Transcript
Page 1: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum

Annual Meeting 2008

The Power of

Collaborative Innovation

Briefing Material

Davos, Switzerland 23-27 January

Prepared by PricewaterhouseCoopers forthe World Economic Forum

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This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used,

distributed or relied upon by any third party without PwC's prior written consent. The analysis and opinions contained in this presentation are

based on publicly available sources, but PwC has not independently verified this information and makes no representation or warranty, express or

implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material,

and neither PwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential

loss or damage suffered by any person as a result of relying on any statement in, or alleged omission from, this material. This material is not

complete without the accompanying oral discussion and presentation.

Prepared by PricewaterhouseCoopers for the World Economic Forum

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of member firms of

PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

The views expressed in this publication do not necessarily reflect those of the

World Economic Forum.

World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: [email protected] www.weforum.org

©2008 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system.

REF: 140108

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1

Global economy...................................................................................................................................... 2Future of US leadership .......................................................................................................................... 4EU + ........................................................................................................................................................ 6Rise of Asia ............................................................................................................................................ 8Challenges in the Middle East ................................................................................................................10International relations..............................................................................................................................12Political outlook ......................................................................................................................................14Globalization ..........................................................................................................................................16Development ..........................................................................................................................................18Global governance..................................................................................................................................20Trade ......................................................................................................................................................22Global risk ..............................................................................................................................................24Energy security ......................................................................................................................................26Systemic financial risk ............................................................................................................................28International terrorism ............................................................................................................................30Non-Proliferation ....................................................................................................................................32Climate change ......................................................................................................................................34Leadership & decision-making ..............................................................................................................36Talent ......................................................................................................................................................38Education and employment....................................................................................................................40Innovation ..............................................................................................................................................42Shifting sources of capital ......................................................................................................................44Corporate governance............................................................................................................................46Financing pensions and healthcare ........................................................................................................48Food and Agriculture ..............................................................................................................................50Urbanization............................................................................................................................................52Water ......................................................................................................................................................54Nutrition & wellness ................................................................................................................................56Health research ......................................................................................................................................58Regenerative medicine ..........................................................................................................................60Societal shifts..........................................................................................................................................62Technology & society ..............................................................................................................................64Advancing science..................................................................................................................................66Technological advances..........................................................................................................................68

Table of Contents

Page 4: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Global Economy

Global economic growth has been strong in recentyears thanks to rapid expansion in China and otheremerging economies, and combined with solidrecovery in the developed world. Inflation has beentame despite the surge in oil and commodity prices(see exhibit).

Now, however, the global economy seems to befacing a serious downturn. The financial woes thatbegan in August 2007 with the dislocation of keycredit markets and losses linked to American sub-prime mortgages have proved more persistent anddamaging than first expected. In addition, theresilience of economies to more costly energy isbeing tested by rising oil prices, which togetherwith higher food prices threatens an unwelcomereturn to stagflation. And a tumbling US dollar hasraised fears of an international monetary crisis ifinvestors lose faith in the world’s pre-eminentreserve currency.

First under fire is the US economy. When thehousing market was booming, Americans couldoffset the hit to their finances from rising oil pricesby borrowing against the rising value of theirhomes. Now that the housing boom has turned to

bust, they must save more from budgets squeezedby yet higher energy costs. As the credit crunchbites and businesses anticipate the puncture inconsumer spending, cutbacks in corporateinvestment could help tip an economy alreadyweakened by subsiding residential construction intoa recession.

In the past, an ailing US economy has beencontagious. Some now hope that the world enjoysgreater immunity because of China’s emergence asa growth counter-pole. Judging by the performanceof emerging stock markets, some investors backthe “decoupling” thesis. Indeed, businessconfidence in Asia finished 2007 near where itstarted, unlike the declines experienced in the USand Europe (see exhibit). The rising intensity ofintra-Asian trade and the continued buoyancy ofcommodity prices also suggest that globaldependence on American growth has attenuated.

But “decoupling” may not materialize. There is lessto the increasing intensity of intra-Asian trade thanmeets the eye. Much of it arises from goods beingsent from other Asian producers to China for finalassembly before export to America and Europe,

Source: Moody's Economy.com

Bankrun on

NorthernRock

Jan2007

Feb

AsiaPacific

NorthAmerica

Europe

Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Largestsub-prime

lender declaresbankruptcy

Two bulge-brackethedge funds reachcreditor settlement

Central bankscoordinate

first liquidityinjection

Fed Fundscut 25 bp

SWF’s beginbail out

of banks

Fed Fundscut 50 bp

Banks annoucewrite-downs

Business Confidence Worldwide

Confidence in Asia-Pacific remains high

40

30

20

10

0

-10

Sur

vey

of b

usin

ess

conf

iden

ce, 4

-wee

km

ovin

g av

erag

e (d

iffus

ion

inde

x)

Commodity Prices

Source: Thomson

Metals prices up three-fold in five years — will food and agriculture follow?

350

300

250

200

150

100

50

Eco

nom

ist p

rice

inde

x

2003

2004

2005

2006

2007

Industrials/Metals

Industrials/Non-food Agriculturals

Foods

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3

which remain the ultimate sources of demand.Emerging stock markets also look dangerouslybubble-like, caused by loose monetary conditionsrather than profit prospects. An overheatedChinese economy may need to slow itself in orderto curb inflation.

If China cannot bear the load, other big economiesmay also prove vulnerable to an Americanslowdown. The Japanese recovery has relied onexports and business investment rather thanconsumer spending. Consumption has also beenunder-powered in the euro area.

If there is a serious setback to the world economyin 2008, it will come as a rude shock. Despite thedotcom recession of 2001-02, which wascomparatively mild, the past 15 years have been ahalcyon period of stability both for growth andinflation. Indeed, the “great moderation” hadsupposedly muted traditional business cycles.

According to some economists, recessions are asinevitable as business cycles. Firms over-invest andconsumers under-save during upswings. It takes adownturn to get rid of surplus supply and to restorehousehold finances. On this reckoning, recessionsplay a useful role in purging imbalances and excessesthat have built up during the boom. Provided they donot turn into protracted slumps, they should notreduce the underlying growth rate when the precedingupturns are also taken into account.

Mainstream theory disputes this cyclicaldeterminism, arguing that economies are insteadsubject to shocks and policy mistakes. These canlead to reverses that can get out of hand. Whateverthe theoretical rights and wrongs of the two views,the historical record shows that major relapseshave been associated with banking crises andexcessive debt. That is a cause for concern after

so long a period in which banks aggressivelysought more risk and households accumulated evermore debt.

At such junctures, standard forecasting models canbe more of a hindrance than a help, since they arenotoriously poor at predicting big turning pointscaused by abrupt mood swings by companies andconsumers. Ironically, it may be easier to projectforward performance over several years, usingmeasures of competitiveness such as thosedeveloped by the World Economic Forum’s GlobalCompetitiveness Report.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• 2008 World Economic Brainstorming:Addressing Uncertainty

• BBC World Debate: Global Economic Shocks:Perfect Storm Ahead?

• Global Competitiveness 2015

• Joint Swiss-US Economic Commission:Potential and Limits of Global TradeLiberalization

• Should We Fear Slowdowns?

• The Global Economic Outlook 2008

• Threats to the Global Trading System

• Update 2008: Economics

• Update 2008: If America Sneezes, Does theWorld Still Catch a Cold?

• Update 2008: The New Forecaster's Toolkit

• Using Technology to Create CompetitiveAdvantage

• What Can We Forecast?

Page 6: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Future of US Leadership

The presidential election will dominate Americanpolitics in 2008 and the discussion of US foreignpolicy in the US will inevitably be affected by theseelection-year politics. It will matter because PresidentBush will still have to make a range of crucialdecisions on international issues such as Iran, theMiddle East peace process and climate change.

While the presidential debate will be heated, therhetorical positions of the leading Republican andDemocratic candidates are relatively quite close onsome key foreign policy issues. With signs that thetroop surge in Iraq has helped stabilize thesituation, none of the leading candidates isguaranteeing a rapid pull-out of American troops.On the Democratic side, neither Hillary Clinton norBarack Obama nor John Edwards has beenprepared to promise that all American troops willbe out of Iraq by 2013. Similarly, all leadingDemocratic and Republican candidates have saidthat it is unacceptable for Iran to get nuclearweapons, and all have positioned themselves asstrong supporters of Israel.

Behind this rhetorical convergence, however, thereare clearly differences in instinct. Republicans aremore likely to favour using force against Iran andmore likely to advocate a “stay the course” strategyin Iraq. It is also clear that the Democrats are muchmore likely than Republicans to believe thatcombating climate change should be a centralconcern of US foreign policy.

The US position on climate change is clearlyevolving, but America is unlikely to accept bindingtargets on carbon emissions during the Bushadministration. The president has pledged topursue a Middle East peace settlement, but theelection year dynamic probably makes it less likelythat he will pressure Israel over issues like WestBank settlements. President Bush has pledged that

Iran will not gain nuclear weapons on his watch.This could mean that he will be content to handthe Iranian dossier over to his successor. Or itmight mean that he regards 2008 as his lastopportunity to make good his pledge – by militarymeans, if necessary.

Many non-Americans will be looking beyond theBush era, for signs of a new style of Americanleadership. Global opinion surveys have shown abig decline in sympathy and support for the USaround the world during the Bush administration,particularly since the invasion of Iraq (see exhibit).

What could the next president do to rebuild “brandAmerica”? Some believe that a more consultative,more attentive approach to the views of its allies,and a less militarized foreign policy could do agreat deal to repair America’s image. A change ofleadership in the White House will give America anopportunity to reintroduce itself to the rest of theworld. Others argue that this is an illusion. Muchwill depend on whether the US remains the solesuperpower. If the US retains its power andleadership role some rumbling resentment will

Western View of the US

Source: Pew Global Attitudes Survey

America losing favour across the West

90%

80

70

60

50

40

30

20

Per

cent

age

of r

espo

nden

ts w

ith fa

vour

able

attit

udes

tow

ards

the

US

2000 2003 2004 20072005 20062002

GermanyFrance

Canada

Italy

Britain

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5

inevitably persist, but there are economic realitieswhich could seriously undercut that role.

The credit crunch, for example, may tip theAmerican economy into recession in 2008. That willtest just how far the rest of the world still relies onthe US as the motor of the global economy.

Further falls in the value of the US dollar in 2008(see exhibit) would have an impact both on theperception and the reality of US global leadership.It might make the US more vulnerable to decisionsby foreign central banks and sovereign wealthfunds. Currency tensions with China, a domesticsense of economic weakness and an election yearwill be a very difficult combination for Americansseeking to make the case for new internationaltrade agreements. So 2008 may not be a promisingyear for American leadership on global challengessuch as the Doha trade round.

The Weakening Dollar

Source: SunGard PowerData; press accounts

105

100

95

90

85

Cur

renc

y pe

r U

S$

(100

=1

Jun

2007

)

Jun-07 Jul-07 Aug-07 Dec-07Oct-07

Fed, ECB and BoJ coordinateliquidity injections

Federal Reserve cuts fed funds rate:50 basis

points25 basis

points

Sep-07

GBP

Euro

Yen

Nov-07

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Rebuilding Brand America: Five Suggestions forthe Future President

• USA — What Next after the Elections?

Page 8: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

EU+

In 2007, the EU began to recover its confidence.After the debacle of French and Dutch votersrejecting a planned EU constitution, Europeanleaders have found a way forward – they haveagreed on a new reform treaty, preserving many ofthe elements of the original draft constitution. Thetreaty’s chances of ratification look quite bright,particularly since Ireland is the only EU nation tohave so far promised to hold a referendum on it.

The EU has also regained much of its economicconfidence. The strength of the euro – whilemaking life difficult for exporters – reflectsinternational confidence in the Europeaneconomy. New countries are keen to join thesingle currency, including some, like Denmark,that initially stood aside. German unemploymenthas been falling, showing signs that thestructural reforms of recent years are working. InFrance, President Nicolas Sarkozy hasdemonstrated his determination to push throughhis reform agenda. European countries continueto dominate the World Economic Forum’s globalcompetitiveness rankings.

The continuing attraction of the “European model”is reflected in the number of countries that want tojoin the EU. In 2007, Bulgaria and Romania becamethe 26th and 27th members of the EU. Balkancountries are also keen to join, with Croatia at thetop of the list. The prospect of eventual Turkish EUmembership remains controversial, but accessionnegotiations are proceeding.

There are still big questions hanging over thefuture of Europe and the European project. TheFrench and Dutch referendums raised questionsabout the popularity and legitimacy of the EUthat the promotion of the “reform treaty” cannotreally answer.

In Brussels, many argue that the EU can only dealwith its “democratic deficit” and popularityproblems if it is given the tools to deliver “results”for ordinary Europeans. This means greater powersover sensitive issues like foreign policy, theenvironment, and judicial and home affairs.Eurosceptics respond that it is paradoxical torespond to the unpopularity of the EU by proposingto give it more powers. They would like to see themember states – rather than EU institutions –asserting leadership within the union.

Others argue that the EU’s leadership problem isgenerational rather than institutional. YoungEuropeans are taking many of the advantages ofEuropean integration for granted, like the freedomto travel, study and work throughout Europe. Theyare also less motivated by the traditional argumentsfor the European project that inspired an oldergeneration of leaders – above all, by the argumentthat the EU is necessary to secure peace inEurope. A key question for the EU in the future willbe how to engage younger Europeans.

The EU also clearly needs to think hard about twoof its signature projects of recent years: economicreform and EU enlargement. As noted, Europeaneconomies have performed relatively well in 2007.But there are also signs that – for the first time inabout 20 years – the EU consensus aroundeconomic liberalization is beginning to crack.

While French President Sarkozy is a liberalizer athome, he has argued for a Europe that protectscitizens from globalization at the EU level. Thesearguments are certainly increasingly reflected inthe European Parliament, which significantlywatered down the EU’s services directive. Initiallyintended to unlock business potential, especiallyfor small and medium size enterprises, there was

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7

considerable backlash from member states thatfeared their domestic internal service providerswould not be able to compete with cheaper offersfrom other member state business. Some detect aloss of confidence in the European Commissionover its traditional championship of market-opening initiatives.

The further enlargement of the EU is alsocontroversial. The idea that Europe is sufferingfrom “enlargement fatigue” has becomecommonplace. It is widely assumed that whileCroatia will probably join the EU in the next fewyears, membership for other Balkan countries andfor Turkey is many years off.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Europe's Model of Leadership

• Europe's Purpose

• The Next Emerging Markets to Explore

• Three Crucial Questions for France

• Three Crucial Questions for the United Kingdom

Page 10: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

The Rise of Asia

Asia’s leading economies have been booming, theregion has been peaceful, and a much-feared rivalryamong Asian powers has failed to materialize.

Yet the future holds many challenges. Several ofAsia’s economic engines have either recentlyinstalled new leaders (Japan and China) or are aboutto elect new ones (South Korea). And questionsabound as to whether the expected slow-down inthe US economy will dent Asia’s performance.

In addition, Asia’s leaders are being called upon toplay a more active role on two pressing policyissues: global imbalances and climate change.Without allowing their currencies to appreciatemore rapidly against the US dollar, Asian countries– nearly all of them with large external surpluses –are unlikely to help reduce the global imbalances.Some argue that it is up to the US and othereconomies to take steps to adjust their policies.Asia’s role is also pivotal in seeking a post-Kyotosolution to climate change. With China and Indiaexpected to account for a large share of futuregreenhouse gas emissions, Asia will be anindispensable part of global progress onaddressing climate change.

Japan, the region’s largest economy, will be thechair of the G8 this year. It can leverage thisposition to demonstrate Asia’s rising importance inglobal affairs in general, and to press for progresson those two issues in particular. Such a display ofleadership by Japan will dispel the fears thatChina’s rise has made Japan less important. True,China’s importance has grown to an unprecedentedlevel, but Japan remains a pillar of Asia’s stabilityand prosperity; both as the anchor of an American-dominated security system in the Western Pacificand as the region’s largest economy and source ofcapital. Under new leadership, Japan has improvedits ties with its neighbours, especially China, and its

G8 chairmanship should provide an opportunity forTokyo to enhance its profile.

Compared with Japan, China’s challenges will bemore daunting. Its explosive external surpluseshave sparked fierce criticism from its main tradingpartners and its quasi-fixed currency regime isunder increasing pressure. At home, excessliquidity, the threat of a stock market bubble andrising inflation could threaten macroeconomicstability, an area in which Chinese policy-makershave traditionally demonstrated admirablecompetence. Such short-term difficulties aredistracting Chinese leaders from attacking longer-term obstacles to sustainable growth, such as theconsumption-investment imbalance, high energyintensity, environmental degradation, risinginequality and an inadequate social safety net. Forthe last three decades China has achieved averageannual growth of nearly 10%, with the years 2002-6all above that level (see exhibit), but to sustain thisremarkable performance for another decade or two,Beijing will have to address these difficultchallenges through bold policy initiatives.

China-EU-US Economic Growth

Source: IMF

China has sustained annual GDP growth of nearly 8-10% for decade

12%

10

8

6

4

2

0

GD

P g

row

th

1997 1998 20011999 20022000 2003 20062005

US

EU27

China

2004

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9

India has joined China as a driver of globaleconomic growth. Yet, like China, India faceschallenges to continue that momentum. While thereis growing hope that annual GDP growth of 10% canbe achieved (the Reserve Bank of India estimates2007 growth at 8.5%), most point to infrastructuredeficits as the primary hurdle. And concerns aboutinequality abound: The nation’s five poorest states,comprising roughly 40% of the population, produceonly one-quarter of total output.

A reinvigorated Japan, a rising China and India, plusSouth Korea and the Association of South EastAsian Nations (ASEAN), are creating a new Asiancommunity. Stronger regional institutions, buttressedby the newly signed ASEAN Charter, ASEAN+3(Japan, China and South Korea) and the AsianRegional Forum (ARF) have defied pessimists andbegun to bring the region’s main actors together.

ASEAN has certainly had its successes and itsmembers seem committed to forming an EU-stylesingle market by 2015. Still, the ASEAN free tradearea would likely best be described as a modestsuccess: intra-ASEAN trade has only risen onepercentage point from 24% of members’ exports in2000 to 25% in 2006. As ASEAN member statesstrengthen ties, they will undoubtedly achievegreater progress around trade and other issues.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Adapting to New Champions

• Asia on the Global Stage: Is It Ready to Perform?

• China's Policy Agenda

• India’s International Agenda

• Innovative India

• Japan: A Forgotten Power?

• The Challenge of Asian Integration

• The Emerging Asian Community: The Role of ASEAN

• Three Crucial Questions for China

• Three Crucial Questions for Pakistan

• Update 2008: New Actors in Asia

Page 12: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Challenges in the Middle East

The year 2007 ended with the US re-engaging inthe Middle East peace process. After so manyfailed attempts to settle the Israeli-Palestiniandispute, the two sides are now committed to tryand reach a deal by the end of 2008. This will meantackling core issues like the right of return ofPalestinian refugees, the status of Jerusalem andthe future of Israeli settlements.

