On a recent layover in Frankfurt airport, the Harvard Business Review (HBR) magazine caught my eye. On the cover is a ball of tangled wires in red, yellow, green and purple under the words “Managing Uncertainty” in large bold print. The magazine was positioned strategically behind a counter of recent nonfiction, prominently displaying the book: Europa Braucht den Euro Nicht (Europe doesn’t need the Euro).
My trip was during the week when results from Egypt’s Presidential election were hanging in the balance. This coupled with the many uncertainties in the region—from occasional setbacks in Tunisia to the ongoing conflict in Syria, all amidst the unstable global economic environment—made the Review a must-read.
The Review is targeted towards businesses but many of the lessons serve more broadly. The first article begins by describing four levels of uncertainty. No use in wasting time with the first three, as what concerns most of us today is Level 4: True Ambiguity. This level is defined as when “multiple dimensions of uncertainty interact to create an environment that is virtually impossible to predict”.
What is the best strategy at this high level of uncertainty? The answer is surprising. This is the level where vision is most important and payoffs can be extremely high. The point is level 4 only occurs during transitions and the actor that shapes things can win big. What is critical is to credibly coordinate the various stakeholders around the preferred outcome. Most dangerous is to act purely on gut instinct.
Given the timing of this issue and recent developments, I wonder if leaders in Egypt and Europe also read it. The swearing in of Morsi coupled with the signals of openness he offered to diverse groups pointed in the direction of the inclusive democracy for which protestors had risked and given their lives. European leaders showed the first signs of addressing the turmoil head-on with direct assistance to Spanish banks. Let’s hope these newly found visions do not become blurred with instinct as complications inevitably arise.
But if the ability to shape outcomes exists only for the major players, what should other affected bodies do? Another pair of articles focuses on the adaptability and agility of firms. In turbulent times, being flexible and adjusting quickly to new information is critical. This includes operational, portfolio, and strategic agility. Together these basically result in the standard bottom line to an economist—improve resource allocation. In turbulent times, the best use of resources can change quickly and resources must be strategically allocated, as new opportunities and challenges arise. A key mistake is put resources (including cash, talent, and managerial attention) into sinking units and projects in order to lift them while missing golden opportunities. Rather, directing resources to the most productive projects and redirecting as the situation changes is vital. While this is obvious at a technical level, psychologically the temptation to shift resources into improving poorly performing areas during bad times is hard to resist. Yet study after study show that growth in companies or countries is strongest when resources flow rapidly to their most productive uses.
For us, this would mean redirecting World Bank resources to the projects and programs that are likely to have the biggest effects in terms of jobs, growth, social and economic inclusion, and poverty reduction in our client countries. There are at least three ways in which these are likely to be different in MENA than in the recent past.
First, the need for strong social safety nets and labor intensive public works is far greater, as downturns affect the poor most dramatically. In MENA this is critical—although absolute poverty is lower than that in most other regions, ahigh share of households hover just above the poverty line and can easily fall into poverty in the presence of a shock. Moreover, high and increasing unemployment has reached worrisome levels in a number of countries.
Second, the Arab Spring is creating new opportunities for supporting better governance that were absent in the past. Good governance is the foundation for growth, private sector development, and inclusion and any opening in this area must be pursued. MENA has lagged on indicators of governance and now is the time for change.
Third, expanding knowledge and bringing more evidence into policy decisions is critical to ensure that the binding constraints to inclusive growth are addressed. Rigorous analytic work on MENA’s economies has fallen behind the rest of the world, largely because of limited access to data, making informed policy decisions difficult. Household and firm surveys are now becoming available, allowing researchers to calculate key indicators of income distribution, gender gaps, access to services, and firm dynamics, which can help shape appropriate policy.
These are certainly priorities. But the challenge for us and for our clients is finding the political will to cut areas with small gains in order to expand in directions with the greatest returns, given limited resources. This type of agility—highlighted as the crucial corporate skill for managing uncertainty—has traditionally been constrained in both international and government institutions.
So I look forward to the 2013 World Development Report (WDR) on risk and uncertainty, which will offer some “how to” for governments and IFIs, absent in the HBR magazine. But given current risks, I hope they share any guidance quickly—not sure we can wait another year.
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