Business, Government, and Human Security
Dominic Barton, global managing director at McKinsey & Company, joins Fortune Magazine's Leigh Gallagher to discuss how business, government, the social sector, and the U.S. military can work together to improve human security in conflict zones globally. Barton draws on his experience leading McKinsey to discuss a range of cases where business leaders have worked with the public sector to ameliorate infrastructure, services, and human security outcomes across the world.
The CEO Speaker series is one way that CFR seeks to integrate perspectives from the business community into ongoing dialogues on pressing policy issues.
GALLAGHER: Good morning, everyone. Thanks for coming out on this blustery day. I’m Leigh Gallagher, assistant managing editor of Fortune Magazine, and it’s a pleasure to be here today—not only because Dom is the only person in business with whom I can wear these high heels. (Laughs, laughter.)
Anyway, we’re here today for the Council on Foreign Relations CEO Speaker Series with Dominic Barton, global managing director of McKinsey & Company. The purpose of the CEO Speaker Series, as many of you know, is to host leading global CEOs to share their insights on issues that are at the center of both foreign policy and commerce, and to talk about the changing role of business in the international community. And we have with us a fantastic speaker to do exactly that.
I met Dom for the first time this past November at our Fortune Global Forum in San Francisco, where he spoke to our audience of CEOs about leadership in a disruptive time in a disruptive place, and about opportunities in emerging markets—two topics he has keen insights on. But here’s the thing about Dom: as global managing director of McKinsey—which is basically CEO of McKinsey—his firm—he and his firm advise a majority of the Fortune 500. Is that fair to say? You can’t say.
BARTON: Yeah, can’t say. Can’t say, yeah.
GALLAGHER: (Laughs.) A lot of companies. And Dom has been at the firm for 29 years, 30 this July, so he’s deeply involved with many of them. And Dom himself has a rule that he talks to—has meetings with two CEOs or global government leaders a day. So when you talk to Dom, you’re not only getting his insight and analysis and perspective, you are getting it filtered through all these people he’s constantly talking to. So it’s not only always interesting to talk with Dom, it is very, very efficient. (Laughs.) So anyway, I’m really, really happy to talk to you today.
There are many things I could talk with Dom about, but we’re really going to be focusing today on human security in conflict zones. Now, that may sound like an unusual topic for a business panel, and it certainly is. Specifically, we’re going to talk about how business, government, the social sector, and the U.S. military can work to improve human security in conflict zones globally. Obviously, it’s a topic with tremendous weight and tremendous urgency, given what’s going on in the world right now from Syria to various crisis zones throughout the Middle East, what happened in Turkey this morning, the threat from ISIS, the migrant crisis in Europe. This is a huge, enormous topic. But it’s also an area where McKinsey is increasingly active.
So, Dom, welcome. We’re going to talk for about a half hour and then we’re going to open it up to questions.
But first maybe we can just start with this: Why is McKinsey—why is human security an increasing area of focus for McKinsey? When did it become so? And what prompted it?
BARTON: Well, thank you, and it’s wonderful to be here at CFR.
This really, I think, has become a more prominent issue because there are so many zones of conflict, if you will. I think the CFR has identified 17 of them, and they seem to be increasing. We’ve got—I think we have now 60 million migrants in the world. That’s higher than it was in World War II. So we have a lot of conflict in hot zones, I think more so than we’ve seen, again, since World War II, and I don’t think it’s going to get better in the short term.
And so, as a business leader, I don’t think you can ignore that because it does affect what you do. It’s not—it’s not an exogenous factor that you can ignore. I think every business leader now worries about it, whether or not they’re operating in Pakistan or Northern Africa or wherever. It’s an issue that’s going to affect you. And I think—so that’s one, it’s just—it’s a prevalent issue in our time, and I think business leaders have to—there’s a role to play. And I’ll get back to that in a second.
The second is I think you’re seeing an increasing interest in government to get business help and increasing help from the military to get business help, if you will, on it. And I personally got involved in this. It was actually Bart Friedman, who is, you know, a core member here in CFR, who got me going. It was through Brookings, and it was work they were doing in the post-Iraq conflict—you know, a notion of how do we think about, post-conflict, ensuring that you’re not going to get conflict happening again, and what is it that business and the military can do.