The divisions on the Palestinian side – andHamas’s control of the Gaza strip – furthercomplicate the situation. Some say now is the lastchance for a two-state solution. Others argue thatnew and creative ways of looking at the problemwill have to be found if another failure is to beavoided. Can 2008 be the year in which the Israelisand Palestinians transform the politics of theMiddle East?

The Israeli-Palestinian issue, however, may nolonger be the centrepiece of Middle Eastern politics.Rather, two more recent issues could dominate theregion: the future of Iraq and the rise of Iran.

For the first time in many months, the political andsecurity situation in Iraq seems to be improving. USauthorities and the Iraqi government claim adramatic drop in violence. Al Qaeda in Iraq seemsto be in retreat. The year 2008 will test whether thisimprovement is sustainable, especially as America’stroop surge winds down. The political intentions ofthe Shia militia, led by Muqtada al-Sadr, will becritical. So will the attitudes of Iraq’s neighbours:Turkey remains very anxious about the situation inthe Kurdish-controlled areas, and Saudi Arabia isconcerned about the decline in Sunni power andthe rise of Iranian influence. Achieving stability inIraq now has a vital regional dimension.

The coming year will also be critical to the world’sefforts to manage Iranian ambitions. New US

intelligence estimates about Iran’s nuclear weaponsprogramme have weakened the hand of thosepressing for military action against Iranian nuclearfacilities. Nevertheless, the Bush administration,Britain and France are likely to continue to pressfor further sanctions, while advocates ofengagement with Iran will stress the need for achange of approach in Western policy. Thedirection of this policy will clearly be influenced bythe balance of forces within Iran itself, and willdepend to a significant extent on how active andaggressive Iranian foreign policy spreads across theregion. Even its military potential will be closelywatched – Iran outspends its direct neighbours onmilitary expenditures (as a percentage of GDP),with the exception of Iraq and Afghanistan, whichare engaged in open conflict (see exhibit).

Whatever happens, Iran will clearly be a player on arange of issues in 2008 – from the nuclear dossierto energy security to regional stability.

The rise of political Islam remains an issue acrossthe region. Hamas’s seizure of the Gaza strip hasalarmed the governments of Egypt and Jordanbecause of the organization’s connections to the

Iran and Its Neighbours: Military Power

Iran outspending its neighbours not engaged in conflict

750

* Manpower figures are 1999 for Armenia and Azerbaijan, 2005 for Afghanistan (high end of range)** Turkmenistan expenditures is 1999 and for Iraq is 2006.

500 250 0 2 4 6 8 10%

Pakistan

Turkey

Iran

Iraq

Afghanistan

Azerbaijan

Armenia

Turkmenistan

Sources: Center for Strategic and International Studies; US Library of Congress Federal Research Division; NATO; SIPRI; CIA

Military manpower, 2006* (thousands) Military expenditures, 2005**(percentage of GDP)

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11

Muslim Brotherhood. In Lebanon, Hezbollahremains a very powerful force, closely connected toIran. Some believe that democracy can only takeroot in the Middle East when governments find away of peacefully incorporating Islamic parties intothe political process. Others argue that thisapproach is naive in the age of Al Qaeda.

At a time when economic growth and theemergence of new forms of civil society aredominant themes in Asia and elsewhere, the MiddleEast remains enmeshed in difficult political andstrategic issues. But is it possible that similar socialand economic developments could transform thepolitics of the Middle East? The flow of oil moneyinto the Gulf States has created not just astonishingeconomic growth and construction booms, but also new models of Arab societies that aresimultaneously open to the world and rapidlymodernizing, and highly conscious of their owntraditions. There is hope in some circles that theycould become models for the rest of the Arab world.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Connecting Economics and Security in the Middle East

• Iraq and Its Neighbours

• Middle East: After Annapolis, After Paris

• Political Islam and Democracy

• Understanding Iran's Foreign Policy

• Update 2008: Middle East

Page 14: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

International Relations

At first glance, the positions of the world’sgeopolitical powers are evident. The US remainsthe world’s dominant economic and military power.The EU is now the world’s largest single market.New Asian powers – in particular, China and India –are on the rise. And the wealth of oil-producingnations in the Middle East, Latin America andRussia is creating new sources of strength on theinternational scene.

Behind these observations, however, lie a shiftingset of relationships. China’s bilateral dealings withthe US may be the single most critical internationalrelationship over the next 20 years. But China’sregional role – and its relations with its ASEANneighbours and Japan – will also be crucial indetermining whether the Chinese achieve theirstated policy of a “peaceful rise”. In addition,China’s dealings with the EU are becomingincreasingly vital to its place in the world. The EUhas recently overtaken the US as China’s largesttrading partner – both the EU and US are alsorunning ever-larger trade deficits with China (seeexhibit) – and so its voice will be increasinglyimportant over sensitive economic issues like tradeand exchange-rate management.

China’s growing network of trade and relationshipsin Africa is a sign that Africa can no longer beregarded as “the forgotten continent” when it comesto international relations and the globalization of theworld economy. Economic growth rates in much ofAfrica were encouraging in 2007, and going backseveral years (see exhibit). A commodities boom andan influx of foreign investment were a reminder thatthere is much more to the African story than civilwars and foreign aid – even if those stories dominatethe international headlines. However, the glimmer ofpromise about Africa’s economic prospects isclouded by growing anxiety about the impact ofclimate change on the continent.

The Middle East continues to be seen in the worldmedia largely as a battleground. The war in Iraq,the Israeli-Palestinian conflict, Shia-Sunni rivalryand political unrest in Lebanon mean that there isno shortage of conflicts to focus on. But the GulfStates – booming largely because of rising oilprices – increasingly aspire to be a cross-roads anda meeting point between East and West.

South Asia’s global role is also complex. India is anincreasingly confident and assertive international

6%

5

4

3

2

1

0

Africa's Economic Engines

Africa’s five largest economies in 2000 have set the tone for the continent’s economic growth

Source: IMF

Ave

rage

ann

ual G

DP

gro

wth

, 200

0-20

06

Nigeria Morocco Africa Algeria Tunisia South Africa

China-EU-US Trade Balances

Sources: US Census Bureau, Eurostat, SunGard PowerData

Tri-lateral trade increasingly imbalanced

$0

-50

-100

-150

-200

-250

Tra

de b

alan

ce (

US

$, b

illio

ns)

2001 20021999 2000 2003 2007(through

Sept)

20062005

EU with China

US with China

US with EU

2004

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.12

Prepared by PricewaterhouseCoopers for the World Economic Forum

Page 15: The Power of Collaborative innovation, PWC, WEF Davos 2008,

13

player. But recent events will mean that 2008 willalso see enormous Western focus on Pakistan andneighbouring Afghanistan.

The situation in Afghanistan is a reminder of twocentral aspects of the new international scene: thedifficulty of translating overwhelming Americanmilitary power into durable political success; andthe comeback of religion as a vital factor ininternational affairs.

The military lessons of Iraq and Afghanistan haveyet to be fully absorbed. Some argue the biggestlesson of all is that American foreign policy hasbecome too militarized. They suggest that, in thefuture, the US must put more effort into soft powerand diplomacy. But even leading Democratic Partycandidates for the US presidency are arguing forincreases in military spending. Many US strategistsbelieve that their nation’s overwhelming militarypower remains its geopolitical trump card. Somealso assert that the US is gradually learning how tofight a counter-insurgency war and that – as theselessons are absorbed – the situations in Iraq andAfghanistan will improve markedly.

But those who believe that the new globalstruggles will be as much cultural as military, pointto the re-emergence of religion as a critical factor inboth domestic politics and international relations. Inboth the Muslim world and the West there has beendiscussion about the need for an Islamic“enlightenment” – equivalent to the Europeanenlightenment of the eighteenth century – if the Muslim world is to separate state from religion.

However, religious issues are not only beingwrestled within the Muslim world. As Europestruggles to assimilate new immigrants, it is onceagain facing tricky questions about the relationshipbetween religion and state, and about the centrality

(or otherwise) of Christianity in European culture.Cultural wars – with a strong religious content – willalso loom large in the American presidentialelection in 2008.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Connecting Economics and Security in theMiddle East

• Faith and Modernization

• Iraq and Its Neighbours

• Middle East: After Annapolis, After Paris

• Military Power in the 21st Century

• Political Islam and Democracy

• Stability in Sub-Saharan Africa

• The Comeback of Religion: A Potential Dangerfor the Secular State?

• Turkey's Challenges

• Understanding Iran's Foreign Policy

• Update 2008: Dividing the World Once Again?

• Update 2008: Middle East

• US-EU-China Relations: A 21st Century Vision

Page 16: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Political Outlook

The year 2008 will mark the last year of thepresidency of George W. Bush and the end of thepresidency of Vladimir Putin. Will these events marka watershed in international politics?

Certainly, much of the world seems to anticipate asharp change in American foreign policy in thepost-Bush era. America-watchers will beobserving the presidential election for signs ofwhat direction the country will take after PresidentBush leaves office. But some experts warn thatexpectations of big changes in US foreign policyare exaggerated. It might be too much to expect anew American president to withdraw rapidly fromIraq, accept the idea of a nuclear Iran, or fullyembrace the United Nations.

Similarly, President Putin’s succession is unlikely toresult in significant domestic changes since heintends to remain in office as prime minister.Undoubtedly, the talk of potential power strugglesin the Kremlin will now subside although foreigninvestors will continue to watch for any signs ofpolitical instability.

In terms of foreign policy, it seems likely that thenext Russian president will emulate the moreassertive approach of the late Putin years.President Putin is likely to bequeath his successora series of running disputes with the Americans –over the Balkans and the fate of Kosovo, overmissile defence and over NATO expansion. Theneed to work out an energy relationship with theEU that meets both sides’ economic and securityconcerns will also be a lingering issue.

Defining the geopolitical ambitions of Russia couldbe a big theme in years to come. Does Russiaaspire to regain its superpower status, and is suchan ambition realistic? Russia’s geography, with20,000 kilometres of land borders, makes itinevitable that it will have close and complex

relations with a vast range of regions – from Chinato Central Asia to the Middle East and the EU.

Russia’s oil and gas reserves – its gas reserves arenearly equal to those in the Middle East (seeexhibit) – could provide the leverage that enablesits return as a superpower. Russia has already beenactive in Eastern Europe, reducing energy subsidiesand attempting to control energy transit andstorage facilities. Such moves may have soundbusiness rationale, but whether motivations mightsome day leap from economic to political realms isnot yet clear.

Russia’s primary energy relationship is still withEurope. But might that change as Asian andChinese demand rises? Russian-Chinese relationsare certainly warmer than they have been for manyyears, with the Shanghai Cooperation Organizationoffering the two countries a chance to develop anew regional club that excludes the US. Buttraditional Russian-Chinese rivalries may still lurk,just beneath the surface.

The emerging Russian-Chinese relationship is justone example of new patterns in internationalrelations. The traditional “concert of powers”,

Proved Oil and Gas Reserves

Source: Oil and Gas Journal

Sha

re o

f pro

ved

rese

rves

, 1 J

an 2

007

The Middle East is home to 56% and 41% of the world's oil and gas reserves, respectively

Middle East

Western EuropeAsia-Pacific

Eastern Europe and former Soviet Union

AfricaLatin AmericaNorth America

Oil Gas

100%

80

60

40

20

0

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.14

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Page 17: The Power of Collaborative innovation, PWC, WEF Davos 2008,

15

which has centred around the US, the EU andJapan. will have to adjust to new global players.The growth of the Chinese and Indian economies –added to the economic revival of Russia and theemergence of Brazil – has made both the G8 andthe UN Security Council look increasinglyanachronistic. If the concept of the concert ofpowers needs to be adapted to today’s economicrealities, can current institutions like the UN andthe G8 be reformed or are new institutions andforums needed?

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• A New Age of Technonationalism?

• Europe's Model of Leadership

• Europe's Purpose

• Orchestrating a New Concert of Powers

• Russia and Its Neighbours

• The Legacies of Bush and Putin

• What Are Russia's Geopolitical Ambitions?

Page 18: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Globalization

Globalization has recently seemed all-conqueringas China, India and former Communist countriesjoined the world economy, which, in effect, hasquadrupled the global labour supply since 1980.Most of the increase has been in the past 15 years.The downturn caused by the dotcom crash wasshort-lived, and world trade and capital flowsrecovered sharply. Migration has also surged. Anever more integrated global economy has deliveredthe fastest spell of growth since the early 1970s.

But the moment of triumph is often a harbinger ofperil to come. In the US, protectionist sentimentand opposition to immigration have becomerampant. Public support for economic integration iswaning in Europe. When the EU expanded in 2004,the UK was the only big member state to open itslabour market to migrants from Poland and theother accession countries. Now opinion polls showthat immigration has become the British public’sbiggest single concern.

Globalization is being challenged in advancedeconomies mainly because it is increasingly blamedfor inequality (see exhibit). As developing countriesbecome more embedded in the global economy,unskilled workers in the rich world are the mostvulnerable to the new competition. While theirwealth and purchasing power is still far beyond thatof many other countries, the gap between high andlow earners in rich economies is great and thepopular perception is that it is unfairly so.

But there is another factor at work: technologicalchange that works to their detriment by increasinglyfavouring skilled labour. This has dramaticallynarrowed the prospects for unskilled labour over arelatively short period of time. Until recently this wasconsidered the main reason why income disparitieshad widened. But new estimates suggest that theimpact of globalization, working through direct-

investment flows made by companies rather thantrade, is as important as that of technology.Moreover, offshoring, spurred by the revolution inInternet and communications technology, is startingto expose previously protected parts of the labourmarket – particularly those in service industries – tointernational competition.

The groundswell against globalization in the richworld has led to a reversal of roles. Once it wasdeveloping countries that resisted opening theireconomies in order to protect home markets andretain domestic ownership of businesses. Now itis the advanced economies that seemincreasingly likely to slam the doors shut, whetherthrough trade barriers, obstacles to migration, orblocking inward capital flows if they involveacquisition of companies.

Emerging economies are increasingly “huntersrather than prey” because of another role reversal.Instead of capital moving into the developing world,it has been flowing uphill as Asia and oil-richcountries have financed a big chunk of the US

Professionals Choosing to "Off-Ramp"

Source: "Off-Ramps and On-Ramps", Sylvia Ann Hewlett (Harvard Business School Press, 2007)and Harvard Business Review, March 2005

Regional Income Inequality

Source: UNDP, Human Development Report 2007/2008; World Bank

Gin

i Ind

ex, m

ost r

ecen

t sur

vey

(0-1

00)

European inequality lower than most

* 12 European Union nations that acceded in 2004 or later

More unequal income distribution

IndiaEU+12* EU15 United States Latin AmericaChina

60

50

40

30

20

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.16

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Page 19: The Power of Collaborative innovation, PWC, WEF Davos 2008,

17

current-account deficit. Until recently, much of themoney went into government bonds, but assovereign wealth funds have proliferated it is beingdirected towards equities.

The spectre of US firms falling under the control ofstate-owned investors seems tailor-made to causedisruptions in the US about this unexpected newtwist to globalization. The political sensitivity of theissue was underlined when Dubai Ports was forcedin 2006 to dispose of American operations it hadacquired along with the rest of P&O, a Britishshipping company. In contrast, there has been anotable lack of fuss as big banks in the US andEurope have recently turned to sovereign wealthfunds to replenish their capital. However, therecould be a very different reaction if these capitalinjections went beyond minority stakes or if thefunds began agitating for changes in strategy.

Some argue that another fundamental role reversalis under way, which will result in R&D andinnovation moving to China and India. Demographictrends mean that the two Asian giants are churningout more science graduates. Economic trends meanthat they will use them to become more prominentin innovation. But the process will be an extendedone. US multinationals, for example, still do the bulkof their R&D in the US; should they carry it outabroad, they mainly do so in other developedcountries. That is because developed economies,for the moment at least, still retain a competitiveadvantage in coming up with new products andservices and finding better ways to make them.

If tensions over foreign investment can becontained and are less likely to emerge than somefear in R&D, migration remains a flashpoint. Ifpoliticians are to resist popular pressures to erectever higher barriers, some fresh thinking may beneeded. A big worry about immigration into

welfare-state economies is that it may push upfiscal costs in the short term. Already, illegalmigrants often pay a substantial fee to people-traffickers, which reflect the gains they expect tomake by moving into a rich economy. One proposalis that host countries should cut out the middlemenand charge immigrants for the right to enter legally.The proceeds would be used to ease anybudgetary burden and curb popular anxieties.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Flow Reversal: The Future Direction of Capital,Innovation and Knowledge

• Global World…Really?

• Immigration, Integration and Security

Page 20: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Development

The eight objectives of the Millennium DevelopmentGoals (MDGs) – laid out by the internationalcommunity in 2000 – were considered ambitious,but achievable. The measurable targets were set toassist the world’s least developed societies escapethe trap of poverty, poor health, conflict andenvironmental degradation. While significantprogress has been made towards some MDGs overthe past seven years, such as improvedgovernance particularly in African countries, risingagricultural productivity, and progress in fightingmalaria and tuberculosis, the process has beenlaborious and too slow.

Donor countries have delivered only a small portionof promised aid, though debt relief efforts didaccelerate slightly in 2005 (see exhibit). Progress isalso uneven: deaths from AIDS are increasing,billions still lack basic sanitation, half a millionwomen die each year from avoidable pregnancy-related complications, and the poorest countriesare not creating employment for their burgeoningyouth populations. At the current rate, theinternational community risks not meeting its MDGsby the target year of 2015.

Reinvigorating the global efforts to attain the MDGsrequires broadening the international coalitionbeyond the UN and its member governmentsaround the world. Indeed, the business communityis proving to be a valuable partner in this effort. The effort requires vibrant domestic private sectorinvolvement to provide employment and skills.Shifting activity from the informal to the formalsector can make a big difference in boostingproductivity and capital efficiency, and thereby liftmore of the population out of poverty.

And overseas multinationals have a role to play aswell. Though sometimes accused of neglectingtheir social responsibility, the international businesscommunity has been an important driving force fordevelopment and bringing the advantages ofglobalization. Such firms have disseminated life-improving technologies, promoted trade, providedincentive-based real-world solutions, and helpedalleviate suffering in developing countries.

For many of the world’s largest companies, therealization that working in the interest of others canhelp their own interest has resulted in fruitfulpartnerships with governments and internationalinstitutions to achieve what none could haveachieved on their own. It would be hard to imaginethe improvement in human welfare in the post-ColdWar world without the contribution of the businesscommunity. Certainly, there is recognition that notall aspects of globalization are positive and that theprivate sector also needs to re-examine its role inthis light. A harmonization of standards might makesense in areas such as labour laws andenvironmental standards.

