Ahead of the annual gathering of world leaders in Davos, the World Economic Forum (WEF) has released an important publication, which uses a scenario approach to gain some insights into the future of the global financial system. This is a very welcome contribution. In the context of a rapidly shifting landscape, scenarios-building techniques can really help all of us understand the key drivers that are shaping the financial industry, identify the critical uncertainties that could dramatically affect the way things play out and provide an effective way to map out the alternative, yet plausible, futures that might unfold as a result.
What I particularly like about scenario-building is that it forces people to think beyond their “wishful-thinking” scenario and prevents them from getting stuck in a binary “black or white” view of the future. Through a creative, yet robust and well-researched process, these techniques first help open our minds to the realm of possibilities and potential impacts, in order to create a set of alternative realities. This in turn can help us prepare better for the future, minimising the “unintended consequences” of our actions and helping us to recognise the signals of profound change in order to navigate this fast-changing landscape.
In that respect, the WEF report offers a great tool for policy-makers and anyone who has a stake in the future of the financial industry (i.e all of us). It starts off with a pretty gloomy outlook of the next few years. It foresees that “over the near-term (2009-2012), the dominant trends in the global financial system will continue to be deleveraging, adaptation to increased government intervention and a weakening of cross-border economic activity”, against the backdrop of a sharp fall of net private capital flows to emerging economies and a substantial drop in the volume of global trade in goods and services.
Following an in-depth review of the potential winners and losers, the WEF reports present a set of four scenarios:
(1) financial regionalism – a world in which post-crisis blame-shifting and the threat of further economic contagion create three major blocs on trade and financial policy, forcing global companies to construct tripartite strategies to operate globally.
(2) fragmented protectionism – a world characterized by division, conflict, currency controls and a race-to-the bottom dynamic that only serves to deepen the long-term effects of the financial crisis.
(3) re-engineered Westerm centrism – a highly coordinated and financially homogenous world that has yet to face up to the realities of shifting power and the dangers of regulating for the last crisis rather than the next.
(4) rebalanced multilateralism – a world in which initial barriers to coordination and disagreement over effective risk management approaches are overcome in the context of rapidly shifting geo-economic power.
The whole report is very insightful and well worth a read. Interestingly, it also outlines the scenario approach it has used in great details. It even provides an appendix on how scenario-thinking can help any institution take strategic decisions, by gaining new insights and uncovering their blind spots.
And it doesn’t stop there. The WEF is planning to take this work forward and use it as the basis for a strategic conversation with stakeholders all over the world:
“In phase two, the World Economic Forum aims to build on the insights of this report and explore opportunities for collaboration to help strengthen the global financial system. This will involve an examination of potential future sources of systemic risk as well as opportunities toreposition the industry for sustainable long-term growth, to ensure economic stability and prosperity of both the financial and real economies.”
This is a great opportunity to get engaged and rethink the fundamental purpose and mechanisms of the financial market. We are all stakeholders after all.