But where it really came to a head for me was in the U.K. And the British Army is basically of the view that now, to be able to think about conflict, we need to have business and—particularly business, more so than even government, involved in preventing it, but also in the post period, and how do we work more systematically together to make things happen. And so we started to get a group of executives together with the senior military leaders in the U.K., talking about conflict zones and what are things we could do. Northern Nigeria—I didn’t realize that one of the largest prison populations in the U.K. comes from Nigeria. They’re Nigerians in—people don’t know that. And so a—it just was an example of a conflict or issue that occurs there is going to affect the U.K. in a significant way. They would have to be involved, probably militarily, if something fell apart. And you actually have quite a lot of British businesses that were involved in that, too: Standard Chartered Bank; you had—you had some of the food companies, though Syngenta’s not a British company, but the chairman happened to be British at the time, and so forth. So there was a(n) interest in saying, are there things that we could be doing to provide—and then you had DFID, which is the aid agency, doing things. But it’s not joined up.
So I think long-winded way of saying I think there’s a—all the different—I call it the tri-sector in a world. You’ve got government, you’ve got the private sector, and the NGOs. Those are the tri-sectors, have to work together more. And I think from each of those areas they’re saying we need the other to help. And I think again, you know, for—I personally think—and I’ll shut up here—one of the biggest sources of conflict is lack of employment. You know, it’s no jobs for people. That’s one of the biggest challenges. And so I don’t think a government can create those jobs; businesses need to create those jobs. But they’re not going to create the jobs if there’s not a viable business and if there’s not security. So I think that’s where it’s in all of our interests to, you know, create jobs that are viable in these hotspots.
And I personally think a lot of the challenges that we’re seeing from Syria and what we’re seeing in Jordan, and has—then spreads, coming into Europe; what we’re seeing in Kenya—I worry a lot about, you know, Kenya, because you’ve got people now—tourism is down, a lot of people are afraid to be tourists there, if you will. I remember the Kenyan president telling me once, he said, you know those 9-year-olds that sell you trinkets on the beach when you’re there? Well, that’s 60 percent of their family’s income. And if there’s no more tourists coming to buy those trinkets, and then someone comes along and says I’ll give you $100 if you hide this particular thing in your home, they’re going to take it because they’re hungry. And he goes, I can’t—we can’t stop that. And so the ability to create jobs to create the stability I think is critical, and I think it’s going to get worse before it gets better unless we do something together.
GALLAGHER: And are you mostly talking to corporations that are already operating in these zones and these regions, and just, listen, you really have to focus on this more, you have to work with these two other sectors, three other sectors? Or are you talking to other businesses who—and saying, listen, we need—we need to build economies in these places, you need to go in there? So is it—is it existing businesses, or is it bringing new players in?
BARTON: It’s a bit of both. So in northern Nigeria—which is, you know, quite a dangerous spot—you’ve got the Gates Foundation, which is doing incredible work on health, right? Just, you know, getting rid of polio. They’re doing a—brave people, as well, that are in there doing it. You’ve got—there’s a—it’s an agricultural place, and Paul would know much more about these. It’s a—Nigeria has the potential to be a significant agricultural player. There’s a lot of good opportunity. But people—the farmers there are afraid to be able—they get—they’re threatened by people. It’s hard for them to be able to not only produce crops, but if they have them to actually transport them to places.
But they are actually businesses that are there that want to do more. You’ve got Woolworths. These are mainly—these are mainly African retail players that are there looking to either source food or do—or do things on that front. And then we’ve had banks—Standard Chartered Bank, others—that want to do actual business there. But they’re not joined up, if you will. And that’s the thing, of how—is there—and then you want the—you need the—you need the security because it’s too terrifying to be in the place. So there are businesses there.
There have been other places where it’s getting people together. So Vodafone; you know, thinking about the auto industry; thinking about players that are basically able to create jobs, support and supply industry, SMEs, and so forth; that are actually saying, where is it that we could go to help. There may be opportunities to do it. So it’s—that’s sort of the mix.
