Globalization 4.0

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By Klaus Schwab

The world today needs a new framework for global cooperation in order to preserve peace and accelerate progress. After the cataclysm of World War II, leaders designed a set of institutional structures to enable the postwar world to trade, collaborate, and avoid war—first in the West and eventually around much of the globe. Faced with a changing world, today’s leaders must undertake such a project again.

This time around, however, the change is not just geopolitical or economic in nature. The Fourth Industrial Revolution—the complete digitization of the social, the political, and the economic—is tugging at the very fabric of society, changing the way that individuals relate to one another and to the world at large. In this era, economies, businesses, communities, and politics are being fundamentally transformed.

Reforming existing processes and institutions will not be enough. Government leaders, supported by civil society and businesses, have to collectively create a new global architecture. If they wait, or simply apply a “quick fix” to repair the deficiencies of outdated systems, the forces of change will naturally develop their own momentum and rules, and thus limit our ability to shape a positive outcome.

THE PARADOXES OF PROGRESS

In the decades after 1945, the world’s economies underwent an ambitious process of integration. Western Europe led the charge, charting unprecedented growth rates as it aimed for an “ever closer union.” Japan and the “Asian Tigers” followed, gaining access to global markets and supersizing their economies. By the early 2000s, the BRICs economies—Brazil, Russia, India, China, and South Africa—had spurred international trade to levels previously unseen; exports now count for about one-fifth of global GDP—the highest level in history. Throughout, the United States played a leading role, setting up the institutional structures that underpinned the global system, securing trade routes, and pumping wealth into foreign markets.

Today, this megaengine of globalization seems to be slowing down. As a percentage of GDP, trade is no longer rising. Worse still, the free-market consensus is unraveling. Around the world, protectionists are making inroads, often elected by voters who feel the current system is stacked against them. Their frustration is understandable: although globalization lifted millions out of poverty, it also meant decades of eroding incomes and precarious working conditions for many others. For American workers, the golden years of globalization ended decades ago. Manufacturing employment in the United States peaked around 1980 and dropped precipitously starting around the time China entered the WTO in 2001. Despite a booming economy, manufacturing jobs are back at pre–World War II levels.

In many other countries, growth rates are dismal and unemployment figures stubbornly high. Across much of Latin America, including Argentina, Brazil, and Venezuela, inflation and negative growth are the order of the day. Europe, still reeling from the aftershocks of the financial crisis, is dealing with a powerful backlash against immigration. Even China is struggling to meet its growth expectations.

Populists and protectionists feed on these ills, and their solutions have about them the rosy glow of nostalgia. Life may not have been materially better in a less globalized world—although for some communities it was—but the society people lived in may have felt more secure, familiar, and certain. Subscribe to this narrative and tariffs, immigration barriers, and a return to national sovereignty will seem like sensible ideas.

But this is wishful thinking. Granted, pushing back against the system of globally integrated value chains may well help revitalize the local manufacturing of cars, electronics, or agricultural produce in Western economies. The real issue, though, is that the production and exchange of physical goods matters less and less each year. From here on out, decisive competitive advantages in the global economy will stem less from low-cost production and much more from the ability to innovate, robotize, and digitalize.

THE NEXT WAVE

We are, put simply, living in the era of the Fourth Industrial Revolution, the most recent wave of groundbreaking innovation. The first brought steam trains, steamships, and the industrialization of weaving and mining. The second electrified—literally—much of the world, introduced the modern assembly line, and brought us the car and the airplane. The third, from the 1970s onward, was centered around the computer and early digitization.

Like its predecessors, the Fourth Industrial Revolution is best described by its leading technologies: artificial intelligence, autonomous vehicles, and the Internet of Things. These are technologies that will affect many industries in the decades to come and accord unprecedented importance to the digital world. What unites them is that they transform the very structures of economic interaction: the twin trends of digitization and virtualization are creating an economy of near-unlimited mobility in which cyberspace is home to all data. As online platforms pursue vertical integration, they cut out traditional intermediaries. And artificial intelligence is creating “smart” systems that are not just analytical but also predictive and prescriptive.

The production and exchange of physical goods matters less and less each year.

In this world, globalization won’t disappear; it will deepen. If in the past global integration grew as trade barriers came down, it will now rely on the connectivity of national digital and virtual systems and the related flow of ideas and services. This is the core of Globalization 4.0.