The emergence of new actors, such as China as adonor country and exporter of development know-how, activist philanthropic foundations, influentialNGOs and new political leaders, is re-energizing

Development Aid

Source: OECD

Development assistance on the rise

$90

80

70

60

50

40

30

20

10

0

Ove

rsea

s de

velo

pmen

t ass

ista

nce,

OE

CD

DA

C m

embe

rs (

curr

ent U

S$,

bill

ions

)

2000 2001 2002 20062004

Non-debt-relief aid

Debt forgiveness

2003 2005

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.18

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Page 21: The Power of Collaborative innovation, PWC, WEF Davos 2008,

19

development in low-income countries. For example,economic growth in Africa has reached a paceunseen in the last two decades. In Latin America,long considered a development laggard because oflingering income inequality, confidence is returning,equity markets are booming and growth hasaccelerated. Such encouraging developments owea great deal to the high prices of commodities. Butsound economic management by policy-makers inthese countries has played a role as well. With fewexceptions, most Latin American and Africanleaders today maintain prudent macroeconomicpolicies and support free trade.

To sustain the momentum of this economic revival,some say these regions need to take twoadditional, and more difficult, steps. One is toestablish a new framework of development thatfocuses on human capital development. Thisrequires more investment in education, health andenvironmental protection. Marketable skills, goodhealth and a liveable environment are crucialingredients for a self-sustaining strategy of povertyreduction. The emerging Santiago Consensus,emphasizing education and deeper regionaleconomic integration, is a step towards achieving abalance between social justice and globalization.This could be a model for other regions as well.

The other task is reducing inequality. This is farmore difficult, not the least because rapideconomic growth is, for complicated reasons, oftenaccompanied by a simultaneous rise in inequality.Only a small number of societies in East Asia(Japan, South Korea and Taiwan) managed to avoidrising income inequality in their high-growth phase.Based on their experiences, it may be possible forgovernments to devise policies that improve socio-economic equality without destroying the incentivesfor private entrepreneurship. Such policies mightrely more on state-sponsored investment in human

capital and less on redistributive taxes (which arenevertheless needed to provide the revenue foreducation and healthcare for the poor).

Since the urban-rural income gap is generally a largecontributor to inequality, public policies mightaddress the pro-urban bias in developing countries.Reducing or eliminating generous subsidies to city-dwellers and using the savings to finance ruraldevelopment will go a long way towards improvingsocio-economic equality without slowing growth. Butsuch a step requires enormous political courage.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Do We Need Economic Growth for GreaterSustainability?

• Latin America: The Re-emergence of a MiddleClass

• New Drivers of Development

• The Economics of Inequality

• The Hidden Power of Business

• The Quest for Peace and Stability

• Update 2008: Surprise Rise of Latin America

Page 22: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Global Governance

Many of our modern global governing institutions –multilateral organizations such as the UnitedNations, the International Monetary Fund and theWorld Trade Organization – can trace their historyback over 50 years. Yet times have changed andmany have questioned whether the institutions havechanged with the times. They are clearly exhibitingvarying signs of ageing. In some circles, questionsabout legitimacy and relevance have emerged.

That some of the institutions have been featured inheadline scandals over the past two years has nothelped. But the institutions have overcome thescandals and undergone leadership changes – BanKi-Moon became the UN’s secretary-general inJanuary and Robert Zoellick now heads the WorldBank. For its part, the IMF, which has stayed out ofthe headlines, has a diminished role now that muchof its lending has been repaid. Its new managingdirector, Dominique Strauss-Kahn, announced inDecember that hundreds of jobs would need to becut to reduce the IMF’s own budget deficit, andthat he intended to sell some of the Fund’s goldreserves to raise capital.

Three longer-term trends suggest a rethink ofglobal governance systems. First, the world hasseen a profound shift in the balance of power sincethe end of WWII. The emergence of China, India,Russia and Brazil as newly influential economic andgeopolitical players has rendered the West-centredglobal governance systems less meaningful andinclusive. Second, new economic and politicalactors, ranging from alternative pools of investmentcapital (sovereign wealth funds, hedge funds, andprivate equity) to networked NGOs and citizengroups, are competing against established globalgoverning institutions for legitimacy, power andinfluence. Third, the current global governinginstitutions have historically been more effectivewhen the US – the emerging superpower at the

time the institutions were founded – exercisedleadership. Some argue, however, that recent yearshave seen a decline in the prestige of US in theeyes of the international community, and thatWashington commands less of a lead relative toother actors.

What is to be done? A total rewriting of the codesof global governance is likely both impracticableand unnecessary. Incremental change, notrevolution, tends to produce more enduringprogress. Understandably, the focus tends to bemore on the distribution of power than on the rulesof the game. Many focus on making the institutionsmore inclusive by giving more authority and voiceto emerging-market giants. The UN has longdebated reforms to its Security Council to givepermanent seats to influential nations such asBrazil, India, South Africa and Nigeria (as well asGermany and Japan from the developed world).The leadership of the World Bank and IMF areappointed by the US and Europe, by tradition.Giving more leadership voice to the emergingmarkets where the two institutions do most of theirbusiness might improve perceptions of legitimacy.And creating new membership status for new non-state actors, such as leading NGOs and globalcorporations, is also worth considering.

Today’s global challenges may require new forms ofcollaboration among all these stakeholders to takeon the difficult challenges ahead, such as climatechange, global financial stability and the influenceof the new actors in the markets. The Baliconference on climate change in Decemberdemonstrated that multilateral summits can stillachieve positive outcomes. And, although a supra-national regulatory agency for the global financialmarkets is conceivable at some point, it is likelythat improved coordination between the US,European and Asian market regulators will address

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Page 23: The Power of Collaborative innovation, PWC, WEF Davos 2008,

21

market confidence and the promulgation of newrules for preventing future debacles on the order ofthe sub-prime mortgage meltdown.

In thinking about global governance, however, it iseasy to spot a hole in the current institutionalarrangements: there is no global body explicitlytasked to fight corruption in government and thecorporate world. Although various internationalinstitutions, such as the UN and the World Bank,have taken an interest in the issue of corruption,sustained global efforts against corruption areknown mainly for their lack of durability. Policies thatare effective against corruption are not well known:market reforms, transparency in government,freedom of the press, the rule of law and anassertive civil society. In fighting corruptioninnovative policies may be less needed than greaterpolitical will. In this context, Africa’s remarkableeconomic progress in recent years is notable; highcommodity prices have helped, but improvedgovernance on the continent (a few trouble spotsnotwithstanding) is arguably a more important factor.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Beyond Bretton Woods: Who Should Lead the Way?

• CNBC Debate: Who's In Charge?

• Human Rights on the Global Agenda

• The Challenge of Endemic Corruption

• The Future of Global Governance: Time forGovernment 2.0?

• Update 2008: Africa's Governance Dividend

• What Has the World Achieved?

Page 24: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Trade

Although liberalized trade remains on the agendaof most countries, rising protectionism fed bywidespread economic anxiety has restrainedprogress in many multilateral, regional and bilateraltrade efforts.

Despite predictions that the Doha trade roundwould be deemed a failure and abandoned in thepast year, negotiations to keep it alive continue.But many still believe the most likely outcome willbe an eventual admission of defeat. The climate forreaching an accord has deteriorated in the last yearas protectionist sentiment in the US, the EU andelsewhere has intensified as a result of worseningbalances of trade, consumer product scares andheightened concerns about energy security. Manyof the US Democratic presidential candidates arethreatening to discard existing trade agreementsand oppose new ones in an effort to appeal to thegrowing number of Americans aggrieved by joblosses, stagnant wages, dwindling benefits andrising income inequality, for which free trade servesas a scapegoat.

Of note, at least a dozen measures have beenintroduced in the US Congress in the past year topunish China for various subsidies and other allegedunfair trade practices. In March, President GeorgeW. Bush announced a new policy of imposing tariffsin retaliation for perceived unfair subsidies. Althoughthe first request for the imposition of such tariffs, forcoated paper, has been ruled unfounded, the policyremains in effect and numerous other requests forsuch tariffs are pending.

Meanwhile, just as the EU’s trade with China hassurpassed that between the US and China,European concerns about Chinese trade practices,including subsidies and its weak intellectualproperty protections, as well as the rising value ofthe euro with respect to the yuan, have alsoenflamed protectionist sentiment.

However, some still hold out hope for thesuccessful conclusion of a multilateral trade round.Although a summit of the US, EU, India and Brazilto save the round in June appears to have failed,some observers say that subsequent progress hasbeen made and that another summit in early 2008could resolve remaining issues.

Even if the claims of progress prove exaggerated,there may be no reason to impose a deadline forconclusion of the round. Since the first trade roundin 1947, each has taken longer than itspredecessor; Doha still has two years to go tooutlast its predecessor. And, time could be onDoha’s side. Although many of the Democraticcandidates in the US are decrying free trade, thereis reason to believe that once in office, the winnerwould moderate his or her position. And, theleading Democratic candidates – Hillary Clinton andBarak Obama – are the most measured in theircriticism of free trade.

And what of the proliferation of bilateral trade tiesthat free-trade advocates feared would emerge likea “spaghetti bowl” should Doha fail? Apparently,those are not that easy to negotiate either. Itappears unlikely that the US Congress willimminently approve other bilateral agreementsforged in the last year. The South Korean accord isstymied by concerns that US autos and beef willnot gain adequate access to the Korean market; theColombian accord is being held up over concernabout the uncertain positions of Colombian unionmembers; and a Panama pact is being held up byobjections that a leading member of its parliamentis accused of killing an American in 1992.

Some regional pacts, which are viewed aspotentially paving the way for wider multilateralaccords or serving as obstacles to them, are alsofaltering in their dimensions. ASEAN’s efforts toreach an EU-style trade pact by 2015 have been

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.22

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23

stalled by the crackdown in Myanmar againstBuddhist monks – President Gloria MacapagalArroyo of the Philippines, for one, has said shewould not sign any accord unless Myanmarinstituted democratic reforms. Meanwhile,Mercosur has yet to create a genuine customsunion, and progress towards trade liberalization hasbeen complicated by rising anti-free tradesentiment among existing and potentially newmembers, including Venezuela.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Joint Swiss-US Economic Commission:Potential and Limits of Global TradeLiberalization

• Threats to the Global Trading System

Page 26: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Global Risk

The global nature of risk has become anincreasing part of our social, economic andpolitical lives. From economic to environmental,from geopolitical to societal and technological,risks are proliferating and their sources becomingmore varied and remote.

Indeed, risk factors cross borders and oceans inmany ways. Financial risks cross borders alongelectronic vectors. How else could bad sub-primemortgage lending practices lead to a bank run anocean away and force central banks on fourcontinents to inject liquidity into their bankingsystems. However, the very ability of centralbankers, whose traditional role has been to protecteconomies by taming inflation and currencyfluctuations to contain such risks, may be dulled bytoday’s interconnected economy. Lowering the USFederal Funds rate, for example, had less effect onbank liquidity than might have been expectedduring the sub-prime crisis as inter-bank lendingrates remained steady or even rose (see exhibit).That might suggest more of a burden on the privatesector to keep a closer eye on risks that otherinterconnected companies, industries or countriesmight be propagating.

Similarly, cyber-attacks cross borders on fibre-opticcables and copper wires. Detecting the source ofthe attack – be it a coordinated foreign governmentspying effort, the combined efforts of innocuous ormalicious hackers, or an automated response fromsoftware agents – is a technical challenge. So, too,is stopping the attack while it is underway;unplugging from the network represents atemporary solution with associated costs, not riskmitigation. As a result, the risk level remains high,as the US Pentagon, the office of the GermanChancellor and the government of Estonia have allrecently experienced.

And some risks lie at, or outside of, those veryborders. Airports and airlines around the worldstruggled over the past year to move people andcargo efficiently; passenger delays seemedrampant. Part of the reason is an increase insecurity procedures meant to mitigate terroristrisks. In other words, the threat of terrorism hasimposed external costs on business and leisuretravellers. Yet other sources for those inefficienciesmight also be present.

In addition, companies and entire nations aredependent on global shipping – for oil, iron ore andcoal, as well as for finished goods such as toys andautomobiles. Shifting global demand has recentlydriven shipping costs to record highs, which couldcreate inflationary pressures above and beyond therising prices of the commodities being shipped (seeexhibit). And the risk of disruptions remains high,particularly at chokepoints like the Malacca Straitor the Strait of Hormuz, which are exposed to long-simmering geopolitical risks and piracy.

The list of geopolitical hotspots closely watched bythe international community remains similar, thoughcircumstances are evolving in each. The Six PartyTalks over North Korea’s nuclear programme has

Source: Thomson Financial; press accounts

Bankrun on

NorthernRock

Jan2007

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Short-Term Interbank Lending Spread

Sub-prime meltdown in the summer of 2007 widened LIBOR spread dramatically

1.4

1.2

1

0.8

0.6

0.4

0.2

0

LIB

OR

spr

ead

to 3

-mon

th T

reas

ury

(per

cent

age

poin

ts)

Largestsub-prime

lender declaresbankruptcy

Two bulge-brackethedge funds reachcreditor settlement

Central bankscoordinate

first liquidityinjection

Fed Fundscut 25 bp

SWF’s beginbail out

of banks

Fed Fundscut 50 bp

Banks annoucewrite-downs

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.24

Prepared by PricewaterhouseCoopers for the World Economic Forum

Page 27: The Power of Collaborative innovation, PWC, WEF Davos 2008,

25

eased tensions in the region, but nervousness overIran’s nuclear programme is only increasing.Breakdowns in diplomacy with Iran, or adeterioration of conditions in Iraq, could bedisastrous for oil-importing nations, which arealready struggling with record high oil prices.Palestinian-Israeli relations could be a touchstonefor keeping peace in the region. Relations acrossthe Taiwan Strait remain delicate yet stable aspolitical and economic interests seem to be pullingin opposite directions. These and other ever-present geopolitical hotspots, including Pakistan,demand the constant attention of risk managers.

And then there is climate change. Publicsentiment for a response to climate changeseemed to reach a tipping point last year, perhapsbest symbolized by Al Gore sharing the 2007Nobel Peace Prize. Citizens around world seemsensitized to severe weather events, and seem tobe asking for more green products from low-energy light bulbs to green power. And manycompanies seem willing to deliver. Encouragingly,the CEOs of 150 major multinational companiessigned a communiqué late in the year calling for a

binding, global plan to curb greenhouse-gasemissions. Business can be a victim of risksassociated with climate change: disruption due toextreme weather, water scarcity and pollution. Butcompanies can develop strategies to enter newmarkets and reduce their own carbon footprint inthe fight against climate change.

Shipping Costs

Source: Baltic Exchange

Baltic Dry Index indicates rapidly rising cargo shipping costs in 2007

Note: The Baltic Dry Index assesses the price of moving major raw materials by sea over 40 shipping routes.

12,000

10,000

8,000

6,000

4,000

2,000

0

Bal

tic D

ry In

dex

Jan-07Jan-01 Jan-02 Jan-06Jan-04Jan-03 Jan-05

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• A Unified Earth Theory: Combining Solutions to Extreme Poverty and the Climate Crisis

• Cyberspying: A Tangible Threat?

• Designing for Resilience

• How Much for the Basics?

• Just in Case

• Moving Goods and People around the Globe

• One Step Too Far: The Dangers of Supply Chain Stretch

• Risky for Business: Flashpoints in Focus

• Update 2008: Assessing Global Risks

Page 28: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Energy Security

The rising price of oil (see exhibit) has ensuredthat energy security is once again a central issue– both for international relations and for theglobal economy. Oil-producing countries areenjoying a financial bonanza, which is leadingsome of them to become much more assertivepolitically. At the same time energy dependencehas become a key concern of many importingcountries. As the major Western energycompanies seek to discover and exploit new oiland gas fields, they are increasingly running into“resource nationalism”.

Governments around the world seem increasinglyreluctant to let foreign companies take the lead inthe exploitation of their natural resources – evenwhen multinationals clearly offer a significanttechnological edge. Some governments, inparticular, Russia, have sought to re-negotiateexisting contracts, and to shift increasing control tothe host government. Nationalized energycompanies now hold the vast bulk of the world’shydrocarbon reserves. But is resource nationalismleading to inefficient exploitation of the world’sresources as well as to a growing temptation to useenergy as a political weapon?

Increasing concern about climate change and therole of fossil fuels in contributing to it have added anextra dimension to the debate. Both issues, climatechange and oil prices, have led to a renewed surgeof interest in alternative energy. Nuclear energy isalso coming back into fashion in much of thedeveloped world, although concerns about safetyand nuclear proliferation mean that there is still apolitical argument to be won. That most nations withnuclear power plants are not armed with nuclearweapons (see exhibit) hardly convinces the generalpublic that one needn’t lead to the other.

But, paradoxically, as global warming causes theArctic to melt; new potential sources of fossil fuelare being revealed, provoking a potentiallydangerous bout of resource nationalism. By someestimates, the area of Arctic sea ice has diminishedby a third over the last 20 years, and, alarmingly,current rates of ice loss are outpacing even thegloomiest forecasts.

Some of these new oil and gas reserves are alreadycoming on stream. This year, Norway will beginexporting gas from the Barents Sea. But apotentially dangerous struggle is gathering pace

Known or Suspected Nuclear Powers

Source: Carnegie Endowment, "Universal Compliance: A Strategy for Nuclear Security"; IAEA, PRIS database

2

2

2

18 1915

59

8

17

17

31

1155

2

2

2

20

6

245

5

104 1

7 6

410

11

1

Countries with known or suspected nuclear weapons programmes# Number of nuclear reactors connected to the grid

Oil Prices

Source: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis

The real price of oil approached its all-time high in November 2007

$120

100

80

60

40

20

0

Wes

t Tex

as In

term

edia

te c

rude

pric

e(U

S$/

barr

el in

200

7 do

llars

)

Jan

70

Jan

75

Jan

80

Jan

85

Jan

90

Jan

95

Jan

00

Jan

05

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.26

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27

over who exactly can claim control of the Arctic seafloors. Russia, Canada, Norway, Denmark and theUS all have potentially competing claims (seeexhibit). Last year, Russia planted a flag on the seabed, to underline its claims.

A more traditional sort of “Great Game” is underwayto exploit the energy resources of Central Asia.Anxious Europeans see Central Asian oil and gas asone of the few feasible alternatives to Russianenergy. Many have been keen to try to developpipeline routes that go around Russia – such as themuch-talked of “Nabucco project”. But the Russiansseem eager to thwart any such plans and, so far,their regional diplomacy has been rather more activeand successful than that of the Europeans.

Central Asians, meanwhile, are keen to mould theirown destiny, and to ensure that their regional storyis not simply about the struggle of outside powersfor control of Central Asian energy resources.Kazakhstan, which is the most energy-rich of theCentral Asian countries, has proposed theformation of a regional trade bloc. But rivalry withUzbekistan may prevent this proposal fromadvancing in 2008.