GALLAGHER: And when it comes to what the private sector can do in places like this, is it—are we talking largely—I mean, it sounds like it’s a combination, but is it the—is it the—you know, the Siemens, the enormous companies, the Vodafones, or is it local, seeding entrepreneurs on the ground which can be so powerful in terms of really developing an economy from the ground up? Or is it a—is it a combination of both? And do those two entities have to work together?
BARTON: It’s both. And I also don’t want to exaggerate; it’s not as though there’s like 25 examples. I think this is early—it’s early days, right? Again, we’re seeing it. It’s in hotspots.
But one of the other trips we did, which is a bit of—I didn’t tell anyone in McKinsey I was going. We took—we went—we took a group of six CEOs to Afghanistan, and it was a range—it was a—it was a mining company, which was a—you know, it was—it was Rio Tinto. It was—it was basically taking—it was a Hong Kong conglomerate, basically, that had interests in everything from food to financial services. It was a small-business leader from the U.K. who had done work in sort of the Silk Roads and that region, mainly in the trade—you know, like low-key manufacturing: food, some retail. And then there was a banker that came as well.
And that—what was interesting there is, even in Afghanistan, as, you know, tense of a place it is, in the northern part there are actually opportunities. And then it was meeting with the Chamber of Commerce. It was literally like being in, in my view, St. Paul, Minnesota. I mean, you had a group of people that got together. These were Afghani businesspeople trying to get things done. They didn’t know how to be able to trade. There was a railroad that had been broken for a while. They were trying to figure out how to fix it.
So the group just started to work. It’s not going to change the world, but there was actually investments that were made and linkages that were made with people. So I think it’s a combination of large and small.
GALLAGHER: And is the driving force—is it capitalism, there’s a huge opportunity here if you get in? Is it moral obligation? Is it let’s grow these economies so that this doesn’t happen again? As you said, this is the single largest factor leading to disaffected youth and such.
BARTON: I think the first part was honestly just curiosity. I don’t think any of those people going to Afghanistan were thinking this was the—you know, let’s get in early and sort of figure out where—how we’re going to make it work, sort of, right? But it was more, is there a way we could help. But I think people want to make it sustainable, and that’s the—and that’s where I think people are saying, well, what is it that could—we could do that will be sustainable in some of the places that are there. And there may be some that are more challenging.
One where I think there is sustainability is actually between—this is something that John Kerry got moving, Tony Blair being involved with the Quartet. But it was really John Kerry, and Tim Collins from Ripplewood played a big role. And this is the—this is sort of Palestinian business leaders and Israeli business leaders trying to create jobs and businesses in Palestine. And they’ve created a fund of about a billion dollars that’s investing in entrepreneurs. It’s actually run by one of our former colleagues, Kito de Boer, who’s basically moved to Jerusalem and is based there. But they’re investing—and again, these are very small businesses that they’re building. What I found most exciting is you have literally Israeli business leaders and investors sitting beside Palestinian business leaders and investors around the table trying to sort this issue while all these things are going on. And so that—and that’s—I think that’s going to be more viable. It won’t be big business, but it’s really providing investment capital, if you will, and the sophistication of how to help these businesses start up. But that’s—you know, I think that—with the view that that will help with stability and with jobs. And what they’re finding there is there’s all sorts of regulatory issues that have to be dealt with, too, about how to move products through it.
So, again, I think—it’s early days, but I think there’s increasing interest in ways to figure out how we—how we do it.
GALLAGHER: What are some of the ways around some of the—some of the hurdles in going to some of these areas? Whether it’s, you know, regulatory, as you mention, or simply logistics, a lot of services aren’t up and running; oftentimes there’s corruption. There’s so many kind of roadblocks for business to operate in these areas. So what’s the key to kind of getting around them?
BARTON: Well, I think one of the biggest issues is actually just having the people that want to do it in your organization, because they’re not—again, they’re not vacation spots, right, if you will, that people are going to. But I—but I think, when you can—so the shortage is actually the people who will do it.
