Convergent Disruptions: The Crucible for a New World Order
Republished October 15th, 2024
By Dr. Indranil Ghosh, Contributing Author/ April 21, 2023
Dr Indranil Ghosh is a sustainable investor, author, and strategic advisor to global leaders. He is the CEO of Tiger Hill Capital, author of the award-winning book Powering Prosperity, and host of leading impact entrepreneurship podcast Impact Unicorns.
Earlier in his career, Dr Ghosh was Head of Strategy at Mubadala Investment Company, Abu Dhabi’s Sovereign Investment and Development fund, and held senior roles at Bridgewater Associates and McKinsey & Co.
Dr Ghosh holds a PhD in Chemical Engineering from MIT (Cambridge, US) and an MEng from Cambridge University in the UK.
A Convergent Set of Disruptions
At Skytop, our family of expert contributors provide you with the tools to scan and prepare for the convergent disruptions that will shape our global socio-economy. Individual disruptions bring about change in an industry, a region, or specific aspects of our daily lives. A convergent set of disruptions build on each other and can change the global system itself in ways that may be difficult to predict.
In the past 30 years, we have experienced many disruptions that changed the way we live. Take the internet and the ensuing digitization of everything. Or globalization in the flow of goods, services and people, which made the whole world more accessible.
Since the COVID-19 pandemic, however, many people feel that a more profound change to the global system is underway.
In my book Powering Prosperity, I explain how major shifts in the global system arise from three convergent disruptions: (i) social attitudes and institutions; (iii) exponential technologies; (iii) superpower transition. But when these powerful forces converge, Humanity’s track record on proactive and positive system change is patchy at best.
Instead, system change is usually triggered by a severe economic crisis and follows a chaotic path. At such times, the system-wide resilience is critical to weather the storm.
The Cold War For Example
After two harrowing World Wars – and Great Depression sandwiched in between them – people clamoured for an era of global peace, self-determination and cooperation. This social sentiment and the lessons of war and financial crisis were enshrined, however imperfectly, in the institutions of the United Nations and the Bretton Woods Agreement that led to the formation of the World Bank and IMF. Colonial powers lost their legitimacy and their financial ability to maintain the extractive system, leading to a wave of independent nations and mass migrations that reshaped labour markets. Large industrial producers in both liberal and communist regimes gained influence, social safety nets (especially in healthcare), and women’s engagement in the workforce took off.
Technologies Unfold
The spread of hydrocarbon-based energy production combined with mass manufacturing technologies concentrated production and population into urban areas. Affordable consumer goods gradually became widely available. Policies like the Marshall Plan helped support devastated economies and helped them rebuild and consume. And the greatly reduced cost of sea and ground transportation allowed goods and commodities to be readily traded.
Liberal economies witnessed a burgeoning middle class, while planned economies were less successful in translating increased production to improved living standards.
But global system change is rarely smooth sailing. The rise of the Soviet Union as a global superpower challenging the U.S. ushered in a tense era of militarization, nuclear armament and proxy wars in Korea, Vietnam, Afghanistan and beyond.
The global economy became hostage to the concentration of hydrocarbon production in OPEC countries.
After periods of excess liquidity and debt build-up, the bills came due leading to debt crises. Countries in Africa and Latin America lacked the governance, investment, and technological transfer to leap beyond extractive economies exporting primary goods and many of them actually de-industrialized. Even some Asian economies, who successfully leveraged forced savings into manufacturing and infrastructure also ran afoul of such financial misallocation. Geopolitical and macroeconomic risks ran high, placing a ceiling on growth and prosperity.
Beginnings of a System Change
Are we now on the brink of another shift in the global system?
If my conclusions are correct, then conditions are indeed primed for system change. The COVID pandemic led to the 4th largest economic crisis since 1850 (as measured by drop in GDP), after the Great Depression and the two World Wars. And notably, it was the most global crisis in modern times, affecting more countries and more concurrently than any of the three big economic shocks of the 20th Century.
The COVID crisis provided the spark that ignited the touchpaper of radical change that had been smouldering for some time.
Social attitudes and institutions
Arguably, the world enjoyed one of its greatest periods of economic growth due to the peace dividend of 1990-2020. Yet global protests had reached a crescendo leading up to the COVID pandemic. This hinted at a major shift in social attitudes. So, what were people fighting for?
Three sentiments were paramount.
