Lenny Mendonca: Will Big Government Change The Rules Of Commerce?

The chairman of McKinsey Global Institute details the challenges and opportunities emerging within a new global regulatory environment.
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TRANSCRIPT

Question: What will the new economy look like?

Mendonca:    The exact timing or the path through the downturn is pretty uncertain but what is clear is that as we come out of it, we will in fact be in a new normal.  It will not be back to the way it was before and there are few things that will be fundamentally different. One of the most important ones is going to be the role of the public sector, more generally in the world’s economy and I don’t just mean the stimulus in the short term -- I mean the role that government plays as a producer, as a regulator, as a portion of the determinants of the direction of investment and performance of the world’s economies.  Companies are going to have to interact with governments in a very different way, that is particularly pronounced in places like United States where that has not been the fundamental intersection.  The second thing that that is going to change partly is the result to that, is that businesses are going to have to regain the trust that has been lost in this last environment.  It’s not just for financial service companies, it’s for all companies and being able to legitimately and appropriately manage expectations and deliver in an honest way value to the range of stakeholders that companies have not just their shareholders but their customers their suppliers, their communities, and the society in which they operate. [Specifically delivering value to] heir employees is going to be an important part of what is going to be expected if companies are going to be successful in this new normal environment. 

Question: How active will government be?

Mendonca:    As we work through the crisis, the government in the United States is going to have a crucial role in determining not just the near term cyclical elements but the more fundamental performance of the economy.  And, in the short term, obviously because of the massive stimulus that’s happening -- both physical stimulus and monetary stimulus as well as direct intervention in many sectors of economy -- the government is going to play an important role in trying to ensure that economy doesn’t get worsen and we’re sustaining growth in the short term.  In the longer term, there is an important set of questions about how that’s managed to ensure that as the economy returns we don’t have extreme deficits in inflation but as importantly is the role that government will play in helping set the ground work for the next wave of productivity improvement in this country.  What’s going to be essential is that if we are going to have real income growth is that in sectors of the economy that are large and employ a lot of the population that we see real performance improvement.  That particularly is true in the health care sector, it’s true in energy, it’s true in education and human capital development and it’s true in the general delivery of public sector goods.  So government has a stimulative role in the short term and it’s got an important role just to lay the ground work for our future productivity improvement in the intermediate term. 

Question: How should businesses respond?

Mendonca:    I think there is no question that businesses are going to have to be thoughtful about their relationship with society more generally with the government in particular and with their stakeholders in general.  It’s partly a consequence of the crisis but it has been a longer-term trend as well.  The expectation of businesses particularly large businesses is that they are not just economic actors, they are societal actors and understanding these obligations and creating a legitimacy for what it is that they are trying to do that is good for them and good for their communities and societies in which they operate, has to be on the agenda of all companies going forward and the current crisis only accelerated that expectation. 

Question: What companies will benefit most?

Mendonca:   Health care is going to continue to be an important part of the world’s economy because of demography, because of aging, because of innovation that‘s occurring in that.  There is going to be an important opportunities for innovation in that sector that help create more quality for less cost and there’ll be important opportunities there.  We’re going to be having to deal with the new energy environment, and there will be important innovation opportunities in the whole range of not just alternative energy but helping make the existing energy infrastructure more efficient and less carbon intensive.  There will be important opportunities in helping provide new types of value to consumers in different retail formats and ways that combine the best of physical delivery and the best of virtual delivery.  What exactly that looks like is hard to say but there will be opportunities for innovation in all of those big important sectors in the economy going forward. 

Question: Will big government suffocate financial innovation?

Mendonca:    I think one of the biggest uncertainties in the next while here as we work through this is exactly what the regulatory environment for the financial sector is going to look like not just domestically but globally.  Financial innovation has been an important driver of productivity improvement for the last 25 years around the world.  Some of that was inappropriate innovation and excess risk.  The right kind of regulation will take that out but not stifle the innovation that's necessary to sustain the ongoing function of the world’s capital and credit markets.  How exactly that’s going to play out is extremely uncertain.  It’s a very important role that US regulators can play both as regulators of the US financial system and as participants in a new global regulatory architecture that remains to be developed.