And then, again, if there’s a—if there’s really a viable business, if you will. I happen to think in a lot of—if you think about Kenya and Somalia and what’s happening there, there’s a lot of infrastructure that needs to be built. It’s getting the roads, the railroads, the power. And that’s where some of the larger organizations, like GE, can play a role, because it’s—once you get that transportation system or the power systems in place, you can do it. And it’s in their interest to want to do it.
And there it’s a matter more of getting everyone lined up, because there is actually the desire to invest, but then it may not be the first priority for what the government’s doing. So it’s making sure that that’s, you know, lined up. And then what—and then when other businesses see that that’s happening, how can they come in. So it’s getting groups of people together.
We’re doing a—I think it’s the week after next Penny Pritzker is taking a group through—we’re going to Nigeria and to Rwanda, and the plan basically is to talk about investment projects and what are ways to try and be able to get a critical mass of people. It’s some—it’s some large institutions and some very small SMEs that are coming from the U.S. to meet again with local players to see what are ways that they can be able to make things happen. And the view is hopefully that with the secretary of commerce there, that helps de-bottleneck some of the issues and some of the particular opportunities. So this is also where, again, you got government, business—it’s for—it’s for capitalism and it’s not aid, but it’s—but it’s also got a broader benefit, I think, in what’s happening.
GALLAGHER: Mmm hmm. What about the tech sector? I want to ask you about the tech sector because there’s so much—you know, talk about what Google’s doing, delivering wi-fi balloons all over the world so everyone can have Internet access; or Facebook doing some of the same. Even something like M-Pesa reducing the cost of banking. Certainly mobile phones have changed the lives of people everywhere. What are the opportunities for the tech sector, the tech giants, and what are the limitations?
BARTON: Well, I think—I’m a—I’m a—I’m very bullish, if you will, on the—on the benefit that tech will provide for bringing more people into the workforce, if you will—into society, into playing a role. And the model for me when I look at that is actually in China with what Alibaba has done. And there’s many others now, Tencent. But if you look at what—what Alibaba did was basically allow, you know, tens of millions of small- and medium-sized enterprises to become part of a market, right? So you can be in some tiny place in a particular part of China and you can participate in that market. So that technology allowed tens of millions of small entrepreneurs and businesses to be able to exist, in a way. And so I think that’s been an—and, by the way, also get access to finance. You know, this was—about four years ago people realized Alibaba—Jack Ma would say, but I’m actually a bank. He didn’t have a license. And he said, I lend anywhere from $10 to $1,000 to our customers, and I’m able to do it at a much lower cost than a bank does because I have more data, and I also have a little bit more of a powerful, you know, enforcing mechanism, which is if you don’t pay it back at the end of the day I’ll shut you off our system; you won’t be able to—you won’t be able to play on our system. And they built up a very significant loan book. Then, when they went into deposits, they got into issues. But they have sort of—they went—financial inclusion actually increased significantly through technology.
And you said M-Pesa. There’s a number of banks in Africa that are doing phenomenal things, sort of Equity Bank, which is a Kenyan bank. It started as a—as a financial inclusion, very low microloans. And what the CEO discovered is that—mainly to agricultural customers—is the reason why people didn’t pay was not because they were—I’m generalizing here—but the reason why they didn’t pay was not because they were, you know, bad people or didn’t—it was because they were sick. Someone was sick in the family, it was typically, and they couldn’t work. And so he decided to put—provide an insurance product, and then was able to—has now built this thing into a very significant business, which is growing, has got big ambition. And it’s—and he’s using tech. The only way he can work in those markets is through an extremely low-cost distribution system, which is technology.
So I think it’s going to—it’ll help allow more people to come in. The challenge is jobs, right, that the number of—you know, are there—will the same number of jobs be required in some of the manufacturing side. And I don’t—you know, that’s going to be a challenge. But I think it’s going to help get more people to participate.
GALLAGHER: Yeah, yeah. And we have that question here as well.