First, a plea for environmental sustainability measures to avert climate change. People were alarmed by the threat to lives and property from extreme weather events and rising sea levels. There were also fearful that the growing shadow of water and food stress could get worse.
Second, people cried out for socio-economic inclusion to reverse the growing wealth and income gap along the fault lines of developed and emerging economies, urban and rural communities, young and old generations, and race.
Third, there was a pro-democracy outcry in places like Lebanon, Moscow and Hong Kong as more authoritarian governments attempted to curb civil and political liberties as well as their economic well-being.
These shifts in social attitude have already been given voice by the UN Sustainable Development Goals in 2015.
These replaced the prior (Millenium) development goals which the global community struggled to meet. But since the pandemic, they have gradually been reinforced through institutional commitments.
For example, governments representing 80% of the world’s economy have now made commitments to a Net Zero Economy by 2060 or earlier. The European Green Deal and the U.S. Inflation Reduction Act has made billions of dollars in public funding available for the deployment of green infrastructure. And trillions of dollars are looking to invest in ESG funds and voluntary carbon offsets, although there are a dearth of high quality products available.
Exponential Technologies
Just as computing speed sustained exponential increases over the past 50 years along the lines predicted in Moore’s Law, many other technologies are experiencing similar improvements in cost and performance.
Fuelled by public support and government incentives, there has been a Cambrian explosion in climate technologies aiming to decarbonize various sectors of the economy. The initial wave of technologies involved wind, solar and biofuels. The recent crop includes energy storage with lithium-ion batteries, green hydrogen produced for fuel and feedstocks, and electrified transportation.
In the future, we will see the scale-up of both engineered and nature-based solutions for direct carbon capture.
Data storage is poised for steep declines in energy, space, and materials intensity which will allow us to maximise the value we can gain from Big Data and machine learning. This will enable many productivity-enhancing applications such as autonomous vehicles, controlled environment agriculture, and genomic drug discovery.
These technological disruptions pose the risk of widening inequalities between the energy and data haves and have nots. Not surprisingly, the have nots will argue for the use of hydrocarbons and the lower standards in data privacy to catch up, especially since the have’s achieved energy and data supremacy through highly polluting measures.
Superpower Transition
Just as the rise of the USSR post World War II contributed to a fractured global order during the Cold War, China, Russia and other illiberal powers will precipitate divisions today.
They already have used the openness of the global system to their advantage.
China, in particular, has used the leverage of the WTO to reshape trade rules and establish growing influence over its Belt and Road hemisphere. Although China’s infrastructure investments in emerging economies are contributing to economic development and job creation, it has left countries like Sri Lanka, Ghana, and Ecuador precariously indebted and vulnerable to further Chinese influence upon default.
Domestically, the Chinese Communist Party is prepared to sacrifice civil liberties to maintain its position of absolute political control. In particular, limited controls on data privacy confer Chinese firms with an advantage in sectors like AI where Big Data and machine learning can confer strategic advantage.
In addition, there is growing suspicion of Chinese firms improperly using customer information when they operate overseas or even at home. The risk of illicit use of sensitive data and cyber attacks is driving countries to enact data sovereignty policies and companies keeping their most sensitive data on-premises. Companies are struggling to comply with a diverse set of policies and potential supply chain disruptions.
Meanwhile, China and Russia have their sights set on strategic annexation in their backyards.
The Russian invasion of Ukraine targeted the industrially developed Donbas region and led to spiralling gas prices, one of Russia’s major exports. The era of cheap Russian gas to Germany is now in question and Germany is scrambling to build natural gas terminals to enable gas imports from other sources, even at a higher price. China’s designs on Taiwan, along with supply chain disruption due to the pandemic have already led to renewed U.S. efforts to rebuild onshore semiconductor capabilities through investment in places like upstate NY.
Similar concerns about China’s dominance of critical mineral supply processing and battery supply chains have prompted a mix of greater investment and restrictions from the U.S. and its allies.
Contours of the New World Order
The transition to any new global system is messy and unpredictable, but the key contours of the next few decades are emerging.
The boldest contour is likely to be greater geopolitical instability.
Authoritarian regimes will attempt territorial advances such as Russia’s invasion of the Ukraine. China has already drawn Hong Kong more tightly into its regime and is eyeing incursions in Taiwan and the South China Sea. It may also use less blatant means, relying on a mix of economic rather than just kinetic coercion. Meanwhile, excessive debt combined with water and food security could destabilise fragile nations like El Salvador and Ethiopia, leading to mass refugeeism, supply shortages and spikes in inflation.
