The Promise of the World Ahead

Speaker Name: L. M. Baker Jr
Speaker Title: Chairman, CEO and President
Speaker Company: Wachovia Corporation
Wachovia Corporation Website

L.M. BakerIt is difficult to imagine a more interesting time to be alive. In any comparison of history this is high drama replete with vivid and powerful contrast. The days ahead will be even more interesting. Change will be the order of the day, stability and equilibrium, only to be encountered from time to time.

Current economic patterns are challenging. The longer economic view for America is still good. There is every reason to expect excellent performance in decades to come. But at this moment, we also know that things really have changed. We have other priorities to consider.

The most interesting and provocative news is not necessarily economic. The scoop of the day is that the real drama may be playing on a different stage, the outcome uncertain, the results harder to see, the end game more difficult to call. The real story is that we are witness to the advent of a new social order.

Headlines hinting at the future are brief but intoxicating, "The world is in revolution," "Change is normal," "Mayhem to be expected."

In the midst of this unfolding tempest, leaders require new tools: flexibility, adaptability, innovation, initiative, freedom to act, the ability to see the long view. Constant re-evaluation of capabilities and skills will be necessary. Consistent testing of strategies will be a life-sustaining practice. Measurement will be challenging. Flexible and useful technology will be essential. Talent and knowledge will be paramount and differentiating.

This is all very important. We are playing a long and serious game. The world is under-going global deflation and recession. The future of the 21st century hangs on the outcome.

What has happened? Not very long ago, we and our way of life seemed invincible. Times were good. Richness overflowed from our chalices. The world was our bounty and its harvest didn’t even seem especially challenging.

The search for the truth reminds us of the first days of this new century. Strong forces were in place shaking the foundations of that effervescent economy of the 90s. We found ourselves uneasy in transition from the old world to the new. Four major factors were at work.

These forces today foster an environment of change. They are:

  • A lower nominal growth environment
  • Price stability and deflation
  • The evolution of the global construct
  • The substitution of knowledge and technology for labor

We have entered an economic cycle that will be distinguished in the future by a lower rate of growth. The expected growth rate of five to six percent is a dramatic shift from high levels of nominal growth encountered in previous decades. Inflation will not provide pricing buoyancy and stimulus that helped corporations sustain top-line growth in the past. The economy will perform well over time, but at a more moderate pace. Business will be challenged to sustain revenue and earnings growth. Market expectations for performance will be adjusted accordingly.

Trends in the economy are deflationary. The cost of raw materials and commodities has moderated reflecting ample supplies and processing and extractive techniques influenced by technology. Labor costs are subdued by layoffs in America and an abundance of low-wage talent from the emerging world. New capabilities arising from technology have made manufacturing more efficient and effective requiring fewer people. Heavy capital investment has created enormous capacity across all sectors of the economy. Consumers are more discerning with more opportunities to buy on their terms. There is not, and will not be, strong pricing power underpinning the economy.

The third major factor at work is the continued evolution of the global construct. The world is now defined by capital, ideas and energy; not by artificial, geographic or political boundaries. New uses of information have changed traditional alignments. New alliances have been formed. Some of these are formal. Many are manifestations of the ability to communicate instantly and effectively around the world. All of this has elevated risk in the eyes of investors but does not alter the long-term attractiveness of trade, in-vestment and growth in emerging markets.

Millions of people are now freely seeking their own destiny and working hard to achieve a better life. In the years ahead the effects of global economic growth promise to be beneficial. In the short-term, industrial nations are under severe competitive pressures. Jobs are being permanently lost to low-wage competitors.

The fourth factor is the substitution of knowledge for labor. Revolution continues in the development and application of technology, but the most significant factor at work is the diffusion of information across society. Useful and inexpensive information is available to everyone and instantly transmitted around the globe.

Cheap and easily available information make technology a trump card for innovators. This capability destroys artificial, inefficient structures at all levels of society. The tech-nology revolution puts the citizens of the entire world on a more level playing field.