GALLAGHER: In terms of conflict zones specifically, when is the time—when is the best time for the private sector to really double-down and go in? Obviously, you want to be there before, create jobs so there is no conflict. But that aside, you know, when is the opportunity there? I mean, you know, I don’t think—maybe you can tell me I’m wrong, but I don’t think anyone is pouring into Syria right now.
GALLAGHER: I mean, when—you know, what is the bell curve? When is the optimal time to go in, either private sector alone or with those partners, as you talked about?
BARTON: Well, I think there—I think what the military—I don’t want to speak on behalf of militaries, but certainly in the U.K., and I think with also the U.S. military, is that part of the plan, if you will, has to start including what’s the—what is the private—a private sector, whether it’s—it’s probably more local than it is foreign. How are you going to ensure that that is in place, even before the conflict—before the—as this Nick Parker, before the bayonets? You know, you need to know what is it that you’re going to do afterwards, and how is that going to come together, and make that part of the plan.
And we—I actually participated in one plan. This is, again, more in the U.K., where they do these and they’re literally, you know, two-week exercises. One of them was actually with Azerbaijan. That was sort of the case study, was Azerbaijan has been taken over by Iran and there’s a NATO force. So it’s this, like, wargame. You go and there’s blue teams and red teams. But what was interesting is they had—there were businesspeople there to say, OK, what are the—what are the things that are going to need to be done to ensure that people will actually start to invest and do things again. These weren’t big companies; it was just entrepreneurs, to see how—what are the conditions you have to have in place.
So I think it’s—it has to be part of the plan. And then, obviously, I think it’s very difficult to go in while a conflict is occurring. But what you’d be surprised at is the resilience of local entrepreneurs and what they can do. Again, in Afghanistan I was shocked at the activity that was going on. It honestly felt like being at a local Chamber of Commerce in the U.S., I mean, a lot of things that were going on. People were there trying to, you know, build businesses and sell their products, and talking about talent problems, and all that sort of stuff.
GALLAGHER: Wow. So with the refugee crisis that we’re seeing right now, has the private sector or have you had conversations about—I mean, McKinsey is the problem solver. (Laughs.) So how do you—how do you think with—about the private sector in solving a problem like that? What are the opportunities? What are the ways?
BARTON: Well, we are involved in that. There’s many people being involved in it.
One way we’ve been involved is actually on—when the—when the refugees come into the country. So we’re—it’s public knowledge—we’re working with the German government because they just can’t simply absorb the number of people that are coming in. It’s just they don’t have the processes. So, you know, just—it’s almost lean operations or what are required to be—to be able to just absorb people and make sure people are screened properly, they’re given the proper places that they can go and so forth.
But I think what we’re also working on with others—actually, Mercy Corps was involved in this in a very good way; the IRC, David Miliband, who’s here in New York—is looking at where do we think the flows are moving. So our global institute is actually taking a look at where do we think migrant flows will be over the next 10 years because it—you know, and what it is that you can then do to deal with the—at the source to prevent, if you will—not to block; it’s more to stop people wanting to have to move and see it. So it’s getting a strong sense of where is the—where do we think this migrant flow is going to, you know, increase or move to—and it’s not just in Syria, which we’re looking at in particular, but it’s also Southeast Asia. I mean, Myanmar, there’s a lot of terrible, sad things that are going on in the South China Sea with the migrants. I mean, Australia has been getting a lot of that effect. We think that that will increase. And again, it’s not—it’s not driven so much by conflict, although that’s been part of it in Myanmar with some of the rebels. It’s actually been, again, lack of jobs, no opportunities, so groups of young people just betting on it to move to find opportunity.
So we’re trying to map that to get a better sense of it. And then also, around these refugee camps you mentioned, there’s some very significant ones in Jordan. You know, 80,000 to 150,000 people; they’re cities. There’s a big—there’s a big one in—we were talking about this before the session—in is it—I wonder where Anna (sp) is; I can’t remember the name of it. It’s in Kenya, al-Sabab (sic; Dadaab). I can’t remember. It’s—do you guys know what that one is? Three hundred thousand people that are there, and it’s been there for so long that there are now grandchildren that are being born from original—so this is a city.