Cyber-crime will also be a prominent systemic risk to the new system.
In his Skytop article Cyber Whack-a-Mole, Chuck Brooks shows that the cost of cyber-attacks on national security, public infrastructure, corporate IP and personal information will grow from $6 billion in 2021 to $10.5 billion by 2025. To mount an adequate cyber defence, significant investments will be required in cybersecurity talent, systems and policies.
Localization
In the face of mounting geopolitical and cyber risks, a second contour will be the localization of production to preserve supply security for key commodities like water, food, energy, rare earths, and semiconductors.
For example, the US Inflation Reduction Act incentivizes the reshoring of metal processing and battery technologies. Meanwhile, new technologies like vertical farming will substitute traditional approaches such as outdoor agriculture, and bring additional benefits such as local job creation, the avoided carbon footprint of global transportation, and a shield against imported inflation.
Higher Costs
In the short term, the net result of these heightened risks is that the new global system will have a higher cost structure. Newly re-shored industries like semiconductors or new modalities like vertical farming will often run at a higher cost in the short-term until scale increases increase efficiency.
Unfortunately, in some places, this will slow down investment in the transition to a zero-carbon economy. For example, Mike Moran’s Skytop article Germany: It’s Not So Easy Being Green points out that Germany’s response to the energy crisis triggered by the Ukrainian invasion has been to invest in natural gas terminals – a practical quick fix compared to accelerating the transition to renewable energy. Countries in developed economies may also need to conserve and get used to lower levels of energy intensity.
Another driver of higher costs will be the need to build redundancy into supply chains, by investing in capacity outside China – both closer to home as well as in other emerging economies like India and Vietnam. As Rachel Ziemba points out, this will increase the importance of standard and rules-setting bodies like the mini-lateral IPEF and the EU-US and EU-India TTC. Overall, the time of rampant free trade and market access concessions is behind us, with more governments aiming to increase their space to support their local economies.
In the longer-term, costs will come down as economies of scale kick-in.
For example, the past decade has shown how the cost of solar and wind power has come down precipitously. Ten years ago, these installations were only possible with government tariffs and subsidies. But today, they have reached cost parity with hydrocarbon energy and attract large-scale investment from institutional investors. Net-zero technologies are likely to follow the same pattern.
Regulation of Sustainable Finance
Sustainable investing is likely to grow rapidly as people become increasingly concerned that their investments at a minimum “do no harm” and ideally generate positive impact.
But as Richard Howitt warns, the backlash against “greenwashing” and “fractious geopolitics” may cause the coalition towards progress to be at risk of breaking up. European financial regulators are making strides to address the problem by implementing a 3-part regulation for asset managers: Taxonomy, Disclosures, and Benchmarks.
The Taxonomy regulation establishes the framework to gradually create a unified classification system (‘taxonomy’) for determining whether an economic activity is environmentally sustainable. The Disclosure regulation introduces obligations on how institutional investors and asset managers integrate ESG factors into their risk management processes. And the Benchmarks regulation defines how to construct investment indices that are aligned with targets for keeping global temperature rise to within 1.5-2oC.
Collectively, these regulations, and others like it, are much needed to set rigorous standards for ESG investments.
Valorisation of Natural Capital
A final contour of the new global system will be the valorisation of natural capital.
Since nature – our oceans, forests, soils, and mangroves – are the biggest carbon stores, the impetus to decarbonize the economy will increasingly promote the preservation and restoration of nature. In a sense this is the latest attempt to bring back in the externalities and costs that economists like to assume away. As with ESG, improvements in the measurement, certification and monitoring will be required to build confidence in the carbon impact of nature-based initiatives such as reforestation, regenerative agriculture and seaweed cultivation.
When properly governed, natural capital investments will constitute an important part of the “just transition” because they will create jobs in rural and coastal areas which are already suffering from restrictions placed on extractive activities like coal mining and fishing.
New World Order
The evidence points to the birth of a new world order, fashioned from the convergent disruptions in social attitudes, exponential technologies, and a superpower transition.
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As a Skytop Contributing Author, I will, along with our family of luminaries, keep you informed of disruptions and how to capitalize on them.