These four factors are and have been for some time stimulating change in process, procedure and business practice. They are causing boundaries to evaporate and standards to be rethought. The combination of lower nominal growth, deflation, new global alliances and the incredible revolution in technology is causing our lives to turn upside down and will severely test us in the years ahead.

Just a few days ago it appeared that America would experience a mild recession and move promptly to sharp recovery. Luminous observers pronounced us economically, "out of the woods," one step away from the economic bounce that would put the old spring back in the national step. Good times and broad prosperity could rally by Christmas. But now we are undergoing global deflation and recession.

The expected u-shaped slowdown and its soft landing were in response to past events: a sharp run up in the price of oil, interest rate hikes and a stunning collapse in capital spending. A similar environment was present elsewhere in the global economy with the addition of contractionary burdens of IMF solutions in many countries laboring under debt restructuring.

The trip from a state of economic euphoria to global slowdown has been brief, but tumultuous. It may be useful to spend a few moments retracing the course of events to see where they lead.

Nineteen ninety-nine was completed in jubilation. Mankind escaped the "Year 2000" crisis with hard work, brains, capital and brawn. The results were interesting. New process and procedure emerged from the cleansing of data files and systems. Inventories of major projects and capabilities led to considerable streamlining. The results were inspirational. And while it is difficult to measure cost benefit analysis of the effort, many organizations emerged stronger and better prepared for future uncertainty.

The smooth crossover to calendar 2000 was preceded and followed by very strong consumer spending and impressive growth in the economy. Growth in nominal GDP was by quarter from 1999 to mid-year 2000: 3%, 2%, 4.6%, and 8.3%. Subsequently in 2000 it was 6.3% and 8%. This was cause for ebullient celebration.

But by high noon 2000 change was stirring. Irrational exuberance was shedding its lustrous skin although the consumer segment of the economy remained strong. Fault lines began to show in the foundation and by mid-year banks and high-risk creditors had begun to see serious problems in credit portfolios. Corporate profitability was moderating and under pressure from changing customer expectations, strong competitive forces, disappointing investments, shifting technology requirements and slowing economic growth. These changes were attacking the structure of many companies not prepared or sufficiently durable to survive in a lower growth world. During Year 2000, the deterioration in corporate credit was breathtaking.

In the winter of 2000, policy-makers came alive to the prospect of serious weakness in the economy. The Federal Reserve began significant easing. The Federal Funds rate dropped 300 basis points in the first nine months of 2001and short rates have now plum-meted to a 2.5% benchmark, the lowest level since the 1960’s. Long rates held firm anticipating economic rebound and alert to the possibility of monetary tightening in concert with a surge in demand coming off the bottom of a recession.

By the opening hours of 2001, alarms were ringing in the global economy and a world-wide slowdown appeared imminent. In America signals were still mixed.

American consumers continued to spend, gaining advantage from low unemployment, real wage gains and the refinancing of home mortgages. As citizens we also benefited from low agricultural and commodity prices now at 25 year lows on a nominal basis.

Corporate credit markets continued to weaken. Inventories contracted except for finished goods unable to be sold. Capital spending halted as industrial and service companies delayed or postponed spending. Almost every company found itself able to defer major projects including hiring and capital investments. Support expenses such as advertising and corporate travel were hit hard.

Manufacturing, in recession since 2000, continued to plunge led by the downward spiral of high technology production. By late summer, ingredients for a more severe contraction were evident accompanied by a global slowdown of significant proportion. During July and August the economy took on a sickly pallor.

On the first day of September, the risk of economic recession seemed dramatically higher. The economy had grown at about 1% over previous quarters but was now stalled. Pressures on performance were negative caused by contraction in employment and consumer spending, global weakness, lack of capital investment, abating productivity and low investor morale now terribly weakened by despondent equity markets.

In the wake of the recent disaster, America will most assuredly experience a recession of greater depth and duration than previously thought. The general weakness in pricing power throughout the economic expansion of the past decade now raises a substantial alarm. If economic confidence is more fragile than first thought, the outcome could be serious, resulting in a self-perpetuating period of deflation and profit destruction. The general weakness in global markets contributes to a profound sense of unease.