GALLAGHER: And you’ve done a lot of work around this, around conflict reconstruction, which is a—which is a whole other thing.
BARTON: Yeah. And also just, you know, we need—these places need mayors, right? You got to have a mayor. You got to have a police force. You got to have hospitals. You need to have this because they’re just so large. And that’s another—I think, again, that a lot of the flow is not—there’s a fundamental reason for why it’s happening that we need to look at and predict what it’ll look like, but then there’s these blockages. And it’s, again, these refugee camps simply can’t take any more people. They have to move on. So how can we make those work more effectively?
David Cameron’s doing a big push right now to say how can we—and this is, again, leveraging business—how can we have business be able to, if they will, buy more product, more of the food product from these parts of the world. Will that help create the jobs? These are just ideas. They’re not nailed down. But—
GALLAGHER: Yeah, there was something I read in a McKinsey paper, even the military purchasing power, there was a—you know, some of this can be as simple as the military purchasing—channeling spending to local businesses. Somebody wrote that more than nine years after the intervention in Afghanistan began, you could still find pallets of bottled water imported from the UAE on a U.S. base that’s within a few miles of three local Afghan water bottling plants whose owners would welcome contracts—those contracts. So, you know, that’s again getting back to the notion of working together, the sectors.
GALLAGHER: While I have you here, I’d love it—we’re going to open it up for questions in a couple minutes, but I did just want to get your take on a couple big topics in the news. We’re just going to switch gears a little bit.
You’re going to China today. Dom’s going to China today at 3:00. What are we to take from what happened last week in the markets? You know, talk to us about the market malfunction, but also the economy story, which is—they’re not the same. Should we be worried about either one?
BARTON: Well, you know, I’d just preface it by saying, again, I’m a bull on China, which may be—again, as I’ve said, I’ve probably drank the Kool-Aid there for too long. So that’s my—and I’ll tell you why I feel that way.
But that said, I think what we’re seeing with the—with the markets—first of all, I’d look at the markets not as a regular market as we see it. It’s a casino. I mean, it’s mainly retail investors that are going—if you ever see a picture, if you ever got to a—there’s actually—in Shanghai, it’s amazing to see people sitting around. It’s almost like going to a cinema, and people are betting. And so it’s not a very—it’s not an institutionally driven market, and so that’s another factor. And it’s been moving up and down.
Someone actually said that now—and I don’t—I don’t want to predict that—that valuations are now getting reasonable. If you—if you recall, last June, the—you know, the—it had just been through a massive boom. I think it had been up, you know, 180 percent. So you have, first of all, that market, it’s an indicator but I think it’s not a very good indicator because it’s a—it’s a casino. It’s retail players.
It’s also been, unfortunately, I think badly managed. I think this is an area—what’s been a bit surprising to me is you’ve got an amazing central banker, you’ve got an amazing finance—it’s a deep technocratic group. But in the markets, it’s not done—it’s not being done well. I mean, there’s no way I can—other way of getting around that to say it. And I think that’s where there’s an opportunity to learn. I think what it’s going to lead to is much more interest on China’s part in having the big institutional players coming into the place—State Street, Vanguard, BlackRock. They need it, because you got to—we got to institutionalize the market more. So I think it’s going to actually spur change.
So my view is I wouldn’t look at what’s happening in the market there as an indicator of the strength or weakness of the Chinese economy. What I would look at more is what’s happening in the private sector in China? We don’t talk a lot about that, but the Chinese private sector—and I don’t want to say it’s for every sector because it does vary. In some areas—steel is a disaster. There’s overcapacity and all—and so forth. But if you look at services—financial services, retail, consumer—it’s booming. It’s just—it’s booming. And you—I don’t know how to describe it in terms of the—of the numerics, but if you look at the—some of the fastest growing companies on the planet today are these—they’re mainly Chinese privately owned services and consumer goods companies that are there.
