Davos 2018: Fixing a Fractured World

Cool nights blanketed the Swiss village with six feet of snow while warm days turned its roads into waterways, creating enough ice and slush to produce the irony of Davos traffic jams. It was as if the weather gods had crafted the perfect metaphor for 2018: a planet and economy that are at once so hot and cold that its people are struggling to keep a grip.

This was my third visit to the World Economic Forum, and the most valuable yet, as it underscored the frenetic pace of change today and how challenging it is to gain traction on the most pressing issues of our time—from the income stagnation that fueled the populist surges of 2016 to the outrages of sexual abuse that exploded in 2017 to the anxieties over technology grip- ping the globe in 2018. The forum’s theme put it aptly: “Creating a Shared Future in a Fractured World.” How do we do that? The mountaineers around Davos would tell you: have a good map, follow contours rather than straight lines, pace yourself, and move in teams. On the way up and on the way down.

Here are some of the issues I found most compelling at this year’s forum.

1. A Synchronized Recovery or Irrational Complacency?

The global economy has rarely looked so good. All but five of 192 countries tracked by the International Monetary Fund are growing—a record high. Unemployment in Canada and the U.S. is at a 40-year low. Europe is well into its recovery. And Asia is giving the world more synchronized growth than we’ve seen in decades. No surprise that stock markets are surging. One economist dubbed the mood “irrational complacency.” Trouble is, stocks have outpaced the economy for nine years running, which few would consider sustainable. Most of the economists at Davos felt that without recent rounds of fiscal stimulus—U.S. tax cuts and Canadian deficit spending, among them—we’d be heading for a correction this year.

So if we’re closer to the end of a cycle than the beginning, what could bring about a downturn? Business leaders at Davos spent a lot of time looking at threats to the expansion, including cyber-attacks, climate disasters and looming trade wars that could force surplus countries like China to stop financing the debts of others like the U.S. But they generally looked through political risks like the Korean standoff. Brazil got some attention, as it heads into a landmark election that may produce a populist government and exacerbate the country’s pension crisis. Italy, also in an election year, was highlighted for its fiscal challenges. But those concerns were not seen as threats to the global recovery. For the most part, the Davos crowd was bullish—and that alone could be cause for concern.

2. Donald Trump: From Political Apprentice to Davos Man

It was Donald Trump’s week at Davos. Even before his helicopter touched down, the president’s presence could be felt in pretty much every discussion, not least because he sent eight cabinet secretaries to project his “America First” agenda. A year ago, following Trump’s election, Davos felt like a post-trauma patient. This year, the crowd seemed to be coming to grips with him. U.S. tax reforms are popular with business. Trump also pushed an agenda—trade fairness and middle-class jobs— that wasn’t out of place in Davos. His advisors told business leaders they aren’t anti-trade; they’re just opposed to countries, particularly China, that don’t follow the rules (as seen by Washington). Their support for a new NAFTA was also clear. The president might still give six months’ notice of termination, but it seems the administration is angling for a deal with Canada and Mexico that would modernize the current agreement. On the final day, Trump’s signature soundbite—“America is open for business” —was what most of the crowd wanted to hear, even if they could do without some of the other stuff. Does that make Trump an internationalist? Hardly. But it wouldn’t be surprising to see him back.

3. Europe’s Back, for Now

Last year’s Davos was full of eulogies for the European project, and even for Europe’s history of liberal democracy. Elections in the Netherlands, France and Germany changed that. Emmanuel Macron took Davos 2018 by storm by projecting a 21st century vision for his country and the continent. The French president said he intends to cut taxes, reduce the size of government, reform pension plans and pour the savings into education and research to power innovation. It helps that the continent’s economy is growing again, thanks in part to cheap money.

But headwinds are never far away. The EU has to work out a divorce with Britain and simultaneously come to terms with its own contradictions, on the size of government, the freedom of movement and the restrictions on free trade in services, among many other issues. Mark Rutte, the Dutch prime minister who fended off a nationalist threat last year, fears the continent isn’t making the tough choices while it has strong leadership and an economic resurgence. His patience could be tested by Italy’s election in March, when the populist 5 Star Movement may have its best showing yet. As Bruno Le Maire, France’s economy minister, warned: without more growth, and jobs, the populists will be back, and stronger than before. “We have no choice,” he said, “but to succeed.”