Lomosonov Ridge, Beaufort Sea and Chuckchi Sea, among otherarctic regions, thought to be home to oil or gas reserves

Lomoso

nov Rid

ge

Arctic Sea Resources

Source: Fortune

BeaufortSea North

Pole

ChuckchiSea

Canada

Alaska

Greenland

Russia

Norway

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• A Dangerous Mix: Nationalism, NaturalResources and High Expectations

• Clean Energy — What's Driving the Mix?

• Nuclear Energy vs Non-Proliferation

• Pipeline Politics

• The Arctic: Less Ice, More Oil

Page 30: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Systemic Financial Risk

The sub-prime mortgage crisis dominated thefinancial headlines in 2007. Multibillion dollar write-downs relating to sub-prime investments gatheredmomentum towards the end of the year, sendingshivers throughout the world’s financial centres andtriggering unprecedented concerted action from anumber of central banks. The Organization forEconomic Cooperation and Development hasestimated that the financial fallout from the sub-prime crisis could reach US$ 300 billion, as well ashit equity markets hard.

Yet financial contagion and systemic fragility arenothing new. A period of significant instability in theinter-war period in 1929-1933, led to bankingregulation and relative calm for several decades.But more recently, systemic financial crises havestruck around the world: the UK’s secondarybanking crisis in 1973 and 1974; the US savingsand loans scandal of 1985; the stock market crashof 1987; the Asian financial crisis of 1997 and theensuing banking crises in Brazil and Russia in 1998,followed by the collapse of Long-Term CapitalMarkets; and the bursting of the dotcom bubble in2000. It seems the more things change, the morethey stay the same, when it comes to financial risk.Indeed, sub-prime’s effect on equity volatility has sofar been relatively small compared to previous financial and geopolitical crises (see exhibit).

The sub-prime story is straightforward enough: acombination of low interest rates, liberal lendingpolicies and innovative financial products enabled ahousing boom. Falling housing prices then led to risingdelinquencies, leading to a cascading credit squeeze.

The details, of course, are far more complex.However, a key element this time around wasfinancial innovation in the form of securitizedassets. Banks could pool sub-prime mortgageloans and repackage them into saleable securities.Some securities could be assigned the first lossesfrom the pool of mortgages, while others could beshielded from those losses and thus grantedinvestment-grade credit ratings, despite the riskynature of the underlying loans.

As it turned out, however, to divorce lending fromthe risk of default encourages risky, unsecuredmortgages. And investment-grade credit ratings forthe least risky tranches proved optimistic in theface of widespread defaults (see exhibit). Worsestill there was uncertainty over who held whatpotential liability with respect to the repackagedloans. As banks began to announce their exposuresto the sub-prime market, stock prices fell. Unsureof the counter-party risk, banks became wary oflending, the interbank lending rate rose, and acredit squeeze ensued.

Source: Thomson Financial; press accounts

Jan2007

AAA

A

BBB-

* ABX series 06-2. The ABX are credit default swaps based on sub-prime mortgage securities.

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Largestsub-prime

lender declaresbankruptcy Two bulge-bracket

hedge funds reachcreditor settlement

Central bankscoordinate

first liquidityinjection

Fed Fundscut 25 bp

SWF’s beginbail out

of banks

Bankrun on

NorthernRock

Fed Fundscut 50 bp

Banksannouce

write-downs

US Mortgage-Backed Securities

Value erosion

100

80

60

40

20

0US

sub

-prim

e m

ortg

age-

back

ed s

ecur

ities

pric

es, b

y ra

ting*

Source: World Economic Forum

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

Suez

Cuban MissileCrisis

Vietnam

Oil crisis 1

Oil crisis 2Falklands

Gulf war 1

Average

Gulf war 2

9/11

Asian crisis

Dot-com

1987 Crash

Sub-prime

Equity Market Volatility

Crash of 1987 stands out as the most volatile S&P500 event over the past 55 years

0.023

0.021

0.019

0.017

0.015

0.013

0.011

0.009

0.007

0.005

0.003

S&

P 5

00 v

olat

ility

(12

mon

th s

td d

ev)

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.28

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29

The sub-prime crisis raises a number of importantquestions. For example, what role should centralbanks play? Central banks are seen as theinstitutions that ensure financial and pricestability, but how far should this role extend, andare central banks equipped to perform thesefunctions well?

“A central bank has a model enabling it to measureinflation and predict how it is likely to develop. Italso has an instrument to affect inflation – theinterest rate,” says Dimitrios Tsomocos of OxfordUniversity’s Saïd Business School. “Move on tofinancial stability problems, however, and we don’treally have a model which enables us to analysefinancial stability. We don’t have a metric tomeasure financial stability. We can’t really predictfinancial stability and we don’t really have a verygood instrument to affect it.”

Many question whether central banks should beshoring up banks that have struggled due toquestionable business models or investmentdecisions, or whether moves such as the injectionof over US$ 100 billion in liquidity in December2007 are appropriate or effective.

“Risk is integral to the financial system and theeconomy, it cannot be eliminated and certainly not

underwritten by governments,” says Alec Chrystal,professor of money and banking, and head of thefaculty of finance, at Cass Business School inLondon. “Firms and individuals that take risksknowingly expect to be highly rewarded when theyget it right, but they should be allowed to losewhen they get in wrong.”

No doubt the current crisis will pass, but it will notbe the last. As financial products grow ever morecomplex, more innovative and, in many cases, lesswell understood, the question is not whether therewill be another crisis – be it credit default swaps orsome other exotic instrument – but when, and howprepared will we be the next time it happens?

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Evaluating Financial Risk: To Whom ShouldCredit Go?

• International Economic Crime

• Regulation and Capital Market Competition

• Systemic Financial Risk

• The Role of Central Banks

Page 32: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

International Terrorism

Since the 9/11 attacks on New York andWashington in 2001, the “war on terror” hasbeen the central focus of American foreignpolicy. But more than six years on, is it time fora reassessment?

The real nature of the threat posed by Al Qaeda isstill much debated by terrorism experts. Someargue that the threat is growing again, as theorganization regroups in tribal lands on theAfghan-Pakistan border. The US has grownincreasingly concerned about lack of progress inthe eradication of these Al Qaeda bases.

Even as some warn that Al Qaeda is re-establishing itself in the area, another school ofthought in America and elsewhere argues that theterrorist threat to the US has been exaggerated.They point to the lack of major attacks on US soilsince 9/11. Europe, it is acknowledged, is muchmore vulnerable because of its large Muslimpopulation, its proximity to the Middle East andNorth Africa. The record of recent attacks andattempts in the UK, Germany, Spain andelsewhere seems to bear this out.

The indiscriminate nature of Al Qaeda’s attacks –in Iraq and elsewhere – also point to the fact thatthe organization is beginning to lose the battle forthe hearts and minds in the Muslim world.Opinion polls show that support for suicidebombing has declined sharply in many Islamic

countries, like Pakistan and Morocco that havesuffered from such attacks in the past.

The battle for public opinion – always critical inthe “war on terror” – may be more importantbecause of the changing nature of the terroristthreat. It may be that Al Qaeda is now bestunderstood as a brand or a network. Rather thanbeing a coherent organization with a singleleadership, it is now a set of ideas – propagatedskilfully through new media and the Internet.There is much discussion of whether recent terrorattacks in Europe have been organized andconceived in the Al Qaeda heartland – or ratherwhether home-grown terrorists have simply takeninspiration from jihadist messages spread throughnew media. The role of the Internet in spreadingjihadist ideology could mean that the “war onterror” is now as much about technology andpropaganda, as it is about armed force.

But the most terrifying threats still persist. Theprospect of nuclear and biological attacks byterrorists remains crucial to any risk assessment.Some argue that it is only a matter of time beforeterrorists attempt an attack with a weapon ofmass destruction. While it is acknowledged thatAl Qaeda has attempted to obtain nuclearmaterial in the past, the fact is that it isextremely hard to come by and building aweapon from scratch is likely beyond the abilitiesof any known terror organization. A “dirty bomb”

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.30

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31

which would spread radioactive material in apopulated area would be damaging, to be sure,but far less so than if the material weredetonated in a nuclear bomb.

However, worries about bio-terror, although lessdiscussed by the media, may be more realistic asthe know-how, technologies and equipmentneeded to produce biological weapons would beeasier to obtain. Controlling this risk will likelydemand the involvement of members of theBiological Weapons Convention, and closecooperation between the biotechnology industryand governments around the world.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Terrorism in a Networked World

• The Threat of Biotechnology

Page 34: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Non-Proliferation

Efforts to prevent the proliferation of nuclearweapons will continue to be a major preoccupationof G8 leaders in 2008. Those efforts will be all themore urgent in view of estimates that morecountries could soon develop nuclear arms. Inaddition to on-going concerns about North Koreanand Iranian programmes, there is the growingspectre of nuclear terrorism. Indeed, all leading USpresidential candidates – on both sides of thepolitical divide – have expressed alarm about thepossibility of terrorists getting hold of nuclear orbiological weapons.

Central to the nuclear issue today is the West’stroubled relationship with Iran. Even after the recentUS intelligence assessment suggesting that Iranstopped work on its nuclear weapons programmein 2003, many in the West seem to doubt Iran’sassertions that its nuclear programme is forpeaceful and civilian uses. And they worry thatinspections by the IAEA cannot be rigorous enoughto prove peaceful intent. Others, however, includingRussian policy-makers, argue that it is worthcontinuing to offer the Iranians enhancedcooperation on a civilian nuclear programme, aswell as other diplomatic and trade benefits, inexchange for greater openness.

The Iranian nuclear dossier is perhaps the mostcontroversial. But similar issues are cropping up inother parts of the world. The Six-Party Talks led tothe encouraging “temporary suspension” of NorthKorea’s nuclear programme, but activities thereremain under close international watch. Theproposed US-India nuclear deal has upset many ofthe more zealous guardians of the internationalnon-proliferation regime, who believe the US hasallowed India too much leeway contrary to theprovisions of the Nuclear Non-Proliferation Treaty.But the deal has also upset Indian nationalists whobelieve their nation has accepted too many

restrictions. Many arms control experts continue toexpress anxiety about the safety and security of thenuclear weapons of the former Soviet Union.

Iran’s nuclear programme refocuses attention onthe difficulty of separating the civilian from themilitary uses of nuclear energy. Reactortechnologies do not inherently lead to weaponstechnologies, but a degree of uranium enrichmentis needed to produce reactor fuel for peacefulpurposes (see exhibit). And, as policy-makers in theWest increasingly invoke nuclear power as aresponse to concerns about climate change andrising oil prices, the proliferation argument willresurface. As the energy market tightens and thereare growing calls for a revival of nuclear power, thepeaceful and safe development of nuclear energywill become an important international issue.

In much of the developed world, resistance to therevival of nuclear power centres on fears of aChernobyl-style accident, and the difficulties ofsafely disposing nuclear waste. But the “safe”disposal of waste will also increasingly meanmaking sure that nuclear material cannot fall intothe hands of terrorists. The threat that nuclear

Countries Possessing Nuclear-Weapons-Grade Fuel

Source: Carnegie Endowment, "Universal Compliance: A Strategy for Nuclear Security"; IEAE PRIS database

Known to possess nuclear-weapons-grade fuel# Number of nuclear reactors connected to the grid

2

2

2

18 1915

59

8

17

17

31

1155

2

2

2

20

6

245

5

104 1

7 6

410

11

1

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.32

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33

power stations could come under direct attack willalso concern policy-makers, who have long worriedthat future 9/11-style attacks could be directed atnuclear installations.

The spread of other weapons of mass destructioncompound the current threat. Ever since theanthrax attacks on the US in 2001, the potential forbiological terrorism has been evident. Indeed,biological weapons are far easier to produceclandestinely than nuclear weapons. This possibilityposes a big problem both for the biotechnologyindustry and for its regulators. The same materials,expertise and equipment that are vital to thebiotech industry – and which offer so muchpromise – also have the potential to do great harm.

Since 9/11, the US has done a lot more to monitorculture collections and research programmes.Some in the biotech industry argue that too muchhas been done, damaging America’s technologicalprowess in a vital developing field. But mostcollections of potentially dangerous cultures areoutside the US, and relatively little has been doneto protect and monitor them. Thus, an internationallegal and regulatory framework may need toemerge that simultaneously wards off the threat ofbio-terror while protecting the biotech industryplayers in multiple nations.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Nuclear Energy vs Non-Proliferation

• The Threat of Biotechnology

Page 36: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Climate Change

Some say that 2007 will go down in history as the yearwhen the world took serious note of climate change,accepting that its challenges are urgent and bound todemand uncomfortable trade-offs.

Over millions of years, the average temperature of theearth has risen and fallen with the atmosphere’s levelsof carbon dioxide, which traps heat that otherwisewould escape into space. Amounts of atmosphericcarbon dioxide have varied between 190 parts permillion (ppm) during the Ice Ages to 280 ppm, whichcharacterize warmer “interglacial” periods like our own.Today’s atmosphere contains the equivalent of 430 ppmof CO2 when factored together with other greenhousegases, such as methane and fluorocarbons. And, atcurrent rates of economic growth, carbon dioxide levelscould reach 800 parts per million by 2100.

Indeed, last November, the UN’s International Panel onClimate Change announced that great damage andhuman suffering would come long before 2100, ifcurrent trends continue. As early as 2020, according tothe panel, between 75 and 250 million people in Africawill suffer water shortages, Asian megacities will bemenaced by deadly floods, many European animalspecies will become extinct and many NorthAmericans will find themselves short of water.Accepting the report, UN Secretary-General Ban Ki-Moon declared that the foreseen climate-changeimpacts are “so severe and so sweeping that onlyurgent, global action will do.”

Shortly after the release of the report, the CEOs of150 major multinational companies issued acommuniqué calling for a binding, global plan to curbgreenhouse-gas emissions. Signers includedexecutives of Coca-Cola, Gap, Nike, British Airways,Nestlé, Nokia, Shell, Tesco and Virgin, and suchChinese companies as Shanghai Electric andSuntech. “As business leaders,” it said, “it is our beliefthat the benefits of strong, early action on climatechange outweigh the costs of not acting.”

An even more striking indication of a changed moodabout climate followed in December at the UNClimate Change Conference in Bali – after an addressby former Vice-President Al Gore, who shared the2007 Nobel Peace Prize with the IPCC, and anintense last-minute push to an agreement. Themeeting ended with a plan to negotiate a new globalclimate treaty by the end of 2009.

At the end of the session, the US – the world’s largestcarbon-dioxide emitter and one of the few countriesagainst binding caps on greenhouse-gas emissions –agreed to the “Bali roadmap”, which commitsdeveloped countries to “measurable, reportable andverifiable nationally appropriate mitigationcommitments or actions, including quantified emissionlimitation and reduction objectives”. Meanwhile, Chinaand India, whose emissions are rising fast as a resultof rapid growth, for the first time committedthemselves to the roadmap.

Also for the first time, nations with large tracts ofrainforest won agreement, in principle, to becompensated for protecting these lands fromdestruction. Deforestation is estimated to cause 20%of carbon dioxide emissions, and many advocateshailed this new international agreement as abreakthrough, not only for Indonesia, Brazil and otherforested nations, but for the world.

Others disagree. Some fear the impact of the forestdeal on any future “cap-and-trade” system foremissions cuts. Under such systems, emission capsare imposed on participants; those who exceed theirlimits can purchase credit from those who are undertheir limits. The resulting market gives incentives to allto reduce emissions. Though some say cap-and-tradeplans are a failure in Europe, where emissions havegone up very slightly since the start of the EuropeanEmissions Trading Scheme in 2005 (see exhibit), othershave faith that the evolving market for carbon will beable to function well, after the caps become more

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35

stringent. Many advocates hope, in fact, that theworld’s separate cap-and-trade systems can bemerged into a global exchange.

All agree, at least, that the scope of the challenge isunprecedented. There is optimism that jobs lostthrough emission cuts can be made up byemployment in new industries devoted to carboncontainment and mitigation. According to apreliminary report released in December 2007 by theUN Environment Programme, the push for lowercarbon emissions can be expected to create manyjobs. For example, the US environmental industry in2005 generated more than 5.3 million jobs, an orderof magnitude more than those found in thepharmaceutical industry (see exhibit). According tothe report, “green” job gains will be seen not only inrich nations, but throughout the world. Among itsother examples are the Indian city of Delhi, where anew fleet of natural-gas powered buses will create anadditional 18,000 new jobs; and Brazil, where thegovernment’s ethanol programme is responsible for500,000 new positions.

Strategies abound for reducing global emissions whilepreserving economic growth, but many arecontroversial; none perhaps more than nuclear power.Reactors produce no greenhouse gasses, and this factis certainly contributing to renewed interest in thenuclear industry. According to the International AtomicEnergy Commission, there are 435 operating nuclearreactors around the world, and 29 more are underconstruction (seven of them in India and another eightelsewhere in Asia). Some argue that, in the words of

the ecologist James Lovelock, “nuclear power is theonly green solution”.

However, given the controversy and long lead timesassociated with commissioning nuclear power plants, awide range of other options are also being explored.Biofuels – essential ethanol-based fuels produced fromgrains and grasses – are already widely used in Braziland elsewhere. They do present some drawbacks, notleast that they divert agricultural production away fromfood at a time when world food demands are growing.Harnessing solar, wind and wave energy is anotherstrategy being pursued by many nations, fromdomestic solar units to large-scale wind and waveprojects off-shore in Scandinavia and other regions inEurope. No one technology is likely to provide the silverbullet solution but the right mix of technology, policiesand behavioural change will ultimately result in asustainable energy strategy – preventing furtherdamage to the planet.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Source: MISI, 2006

Green Jobs

7

6

5

4

3

2

1

0

Env

ironm

enta

l ind

ustr

y jo

bs (

mill

ions

)

1975 1990 2005 2020F

Note: Environmental industry jobs are defined as “those which, as a result of environmental pressures and concerns, have produced the development of products, processes, and services, which specifically target the reduction of environmental impact.”

Environmental industries could employ 6.9 million in the US by 2020

Carbon Emissions in Europe

Source: European Environment Agency

Europe's greenhouse gas emissions had already fallen beforethe EU Emissions Trading Scheme came into effect

5.3

5.2

5.1

5.0

4.9

4.8

4.7

4.6

4.5

CO

2 eq

uiva

lent

em

itted

, EU

27 (

billi

on to

nnes

)

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

EU ETS carbontrading begins

Related Sessions

• Beyond Kyoto: Is Collaboration Possible?

• Climate Change Divide

• Going Nuclear to Fight Climate Change?

• Green Jobs: Putting Climate Change to Work

• The Effectiveness of Carbon Trading

• Update 2008: Progress on Climate Change

Page 38: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Leadership & Decision-Making

Big problems require big solutions and effectiveleadership. They require the collective will ofgovernments and business, and concerted action tomeet challenges that threaten the economic well-being of the world’s nations and, if some scenariosprove to be true, the viability of the planet.