The SOE sector is a different one. And that’s—I think the anti-corrupt—state-owned enterprises. That sector is a difficulty. It’s got—there is a lot of restructuring that’s required. And I think this anti-corruption drive, which is a—you know, it’s a very good thing to do. It has led to a freezing of change in the SOEs because SOE CEOs and chairpersons are afraid to make restructuring because it’s a bit like the old red guard. If I see David Hunt, he’s running an SOE, and he has—and I don’t like the restructuring he’s doing, I can just send a letter in to Wang Qishan, who’s the head of—he’s in the standing committee—and say, you know, I saw David had this amazing bottle of wine with some people. I don’t really know what he’s up to, but you might want to check it out.
And then he gets an investigation. He gets a hundred-questionnaire thing, which as some very deeply personal questions too on it. And you cannot lie on those. So it’s almost like a—if you—it’s not what you’re accused of, it’s what you say where a lot of people are being picked up. So people are not doing restructuring. They’re nervous about being called on. And they also capped the compensation of these SOE leaders, right? The ratio, I think, cannot be more than six to one. I may not have it exactly right. So people are going why am I going to—so that—the SOE sector is frozen, and that’s a worry because it needs restructuring. Private sector’s booming. Infrastructure’s moving along.
And again, my fundamental view is I look at China as 54 percent urbanized. Every year we’re seeing 25 million people move from rural areas to cities. That’s what’s growing the middle class that’s there. It’s very much in the interior. And there’s the opportunity. And we see, again, the private people doing it. I don’t think growth will be 8 percent. My own sense is growth is somewhere between 6 to 6 ½ percent. But I think it’s real. It’s just going to be—it’s a different type of growth. It’s more, again, consumer services as opposed to the manufacturing. Does that—
GALLAGHER: Yeah. Yeah, great.
So I think we’d like to open it up. At this time, I’d love to invite our members to join in the conversation with their questions. A couple of reminders. This meeting is on the record. Please wait for the mic and speak directly into it. Please stand then state your name and affiliation. And please limit yourself to one question and keep it concise to allow as many people as possible to ask questions. That said, do we have any questions? Here we go.
Q: Thank you. Earl Carr representing Momentum Advisors. And I had the pleasure of working for McKinsey in the Shanghai office.
You were talking about China. And you talked about the importance of services and how they’re growing. I was wondering if you could talk a little bit about the significant amount of corporate debt in China and if you saw that as a concern, and how that is impacting the Chinese economy.
BARTON: Yeah, there is a significant amount of debt. And our global institute has been looking at that. But the area where the debt is most significant is in the SOEs and also within municipalities. There’s not a—there’s not a municipal bond market, right? So a lot of the cities have to raise money by selling real estate. That’s kind of the—and that’s why you get these cycles that are moving through. And I think that—the restructuring of the debt at the municipal level I think is going to be one of the most significant things that’s required. If you actually, though, look at their—you know, the foreign reserves that they’ve got, it’s—I can’t remember what the number is—even with exports not being anywhere near they were in the trillions of dollars.
But also, I think we underestimate the impact of oil. You know, China’s an oil importer, as you know. And so basically when oil went from $80 to $60, that paid for the Asian Infrastructure Investment Bank, the BRIC Bank, all these big investments that they were making were—just because of what’s happening with oil. And I’m not—who knows whether that’s sustainable or not or whether that’s going to be—but they’ve been getting a lot of benefit, if you will, from the commodity price decline, and where it is particularly oil. So the debt, I would argue, is—it is significant, large, under-recognized, if you will. But primarily, I would argue, at the city level. At the national level it’s not. I’m not worried about it.
There’s pension issues with an aging population that we need to worry about because that’s not well-developed. So I worry about that liability, if you will. It could be coming down the line. I don’t know if we would consider that a debt, but it’s a—it’s a problem. The only thing I would say is you have a very deep, technocratic group of leaders, right, that are—that are looking at this. They’re not not aware of the debt issue and how they’re moving—they’re not not aware of the municipal challenges. The question is trying to—how do we get these experiments, which is what they’re trying to fix it, to be able to then replicate it across other places. That’s what’s being worked on.
