In turbulent times, there is growing interest in finding ways to foresee catastrophes before they occur.
True foresight requires methodical approaches, such as scenario planning, to account for multiple variables and possible trajectories.
The World Economic Forum’s ‘Global Economic Futures’ series applies scenario planning to some of the most complex aspects of growth.
“At some point, we might have one or two quarters of negative growth.” This was stated by the head of the UK central bank in early 2008.
A few months later, citizens watched in horror as the country’s economy plunged into what is now known as the ‘Great Recession,’ a period that has gained notoriety among historical events.
Just like turbulent periods in the past, our current reality sparks interest in anticipating disruptions before they cause serious damage. However, the effort cannot be limited to fanciful predictions. It must be a careful examination of different and plausible scenarios based on reality. Less prophecy and more strategic analysis.
Planning for the worst-case scenario is a practice as old as granary management in ancient Egypt, which were the central banks of the time; unproductive fields had to be compensated with the storage of reserves, and an incorrect projection could mean disaster. Over the years, successive forecasting experts have often been correct, but have also struggled to capture people’s attention. Just ask Ray Dalio, the famous investor credited with predicting the last global financial crisis. Recently, he has indicated that people should recognize mechanical warning signals.
But perhaps making pessimistic predictions is not enough. It may be more useful to reconstruct narratives that explain multiple trajectories. Recently, the World Economic Forum has started applying this in the form of scenario planning to some of the most complex aspects of economic growth, in an increasingly complicated global context.
“Scenario planning has a long history. And at a time when there are dramatic disruptions in commercial systems and serious doubts about long-established economic relationships, it has a particularly important role to play,” said Aengus Collins, Head of Economic Growth and Transformation at the World Economic Forum.
The first edition of the Forum’s ‘Global Economic Futures’ series applied scenario planning to productivity—an essential ingredient of growth that has been relatively scarce.
The four potential productivity scenarios projected for 2030 range from a ‘drought,’ where the simultaneous slowdown of innovation and skill development undermines the standard of living and weakens most industries, to a ‘leap,’ where a virtuous cycle of healthy innovation and skill development creates favorable conditions for nearly all types of businesses.
These are not predictions, but rather a guide for decision-making.
The second edition of the series, published last month, focuses on competitiveness. It is a broad term with different meanings depending on the context.
The four scenarios proposed for competitiveness in 2030 range from a ‘fortified economy,’ where protectionism and the instrumentalization of resources weaken most industries, to a ‘fluid order,’ where geopolitical stability and reduced regulation stimulate dynamism and reignite growth. At least until the unequal distribution of benefits and the lower level of protection begin to erode prosperity.
Anticipating scenarios, avoiding panic
In 1873, everything suddenly seemed to go wrong.
Investors on both sides of the Atlantic were investing money in railroads and real estate at a frantic pace. Just a few years earlier, the United States had installed around 2,000 miles (3,200 kilometers) of new railway tracks annually, which increased to nearly 7,000 miles in 1872. When the real estate bubble burst in Vienna, it created a domino effect westward that affected the British economy and Wall Street. This caused the collapse of a huge overleveraged American bank, which sparked panic.
Anyone observing the markets could see that problems were looming. But when so much is at stake, it is tempting to ignore warning signals. Another clear example: the 2008 global financial crisis. Once again, unchecked speculation in the real estate sector ended in tears. A major Wall Street bank disappeared. The same story repeated itself.
Ray Dalio and others may have foreseen the 2008 collapse, but many factors prevented clear vision. Some of the same factors that undermined the real stability of the financial system created an illusion of stability and wealth for many people. Narrow vision prevailed.
Scenario planning is a way to try to broaden it.
RAND Corporation emerged from a US military project to design an “experimental spaceship that would circle the globe” in 1946. In the following decades, it played a significant role in the early development of the internet and artificial intelligence. It also pioneered the use of scenario planning.
One of its most notable efforts in this area was evaluating a series of events that could lead to the outbreak of nuclear war.
More recently, it has promoted the use of scenario planning to help Norway prioritize areas of research and innovation, and to support the UK’s efforts to use technology to solve its traffic problems.
Ideally, the process should not only alert to risks but also help formulate relevant questions and explore possibilities that may not be immediately apparent.
The Forum’s work in Global Economic Futures is similarly designed to foster critical and creative thinking, with the ultimate goal of achieving better outcomes.
At a time when the constantly changing climate forces a rethinking of economic policy and increases geopolitical uncertainty, there is no shortage of potential applications.