This new form of globalization is arriving at breakneck speed. Consider digital flows: already in 2016, a study by McKinsey & Company calculated that “digital flows—which were practically nonexistent just 15 years ago—now exert a larger impact on GDP growth than the centuries-old trade in goods.” It also found a 45-fold increase in the amount of cross-border bandwidth from 2005 to 2016 and predicted another fivefold increase by 2022.

All of this has sent a jolt through the global economy. The first sector to be affected was manufacturing, where automation, localization, and individualization have begun to replace traditional supply chains. Going forward, this means that competition will be based less on cost-effectiveness and more on the ability to innovate.

In this new environment, the world is a company’s oyster. Consider the U.S.-based tech giants: in less than 25 years, Amazon grew from a startup e-commerce store to the world’s second-largest traded company, revolutionizing retail, cloud computing, and other Web services; Apple became the world’s first trillion-dollar company in 2018, barely a decade after it released the first iPhone.

BENOIT TESSIER/REUTERSDisruptors of yesteryear: Shipping containers in the Port of Le Havre, France, September 2018.

Titans of previous industrial revolutions, such as Cornelius Vanderbilt’s railroad companies, ExxonMobil, and IBM, also benefited from such winner-takes-all dynamics, but their economies of scale tended to taper off, bounded either by natural limits or by man-made laws. In our era, however, limitless network effects have replaced old economies of scale. For “big tech” firms, the upper user limit is nothing less than the entire global population, and they are expanding at a record pace. Planes and cars took more than six decades each to reach 50 million users. Computers and mobile phones managed the feat in 14 and 12 years, respectively. In the age of ubiquitous smartphones, it took WeChat, the all-in-one app that has become a dominant means of communication for China’s netizens, only a year to reach this milestone. At latest count, four companies count a billion users or more: Three American ones (Alphabet, Facebook, and Microsoft) and a Chinese one (Tencent). The market power these companies have garnered along the way is awesome.

It doesn’t end there. By moving into new industries—such as cloud computing, healthcare, loans and payments—Amazon, China’s Alibaba, and other tech companies are becoming digital conglomerates. Other platforms, such as Airbnb, WeWork, and Uber, expand globally without ever owning the physical assets their services rely on. Along the way, these firms have outgrown the boundaries of traditional businesses and disrupted social patterns. Artificial intelligence, big data, and the ability to build mass-use tech platforms are starting to determine even national power.

For those with access to technology, this is great news. For labor, not so much. As economies of scale evaporate, and robots and AI increasingly replace humans, companies no longer require hundreds of thousands of employees to run their operations. The industrial giants of yesteryear were among the world’s largest employers. Today, those lucky enough to be employed are either highly skilled and highly paid, or low skilled and low paid.

The United States is not even the country where workers will be hit the most. The industrialized West outsourced most of its manufacturing jobs to lower-cost developing countries during a previous wave of globalization. Look instead to Bangladesh, the Philippines, or Vietnam, where advanced industrial robots are replacing skilled human workers in sewing and other trades.

The industrial giants of yesteryear were the world’s largest employers. Today, those lucky enough to be employed are either highly skilled and highly paid, or low skilled and low paid.

The result is a widening gap between the winners and the losers of the Fourth Industrial Revolution. At the top of the pyramid, a small crop of founders, investors, and other shareholders form a fantastically wealthy elite. At the bottom, low-skilled employees must count on minimum wages to live. The ranks of the middle class, once the connecting tissue of society, are thinning, and social cohesion is suffering as a result.

Making matters worse, digitization has opened the floodgates to information and disinformation alike. Algorithms, not humans, now determine much of what we see and read. Disinformation campaigns distorted recent elections in the West, and similar things are happening around the world. Citizens’ trust in their government leaders, their judiciaries, and the media is at or near an all-time low.

THE CORNERSTONES OF A NEW ORDER

It is hard to overstate what’s at stake for societies and their governments in the face of these shifts: success or failure will help determine quality of life for generations to come. Confronted with the Fourth Industrial Revolution, governments and societies have three options. They can protect the “losers” of this transformative change, putting in place effective social safety nets, active labor-market policies, and efficient healthcare systems. They can double down on neoclassical laissez-faire economic policies, with the hope that the resulting wealth will benefit all sectors of society. Or they can leverage the opportunities of the Fourth Industrial Revolution, designing and governing inclusive platforms and systems that are fit to deal with the complexity of the new wave of global integration.

In the early stages of the Third Industrial Revolution, the New Frontier and Great Society agendas under U.S. Presidents John F. Kennedy and Lyndon B. Johnson strengthened the United States’ international leadership position as well as its domestic cohesion. By the end of the 1960s, the country had managed to put a man on the moon and halve its poverty rates while its companies were global market leaders. Though the benefits were by no means shared evenly, per capita GDP per capita rose to record levels.