In the past, business and government leadersentrusted with addressing such problems could bedivided into risk-takers and risk-managers. Thisdecade, however, such divisions have begun toblur as well-honed methods of assessing futurehazards are proving insufficient to navigate aworld of dynamically evolving geopolitics,changing climate and economic restructuring.Global climate change, for example, could rendermoot a host of projections about crop yields,fisheries and coastal development, but scientistscannot yet say how with much precision. Facing adecision-making landscape in which risks are notmeasurable or even known, leaders may need tocombine the skills of risk-takers, who havelearned how to live with uncertainty, and those ofrisk-managers, who have the tools for preparing aresponse to upheavals.

Much stock is placed in meetings like December’sBali conference on climate change or the Annapolissummit on finding an Israeli-Palestine peaceaccord. But an equal measure of leadership mustbe demonstrated following such gatherings, whendisparate constituents must be convinced thatnegotiated compromises are worth their costs.

And solutions to problems as large as climatechange require multistakeholder participation. Theability of governments to make dramatic policychanges of the sort needed to solve big problemsis likely limited without the private sector.Governments will need to work carefully withprivate sector actors to ensure not only that

societal gains outweigh losses, but also that thelosers themselves do not become disaffected.

How can multistakeholder solutions be formed inthe face of seemingly intractable problems?Transparency is a key element. Public bodiesmight, for example, foster trust through legislationthat encourages corporate transparency andthrough their own commitment to lead by example.Management can commit to telling its storytruthfully and without spin. Public trust and supportare essential when trade-offs must be faced.

Corporations might also consider action when thereis already public support. On such issues assustainability and responsible corporate behavior,for example, companies and their representativeindustry organizations can make significantprogress on their own. The International Council onMining and Metals (ICMM) is a good example. TheICMM adopts a multistakeholder approach toensure that mining, and the use of mining products,is conducted in a responsible manner, and hassocial and economic benefits for the countries inwhich it takes place. The ICMM has measurablyhelped to improve mining practices, by engagingwith mining companies, governments, multilateralagencies, donor bodies and other stakeholders.

Such collaborations define a networked world ofdistributed leadership, in which leaders will requirea range of distinct skills. “Where there is distributednetworked leadership, in the absence ofhierarchical power, people will need the ability topersuade, influence and convince others that theirapproach is the right one for the organization,”says Arnoud de Meyer, dean of CambridgeUniversity’s Judge Business School.

The next generation of leaders will be called uponto bring together and inspire people from many

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37

different nationalities, ages and with differingaspirations. Their generation may react verydifferently to traditional organizations and careerpaths, having grown up surrounded by technology,continual access to information and perhaps evennew social models driven by technology and themedia. Some believe the concept of management,rather than leadership, may become fashionableonce again. After all, according to the likes ofFrederick Taylor and Henri Fayol, early 20th centurypioneers of business research, management wasnot about administration, it was about “gettingthings done through a community of people”. Thatskill is precisely what seems to be required in themodern world of networked organizations anddistributed leadership.

Finally, given the time period associated with manyof the problems facing the world, corporations,leaders and managers may need to focus oncreating solutions and value over the long term,rather than just concentrating on the next quarter.One recent survey revealed that chief financialofficers were all too willing to sacrifice drivers oflong-term success in order to meet their quarterlyfinancial targets. “Creating long-term value requiresthe right steps to be taken, both in the short andthe long term,” says Andy Neely, deputy director ofthe Advanced Institute for Management Researchin the UK and director of research at CranfieldSchool of Management. “The trick to achieving thisis to align today’s measures with tomorrow’s valuedrivers. Concentrating on the right issues –especially the non-financial drivers of futuresuccess – is essential.”

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Corporate Global Citizenship in the 21stCentury

• Creating a Culture of Leadership

• Developing Strategy in a Networked World

• Fair Play: A Winning Concept

• Leadership and Skill Development: A Cross-Cultural Debate

• Long-term Value in a Short-term World

• Psychonomics

• Tackling Global Issues through Corporate GlobalCitizenship

• The Art of Business Diplomacy

• The Power of Collaborative Innovation

• Unsustainable Trends

Page 40: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Talent

The war for talent may be heating up as the long-term effects of demographic change and skillshortages are felt around the world. Talentedpeople are a key competitive differentiator forcompanies; they are also necessary in public life,leading public institutions and intergovernmentalbodies to meet the challenges of 21st century.

Sadly, however, evidence suggests that talent is inshort supply, and that this situation is unlikely toimprove in the near future. The US Bureau ofLabour Statistics forecasts a labour shortfall in theUS of 10 million workers by 2010, with the 500largest US companies losing 50% of seniormanagement in the next five years. Globaldemographics are not helping. By 2025, thenumber of people aged 15-64 is projected to fall by7% in Germany, 9% in Italy and 14% in Japan.Over the next 25 years there will be 75 millionfewer Europeans, 65 million fewer Japanese.

As well as changing demographics, there is theskills challenge to contend with. The UK is a goodexample of the problems facing developedeconomies. The Sector Skills Almanac for the UK2007, a comprehensive sector-by-sector study ofUK skills notes that there is a shortage of basic andemployability skills. The Leitch Review of Skillspublished in December 2006, reported that by2020, 1 million people in the UK will lack functionalliteracy skills, six million will lack functionalnumeracy skills, and 11% of those over 25 yearsold will lack the equivalent of a basic schoolleaving qualification.

Dealing with the talent shortage in the workforcewill not be easy, but one way is to attract and retainemployees from a range of people who may beunderutilized, in particular, people over 65 yearsold, and women returning to the workforce. It willalso be essential to employ the youthful millenniumgeneration in ways that engage their sensibilities.

In a 2005 Harvard Business Review survey of 2,443highly qualified women business professionals,nearly three-quarters of respondents who left theworkforce intended to return, yet less than 40%were able to do so in a full-time capacity (seeexhibit). And there is evidence that increasing acorporation’s openness to gender diversity couldpay dividends. Consider a 2007 Catalyst studythat found boards of directors with more thanthree women earned five percentage pointshigher return-on-equity than the average firm(see exhibit).

Source: Catalyst (2007)

Corporate Performance and Women Serving on Boards of Directors

18%

15

12

9

6

3

0

Ret

urn

on e

quity

of F

ortu

ne 5

00co

mpa

nies

, 200

1-20

04

Three or morewomen directors

Top quartile, women on boards

Average Bottom quartile,women on boards

Financial indicators appear to be better when there is greater representation of women on boards.

16.7%

13.8%

11.5%

9.1%

Most Highly Qualified Women Who "Off-Ramp" Intend to "On-Ramp"

Source: "Off-Ramps and On-Ramps", Sylvia Ann Hewlett (Harvard Business School Press, 2007)

100%

80

60

40

20

0

Per

cent

age

of h

ighl

y qu

alifi

ed w

omen

who

"off-

ram

p" fr

om th

e w

orkf

orce

Want to “on-ramp” back to the workforce

Almost three-quarters are successful in returning to the workforce

Succeed in “on-ramping”

Full-time

Part-time

Self-employed

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.38

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39

“One way to attract and retain these disparategroups would be to offer alternative workarrangements,” says Monika Hamori, a professor atSpain’s Instituto de Empresa business school.According to Hamori, these arrangements includeflexitime – work schedule outside of normal workinghours; telecommuting – a choice of work locations,including working from home; part-time work; andpaid and unpaid leaves of absence for childbirth,personal needs, or professional development.

In the future, organizations will need to sourceemployees from a wider talent pool, just as fast-moving consumer goods company Procter &Gamble and pharmaceutical firm Eli Lilly do,through YourEncore, the open network connectingmember companies to a database of highperforming retired scientists and engineers.

Organizations will also need to focus on getting thebest from diverse, high performing workforces.Managing tensions between individualism andcollectivism, or empathy and assertiveness, and theimportance of soft skills, such as mediation andnegotiation skills in the team environment, arefundamental issues in ensuring maximum teamperformance, says Mark de Rond, an academic atCambridge University’s Judge Business School,particularly when it comes to an internationallydiverse, select group of over-achievers.International diversity starts at the top, yet by somecomparisons, only in the UK are more than one infive chief executives foreign-born.

Finally, in a world where talent is at a premium itwill be a more effective long-term strategy fororganizations to develop senior leadership talentinternally, rather than source it externally. There area number of critical factors related to succession,says Hamori, noting that the Society for HumanResource Management annual succession planning

survey in 2006 revealed only 29% of companiessurveyed had a formal succession plan and 42%had no plan at all.

Succession plans, says Hamori, must be alignedwith the business strategy, the culture of theorganization and the macroeconomic environment;systematically planned; and supported by othertalent identification structures, with high potentialidentified based on their ability to learn and adaptto changing situations – and not just based ontheir competencies.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Bridging the Skills Gap

• Finding Your Top Performers: The CorporateTreasure Hunt

• Grooming Your Successor: Why Is It So Hard?

• The Secrets of Successful Team Building

• The Workforce's New Demographics

Page 42: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Education and Employment

There is abundant evidence to link educationalattainment with employability. The OECD hasshown that more education improves the incomesof individuals and societies; one extra year to theaverage years of schooling increases GDP percapita by 4% to 6%.

However, in some of the most developed countries,there are signs that the economic payback to highereducation is not as dramatic as it once was and thatthe payback may continue to diminish. What’s more,in the US, Germany and some other developedcountries, the percentage of young people withcollege degrees is declining. And in the OECD’s mostrecent survey of science education, many studentsfrom Eastern Europe and Asia outperformed theirpeers in countries such as the US and France,suggesting that some developed world educationalsystems could be improved (see exhibit). Theunderlying causes of these developments and theappropriate public policy response to them aresubjects of considerable debate.

Many believe the decoupling of higher educationalattainment and individual income can be traced tothe effects of globalization. According to this view,

the disconnect is explained by the shift frommanufacturing jobs – accounting for thepreponderance of jobs moving overseas – to thegrowing offshoring of service sector jobs, includingeverything from call centre help desk personnel tocomputer programmers.

The service jobs widely identified as mostvulnerable to offshoring are those that are routine,can be computerized and can be deliveredelectronically. These categories includebookkeepers, data entry teams, financial analysts,graphic designers and computer programmers.Many of these jobs that are suitable for the collegeeducated are being filled by the skyrocketingnumbers of college graduates in developingcountries, offering the same skills at less cost.

In response to this trend, policy-makers,corporations and academics have sought todefine what kind of jobs are most likely to remainimmune to increasing globalization and how toproduce workers who are uniquely suited to holdthose jobs. The jobs that may be least vulnerableoccupy two ends of an income and skillsspectrum. At one end are highly paid, highlyskilled jobs such as managerial positions andprofessions like medicine and law. To preparelarge numbers to work at the high end of thescale, education would be directed at fosteringcreative problem-solving abilities and innovativethinking. At the other end are personal-serviceproviders such as taxi drivers and hair-dressers.

While many agree that developed countries’continuing competitiveness lies in the nurturing ofproblem solving and innovation, there is sharpdisagreement as to whether a focus on education isa sufficient response. A significant body of opinionholds that maintaining competitiveness requirespolicy changes outside the educational sphere.

Science Literacy

Source: OECD

Sci

ence

lite

racy

, mea

n sc

ore

of 1

5-ye

ar-o

lds,

200

6

Fin

land

Hon

g K

ong

Can

ada

Japa

n

Net

herla

nds

Kor

ea

Ger

man

y

UK

Aus

tria

Bel

gium

Irel

and

Sw

eden

Den

mar

k

Fra

nce

US

Spa

in

Italy

Por

tuga

l

Gre

ece

Chi

le

Uru

guay

Tha

iland

Mex

ico

Indo

nesi

a

Arg

entin

a

Bra

zil

Col

ombi

a

600

500

400

300

EU15

North America

Latin America

Asia

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41

According to this outlook, those nations mustreduce business costs without reducing standardsof living, for example, by separating healthinsurance and social security from employment,demand enforcement of fair labour practices bytrade partners; increasing spending on scientificresearch; and increasing social spending to enablea larger sector of the population to take advantageof the educational opportunities available. Butothers say that those calling attention to theerosion in the pay advantage of the collegeeducated and for a broader response to promotecompetitiveness have cherry-picked the education-income data to further their agenda of expandingsocial programmes.

Improving the quality of education is also high onthe agendas of emerging countries striving to attainand improve competitiveness. Even as there hasbeen marked progress in the growth of primaryeducation in emerging nations, there is growingawareness that quantity alone is worth little if it isof low quality. In some transition economies,metrics such as the number of years of educationmatch those of developed countries. Yet,multinationals that have entered those nations donot necessarily find a populace in tune with themodern global workplace, complaining of workersaccustomed to rote learning, not problem solving.

Although decided how to allocate resources foreducation is a universal issue, emerging markets inparticular face the question of whether to devotelimited resources to further expanding access toprimary and secondary education, or whether tospread resources more thinly in order to developtertiary education as well. Some argue that all threemust be pursued. Others say that it makes moresense to rely on tertiary education opportunities indeveloped countries and to concentrate resourceson primary and secondary levels. The OECD survey

suggests that science education is working well indeveloping nations, and that they may becomesources of global science and engineeringinnovation – a prospect that bodes well overall forthe health of the global economy but will onlyfurther heighten the pressure on governments andeducation systems in developed nations to improvethe competitiveness of their populations.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• What Does Technology Do for Education?

• What Job Should My Child Take in a GlobalizingEconomy?

• What Kind of Education for What Kind of World?

Page 44: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Innovation

In November 2007, BusinessWeek magazine askedseveral US presidential candidates for theirthoughts on innovation. The candidates all agreedinnovation was important for America’s futuresuccess, but each offered a different definition.

This should come as no surprise as there appearsto be little agreement among businesspractitioners or policy-makers on the meaning ofinnovation or what constitutes best practices interms of implementation. “There is a lot ofconfusion about the word ‘innovation’,” says VijayGovindarajan of Dartmouth’s Tuck BusinessSchool, recently appointed General Electric’s ChiefInnovation Advisor. “People mistake innovation forcreativity. To me innovation is commercializingcreativity. It is creativity multiplied by execution; ifyou have a score of zero on either one of them youhave no innovation.”

How, then, to achieve it? Perhaps by openinnovation models, the most significantdevelopment in recent years. Traditionally,innovation was conducted behind close doors,within in-house or captive R&D units, and the fruitsof that research and development fiercely protectedusing intellectual property (IP) legislation via patent,copyright, trademark, as well as contract.

Today, many companies recognize that the in-housemodel is not necessarily sustainable or productive inthe longer term, for a number of reasons, includingthe increasing costs of R&D, the threat of imitationand the speed to market of competitors. Indeed, theresearch element of R&D seems on the decline. Forexample, The Economist recently reported that BellLabs had 25,000 researchers and its own physicslaboratory some 50 years ago. By 2003, now part ofFrance’s Alcatel-Lucent, it was down to some 1,000researchers.

Open innovation models, inspired by the open-source software movement, embrace openstandards, collaboration, cooperation,competitions, joint ventures, spin-offs andinnovation networks. So, for example, Google hasteamed up with the XPrize foundation to offer atleast US$ 20 million to the first private team toreach the moon, operate a robotic rover andtransmit data back to Earth by 2014. Elsewhere,multinationals like Procter & Gamble havepioneered external networked innovation models.

On the other hand, others point out that openinnovation only works under certain circumstances.IBM may have shifted some of its software effortsto the open-source Linux platform, for example, butit has a tight hold on the intellectual propertybehind much of its hardware business.

The merits of such new innovation models aresupported by studies such as Booz AllenHamilton’s annual Global Innovation 1000 of thebiggest R&D spenders, the majority of whomconducted traditional R&D. The reportdemonstrated that: “There are no significantstatistical relationships between R&D spending andthe primary measures of financial or corporatesuccess: sales and earnings growth, gross andoperating profitability, market capitalization growth,and total shareholder returns”.

With a networked approach to innovation,corporations can extend the search for innovationacross the globe. A number of strategies can beused to sense the signals of innovation, including:dispatching idea hunters to track down newinnovation triggers; working with active users ofproducts and services; and using new marketresearch approaches – studying what people dorather than what they say.

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43

Yet open innovation still faces many challenges, notleast that of IP rights. Indeed, the future of IP rightsper se is the subject of heated discussion, withdebate polarized over placing innovation in thepublic domain. On one hand, opening up IP removesthe incentive to invest in R&D. On the other hand,excessive use of IP protection disadvantagesdeveloping countries, stifles innovation, and is notthe appropriate model to capture value in anetworked world where relationships are paramount.

The way forward is unclear, and the signalsconfusing. In the past, India did not grant patentsfor discovery or invention, only process. Now, itgrants 20 years of patent protection to post-1995inventions, suggesting that patents are importantinputs to innovation. Yet, IBM’s move to providefree access to innovations covered by 500 of itssoftware patents to the open-source softwarecommunity suggests that those patents may not beessential for corporate innovation.

The reality is that the future of innovation is stillsearching for a middle ground somewhere betweentraditional R&D models and new open models.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Local Innovation for Global Impact

• My Idea, My Design, but Whose Property?

• R&D's Impact on Shareholder Value

• Update 2008: Defining Innovation

Page 46: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Shifting Sources of Capital

Last summer, when the US market for mortgages tosub-prime borrowers collapsed, the crisis spread tothe debt market. People are now carefully watchinghow the “credit crunch” will unfold as central bankshave stepped in to alleviate the pressure on banksand on businesses that depend on borrowedmoney to fuel their activities. Private equity, hedgefunds and sovereign wealth funds – which havebecome the most dynamic sources of deal makingand investment and are powerful enough to beconsidered new centres of capital – have beengreatly affected.

Until the summer of 2007, private equity firms wereexecuting a record number of buyouts. Indeed, thetransformation of bellwether firm the BlackstoneGroup into a public company in June seemed toherald a new age of power for private equity. Butthis fall, a number of high-profile deals stalled orfell apart. And worries are not limited to the presentdeal-making climate: It is estimated that since2003, 42% of the high-yield corporate bondsissued were rated B- or lower. Much of this debtrepresents money used by private equity inbuyouts. In view of private equity’s use of long-term leveraged debt, it remains to be seen how itwill weather the current credit squeeze, especially ifit continues far into the new year.

Private equity has reason for some optimism. Itsinvestments are now spread farther across theglobe than during the downturn of 2000-02. Whileprivate equity’s investments have risen for sixconsecutive years, its fund-raising has risen evenmore rapidly (see exhibit). But if the buyout marketremains cool, firms may find that opportunities laynot with the takeover of large companies, but withthe buying of mid-sized companies or with thefunding of small ones. If so, detractors of privateequity’s excesses will be pleased. As private equityhas grown larger, calls for greater regulation of the

sector have grown louder. Legislators in the US, forinstance, want to eliminate the tax advantage ofpublicly held private-equity firms, which are treatedas partnerships instead of corporations. Marketconditions will bring further tempering. Followingthe summer, the Carlyle Group’s head, DavidRubenstein, predicted that private equity firmswould hold on to their investments for an averageof four to six years.