4. China’s Presence: Less Talk, More Action

China was the star of last year’s Davos, with President Xi Jinping using the stage to project his ambitions for global leadership. The regime was much less visible this year, but no less influential. Xi’s top economic adviser, Liu He, outlined the government’s priorities: to reform state-run industries, cut poverty and reduce pollution. And on the last count, China-watchers were clear: Xi’s determination to fight climate change is serious, and stands to transform China and much of Asia. The massive, Chinese-led infrastructure project, the Belt and Road Initiative, is already setting new environmental standards for the region, and laying the ground for a seismic shift in global capital. China thinks the initiative can generate $2.5 trillion in trade within a decade, with new corridors connecting the Pacific Rim with both the Arabian Sea and the English Channel. 3 China’s ambitions for technology are just as impressive, except they’re not coming from government. Kai-fu Lee, the CEO of Sinovation Ventures, told the forum he’s invested in 45 new AI companies in China since 2015, as part of what he called an AI “arms race” with Silicon Valley. He said Beijing is committed to making China an AI leader by 2030, and has built a new generation of “amazing engineering schools” to feed companies like his. China’s advantage: fewer privacy restrictions, allowing businesses to access data in ways their Western competitors can’t.

5. Ecosystems, and the Rise of Digital Darwinism

Davos brings together governments, businesses, academics and activists from all corners of the world to share their experiences on emerging trends. This year, every conversation seemed to touch on concerns about the rapidly changing relationship companies have with their customers, and governments with their citizens. The best companies seemed to be trying to redefine their markets as ecosystems that they’re building with suppliers, partners and customers, using each other’s data to understand consumer needs. Jeff Schumacher, one of my favourite ecosystem thinkers at BCG Digital Ventures, predicted a new generation of specialty ecosystems— baby needs, for instance—that will require us to focus on our strengths and find others who can cover our weaknesses.

Data will make many of those decisions for us. Still unclear is whether producers and service providers will thrive in these new ecosystems, or be shaped by the so-called platform companies like Facebook and Amazon that act as intermediaries. Either way, consumers are winning, with more choice, more convenience, better prices and better experiences.

Smaller firms are thriving, too, especially those that can insert themselves in a
fast-growing ecosystem. Perhaps it’s no coincidence that this year’s forum drew more small companies than ever. Just as the platform economy is disrupting old companies, it’s giving rise to many more new ones. This Darwinian shake-up could even lead to what’s being called a “splinternet”—a fractured digital world made up of many ecosystems rather than the global platforms that have dominated so far.

6. Big Tech, Little Government

The Silicon Valley tech giants used to be the cool kids at Davos. This year, panel after panel seemed designed to hold them accountable for a host of woes. Marc Benioff, the founder of Salesforce and a giant in the Valley, called for government regulations to rein in the search and social powerhouses. George Soros went further, lighting a firestorm at his annual Davos dinner by saying “social media companies exploit the social environment” in the same way oil companies used to exploit the natural environment. He singled out Google and Facebook as “utilities” that need to be taxed and regulated much more aggressively, and predicted a stronger EU would take the lead. France’s Macron echoed the sentiment, more diplomatically, by calling on other governments to join him in trying to set a new international tax standard for the digital economy. It’s unclear how that would be administered—and also what problems the Valley’s critics are trying to solve. Tax fairness? Excessive market share? Invasion of privacy? Abdication of media standards? Or something else? While there’s no clear response to the techlash, the Valley knows it has a problem and will have to engineer some solutions pretty quickly.

7. Cryptocurrency, Back to Earth

Cryptocurrencies and their underlying blockchain technology were among the hottest topics at the forum, but not entirely for the right reasons. By the end of 2017, there were nearly 1,400 cryptocurrencies in circulation—digital money, in effect— with a combined market cap of roughly $610 billion, up from just $18 billion at the start of the year. And at least 33 of them were valued at $1 billion or more. The big financial trend of 2017 didn’t have many fans at Davos, though. Larry Fink, the head of BlackRock, called them “an index of money laundering.” That said, we should not lose sight of the utility of blockchain technology, which could be used to improve financial systems.