The key to recovery is a resumption of confidence, employment and demand. The question to be resolved in the days ahead is the degree and vigor of fiscal and monetary stimulus and the ultimate consumer and investor response. Through the summer and in the weeks following the national tragedy, policy responses have been minimal and limited. Now timing is important lest caution, risk aversion and entrenched stubbornness on the part of investors and buyers become permanent. The economic health of America and our global friends may hang in the balance.

Assuming progress and success in hobbling the terrorist threat and achievement of responsive "Public policy," America could gain confidence, inspire investment and achieve a resurgence of activity. This could help lead to a prompt and sharp recovery.

Continued successful attacks on the United States and its allies will erode confidence and could forestall any rebound. If this happens, the country will revert to a more severe war footing and undergo significant change in the composition of Gross Domestic Product and the means to achieve it.

In recent decades our economies have actually benefited from the benign attributes of deflation. Individuals have had lower costs and more goods, services and value for fewer dollars. Businesses have had good profits. Governments have enjoyed surpluses.

Now we are in a more mature phase of the deflationary cycle as revenue and tax receipts for business and government falter and profits shrink. In the contraction of big government and continued restructuring of corporations, jobs are lost, incentive pay curtailed and hiring reduced. There are cutbacks in training, travel, investment and support for products and services. In a prolonged contraction broadened by entrenched consumer apathy, corporations may need to permanently lay off workers and customers. This we very much wish to avoid.

Under a normal scenario corporate profits would continue to sink during a recession, then rebound as the cycle matures. Corporate profits should ultimately grow in line with nominal Gross Domestic Product.

In the years ahead, our nation’s economy will expand based on population growth, productivity and inflation. The combination of these is expected to create nominal growth in the range of five to six percent over time after the effects of rebound from recession.

Therefore profit growth in the world ahead will be in that range. Some companies will do better, but some will do worse and management under all circumstances will be extremely challenged. It is good to remember: this is a world where "Change is normal, stability and equilibrium, states to be encountered from time to time."

I believe that the years ahead can be good ones. It is possible to envision a substantial period of economic growth stretching decades into the future. Forces driving global expansion are still in place. They bode well for prosperity over time.

Progress, however, will be supremely challenging and perhaps even painful. There will be disruption, disappointment, stress and strain. Significant events will happen for which we cannot plan. Those who prepare themselves for the discipline of the new world will perform better.

Provocative and exciting scientific discoveries, ideological leveling and changing views of future events continue to move at accelerating speed reshaping our sense of reality. We are no longer safe relying on the concrete and predictable. In this world denial and ignorance raise questions of survival. In the past, many of us have been too comfortable with the illusion of certainty.

By December 31, 2000, the total population of the world included two billion teenagers. This is a frightening statistic. It is vital to understand who they are and their influence on the global family.

These young people are charter citizens of the global society. They share a commonality of experience not limited to distinct culture or geographic boundaries.

The influence of these "new world children," combined with the dramatic tide of democratic capitalism, should do for the world economy what this nation’s baby boomers did for growth in the United States in the 70’s and 80’s. Their entry into the economic picture will help propel worldwide economic growth over time.

Armed with idealism and the energy of youth, these young citizens will help resolve the transition of our nation states to a true global community. Their impact on culture and lifestyle will soar beyond the limits of our current imagination. They are intelligent and educated. They are highly skilled in the use of technology and new age communication techniques. They are, by the way, conservative, ambitious and of high principles.

To a greater degree than each of us may have thought possible; political, economic and social change is in the offering. These teenagers of the world are joined by a diverse global society of citizens who wish to participate in decisions affecting their families and their future. This coalition, which embraces change, is joined by many people who did not participate in the great surging economy.