Like private equity, hedge funds began the summeron a cheerful note but ended shaken. Though manyof them suffered significant losses in the thirdquarter, investors did not pull money out, as manyhad feared. With a record US$ 1.8 trillion in assets,hedge funds remain a strong force, and like privateequity firms, they are beginning to go public, andhence perhaps forgoing some freedom of action.This development worries people who fear thepublic’s access to risky investments formerlyreserved to very wealthy and presumably betteradvised investors, but is applauded by those whobelieve that firms beholden to shareholders will beless likely to behave rashly. As hedge funds thrivein volatile markets, the new year could hold thepromise of a return to large profits.

Private Equity Capital Vs. Investments

Source: Buyouts Newsletter, S&P LCD, Bain US LBO fund database, Bain

$300

200

100

0

Cap

ital r

aise

d / e

quity

inve

sted

(U

S$,

bill

ion)

Note: Capital raised includes domestic and foreign funds raised by US-based LBO firms

1993

1992

1994

1995

1996

1998

1999

2000

1997

2003

2002

2005

2004

2001

2006

2007

E

Buyout capital overhang of ~US$ 300-350 billion globally

Equity investedCapital raised

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.44

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45

Another budding source of capital also coming ofage are state-run investment vehicles known assovereign wealth funds (SWFs), which are prominentin Asia and the Middle East. SWFs are not a newphenomenon, however, burgeoning oil prices andtrade surplus have filled their coffers: they now havean estimated value of US$ 2.5 trillion and that isexpected to grow to US$ 12 trillion by 2015.

As credit markets roil, some welcome SWF activity– between April and late November 2007 SWFsinvested US$ 37 billion in financial institutions. Buttheir money pours into banks, stock exchanges andprivate equity firms – China’s fund recently put US$3 billion into the Blackstone Group, the Abu DhabiInvestment Authority has infused a hurtingCitigroup with US$ 7.5 billion and the SingaporeGovernment Investment Corporation will pour US$9.7 billion into UBS.

There is real concern about the potential politicalimplications of these investments. To date, SWFshave represented patient capital and relativelypassive ownership (see exhibit). The fear is thatthey may some day become activist owners whoseinterests spill over into the political realm.

Source: Standard Chartered (2007)

Top Sovereign Wealth Funds

Str

ate

gic

Co

nve

ntio

na

l

Inve

stm

en

t a

pp

roa

ch

Level of transparencyLow High

Perceived levels of transparency and investment approaches vary

UAE (Dubai)-DIC

UAE (Abu Dhabi)-ADIABruneiOman

KuwaitTaiwanVenezuela-NDF

Russia

Kazakhstan

S Korea

Singapore-GIC

Singapore-Temasek

Malaysia

NorwayUS (Alaska)Chile

Canada (Alberta)

UAE (Dubai)-IstithmarQatar

China

Algeria

Libya

Commodity fundNon-commodity fund

Over US$ 500 billionUS$ 250-500 billionUS$ 100-250 billion<US$ 100 billion

Assets (2007):

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Myths and Realities of Private Equity

• Myths and Realities of Sovereign Wealth Funds

• Private Equity and Hedge Funds — Friend or Foe?

• The M&A Heatmap for 2008

Page 48: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Corporate Governance

The state of corporate governance continues toevolve as does the role of the boards. At the onsetof the decade there was a revelation that corporatefraud had been allowed to pass undetected bypassive corporate boards. For several years,attention, particularly in the US, focused onexecutive compensation – lavish pay with littleevident link to corporate performance and goldenparachutes that amounted to rewards for failure.

The most recent flare-up over the concerns of theboards of directors, especially financial servicescompanies and their inability to manage the risksrelated to sub-prime mortgages. Several USmortgage lenders have gone bankrupt. Moretroubling, as loan defaults or the threat of defaultsrose, most investment banks were caught holdingsecurities linked to sub-prime mortgage values andhave written off tens of billions of dollars of losses.The episode has so far cost several CEOs theirjobs – and criticism has been directed at boardsand their lack of oversight.

Yet, there is a subtle difference in this criticism frompast complaints about the behaviour of boards.Years ago, had a board enquired about tradingdesk operations in structured finance, it would havebeen regarded as meddling. But now, boards areexpected to monitor enterprise risk, keeping oneclose eye on the balance sheet and another on theexecutive team. And they must also have anemergency plan ready, in the off chance that a newCEO would be needed. It would seem thatshareholders’ expectations are greater than ever.

In response, boards are broadening theirnominating committee searches to bring in newtalent. Part of this is out of necessity. Sitting chiefexecutives, generally coveted for board positions,are joining fewer and fewer boards, therebyshrinking the available pool of directors. Some of

the most prominent CEOs sit on no boards buttheir own company’s. Another part is strategic. Ascompanies globalize and branch farther afield, theyare seeking directors with experience andconnections in new countries, like China, whichhave particular expertise, perhaps in global supplychain management. Consumer-based companiesmight want more directors with expertise selling toa particular demographic.

Gathering talented individuals to serve on a board,however, does not necessarily make for goodgovernance. Much like a sports club, a board ofsuperstars is no guarantee of success. Thechemistry of the group matters, among its membersand with the executive team. As different directorsjoin from increasingly different backgrounds, theability to create a positive chemistry in a shortamount of time becomes more difficult.

Experts suggest that more attention be placed onthe softer side of governance and on inter-personalrelations among directors. Board consultant RamCharan, for example, has suggested formal andinformal techniques that can help directors “gel”,such as congenial executive sessions held withoutmanagement present, rolling 12-month agendas,clearer management presentations and off-sitemeetings. The process also requires a skilled chairor lead director who has the respect of the boardand the skills to facilitate. And it takes directorswho are engaged with their governance workoutside of board meetings.

A board, of course, is the representative ofshareholders. But the character of the shareholdersthemselves is changing. Problems with oversightand compensation have seemingly prompted areturn of shareholder activism. Unlike the“greenmail” of the past, today’s activism issometimes driven by small shareholders, including

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47

hedge funds and single-issue activists, in somecases holding less than 1% ownership stakes (seeexhibit). Policy-makers in the US, Europe andJapan have so far resisted making dramaticchanges to increase the influence of smallshareholders in their respective governanceregimes. Yet some activists have recordedsuccesses nonetheless – whether ousting a CEO orinitiating a breakup – suggesting a new publicacceptance of shareholder democracy. Will thependulum swing too far?

Then there is the increasing influence of privateequity and sovereign wealth funds. Private equity iscriticized by some as having a short time horizonand thus not keeping long-term shareholder valuein mind. But others point out that the averageholding period of a public share in the US is lessthan year, so the concept of a long-termshareholder is a bit of a myth. And private equityfirms make for active and involved boards thatwork in tandem with management. Indeed, theykeep one eye on the balance sheet and another onthe executive team.

Sovereign wealth funds, for their part, have beenactive in acquiring stakes overseas, includingequity capital injections into investment banksstruggling with sub-prime mortgage. Yet there hasbeen some opposition to this broad trend, basedon links to foreign governments. The fear is thatsuch an investor could force strategic moves thatbenefit foreign national, rather than shareholder,interests. The cynical view, however, is that theopposition’s real roots are in a nationalist mentalitythat has nothing to do with shareholder interests. Inany case, to date, such investment has representedpassive and patient capital, exactly the type ofinvestment that many companies would welcome atany time.

Shareholder Activism

Not all activists have large stakes

Source: AFX Financial News, Associated Press, Chicago Tribune, The Daily Telegraph, Dow Jones International News, Forbes, The Independent, International Herald Tribune, PR Newswire, Reuters News, The Times, The Wall Street Journal

Note: Start date is when activist challenge was reported to have been mounted.

Select examples of recent shareholder activism

OutcomeCompany Activist Stake Proposal Start date Successful Unsuccessful Ongoing

Yahoo Eric Jackson >0.2% Oust CEO Jan-07 ✓ & others

Tokyo Ichigo Asset 13% Reject a bid from Jan-07 ✓ Kohtetsu Management Osaka Steel

ABN Amro The Children's 3% Breakup of bank Feb-07 ✓ Investment Fund

Cadbury Trian Fund 3.5% Split up company Mar-07 ✓ Schweppes Management

HSBC Knight Vinke >1% Improve corporate May-07 ✓ management structure

Chinese The Children's >8% Prevent privatisation May-07 ✓ Estates Investment Fund

Vodafone Efficient Capital <1% Sell Vodafone stake Jun-07 ✓ Structures in Verizon

Kraft Foods Trian Fund 2.4% Improve corporate Jun-07 ✓ Management management structure

BEA Carl Icahn 13.2% Accept Oracle bid Sep-07 ✓ Systems

Generali Algebris Fund <1% Improve corporate Oct-07 ✓ management structure

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• The DNA of Effective Boards

• The Rising Influence of Minority Shareholders

Page 50: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Financing Pensions and Healthcare

Over the next two decades ageing populations inthe developed world – and beyond – will increase.Currently, 12% of Americans, 16% of Europeansand 20% of the Japanese are older than 65, thetraditional retirement age. By 2030, these figureswill reach 19%, 23% and 31%, respectively. Bythen, 16% of the Chinese will be 65 or older,double the current proportion.

This historic shift towards older populations will havefar-reaching consequences, some welcome, othersless so. Although the prospect of so many morepeople living longer is cause for celebration, there isoften foreboding about the social and fiscal effects.A variety of gloomy scenarios depict the world of2030 as one in which an ever larger older populationlives off the effort of an ever smaller workforce.

Such pessimism is ill-founded because itsunderlying forecasting model, which essentiallyprojects forward the condition and behaviour oftoday’s elderly, is too deterministic and omits fartoo much. People’s behaviour is shaped not onlyby their age but also by their generation, reflectingtheir experiences as young people. Furthermore,the meaning of age is changing thanks to theimprovements in health and living conditions thatenhance longevity. Tomorrow’s 65-year-olds will bevery different from today’s, let alone from thosewho toiled all their lives in backbreaking manualoccupations during the last century when socialsecurity systems were first introduced. Mostimportant, reforms to the labour market andpension financing can change the economicoutlook for older people.

People retiring today behave quite differentlyfrom their parents. Many may choose not toretire at all rather than quitting work at theearliest possible opportunity. Many of those intheir forties and fifties say that they expect to

continue working as long as possible; and theidea of early retirement is becoming less popular(see exhibit). This is less surprising than it mayseem since for so many people work providesmany compensations other than wages, such ascognitive stimulus and social networks.

Changes in pension policy, which already varysignificantly among different nations (see exhibit)will also contribute to a redefinition of retirement.Already, past reforms have made public pensionsless generous. A new wave of reforms is raisingthe state pension age, as in Britain and Germany,in order to take account of rising longevity. Theintroduction of “notional defined contribution”pension plans in countries like Sweden andLatvia seeks to replicate private incentives inpublic schemes. Although these essentiallyremain mandatory plans financed on a pay-as-you-go basis, pension benefits are paid asannuity values that reflect lifetime contributionsand rises in life expectancy.

An alternative approach, which avoids directcompulsion, is being pioneered in New Zealandand Britain. Drawing on insights from behavioural

Sources: MetLife Insurance; Age Concern UK; US Census Bureau; UK Census 2001

Working Baby Boomers

80

60

40

20

0

Bab

y bo

omer

pop

ulat

ion

(mill

ions

)

US UK

US and UK baby boomers expect to work beyond the age of 65

Wishing orexpecting to workpast the age of 65

36%

40%

60%

64%

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49

economics, it will top up a basic state pensionwith a voluntary private pension into whichworkers are automatically enrolled so that the onusis on them to opt out rather than to opt in to thesavings scheme. Just as with a private pensionplan, workers can vary their saving rates (up to alimit) according to how much they want inretirement income and how long they want to carryon working.

One of the biggest worries about population ageingis that it will add a further demographic impulse tospiralling healthcare costs. After all, the averagemedical cost of people over 65 is several timesgreater than that of working-age adults, and thehighest lifetime healthcare costs are incurred in theimmediate years before death.

The demographic impact of population ageing onhealthcare costs can also arise from generationaleffects, such as baby boomers who will soon jointhe ranks of retirees and may press for moreexpensive medical treatment than their parents.The answer to such demands, as with healthcarecosts more broadly, is to make medical marketswork more effectively.

Despite the many differences in health systemsaround the world, reforms will share two commonfeatures – they will enhance the power of third-party payers (insurers or government agencies),who pick up most of the expenses, by arming themwith better information about the quality and costof services, and they will tackle the power ofhealthcare providers by enhancing competition inmedical markets.

100%

80

60

40

20

0

Pension Fund Assets in Select OECD Countries

US and Norway represent different approaches to funding pensions

Source: OECD; IMF

Pen

sion

fund

ass

ets,

200

6 (p

erce

ntag

e of

GD

P)

NewZealand

SouthKorea

Japan

Pub

licP

rivat

e

Sweden Ireland Finland NorwayCanada US

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• The Long Shift into Retirement

• Who Can Afford to Retire?

Page 52: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Food and Agriculture

“As long as I’m president, I don’t want to be goingto other capitals begging for food,” Bingu waMutharika, president of Malawi, is reported to havetold his aides in the autumn of 2005. His decisionled the recently-elected president to reject market-oriented agriculture policies, in favour of a stronglyinterventionist programme to help farmers earntheir livelihood.

Since the change, Malawi’s corn harvest jumped to3.4 million metric tonnes in 2007, up from 1.2million metric tonnes in 2005. Good weathercontributed to the increased harvest; thegovernment, and some economists, also creditgovernment subsidies for fertilizer and seed.

The situation in Malawi is but one sign of a globalshift in thinking about agriculture. Developmentexperts are increasingly persuaded that poorfarmers throughout the world need moreassistance. Indeed, some say, improved incomeand investment in agriculture is crucial for theeconomic growth of the poorest nations, wheremore than 65% of jobs are in farming. A WorldBank study concluded that gains in farmproductivity in such nations yield three times theincome gains as do advances in other sectors.Partly as a result, according to the London-basedInternational Grains Council, the world’s cerealcrops in 2007 will amount to 1.66 billion tonnes, thelargest on record.

Should trends continue, however, some observersexpect major shifts in agricultural policy, as theeffects of agricultural change hit home – especiallyin the form of rising food prices. The world price ofwheat reached its highest ever last summer (seeexhibit). The average price of corn this fall was US$150 a tonne, 50% higher than it was in 2006. As aresult, food companies paid 6.6% more in 2007 fortheir raw materials than they had a year before,

according to the United Kingdom’s Office forNational Statistics. Already, China, Argentina,Mexico, Morocco and Egypt have instituted someform of control on food prices for consumers. India,Ukraine and a number of other nations have movedto reduce their food exports to alleviate pressure ontheir consumers.

One major cause for food inflation is the globalpush to switch production to biofuels, promptedby the high price of oil, anxieties in rich nationsabout energy independence, and a world-widedesire to stem the production of carbon dioxideand other greenhouse gasses. For instance, theEU has set a goal of meeting 5.75% of itstransport-fuel needs with biofuels by 2010.Ethanol, derived from corn, sugar or grasses, isbeing produced in record amounts in the US,Brazil and other nations. In 2000, some 15 milliontonnes of US corn production went to the fuelsector; in 2007, the figure was 85 million tonnes,one-third of the US corn harvest. Global pricerises for rice and soybeans could in part beattributed to the fact that many farmers haveswitched to corn, now that such crops commandrecord prices.

Agricultural Commodity Prices

Source: IMF

Price of wheat has doubled in less than two years

300

250

200

150

100

50

Inde

x of

com

mod

ity p

rice

(100

=Ja

n 20

02)

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Wheat

Soybeans

Rice

Maize

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51

A second force pushing food prices up is globaleconomic growth. Prosperity in China, India andelsewhere is leading millions more to shop for amiddle-class diet, which consists of moreprocessed foods and meat. China’s per capita meatconsumption, for example, was 20 kilos in 1985; in2007 it reached more than 50 kilograms. Whenconsumers shift from eating grains to eatinglivestock that eat grains, demand for grains shootsup: Producing 1 kilo of beef requires 8 kilos ofcereals; a kilo of pork requires 3 kilos of cereals.

The spike in prices is probably not a cyclical trend.In the past, price gains have been followed bydeclines as markets responded with moreinvestment and production. However, many do notexpect to see this pattern in the next 20 years.Land that can be converted to farming tends to bein regions without infrastructure, making it lesslikely that the needed investments will be made.Moreover, the effects of global warming mayreduce the fertility of land in unpredictable ways.The International Food Policy Research Institutepredicts that cereal prices will stay high, and be10-20% higher by 2015.

The trend could benefit poor farmers around theworld. After years of falling prices for theirproducts, and rising costs for such inputs asfertilizer (which depends on the price of oil),farmers in many nations stand to see their incomesrise. Of the world’s 3 billion people who do not livein cities, some 2.5 billion are involved in farming,according to the World Bank. Often, they areuntouched by economic progress in urban areas.Rising farm income could help redress the balance.

Of course, this argument presumes that the world’spoor will gain more in income from sellingfoodstuffs than they lose in paying for their ownfood. Accordingly, some recommend targeted

programmes to protect the spending power of theworld’s poorest people, who are those who suffermost from high food prices. If governments indeveloping nations can shield their poor from pricehikes and the developed world adjusts itsagricultural policies in response to strongerdemand and prices, than developing nations mayactually receive an important boost in income fromagriculture. However, both the developed and thedeveloping worlds may need to come to terms withfood price inflation for years to come.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Food, Culture and Civilization

• Investing in Nutrition

• Rethinking the Food Chain

• The Straggler of the Global Economy

Page 54: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Urbanization

Humanity is rapidly urbanizing, but will its citiesbe ready?

In the face of an historic worldwide migration thatcould lead to 80% of all people living in urban areasby 2050, all cities will be hard-pressed to providebasic urban services. Clean water, efficienttransportation, and reliable electricity cannot beensured in the future for any city – rich or poor –without massive programmes to build or repairinfrastructure. The point has been brought home inrecent years by ageing infrastructures thatcontributed to the massive power outage on theEast Coast of North America in 2003 and the deadlycollapse of a highway bridge in Minneapolis in 2007.And it’s experienced every day in the form of rollingpower outages, impenetrable traffic jams andunsafe drinking water in cities from Lagos to Delhi.

According to a study by Booz Allen Hamilton, thecost of modernizing and expanding urbaninfrastructure around the world in the next 25 yearsis estimated at US$ 40 trillion: US$ 22.6 trillion forwater, US$ 9 trillion for power supply, US$ 7.8trillion for rails and roads, and US$ 1.6 trillion forports (see exhibit). In almost all urban areas,decisions about allocating resources forinfrastructure will shape the options available forother urban concerns: pollution, crime andeconomic development (see exhibit).

