The geo-political world has recently had two big surprises; the first one might have been called an exception but the second one means it’s time to think again.
On Wednesday 23 November, 2016, Roger Martin-Fagg from Henley Business School gave Finnish business people an economist view on where we are in the wake of new global forces like Brexit and Trump; what it means for the future of Europe; and how Finnish business should best navigate the uncertainty.
Kristiina Helenius, CEO of Amcham, framed the discussion with some sober reflections on current market conditions from a Finnish business standpoint. The US-Europe Trans-Atlantic relationship is still the backbone of the world economy (50% of global GDP), so to some extent Finland should be safe in that. However, following Donald Trump’s victory, the Trans-Pacific Partnership is suddenly off the table, which makes room for China to come in swiftly and fill the vacuum. “Looking at US direct investment flows, the Nordics are losing ground but Finland is losing the most,” says Kristiina. “Only 3% of US direct investment to the Nordic countries finds its way to Finland.”
What’s ahead for Finland? “The economy is not yet recovering,” says Kristiina, “which makes Finland less attractive to foreign investment.” However, she does see continued strength in the defense sector, “with a lot of rebalancing of deals as we settle into this new world order.” Kristiina also anticipates future growth in the area of life sciences for Finland.
Roger Martin-Fagg took the floor describing himself as a behavioural economist, who looks at how people really make decisions. His brand of economics differs from the traditional approach, “based on a mistaken assumption that humans are going to behave rationally.”
Drawing on Daniel Kahneman’s ground breaking research from his book Thinking, Fast and Slow, Roger discussed how 80% of the time we make decisions based on a part of our brain that Kahneman calls System 1, which is instinctive and emotional, whereas only 20% of our thinking is done using the rational part, which Kahneman calls System 2.
Trump campaign and Brexit anchored in emotional thinking
“Donald Trump is brilliant at tapping into the System 1 emotional man,” says Roger. The basic tenets of Trump’s campaign – ‘We’re going to build a wall!’ ‘Make America great again!’ – are all designed to ignite System 1 irrational thinking.
Before the Brexit referendum, people anchored their thinking to similarly irrational ideas like ‘We’ll be overrun by immigrants’ or ‘We’ll lose the queen!’. Experts and elites watching Brexit unfold, assumed that people would eventually take the time to deliberate carefully and see sense. “And why wouldn’t they?” asked Roger, “I mean if you stop to think about it, you’d be crazy to vote to leave the largest free trade zone on earth!”
With elections coming up in Italy and France, Roger expects the Italian referendum not to be about the constitution but rather a vote against the current prime minister. Similarly, in France he anticipates Marine Le Pen to do much better than expected. A big question mark has even been put over the elections in Germany. Regarding France, the experts Roger speaks to believe Le Pen might do well in the first round, but then the French people will eventually come to their senses. However, Roger isn’t so sure. “If you’re living in a northern suburb of Paris and don’t like your conditions, your vote may well be a product of emotional System 1 thinking.”
Why is all this happening?
The simple answer is lack of equity. As a result of politics moving inward in terms of trade, everyone’s thinking me not us. Roger Martin-Fagg cites fresh World Trade Organisation figures, which show, for the first time, an entire collapse in world trade as a ratio of world GDP growth.
Looking at the global share of wages to GDP, in most countries the ratio has gone down, mostly at the level of unskilled labour, which underscores people’s emotional view that globalisation is to blame. Although, Finland together with the rest of Scandinavia is still quite well positioned, the US and the UK are showing massive wealth inequality, and the value created from trade is more and more making its way only to the top echelons.
How can Finland succeed?
We live in a globally connected world but time and distance still do matter. “We think that it’s countries that trade together, but it’s not. It’s companies, and their decisions are guided by people,” says Roger. “Never underestimate the power of management preference.”
The advice that he gives to businesses in Finland and all over the world is that culture matters! “People still choose to buy from the people they like best and from the places they like to visit.” In Finland, the infrastructure works, education is superb, everyone’s polite and always on time. That’s important for doing good business.
“Be nimble” says Roger Martin-Fagg, “be distinctive, and most of all, be compelling!”