With all of my optimism for the future, I am not totally naïve. In many ways and for many citizens, the miserable state of the world is still with us. Wrong decisions are made. The right people still do not always get a fair chance. Many lack education and the opportunity to pull themselves ahead. For them, a lofty vision of the world is a dream to be had by someone else.

At the beginning of the last century, about 50 acknowledged states constituted the world community. The number is now approaching 200, with most newer states created from ethnic conflicts that have flared with the collapse of previous governments or alliances. The fragmentation and reordering of state boundaries and identities likely will continue. The depth and breadth of this process will proceed at varying rates of speed and with varying rates of permanency.

The challenge in many ways is the rich and diverse array of economic and cultural relations, all enabled by technology, facilitating the interconnectedness of people around the world. At the same time, this electronic environment removes the previous cultural restraints that once allowed many peoples to live in harmony, even if uneasily. These new trends are giving rise to new methods of conducting affairs: broad social movements, armed response to regional problems and the mushrooming of global interdependencies. All of these change the long-term relationships of nations to one another creating significant shifts in the distribution of power. The shape of the new world will not be known for decades; meanwhile, weak foundations will cause problems and discontinuity. The new world of the 21st century is being shaped by many new and emerging balances of power. It is incumbent upon the United States, for selfish as well as altruistic reasons, to be helpful in this tumultuous process.

The needs of our people are great. In the years ahead we have many major tasks to perform.

We must take steps to protect the vibrancy of the global economy. Growth in world Gross National Product is absolutely necessary to meet fundamental human needs.

We must resolve the issue of terrorism. For some time into the future we will witness changes in identity, national boundaries, races and cultures. Ethnicity will continue to exert itself in uprising, rebellion and civil disturbance. But increasingly, violent and disruptive leadership will come to understand that this behavior will cause their exclusion from the benefits of world progress.

In the process of ensuring economic, social and physical well-being, we must not lose sight of the protections that democracy demands. Democracy means that all citizens have a decisive say in the process of governing. They are linked through their elected representatives with appropriate checks and balances and ways to actually rid themselves peacefully of those who ignore their expressed will. This process works well when all participants subscribe to a basic notion of civil behavior.

There is no dispute today on the need to provide for the defense of our citizens. Freedom from fear is an inalienable right of our people. It is one of the few directly expressed functions of national government. But we must also exercise vigilance to protect our personal freedom.

Finally, we must open our minds to the needs of the world. For the United States to play a major role in the global world of tomorrow, we must regain confidence in ourselves and in our economic system. It is a confidence well-earned through the years. Our democracy has survived war, recession and depression. To many nations emerging from domination and despair, we are still the ideal, still the hope of the world; and, with our many faults and frailties, still worthy of emulation.

Prosperous nations of the world must come together to wash away the disaffection that hangs over the global community. We must unite against the forces of poverty and her handmaiden’s ignorance and despair. We must build agreement on steps toward economic progress, literacy, citizen health and higher standards of living.

Americans are blessed to live in freedom with abundant and well-earned resources. In years to come we will generously, as we always have, give up some of that wealth for the good of our friends around the world.

The 21st century will be one in which the primary architects of history will be those who reach out to the world’s inhabitants and help them find a better life. The clear result will be reduction in oppressive government and barbarian behavior. The task of America is of epoch proportion.

My heart is filled with joy at the opportunity to be with you at this fine University. This is a beautiful day made more bountiful by the presence of President Wang, his students and other friends from China.

President Wang, your mission at Fudan University is important to the world. Your responsibilities are overwhelmingly significant because of the contribution ultimately to be made by your students.

A goodly number of these young people have been to America. They have studied at Appalachian. They have visited in our workplaces and in our homes. As a result, they are now and forever our friends. And in our hearts, they are our children just as surely as they are your very own.

My thoughts in these closing moments are with our children. We have a sacred obligation to them, and they in turn must prepare for service in a new and volatile world. Now we need them more than ever.

The attacks on America of September 11 do nothing to alter this view. Global terrorism must be swept aside. The forces of darkness and evil must be vanquished. The children of the world must be nurtured and saved. Our people must live together in peace.