Obtaining capital for large-scale investments will bedifficult, but many expect it to be the easierchallenge. A bigger problem could be the weight ofpolitical tradition and conventional thinking.Throughout the world, cities are governed bymultiple, often conflicting authorities, posingimmense obstacles to policy-makers who wish toplan expensive changes. In cities like Nairobi andWashington DC, decisions about the city often fall inthe national government’s purview. Officials of the

surrounding state have a large say in the affairs ofcities such as Mumbai and New York. Infrastructuresystems that provide water, electricity and transportare often treated separately by differentstakeholders. Yet, many urban planners believe thethree systems are so intertwined that none can bebettered without addressing the others.

Apart from the shared infrastructure crisis, thechallenges that face cities in the developed worldstem from the need to compete for workers and

Urban Priorities

Source: Siemens; GlobeScan; MRC McLean Hazel

80%

60

40

20

Per

cent

age

of r

espo

nden

ts in

dica

ting

need

for

inve

stm

ent i

s “v

ery

high

Note: From a 2006 survey of 522 officials and influentials from 25 megacities.

Tra

nspo

rtat

ion

Env

ironm

enta

lpr

otec

tion

Hea

lthca

re

Edu

catio

n

Ene

rgy

supp

ly

Sol

id w

aste

Wat

er s

uppl

y/w

aste

wat

er

Pub

licho

usin

g

Pub

licsa

fety

/sec

urity

Transportation needs high on city policy-makers' agendas

Air/seaports$1.6T

Road and rail$7.8T

Power$9.0T

Water$22.6T

Water represents over half of infrastructure development needs, from 2005 to 2030

Middle East $0.9T

Africa $1.1T

U.S./Canada$6.5T

Latin America$7.4T

Europe$9.1T

Asia/Oceania$15.8T

Worldwide Infrastructure Challenges

Source: Booz Allen Hamilton, Global Infrastructure Partners, World Energy Outlook, Organisation for Economic Co-operation and Development (OECD), Boeing, Drewry Shipping Consultants, U.S. Department of Transportation

100%

80

60

40

20

0

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53

investment, and to satisfy growing demands foreco-friendly growth. Urban areas in developednations compete for a cohort of new economyworkers and investors who value cultural amenities,safety, reliable services and ecologicallysustainable development.

In the developing world, on the other hand, theurban challenge will be to cope with unprecedentedpoverty and population growth. Those nations’cities will grow at an average annual rate of 2.4%over the next 30 years; making the developingworld 56% urban by 2030 (it was 27% urban in1975). In the next two decades the world’s mostpopulous cities will be found mainly in thedeveloping world, and some will be “metacities” –massive urban areas of more than 20 million peopleeach. This will create enormous demand forupgraded infrastructure, which, in many developingcountries, must be built from scratch.

Despite the infrastructure crisis and on-goingpressure from the migration to cities, there aresigns for optimism. Around the world, some citieshave succeeded in addressing problems onceregarded as intractable.

Areas in which cities have made significantimprovements share certain traits. One isegalitarianism. Cities that show the mostimprovement, some argue, are those that haveaddressed the needs of all their citizens, rich andpoor alike. Cities such as Bogota and Quito inSouth America have instituted popular public-transitplans that enhance mobility by means of extensivebus systems, bicycle paths and traffic regulations.

Another trait shared by effective city governments isa go-it-alone approach to major problems. Manycity governments believe they must actindependently of national or regional governments

when they can. For example, Bangkok’sgovernment, in a decade which saw a 40% increasein motor vehicles, has cut the city’s once-notoriouspollution by imposing its own emissions-controlrequirements on cars, taxing the worst-offendingtypes of motorcycle engines, and requiring cabs touse natural gas. In the long term, many argue thatsuccessful cities adapt their physical and culturecapital. Cities that have thrived in the long term hadboth the willingness to be flexible and transformthemselves – Singapore and New York are just twoexamples of cities that began as ports, becamecentres of industry, and have now made thetransition to information-age economies.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Fixing Critical 20th Century Infrastructure

• Infrastructure: Who Is Going to Pay for It?

• SlimCity — Managing Urbanization

• Tomorrow's Growth Hubs

• Urban Infrastructure: Starting from the Ground Up

• Urban Renewal: How Cities Are Aiming forSustainable Growth?

Page 56: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Water

Water scarcity is fast emerging as a serious near-term security threat. The world’s supply offreshwater (water that contains less than 250milligrams of salt per litre) depends on practicesthat cannot be sustained. Rising demand forfreshwater, from a growing world population, is onereason. Another is the effect of climate change.

Scarcity already exists in many parts of the world.A person needs about 50 litres of freshwater a dayfor drinking, bathing and cooking, according tosome estimates. Yet, more than 1.5 billion people inthe world lack access to the clean water they need.Poor people suffer most from the effects of waterpoverty: between 1 million and 2 million deaths peryear from diarrhoeal diseases are attributable to alack of access to clean water and sanitation,according to the World Water Forum.

Indirect demand for water is far greater thanhousehold consumption. In order to eat, peopledepend on agriculture, which uses some 70% ofthe world’s water supply (see exhibit). They alsodepend on industry, which consumes much of therest, including water used for energy – directlythrough hydropower and indirectly through growingbiofuel crops. According to the International FoodPolicy Research Institute, humanity will draw 50%more water in 2025 for non-agricultural uses.

Yet, water is a relatively rare commodity: 97.5% ofthe world’s supply is salty or brackish and most ofthe rest is frozen at the poles. It is no surprise,then, that many believe water will be a source ofviolent conflict in the near future, with some 30nations expected to be affected by inadequatewater supplies in 2025. Already, some argue thatthe Darfur disaster began as a conflict over waterbetween pastoralists and farmers.

Still, some experts say the water crisis is as mucha matter of habits as a fundamental scarcity. Some45% of water used for irrigation is wasted. Indeveloping nations, 80% of freshwater goes toagriculture because of inefficient irrigationtechniques, compared to 30% in developednations. On the whole, developed nations, whichuse more water for industrial purposes, consumemore than twice the water per capita than dopoorer ones.

Among the experts’ recommendations: endinggovernment subsidies that mask the true cost ofwater (see exhibit); encouraging conservationwith public-awareness campaigns; changingirrigation practices to make more efficient use ofthe resource; and developing technologies thatallow individuals and industries to do more withless water.

Water Tariffs and Expenses

Source: World Bank, "Water, Electricity and the Poor" (2005)

100%

80

60

40

20

0

Per

cent

age

of w

ater

util

ities

High income Low income

Tariffs in lower income nations not high enough to coveroperating and maintenance (O&M) expenses

...too low to cover O&M

Tariffs are...

...enough to cover O&M

...enough for O&Mand partial capital

Water Consumption by Sector

Source: IFPRI and IWMI, "Global Water Outlook to 2025: Averting an Impending Crisis" (2002)

Cub

ic k

ilom

etre

s

Agricultural uses dominate water consumption

2,500

2,000

1,500

1,000

500

0

1995 2025 1995

Domestic

Irrigation

IndustrialLivestock

20251995 2025

Developedcountries

Developingcountries

World

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55

Some also recommend privatizing water supplies toincrease efficiencies in the delivery cost of water.Private-sector water management remains a growthindustry. According to the German consultancyHelmut Kaiser, the world markets for water andwastewater, some US$ 287 billion in 2004, will riseto US$ 412 billion by 2010, with most of the growthin China and South-East Asia.

Technologies that make freshwater from othersources are one way to increase supply. Theworldwide market in desalination technology isestimated to be growing at 15% per year, and isprojected to be worth some US$ 30 billion by 2015.“Toilet-to-tap” plants, which convert sewage intofreshwater, have been built in water-scarce areasthroughout the world, from Namibia to California.

However, these technologies remain relativelyexpensive, and the energy they require may makethem consumers as well as providers of water.Similarly, the use of biofuels as an alternativeenergy source has increased water consumption.Biofuels are made from corn, sorghum, soybeansand other crops, so their production requires waterfor irrigation. Devoting more acres to raising corn orother crops will also lead to more fertilizer-contaminated runoff and soil erosion, which couldimpact the quality of freshwater for other uses.

Moreover, biorefining crops into fuel also demandswater. According to a recent report by the USNational Academies, the production of 100 milliongallons of ethanol requires enough freshwater tomeet the needs of 5,000 people.

Meanwhile, as methods to solve the waterproblems are debated, climate change appears tobe affecting freshwater availability. Changes inrainfall patterns are reducing the capacities ofreservoirs and natural sources of freshwater, andcountries that get water from winter snows orglaciers face shortages due to warmertemperatures. For example, the Chacaltaya Glacierin Bolivia, the source of freshwater for the cities ofLa Paz and El Alto, is projected to melt completelywithin 15 years. Rising seas could also affect thesalinity of freshwater near the coasts, where bothdrinking water and irrigation are drawn fromunderground aquifers.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Are We Being Bio-Foolish?

• Death, Disease and Dirty Water

• Securing a Watertight Future

• The True Value of Water

• Time Is Running Out for Water

• Who Is Managing Your Supply of Water?

Page 58: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Nutrition & Wellness

Policy-makers the world over are concerned aboutthe mounting costs of employing ever moresophisticated medical technology to treat growingand/or ageing populations. Healthcare spending inmost European countries over the past decadeoutpaced economic growth. In the US, healthcarespending amounted to over 15% of GDP in 2004(see exhibit), and is predicted to increase to 18.4%by 2013.

Most observers agree that societies will be forcedto adopt less costly approaches to delivering care,adopt new technologies, and face up to theeconomic aspects of healthcare decisions.However, much of the coming crisis in globalhealthcare could stem from the consequences oflifestyle choices, which can be addressed today fora fraction of the costs they will impose if allowed tocontinue unchecked.

The reason is that habits like tobacco use, poordiet and lack of exercise are high risk factors forchronic ailments later in life. Those chronicdiseases – heart disease, stroke, some cancersand adult-onset diabetes – are already a heavy

burden on healthcare systems throughout theworld. Writing in the journal Nature last November,a team of experts noted that more than half ofdeaths worldwide are caused by chronic disease,and that it is an error to think of these diseases asproblems of affluence: 80% of the mortality is inthe developing world. Without action soon, theypredict that about 388 million people worldwidewill die of chronic diseases within the next decade.Moreover, as millions of people live longer lives,their chronic diseases will strain healthcareresources, particularly in poor nations. In the US,chronic diseases’ economic costs due to lostproductivity that could be avoided by lifestylechanges are forecast to be several times the directtreatment cost of those diseases (see exhibit).

Many believe a consensus is emerging about thesteps needed to address the chronic disease crisis.Healthcare systems, now oriented more towardtreating infectious diseases, should shift someresources to the chronic disease challenge. But,more importantly, governments are likely to pushcitizens to avoid tobacco, to eat less fat and sugar,and to exercise.

Source: The Milken Institute, “An Unhealthy America: The Economic Impact of Chronic Disease" (2007)

Forecast Avoidable Costs of Chronic Disease

Avo

idab

le c

osts

(U

S$,

bill

ions

)

$500

400

300

200

100

0Cancer

Note: Avoidable costs are those that could be eliminated by reasonable improvements in behaviour and treatment. Direct costsare treatment costs. Indirect impacts are losses in output due to absenteeism, “presenteeism” and other productivity reductions.

HeartDisease

Hypertension MentalDisorders

Diabetes PulmonaryConditions

Stroke

In the US, the avoidable indirect impacts (ie, productivity losses)of chronic disease are four times as high as the direct costs

Indi

rect

impa

cts

Dire

ctco

sts

16%

12

8

4

0

Public and Private Health Expenditures

Healthcare spending was over 15% of GDP in the US in 2004

Source: WHO

Hea

lth e

xpen

ditu

re a

s a

perc

enta

ge o

f GD

P, 2

004

China India Japan France US

Pub

licP

rivat

e

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57

The challenge of how best to do this has spurred aboom in research on the complex psychology ofeating. At the Restaurant of the Future inWageningen, the Netherlands, for example,customers are monitored with hidden scales andcameras so that scholars can test the effects ofdifferent environmental factors on an individual’schoice to eat a healthy salad or a greasy sausage.

Some believe the private sector must be enlisted,both to help spread health awareness amongemployees and, in some cases, to make theirproducts more compatible with a healthy lifestyle.Some companies have established health andwellness programmes that guide productadvertising and encourage employees to be morehealth conscious. Many have undertaken toremove trans-fatty acids from their products; toreduce levels of salt, sugar and saturated fat; andto increase the use of fruit, vegetable, nuts andgrain. Food companies are also using theirmarketing experience to promote more physicalactivity, and fruit and vegetable consumptionespecially among children.

Still, experts do differ about the relative merits ofdifferent policy approaches. Some favour moralexhortations and incentives (programmes to helpsmokers quit, for example, or even worksite weightloss contests). Others, however, support moremuscular interventions: fining people for smokingor obesity, for example, or using techniquesdeveloped for epidemics to track how welldiabetics comply with treatment requirements.

Critics also worry about the effects on civil libertiesand privacy. In reply, some policy-makers cite bothpublic health and economics. New York City officialsthat monitor the blood sugar levels of diabeticsjustify the policy by noting that, in their city alone,diabetes costs US$ 5 billion a year to treat, and that

government has a duty to help citizens preservetheir health. The burden of chronic disease is solarge, many say, that it could alter cultural traditionsabout which behaviours are private and which arethe concern of society at large.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Food — A Whole New World

• Investing in Nutrition

• Mood Manipulation

• Preventing the Spread of Chronic Disease

Page 60: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Health Research

It was once an image of the future: Some day, yourdoctor would use information about your uniqueDNA to diagnose your illness, decide about drugdosages, and advise you about your health risks.

In 2007, “some day” is fast becoming “now”. In anhistoric shift, personalized, gene-based approachesto medical care are drawing closer. But in-depthassessments of different risks faced by eachpatient pose a challenge to the conventionalassumption that each person needs, and has aright to, the same medical procedures. Hence,“genomic medicine” is far from perfect, and itsdisruptive effects are already being felt by doctors,patients, and the industries and governmentagencies that serve them.

The dawn of genomic medicine is a confluence ofseveral recent developments. In biomedicine,researchers have made large strides to find linksbetween particular variants of genes and risks fordiseases, including adult-onset diabetes, breastcancer and heart disease. Meanwhile, technologicalbreakthroughs have made previously expensiveprocedures accessible.

A completely sequenced genome still remains tooexpensive for widespread use – the recentlycompleted genome of DNA’s co-discoverer, JamesWatson, cost about US$ 1 million – but an accountof medically important genes in your DNA can bepurchased for about US$ 1,000. A huge market hassprung up for very basic genetic testing for thegeneral public.

Much of the excitement among researchers stemsfrom recent discoveries that there is commonground among genes associated with higher risksof widespread diseases. For example, one variantof the gene FLAP has been linked to a doubled riskof heart attacks, according to the Icelandic

genomic research company deCODE, which hasbeen looking for genetic clues to 50 commondiseases since 1996. But the same variant is alsoassociated with risk of stroke and with asthma.

According to Kari Stefansson, CEO of deCODE,genes linked to more than one disease are thosethat regulate other genes, prompting them to createmore proteins, or, alternately, “silencing” them.That’s an important clue for pharmaceutical makersseeking to match particular genes with particulardrugs. The cancer medication Gleevec, forinstance, is now given primarily to patients whosegenetic makeup indicates it will work on them.These developments have sparked enormousinterest among insurers and health-systemregulators who expect that genetic targeting –identifying those who won’t benefit from treatment– will save money.

But the importance of regulatory genes alsocomplicates the picture because gene expression issensitive to the environment and habits of eachindividual. The same gene may be active in oneperson but silenced in a twin, depending on diet,stress and many other environmental choices. Agood example, says Francis S. Collins, head of theHuman Genome Project, is macular degeneration –a loss of tissue in the retina that is a leading causeof blindness in the elderly in developed nations. “Itdoesn’t hit you until you’re 80 or 90 years old,” hesaid recently. “It doesn’t sound like a geneticcondition. Well, guess what? There are two genes,and if you combine them with smoking theyaccount for about 80% of the risk.”

Because of these complexities, many scientists saygenetics has been over-sold as a predictor ofindividual destiny. Some argue that the comingflood of genetic data could do more harm thangood. For example, one gene, TCF7L2, has been

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associated with type-2 diabetes. Few dispute thathaving inherited two copies of this gene doublesone’s risk of the disease. However, for those whoare active and not obese, the risk of adult diabetesis still very low, even if they possess the gene. Sogenetic tests based on this gene have little medicalvalue. Late last year, the United Kingdom’s HumanGenetics Commission called for tighter regulationof commercially available genetic tests. Onecommissioner declared them all a waste of money.

Should genomic medicine become the norm, someregulators see a major challenge. After all, theirhealth-care systems rest on democratic principles ofequality – the expectation that all citizens should betreated in the same way. But genetic analysis findsindividual differences, whose value is precisely in thefact that one patient should not be treated likeanother. Who decides that and how it is explainedto, and understood by, the general public will be anextremely sensitive area for policy-makers.

The resulting tensions are already being expressedin political disputes over genetic information.Patients and doctors fear that people with geneticpredisposition to disease will face discrimination.Will administrators deny care to people on the basisof their gene profiles? Will private insurers refusecoverage to a person whose genes indicate a higherthan normal risk of expensive medical needs?

Both sides worry about asymmetry of information.Insurers suspect that people who know their riskswill take advantage of companies, while patients’rights advocates say they expect companies to usegenetic data to refuse care. A recent study byRobert Cook-Deegan of Duke University, forexample, found that people who tested positive fora gene linked with Alzheimer’s were five times morelikely to seek long-term care insurance. Britain’sinsurers agreed to a moratorium on genetic testing

of new applicants for coverage (it is set to expire in2011). And in the US, legislation banning insurersfrom denying coverage on the basis of genetictests is pending.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Cancer Meets the Human Genome

• Genomics of Disease

• Malaria: What Does It Take to Stop It?

• Redefining the Limits of the Human Body

• Reforming Healthcare

• Rules for the Genome Era

• The Scientific and Medical Revolution of RNA

• Turbocharging Drug Development

• Update 2008: Designing a Cure for Cancer

Page 62: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Regenerative Medicine

It has been called genetic engineering on steroids.This decade’s convergence of computing power,nanotechnology and genetics has given scientistsunprecedented power to alter life forms and evencreate them from scratch.

Already, genetic engineering has achievedbreakthroughs that would once have beenconsidered science fiction. For example, DrewEndy, a biological engineer at MIT, recentlydescribed an exercise in which the commonbacteria e. coli was reprogrammed to give off thescent of wintergreen while it grew and thenchange to smell like bananas when it reached theend of its life cycle. Indeed, last year, the VenterInstitute applied for a US patent on a method ofcreating a genome entirely from scratch and forinserting such a genome into a cell. The companyis describing, according to both its supportersand critics, a method for creating an entirelyartificial organism.

