The Rise and Fall of Great Powers

We live in a world with 196 nations and even though we live in peaceful times, they all compete for investors, talents and visitors. Nations have always competed with each other, just as companies compete for business and individuals compete for the most interesting jobs.

Within these nations, the global competition of places is estimated to host 2,7 million towns, 3 thousand large cities and 455 large metropolitan areas with a population over one million. All of them compete in the struggle for attention and economic growth. Lack of growth means stagnation and decline.

In 1987, Paul Kennedy´s classic book The Rise and Fall of the Great Powers was published.  The book explores the politics and economics of the Great Powers from 1500 to 1980 and the reason for their decline. Paul Kennedy thesis of great powers can be summarized: The more states increase their power, the larger the proportion of their resources they devote to maintaining it.

If too large a proportion of national resources is diverted to public spending like military purposes, that do not invest in expanding the base for future growth, this in the long run leads to a weakening of power.

The capacity to sustain a conflict with a comparable state or coalition of states ultimately depends on economic strength, but nations apparently at the zenith of their political power are usually already in a condition of comparative economic decline. Power can be maintained only by a prudent balance between the creation of wealth and public expenditure, and great powers in decline almost always hasten their demise by shifting expenditure from the former to the latter. Spain, the Netherlands, France and Britain did exactly that.

In a Place Management training session recently, a participant asked me if I think the current crises in Europe is because of tensions in the currency union and the Euro or if there are other reasons. As I thought about this, I reminded myself of Paul Kennedys book and thinking about it, events in recent years indicate that it may now be the time for Europe and United States to ride the trend of decline. Many signs indicate that the current crises is a structural crises and not just another recession.

Youth unemployment across Europe is reaching unprecedented levels and even with a moderate recovery it is unlikely that existing businesses will hire enough people to return unemployment to pre-crises levels. The public sector will not hire at all. Instead the hope is in generation of new businesses and for this, the place climate in Europe´s regions, cities and towns need to be friendly and supportive to entrepreneurs.

The European Union has countered the crises by launching a new strategy, EU Horizon 2020. In a changing world, the EU aims to develop towards a smart, sustainable and inclusive knowledge economy. The idea is that these three mutually reinforcing priorities should help the EU and the Member States deliver high levels of employment, productivity and social cohesion. Each Member State has adopted its own national targets in each of these areas. As we have written about previously on this blog, concrete actions at EU and national levels underpin the strategy.

What innovation for competitive advantages can Europe rely on to grow new business, in a world where manufacturing of new products is much less expensive in developing economies? Even with new manufacturing businesses, mainly engineering, product design and qualified white collar jobs are created in Europe and the bulk of manufacturing is made elsewhere, leveraging on outsourcing and efficient global supply chains. This will not reduce the large structural unemployment of the workforce.

At least Europe has one advantage. We are still better than the developing world in coming up with and launching new companies that compete in the world market with disruptive innovative business models. Recently I have encountered new such businesses in industries as diverse as cleantech and waste management.

Europe’s future is about success or failure in recovery. On the global scale economic growth is currently happening in Asia and Africa. The Economist published the chart below today.

China’s nominal GDP surpassed that of Italy in 2000, France in 2002, the United Kingdom in 2006 and that of Germany in 2007, before overtaking Japan in 2010, making China the world’s second largest economy. If we consider the effect of cumulative growth, China may surpass the United States as the worlds largest economy by 2020.