UNCTAD (United Nations Conference on Trade and Development) released a policy brief last year that said robots could take away two-thirds of jobs in developing countries.

We see some of these shifts already. Today’s five largest global companies are: Apple, Alphabet (Google), Microsoft, Amazon, and Facebook. They employ around 720,000 people. A decade ago, the big five were completely different: Petrochina, Exxon Mobile, General Electric, China Mobile, and Bank of China. They employed around 1.3 million people. What a decade can do! Today’s five biggest companies are all technology companies. Their market capitalization is 30% higher than that of the top five a decade ago; they achieve that with a whopping 44% less staff (figure 2). This has a large impact on labor markets and jobs.

Does this alter work preferences? Yes, and this is best assessed by looking at the two most dynamic groups of (future) job seekers: millennials and today’s teenagers. They feel that they are receiving conflicting messages from employers and career advisors: On the one hand, they are told that robots are bound to replace future jobs; on the other, they need technical skills to compete in the job market.

Caught in this conundrum, they are trying to create new types of jobs, rather than going for traditional ones such as banking, finance, or accounting. They dream of becoming YouTube stars, famous videogame vloggers, or Instagram travel bloggers who are paid by sponsors to visit hotels and restaurants around the world and generate sufficient number of likes. New creative companies pop up even in professions that well-educated young people ignored for many decades. Old merchants’ jobs have been revived, from organic bakers to cool rural wine-makers and hipster butchers.

“Forty-five percent of the global working age population is underutilized, either unemployed or underemployed.”

I am less concerned about the imaginative young generation; they will find their way. It is the group of middle-to-older, middle-to-lower-skilled workers where issues might arise. A recent McKinsey estimate shows that 45% of the global working age population is underutilized, either unemployed or underemployed. Unless there is a redirection of investment into labor-intensive productive sectors and retraining, the desired job creation may not happen, fueling unhappiness, unrest and populism.

3. Rising Protectionism

G20 countries have become more protectionist. The total number of discriminatory protectionist measures implemented by G20 countries has increased over the past five years (figure 3). The main driver has been the U.S. According to the Global Trade Alert report, had the United States been excluded, the total number of protectionist policy instruments imposed by the G20 would have been lower in 2017 than in 2016. The U.S. has implemented the most protectionist and trade restrictive measures of its peer group, the European Union the least (figure 4). This sounds counter-intuitive for the country that prides itself as an open economy, but it seems that it is Europe that is championing trade barrier reductions and the avoidance of protectionist measures.

“The recent refugee crisis in Syria and the resulting arrival of more than one million migrants in 2015-2016 in Germany presented a formidable challenge to political and social stability.”

4. Increasing Migration

The recent refugee crisis in Syria and the resulting arrival of more than one million migrants in 2015-2016 in Germany presented a formidable challenge to political and social stability. In addition to tougher checks on the EU’s external borders, and a controversial refugee pact with Turkey, the EU is investing more in the migrants’ countries of origin. The refugees from Syria have been fleeing a brutal civil war. They are escaping violence, as many also are from Iraq and Afghanistan, and, in such cases, humanitarian reasons should always prevail over other considerations. Wars, climate change, and broader economic and social inequalities are the root causes of migration flows. While these increases in migration are all easy to understand, they nonetheless cause issues in the countries of arrival: integration problems, absorption limits and skills-mismatches.

5. Growing Influence of Social Media and the Post-truth World

Social media pose the final major challenge to international organizations. According to a recent analysis by the Reuters Institute for the Study of Journalism, 51% of people with online access use social media as a news source. Social media is the primary source for news for 44% of smartphone users in the U.S. and 38% in the U.K. (figure 7). Coupled with the proliferation of so-called fake news, which became so prominent in last year’s U.S. elections, as well as social media’s favoring of ever shorter and catchier messages, it is no wonder that many observers are saying we are living in a post-truth world.

“In the November 2016 U.S. elections … top fake election news stories generated more total engagement on Facebook than the top election stories from the 19 major news outlets combined.”

A recent BuzzFeed analysis of social media traffic in the run-up to the November 2016 U.S. elections found that top fake election news stories generated more total engagement on Facebook than the top election stories from the 19 major news outlets combined (figure 8). These trends represent serious tests on many fronts, including combating terrorism and securing the proper functioning of democratic institutions. Fear, anger and despair enlist recruits for terrorism. They also create a more polarized social climate and the rise of extremism, as we were recently reminded by the tragic events in Charlottesville in the U.S. or by some half a dozen car terror attacks in Europe this year.

Is Peaceful International Collaboration Ending?

Despite these daunting challenges, there are also reasons to be optimistic. At the European level, political leaders have regained faith in sticking together to address global and societal realities. At least two factors have been crucial to the recovery of confidence in the European project. First, the EU is delivering economically. The euro area and the broader EU recently recorded their highest ever employment levels. Investment is up, and growth is projected to be on a par with, if not higher than, growth in the U.S. this year.

Second, despite growing populism, Europe’s citizens have confidently stood for democracy, open borders, economic reforms, and more Europe. The results of the elections in the Netherlands and France bore witness to this positive trend among European societies. In spite of the recent electoral gains of an extreme right-wing party in Germany, the election outcome was again clearly pro-European. The continent appears in better shape today than it did after Brexit one year ago.

In my view, Europe can offer lessons in regional integration that are relevant for other parts of the world. Among others, my institution – the European Stability Mechanism (ESM) – is a product of European cooperation in response to the financial and economic crisis. As the largest and most active regional financing arrangement, the ESM works closely with its peers in other regions of the world.

Beyond Europe, the continued rise of Asian economies, as well as those in Latin America, present new opportunities for strengthening international cooperation in many of the areas I have mentioned, including finance, infrastructure, energy, education, climate change and others.

So what does this all mean for public international organizations? These organizations act as agents of their shareholders (i.e., member states) and are called upon to help address difficult challenges. Some international organizations that raise funds in the capital markets for their operations, like mine, also have to be attuned to the concerns of their investors. In general, international organizations also dispose of soft power, derived from funds and moral suasion based on extensive experience, as well as the values and norms that they adhere to and champion. Obviously, international organizations also need a broad-based buy-in from the public at large, in particular in times of change and uncertainty. All this needs to be done while maintaining lean organizational structures to keep the costs for taxpayers low.

In our autumn 2017 session of the group of senior officials from international organizations, we pushed ourselves to find modern ways to explain better what we do and what we can offer when it comes to tackling these challenges. Among other matters, we discussed using more social media and empowering our talented and hard-working staff to share their personal stories, because it can best demonstrate the tremendous impact of their work.

“Multilateral institutions and international organizations have proven to be the most effective way to solve complex global problems in a peaceful and constructive way.”

We also need to make our institutions less bureaucratic and truly “lean, clean and green,” not only because it is more efficient but also because it can help us attract more talent among the millennial generation. And finally, we need to work even harder to better cooperate with each other and to ensure the missions and activities of our institutions make a difference, because nothing can demonstrate the value of multilateralism better than international organizations delivering effective and sustainable solutions to the most pressing global challenges.

But at the end there is only one question that matters: Is there any alternative way to making our world with more than 7 billion people work? Not at this stage – multilateral institutions and international organizations have proven to be the most effective way to solve complex global problems in a peaceful and constructive way. All other alternatives involve far more violence, aggression and isolation. If we look through the eyes of our children, it is much wiser to collaborate and work together rather than fight (digitally) with our global neighbors, whether close by or far away.

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