The potential of the Fourth Industrial Revolution dwarfs even the progress made during the three previous industrial revolutions combined. There is no reason today’s leaders could not proactively manage negative externalities and ensure that inclusive policies distribute opportunities fairly. Digital resources are limitless, and so too can be the wealth they create.

Yet achieving this outcome requires more than patchwork actions that seek to reinvigorate outdated systems. We need fresh thinking about what free and fair economic relations in today’s world means. The global system that states built after World War II was designed around the globalization of planes, cars, global manufacturing value chains, and early computers. But that global system has run its course, and no international organization in existence can cope with the challenges of Globalization 4.0. There is very little discussion of, let alone consensus on, how to regulate technologies or deal with the Fourth Industrial Revolution’s winners and losers.

What, then, should the new global operating system look like? It should begin by accepting the reality that the Fourth Industrial Revolution is even more borderless, interconnected, and interdependent than the global economy of integrated supply chains. Second, global cooperation should focus on the governance issues at the heart of the current transformation: cybersecurity, the uses of AI and the gene-editing technology CRISPR, and intellectual property and data protection agreements. Security, above all, has always been a precondition for globalization. That remains true in cyberspace: when the Internet is not safe, economies suffer. We must ensure the safety of Globalization 4.0’s digital sea-lanes and havens.

As the United States, China, and other states vie for leadership in AI and gene editing, they should agree on what is and isn’t allowed.

Artificial intelligence, for its part, can do as much harm as good and requires careful regulation. As the United States, China, and other states vie for leadership in the field—and in other technologies, such as gene editing—they should agree on what is and isn’t allowed. The same applies to financial systems. Cryptocurrencies such as Bitcoin have already proven their advantages over traditional money, but they are not immune to exploitation by speculators and criminals. Going forward, central bankers and policymakers should agree on how to optimize the system’s blockchain backbone so that it can benefit everyone.

Threats from the nondigital world won’t go away, either. Wildfires, droughts, and tropical storms remind us that climate change threatens our habitats, biodiversity, economies, and societies. Meanwhile, population growth is set to continue for another few decades, although at a slower pace. This means that geopolitical hot spots will multiply and that migration will accelerate. Faced with such extreme conditions, sovereign nations have a right to design adequate national policies and contingency plans. But multilateral coordination is key, as we share one planet and are responsible for its commons. In doing so, leaders must accept that we now live in a multipolar world in which several countries and regions will need to share the burden and the bounty of global leadership.

Finally, we must come to terms with the sharing and platform economies. So far, they have benefited the endusers and, above all, the platforms’ owners. Most platforms are concentrated in a few global hubs, and their advantages have accrued mostly to a small group of early, risk-seeking investors. Because these platforms rely on fewer employees and cut out middleman companies, they hurt national treasuries and many existing businesses. In response, international agreements should lay out new methods of taxation. Rather than taxing labor, which could handicap already precarious forms of employment, governments could agree to tax platform activities “at source”—namely—where users are based. That way, governments around the world could benefit, and fund the education and reskilling of their people.

GUIDING PRINCIPLES

As we address the challenges of Globalization 4.0, we would do well to follow three crucial principles. First, the dialogues that take place to shape Globalization 4.0 must involve all the relevant global players. Governments, of course, have a key leadership role to play, but business is the driver of innovation and civil society serves a critical role in making sure this innovation is applied with the public’s interest in mind. Second, the preservation of social and national cohesion should be placed front and center. Safeguarding and strengthening the pillars of social justice and equity will be necessary to sustain national social contracts and preserve an open world. This cannot happen without bottom-up decision-making, which enables the substantive engagement of citizens around the world. Third, coordination—achieving shared objectives—will yield more successes than cooperation—acting out a common strategy. The Paris Agreement on climate change and the United Nations Sustainable Development Goals are examples of a coordinated approach that leaves room for actors to devise their own strategies. In a world where shared values are a rare commodity, coordination based on shared interests is the most manageable approach to global governance.

We’ve been here before. In the second half of the twentieth century, leaders from all sectors of society laid the institutional foundations for sustained peace, security, and prosperity. Since that time, however, the world has radically changed. A new approach is now called for, one that shapes our global future through a sustained commitment to improving the state of the world. Leaders can debate whether they should work with the good of their country, or that of humanity, in mind. But this much is clear: Globalization 4.0 will only accelerate from here. We must do what we can to harness it for good—and for all.