The message from governments was unequivocal, that we should expect regulation. Both Steve Mnuchin, the U.S. treasury secretary, and Christine Lagarde, the managing director of the International Monetary Fund, expressed concern about the possible use of cryptocurrencies for money laundering and terrorist financing. How they’ll put the crypto-genie back in the bottle is a question they didn’t answer.

8. The Workplace Crisis

It wasn’t lost on Davos planners that of all the social forces since the last forum, the most profound was #MeToo. An explosion of revelations about workplace harassment, abuse and violence has shaken the world, and reset the leadership conversation. The forum had more women delegates (although still low at 21%) and all-female team of co-chairs, including the IMF’s Lagarde, IBM chief executive Ginni Rometty and Norwegian Prime Minister Erna Solberg.

Programs are one thing; changing culture is another. In his keynote, Prime Minister Justin Trudeau threw the challenge back to the audience, saying government and business leaders need to come to grips with the nature of many workplaces. While leaders typically use the forum to pitch their countries to investors, Trudeau opted for moralism over mercantilism. He urged the Davos crowd to “hire, retain and promote more women,” and for governments to pursue better family leave benefits, more investment in girls’ education and, perhaps most critically, a change in attitude around diversity. It’s good for business, he said. It’s also a Canadian advantage.

9. In Less We Trust

On the opening day of Davos, the annual Edelman Trust Barometer showed we live in a divided world of trust. It’s growing in the East and fading in the West, with Canada somewhere in between. But while most Canadians distrust government, our global brand for business is now the most trusted in the world, just ahead of Switzerland, Sweden and Australia. The Edelman barometer, which surveys 32,000 people in 28 countries, found that trust was down in 22 of them. Worst of the lot: the United States, which saw a 37% drop in trust across all institutions. In every business meeting I attended, the subject of public trust and corporate citizenship was front and centre. It’s no longer about social responsibility, or giving back. It’s about strengthening an organization’s role in its community, and being there for the long haul. That’s not easy when, in the digital space, most organizations don’t get to see their customers anymore, or vice-versa.

There are glimmers of hope, though, including a return of trust in expertise. In the Edelman survey, credibility measures for technical experts, financial industry analysts, journalists, business leaders and successful entrepreneurs are no longer in the red. One reason is a growing distrust of the tech platforms that were once seen as the great democratizer of expertise, and a spike in trust in the experts themselves. No one wants to lose the openness and connectivity of the Internet, but an appreciation of credentials wouldn’t be bad, either.

10. Robocalypse, Later

Business leaders are concerned about the threat of automation to their operating model—and their employees. They’re also not confident governments or the education system can help workers stay in front of the tidal wave of change that’s coming. We know technological disruption rarely reduces overall employment. But we also know that advances in AI and robotics will change the skills required in most jobs faster than we anticipate. Our workforces will need to be more nimble and adaptive than ever. Ruth Porat, Google’s chief financial officer, says 90% of new jobs in Europe require digital aptitudes, even though they’re in short supply. She says it’s not about coding. “It’s about spreadsheets and writing emails and making presentations.” Not always easy for a truck driver or cashier.

Rather than letting those employees go, some businesses are finding it cheaper (and smarter) to invest in a new trend called “radical retraining.” The challenge is that across the world governments have cut spending on education and training. David Autor, an economist at the Massachusetts Institute of Technology, thinks a massive investment in new education systems may be needed, just as the state college system was expanded at the turn of the last century to help youth displaced by mechanized farming. Yuval Noah Harari, the best-selling author of Sapiens: A Brief History of Humankind, thinks we need a more radical rethink of education and lifelong learning. If not, the social cost of the Fourth Industrial Revolution may be worse than that of the First, for a simple reason raised by Harari: “People fear something worse than exploitation. They fear irrelevance.” And that may be the greatest challenge of our time: to maintain and strengthen our human relevance as we turn to machines to do more and more for us. If we can’t get ourselves right, all the other challenges of Davos won’t get solved, either.

Dave McKay is President and CEO of RBC, Canada’s biggest bank, and one of the largest in the world based on market capitalization. Dave is credited with helping transform the bank’s retail division and introduce new technology that has enabled RBC to adapt and evolve to rapidly-changing consumer demands.

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