Advancing with equal speed is the field ofneurotechnology – engineering direct links betweenbrains and machines. In the US in 2007, forinstance, cochlear implants for hearing numbermore than 50,000. Deep brain stimulators to reducethe effects of epilepsy, Parkinson’s Disease andother movement-control disorders have been donemore than 30,000 times. And a handful of peoplehave had their vision partially restored with retinalprostheses, according to John Donoghue, aneuroscientist at Brown University and principal ofthe firm Cyberkinetics, which makes the BrainGateinterface for prosthetic limbs. Until quite recently,direct neural links to a prosthesis were not as fast

or reliable as indirect links – injured people couldlearn to use an artificial arm faster by learning towork it with chest muscles, for example, or use acomputer by learning to use a device thatresponded to their eye movements.However, many believe the tide is now turning infavour of direct brain-device interfaces. InOctober 2007, the journal Nature published tworeports of breakthroughs in the brain-machineinterface. One performed by Donoghue usedelectrodes implanted in a paralyzed patient’smotor cortex (the part of the brain that controlsvoluntary movements). Through a spinal cordinjury, the patient’s motor cortex had been cut offfrom his body for three years. After the electrodeswere implanted, he quickly mastered the deviceand was soon using it to pick up objects with arobotic arm, open his e-mail, and channel surf onhis television. In the second report, Krishna V.Shenoy of Stanford University describedsuccessful tests of a method for implantingelectrodes in monkey motor cortices that gavethem better and faster control over a computerthan had previously been possible.

Demand for such interfaces has been driven by themilitary, whose soldiers have lost limbs andfunction in “improvised explosive devices” andguerrilla attacks of 21st century warfare in Iraq,Afghanistan and elsewhere. The US DefenseAdvanced Research Products Agency in 2006committed nearly US$ 50 million to a 35-partnerventure among laboratories and companies todevelop better artificial limbs for amputees. Long-term demand is also expected to grow steadilydue to ageing populations, which will experience

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61

higher incidents of stroke, diabetes andneurodegenerative diseases.

Meanwhile, research spending on biomaterials –materials that interact with living tissues formedical purposes – is increasing worldwide by24% a year, according to JOM, a publication of theMinerals, Metals and Materials Society. Suchmaterials include, for example, polymers thatprovide “scaffolding” on which new nerves cangrow to replace damaged ones. According toKalorama Information, the global market in thesematerials will grow to US$ 8.8 billion in 2012 fromUS$ 4 billion in 2006.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Innovation through Convergence

• Regenerative Medicine: Reprogramming the Cell

• Turbocharging Drug Development

Page 64: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Societal Shifts

Among the Mae Enga of Papua New Guinea, thereis a saying: “We marry the people we fight.” It’s asentiment also found in the history of Europeanaristocracies (where royal houses were on oppositesides of wars), and in Africa (“They are ourenemies, we marry them,” is one tribal proverb).Anthropologists note that throughout human historythere has been contact among peoples of differentethnicities, cultures and religions. And throughouthuman history, such contact has shown patterns ofcooperation and conflict.

Thus, to many scholars, “diversity” – when peoplesof different cultures, gender, generations and/orappearance are in contact – is a source of bothpeace and conflict, sometimes simultaneously.

Today, globalization has increased contactsbetween people of different backgrounds andcultures. Immigration has brought foreign culturesto urban centres where mayors and municipalleaders are left the task of managing thecomplexity of diverse communities.

According to the UN’s Department of Economicand Social Affairs, the percentage of foreign-bornresidents in the populations of OECD nations hasrisen steadily over the past four decades – morethan doubling (from 4.1% in 1970 to 8.8% in 2005)in Europe and in America (from 5.6% in 1970 to13.5% in 2005). A 2006 study by the economistsGianmarco I.P. Ottaviano and Giovanni Peri foundthat US-born citizens living in metropolitan areaswhere the share of foreign-born residents increasedbetween 1970 and 1990 enjoyed increased wagesabove the gains of native-born residents who livedelsewhere. Diversity has also been found toincrease any group’s problem-solving abilitiesbecause it brings a variety of different methods andsolutions to a shared problem. Yet opinion surveys

show mixed sentiment towards different aspects ofdiversity (see exhibit).

Migration also increases diversity in nations thatsend migrants forth, by bringing new ideas, goodsand “social capital” – networks and their norms oftrust and reciprocal obligation – back to theirsocieties, argues Harvard political scientist RobertD. Putnam. Those effects, plus the wages sentback to home countries, have such an impact thatincreasing immigration from developing nations by3% would have more economic benefits than allcurrent development assistance, plus theforgiveness of all Third World debt and the removalof all trade barriers for those nations. Moreover,culture can move across borders through art aswell as through people, with famous museums inforeign countries introducing their standards of artappreciation (see exhibit).

Even as diversity is hailed for its long-term benefits,some scholars take note of its other aspect. In amuch-cited study published in 2007, for example,Putnam presented evidence that people who live indiverse areas have reduced social capital. In

Diversity Opinions in Europe

EU survey respondents see disability and age as disadvantages in their societies

80% 60

Disadvantage AdvantageNeither

40 20 0 20 40 60 80 100%

Source: Eurobarometer

Disabled

Aged over 50

Of a different ethnic origin to themain ethnic group in the country

Homosexual

Of a religion that is different fromthe main religion of the country

A woman

Aged under 25

A man

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ethnically diverse neighbourhoods in the US, hewrote, “residents of all races tend to ‘hunker down’. Trust (even of one’s own race) is lower, altruism andcommunity cooperation rarer, and friends fewer”.Teams of employees in the US and Europe are alsofound to have lower satisfaction and higherturnover the more diverse they are. For managersand policy-makers, then, diversity could turn out tobe not a goal to be achieved, but rather a complexdynamic to be managed.

Immigration is also bringing different religions faceto face with each other. Belief systems retain astrong influence over behaviour and exposure todiverse thought often reinforces the sense ofadherence to a set of religious or secular beliefs. Itraises the question of why people accept andidentify with these precepts even though they havenot experienced them personally.

Travelling Exhibitions

Source: Individual gallery/museum websites

14

12

10

8

6

4

2

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© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Adapting to Multiple Civilizations

• Art Swing

• Belief Systems: To What Extent Do They Guide Us?

• Entente Cordiale: The Rise of the Multicultural Couple

• Food, Culture and Civilization

• Globalization = Cultural Homogenization?

• McMuseums: Can (High) Culture BeTransferred?

• The Diverse Society: Why It Matters

• Update 2008: The Sustainable Consumer

Page 66: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Technology & Society

Estonia, the Maldives, Sweden, Macedonia and thePhilippines shared a diplomatic distinction lastyear: they all opened, or announced plans to open,embassies in the online world, Second Life.

As politicians, publicists and some universityprofessors had already discovered, Second Life –which permits anyone with an Internet connectionto socialize, travel, trade and work in a virtual world– is not really a computer game. With 11.5 millionregistered accounts, it is a powerful instrument ofcommunication, social contact and commerce.While the growth of the Second Life economy mayhave stalled in 2007 (see exhibit), it has becomeclear that virtual worlds offer new forms of socialoutlets for many people.

Most of the world is accustomed to using theInternet as a source of information. A 2006 surveyof secondary-school students in Uganda, forexample, found that nearly half had used theInternet (most within a week the survey). In thesame year, the journal Cyberpsychology andBehaviour reported that a slight majority ofPakistani college students in Lahore said they usedthe Internet often enough to be forced to

reschedule other activities as a consequence.In the remainder of this decade, millions are likelyto begin using the Internet for a different humanneed: social life, with all its benefits in recognition,friendship and reciprocal favour-trading. In 2006,worldwide digital “content” was estimated to total161 billion gigabytes. By 2010, according to EMCCorp., global content will be 998 billion gigabytes,and 70% of that will be created by individuals.

People the world over are already linked by social-network sites like MySpace, Orkut, Bebo, LinkedInand Facebook. For the moment, each of thesenetworks is a closed system, but many predict theboundaries will fall. In pursuit of such“interoperability”, Google last fall announced itsOpenSocial project to create applications that willwork in any social site. Similar in spirit is the pushamong some software developers to create anOpenID – a single-password method of signing intoWebsites and Internet services. Many expect socialsites to follow the pattern of information-searchsites in the early 1990s – beginning as separateand proprietary, and then merging into a single,global realm with huge market potential.

Apart from the social networks, however, the Webalso offers many unofficial ways for people to besocial. Think of the hours donated by creators offreeware, and helpful advice freely given onvarious forums and web-based groups. TheInternet provides unparalleled evidence that, formany people, recognition and mutual help aretheir own rewards.

The effect of such social motivations is to blend theWeb world with the natural one. Far from escapinginto virtual worlds, most young people combineWeb experiences with those of the natural world. Apotential tourist to the Maldives, for example, canlearn of visa requirements and must-see locales at

Virtual Recessions?

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Second Life transaction volume stalled early in 2007

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© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.64

Prepared by PricewaterhouseCoopers for the World Economic Forum

Page 67: The Power of Collaborative innovation, PWC, WEF Davos 2008,

65

the nation’s Second Life embassy, withoutexpecting that the virtual experience could replacea real trip. Many observers expect the virtualtourism market to bloom. New markets will alsoemerge for software for virtual teaching and militaryapplications. One tourist attraction, the Parc deFuturoscope in France, for example, plans a realtrain in which tourists will watch virtual realityanimals through digital binoculars.

Many expect to see profound effects on thehuman psyche from such a media-saturatedworld. The media scholar, Thomas de Zengotita,argues that the “always on” media consumer is a“flattered self”, who expects all information torelate to him or herself – so that, for example,even news of a natural disaster comes from apersonalized newsfeed.

Others foresee negative consequences for bothmind and body. A study of teenage girls in thejournal Obesity last year found a link betweenheavy digital-media use (web surfing and gameplaying) and obesity – a correlation that held evenwhen different levels of physical activity wereaccounted for. Other scholars are concerned aboutthe deviant messages of online communities thatsupport anorexia, suicide or terrorism. And many see a danger in having so much mediafighting for human attention. One proponent of thisview is the American social critic David Shenk, wholast year wrote that it takes an experiencedcomputer user an average of 15 minutes to returnto "serious mental tasks" after answering e-mail orinstant messages. Add it all up, economists say,and you have an (admittedly gross) estimate ofinterruptions costing the US $650 billion annually. Others, however, say the wired generation is notdamaged, but different. There are advantages tohaving multiple methods of communication, somesay, noting that the few reports that emerged from

the recent crackdown in Myanmar were furnishedby tech-savvy people who could get aroundgovernment controls. In this way, citizen journalismthen becomes another form of the Fourth Estate –an egalitarian media that can advocate policy andinfluence political power in the real world.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Add a Friend: Accept or Decline

• Alternative Capital Markets

• Leveraging Technology for Development

• Mobile Activism: Does the Mob Rule?

• Stimulation — A 21st Century Addiction

• Virtual Worlds — Fiction or Reality?

Page 68: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Advancing Science

Some studies have shown the general public lacksan overall knowledge of scientific facts andconcepts. According to University of Michiganpolitical scientist Jon D. Miller, for example, only28% of Americans are informed enough tounderstand a daily newspaper report about ascientific topic. Figures for the EU and Japan areeven lower.

One consequence of scientific illiteracy is a dearthof young people choosing scientific careers. Thismay be reaching a crisis point when it comes toboth the quantity and quality of students inmathematics and basic sciences.

However, curing the public’s indifference to sciencewill require more than just getting the facts out,many observers say. A deeper problem might lie inpublic understanding of scientific methods – notjust the data that scientists find, but how they findit. Citizens can always learn new facts. In fact,Miller has found that the proportion of “scientificallysavvy” people in advanced societies has doubledsince 1985. But if citizens reject scientific methods,they may not be able to recognize facts for whatthey are or discuss them in a reasonable manner

More importantly, when scientific experts disagree,for example, about the effects of climate change onAtlantic hurricane risks, interested parties look atthe issue as a sign that no scientific consensusexists. In such discussions, the public wants toknow what the outcomes will be in the future; yetthis is precisely what scientists cannot say for sure.Whether the issue is a personal choice about diet ora policy on stem cells, anyone contemplatingscience, some say, should understand how it works.

Many educators say that what the public needs tounderstand is that the dichotomy between scienceand uncertainty is false. Rather, it is the nature of

the scientific method to treat all results as subjectto further proof and reconsideration. For scientists,unsolved mysteries are a sign of a healthydiscipline; heated disagreements are business-as-usual; and no theory – not even relativity – isimmune to being questioned. Hence, the mosttroubling forms of modern scientific illiteracy arethose which stand the scientific method on itshead, claiming that “good science” means allresearchers agree, and all facts “fit” the goingtheory, and no one questions the results. This isexactly how we should consider the role of science,where strong disagreements among researchers areconsidered healthy, even necessary to progress.

Scientific illiteracy is exploited by interestedstakeholders. The claim that global warming is ahoax, for example, is often buttressed by citationsof scientific research that criticizes current modelsof climate change. Even as the scientifically literateremain a minority in democratic societies, thosesocieties face challenges that require a correctgrasp of scientific method.

Nowhere is this clearer than in realms of researchwhere scientists follow the logic of scientificresearch or commercial potential into areas thatmake many people uneasy. An analysis of singlenucleotide polymorphisms in your genome – thespots in your DNA that are different from generichuman genes – can now be bought from Iceland’sdeCODE genetics or California’s 23andme for onlyUS$ 1,000. For scientists, it is a proud milestone.Many in the general public, however, worry aboutgenetic discrimination and violations of privacy.

Meanwhile, central problems of economic andpolitical direction cannot be reasonably graspedby citizens unless they can evaluate ongoingscientific research. One example recently noted bythe UK weekly New Scientist is the question of

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.66

Prepared by PricewaterhouseCoopers for the World Economic Forum

Page 69: The Power of Collaborative innovation, PWC, WEF Davos 2008,

biofuels. The biofuel option is intuitively andemotionally attractive (about 12 million hectares,or 1% of world agricultural land, are already beingdevoted to biofuel production). But policydecisions will require a careful evaluation of dataabout the costs and benefits of this approach.According to the International Water ManagementInstitute, studies indicate that quadrupling worldbiofuel production by 2030 would require anadditional 180 cubic kilometres of fresh waterfrom rivers and aquifers worldwide.

Can water-scarce nations afford the extra impact?Science can help answer that complex question,but only if the public is prepared to listen.

67© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Accelerating Physics

• Before the Big Bang?

• Capitalizing on the Male and Female Mind to Grow the Bottom Line

• Genetics and Synthetic Life

• How Science Will Redraw the Business Landscape of the 21st Century

• Science and the Global Agenda

• Solving the Mysteries of the Mind

• When Science Outpaces Society

Page 70: The Power of Collaborative innovation, PWC, WEF Davos 2008,

World Economic Forum Annual Meeting 2008

Technological Advances

Breakthroughs often come in the form ofimaginative solutions to large, difficult problems. Inenergy, for instance, where the race is on to findalternatives to fossil fuel, researchers want todiscover or create microorganisms – “superbugs” –capable of efficiently producing ethanol fromcellulosic material such as switchgrass. Ininformation technology, chipmakers arerevolutionizing computing, where “parallelprocessing” is compelling companies such asMicrosoft to write software in new ways, and couldusher in an era of significantly more advancedcomputing. Across the tech spectrum, people areeager to identify and exploit emerging technologythat will change the world.

Optical signals have long enabled the transmissionof data over fibre-optic cables, but the componentsthat create, modify and receive them have beenmade of materials too expensive for use withincomputers. But soon chipmakers such as Intel mayuse silicon-based lasers to send information onbeams of light within and between computer chips.This breakthrough might amount to thereplacement of traditional, copper-based electroniccircuits. And because other advances in themanipulation of light are making so many differentkinds of things possible – improved efficiency ofliquid-crystal displays, new therapeutic approachesto cancer, and even, maybe, somethingapproaching invisibility – some call photonics thescience of the 21st century.

Whether the next leap in computing comes fromparallel processing, photonics or other suchadvances, some will eagerly use it to alter the veryway we interact with computers. Researchersworking in a field, known as augmented cognition,use sensors to evaluate a person’s mood, energylevel and state of concentration. They wantcomputers to use such cues to alter what is

presented to the user, and how. This work is ofinterest to the video-game industry, but itsapplication can also be deadly serious: An activeparticipant in this field is the US Defense AdvanceResearch Projects Agency. Meanwhile, “brain-computer interface” researchers are experimentingwith the use of invasive and non-invasivetechniques to allow a user to command a computerusing thought alone.

Excitement in technology is not reserved for thelab. The convergence of communication, GPStechnology and payment systems in one device,the mobile phone, is altering the consumerlandscape. This convergence will affect advertising,content delivery and access to consumer data. Butas important as convergence is the question ofwhether mobile phones will continue to be “walledgardens” in which users have little or no choiceabout a phone’s operating system and software.Months after Apple launched the closed-systemiPhone, Google announced Android, an open-source mobile phone operating system. As thisfundamental question of the nature of a mobilephone plays out, observers will carefully watchwhat happens when, in 2008, the US FederalCommunications Commission auctions offbandwidth made available by television’s switch todigital transmission. Google is thought to haveplans to bid.

One resurgent area of technological fascination istruly out of this world. In March 2007, the US Stateof New Mexico announced its plan to build aspaceport from which companies will be able tolaunch tourists into space. Virgin Galactic is sellingsuborbital flights for US$ 200,000. The push forprivate space exploration is being led by wealthytech luminaries, such as Microsoft co-founder PaulAllen, Elon Musk of PayPal, and Amazon’s JeffBezos. Meanwhile, this year Japan and China

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69

became the first Asian nations to launch lunarorbiters; India plans to do the same in 2008. And ina shift that some see as a renewal, NASA hasannounced its intention to send astronauts to themoon by 2020 and is actively working onunmanned missions to Mars. Observers of spaceexploration are both excited and uncertain abouthow, 50 years after the launch of Sputnik, thesebursts of energy in the private and public sectorswill play out.

© 2008 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

This material was prepared by PricewaterhouseCoopers (PwC) for the specific use of the World Economic Forum and is not to be used, distributed or relied upon by any third party without PwC'sprior written consent. The analysis and opinions contained in this presentation are based on publicly available sources, but PwC has not independently verified this information and makes norepresentation or warranty, express or implied, that such information is accurate or complete. All recipients of this material must make their own independent assessment of the material, and neitherPwC nor any of its affiliates, partners, officers, employees, agents or advisers shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying onany statement in, or alleged omission from, this material. This material is not complete without the accompanying oral discussion and presentation.

Related Sessions

• Designing Interfaces

• Mobile Models for Growth

• Pioneers and Pitches: The Next Big Thing

• The Future of Mobile Technology

• Update 2008: Technology

• Working at the Speed of Light

Page 72: The Power of Collaborative innovation, PWC, WEF Davos 2008,

The World Economic Forum is an independentinternational organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.

Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)


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