At the opening session of the Global Alumni Forum in Madrid, SebastiánEscarrer, vice chairman of Sol Meliá SA, Wharton dean Thomas S. Robertson and Wharton finance professor Jeremy Siegel each offered different observations about the state of the global markets, the outlook for reform, and the roles that companies, governments and business schools must play in a newly reconfigured economic environment.
Escarrer — whose company, headquartered in Palma de Mallorca, is both the overall market leader in Spain and one of the largest hotel groups globally, with more than 300 properties in 26 countries – noted that Spain’s recovery “has proven to [take] longer than originally expected, in contrast to the countries in Latin American, which have demonstrated the success of tough fiscal and political reforms.”
His observations come against what he called a “global backdrop of widespread political crisis,” ranging from high unemployment to serious health care concerns, and encompassing “international security breaches that are threatening the lives of business.” As examples, he cited the H1N1 flu, which can bring down a whole country’s economy, and the threat of terrorist attacks, which can paralyze an entire global industry. “Governments alone can’t face the challenges,” he noted, calling instead for widespread public-private partnerships, new approaches to leadership that include the ability to adapt to changing circumstances, and a vision of business and finance that includes a commitment to corporate responsibility and sustainability – a focus of his own company’s recent initiatives.
Spain, he pointed out, was the “darling of the economic boom. Concentrating on the short term, it relaxed immigration policies and admitted about seven million immigrants to fuel the construction sector. Now that the real estate sector has burst, many of these people have no means of sustaining themselves, thereby placing an enormous burden on the state. At least one million immigrants will not be able to find a job in Spain in the immediate term, and there are no jobs being created for them in other European countries.”
Indeed, a Wall Street Journal article earlier this month noted that the unemployment rate in Spain among immigrants now stands at 30%, up from 12% in 2007, and is higher than Spain’s overall unemployment rate of 20%. The article also noted that immigrants filled approximately 40% of the six million jobs created between 1997 and 2007. The country’s foreign-born population has increased more than 500% over the last 10 years.
While noting that Spain is “in desperate need of strong reforms to regain competitiveness,” Escarrer also expressed confidence that the country will be able to recover from the current crisis. Part of the challenge is the importance of fostering new leadership, he stated, speaking later about the need for executives who can create value not only for shareholders, but also for a variety of stakeholders, including employees. “We are a service company. Employees are our internal clients,” Escarrer said. “They are essential; about 80% of innovation comes from inside.”
Yet in order to adapt continuously to change, he added, leaders also need to know what is going on outside, in a global environment that includes suppliers, trading partners, alliance partners, investors, NGOs and others. The key is “actively listening” to all constituents, and not simply “replacing old leadership traits, but mixing them with new ones.”
His own industry – tourism and travel – is “very fragmented, composed of many small- and medium-sized companies, which makes it difficult to influence governments.” Without being able to exert that influence, he said, “governments aren’t taking us into account.” A clear example is the air traffic crisis that resulted from the volcanic ash eruption in Iceland last spring during which 7.5 million Europeans were unable to travel for six days. “Politicians didn’t care. Their first reaction was on the fourth day, and that was a conference call,” Escarrer noted. This delay would not have happened if the industries involved were automotive, financial services or pharmaceutical, he added.
Robertson pointed to the importance of knowing how to operate in an environment where ambiguity is the norm, where students will be working in industries that did not exist 10 years ago, and where companies and institutions, including business schools, must meet "the challenge of becoming truly global." This means, for example, that faculty should direct their attention not just to the developed countries or to the BRICs — Brazil, Russia, India and China — but "to all the 200 countries in the rest of the world as well." Having social impact – being a force for good – is equally important in both the corporate and the education environment, he added. The goal is to be “the best business school for the world, not just in the world.”
‘Last Optimist Standing’
Sometimes, said Jeremy Siegel, "I think I’m the last optimist standing" when it comes to the economy and its future direction. Not that there aren’t problems, he noted during remarks that covered the U.S. recession, Europe’s economy, the euro, budget-busting entitlement programs, aging populations and productivity growth, among other topics.
Most professional economists, said Siegel, think the U.S. is on "a self-sustaining path" to recovery, especially since most of the stimulus programs — such as tax cuts, mortgage aid programs and social security rebates — have expired. He predicts 4% GDP growth in the second half of this year, and a drop in unemployment to 9% by the end of the year and to 7% by the end of 2011 (it is currently 9.5%.) The U.S. congress, he added, "has voted the most generous unemployment benefits, by a factor of four to five, than ever before in past recessions." Some studies suggest that up to two percentage points of unemployment is due to these generous benefits, Siegel stated, leading some economists to suggest that it is time to scale them down. That, in turn, could lead to a bigger drop in the unemployment rate than many economists are projecting. (A recent Wall Street Journal article notes that laid-off workers are typically entitled to 26 weeks of benefits; during times of recession, some workers in hard-hit areas can receive an additional 20 weeks. In this recession, according to the article, another 53 weeks of federally-funded benefits have been added on, with the average weekly amount totaling $310.)
While two-thirds of the current budget deficit is due to the recession — a number that most economists say is sustainable — Siegel noted that a significant problem for many developed countries (including the U.S.) will be medical costs, especially Medicare. "Medicare was a budget buster before the current recession; now it is even more serious." He predicts that in 10 to 15 years, Medicare will no longer be free. "Social Security, believe it or not, is almost balanced" and can be adjusted as needed by raising the retirement age, among other modifications.
Turning to Europe, Siegel reminded the audience about past discussions concerning "the optimal area for a common currency." In the 1990s, Europe was debating who should join the eurozone and what the qualifications should be. Germany, France, Belgium, the Netherlands, Luxembourg, Austria and others were considered. "The big debate back then was whether Italy would be ready. The next debate was about Spain and Portugal. Then Greece. Greece join the euro zone? Impossible. It was never going to happen." In looking at the optimal qualities for a common currency, two important factors were “labor mobility between the common currency zone, and fiscal transfers — with a strong central government able to transfer monies between strong and weak areas. Arguably, Europe does not have enough of this," Siegel said, while the U.S. "absolutely satisfies these criteria. We have the most mobile labor force in the world, and our fiscal budget — how much we pay in federal taxes — overwhelms how much we pay in state and local taxes. This makes the U.S. an optimal zone. The question is, is Europe an optimal zone?"
The problems go way beyond budget deficits, according to Siegel. "They go to the question of competitiveness in costs: Was there too much of an increase in labor and other costs during the boom that now weigh heavily on Spain, Portugal, Greece and other countries? When countries had their own currencies, the solution was devaluation. Then you become competitive again." It is easier, Siegel added, to lower real wages by generating inflation than by keeping inflation low and telling workers that they have to take a pay cut. "That asymmetry is a big problem for Europe. There is no option to devalue…. The only way to get competitive is to get costs back in line."
Siegel described the Mediterranean countries as among the oldest in terms of population age. Spain, Portugal and Greece in some ways are rivaling Japan, whose age profile is the oldest. (The U.S. also faces challenges in this respect, with 85 million people coming into retirement now that the first of the baby boomers are hitting 65.) Countries are not going to be able to deliver on the benefits they have promised their citizens, especially in the area of health care, but also with regard to pensions, he noted.
As for the impact of the European crisis on the U.S., “it means a greater delay on Fed tightening,” Siegel noted. “I had expected the Fed to start raising interest rates by this time, but inflation has remained much lower, and the risks of another downturn are sufficient to keep the Fed on hold longer” — a situation that benefits the U.S. dollar. In addition, given the problems with the euro and eurozone, most central banks and treasuries “have halted the accumulation of euros relative to dollars that had been taking place over the last three to four years. The U.S. never really lost its status as world reserve currency, and will probably reign supreme over the next few years,” Siegel predicted.
In response to a question about how stocks perform when there are rapid increases in inflation, Siegel responded: “Not well. In the long run, though, stocks are a good hedge against inflation because they are based on real assets — on land, capital, ideas, etc., which tend to rise with the price level.” He also noted that equities have done better than bonds in every country.
Looking at the foundations for long-term growth, Siegel cited productivity as the main driver, “including rates of innovation, invention, discovery, how to produce more with less, how we learn to do things better.” That, in turn, is determined by “how many people around the world are engaged in looking at the problem. The explosion of international communication – bringing billions of people from China, India and elsewhere into the research fold who had been excluded in the past — argues for an acceleration of discovery … not a slowdown.” The gains, Siegel said, go to everyone. “One country may collect patent money, or copyright money,” but overall there will be huge breakthroughs in alternative energy, medical research, conservation. “People ask where demand will come from. Demand always comes from new products…. Productivity growth will be key to the global economy going forward. That growth benefits all countries.”