And the other thing I would just say is I’d, again, at the risk of drinking the Kool-Aid too much, I think that Xi Jinping is someone who I personally think is looking at, you know, his legacy, if you will, at sort of Mao Zedong, Deng Xiaoping, Xi—and it’s a 30 year—he has a 30-year horizon. Even though he will only officially be in power for eight years, you know, because of the role that former presidents play in the group I think he’s thinking of a long game. And so he’s totally comfortable doing the restructuring now no matter what it does for—because he’s playing a longer game. That’s a feeling I have. I haven’t talked to him. He’s not told me that or anything. But that’s my sense, is that he’s playing a long game.
So he’s doing some—he knows what this anti-corruption drive is doing to growth. And some people have said, saying the SOE challenge is taking a 1 percentage point drop on GDP because of what’s happening. But he’s comfortable with that because you got to get it—he’s going to consolidate power. He’s got to reform the party. He’s doing a lot of things now because he has a longer view. So I think that’s a—which is very different from what we have with a lot of our political leaders, right, in terms of how we think about it.
GALLAGHER: Yes, right here.
Q: Thank you. Dom, first congratulations on the work you’re doing. In typical McKinsey style, you’re doing it low-key, no ego, selfless, McKinsey name isn’t all over the place. And of course, you got that from your mentor Ron Daniel. But it’s great to see in a world filled with egos today the kind of work you guys are doing.
So my question is—
GALLAGHER: Paul, can you just introduce yourself.
Q: Oh, I’m sorry. Paul Fribourg with Continental Grain.
So my question is, McKinsey is known around the world. It’s probably the best firm at hiring and training of great talent. And could you take that knowledge and set up some kind of an international organization that could go to these underdeveloped countries and help select the best and the brightest, set up programs to train and develop future leaders, whether they’re business leaders or political leaders, and jump-start the process locally by bringing the best and the brightest in key positions? Yesterday there was an article about the Steve Schwartzman Scholars in China. But if you could—with your knowledge at McKinsey of how to do this, how to select the best people, how to put training programs together. Not done by McKinsey, but with your knowledge and know-how. Could that make a difference in these countries, to take that young generation and give them a chance?
BARTON: That’s a—well, thank you, Paul, for your comment. I mean, I do think there’s more—and this is where, for example, one of the things we struggle with at McKinsey is innovating. We’re a very conservative place. I was talking about our internal—so we’ve been trying to do things differently. And one of the ideas from our—we have an Africa practice—saying, you know, that maybe one of the best things we could do there, even from a client service point of view, is to establish a leadership school—exactly, but more like business—because that would move it. And if we—to your point—when we opened up our office in Kenya, I remember the Kenyan president was not, frankly, so much excited or disappointed that we were going to help them companies and so forth, as he said many people will then join McKinsey and leave and they’ll help do things for us. That’s what we see as the benefit, frankly, not what you do.
So I do—I think it’s a very good push. And I do—one thing we talked about before, we have an effort going on, we’re calling it generation, which is to try and create sort of jobs for people. And we’ve taken in about six countries—we take people who just have high school education and put them in a six-week program in an area where jobs are required. So it’s—for example, health care services is a big one. We’re doing one in Pittsburgh. But in Nairobi, where we’re doing a lot of this work, it’s actually around—it’s retail, it’s logistics. And in six weeks, you can train people who are able to then be job ready. And employers like it because they actually stay longer, they—and it’s not learning the hard skills. It’s the soft skills. So I think there’s—a you’re right. It’s a good push. There’s a lot more we could do. And I think other organizations as well, as you said, because that’s the gap.
One experiment we’re thinking about doing is in Myanmar. There aren’t enough businesses for size for us to be able to work there. So an experiment that we’re going to take is to take 10 of our young people, we call third-year business analysts, to go—they’re very talented people—to basically go there and build a business. McKinsey doesn’t own businesses. We’re not—to build it, and then it would have to be sold or taken over by a business that’s actually there, because the challenge is there’s not enough entrepreneurs, if you—or sort of people who want to build this. We’re looking at one in actually health care services. And, well, I’m just ruminating on what you’re saying. I think there’s a lot of opportunity.
GALLAGHER: I’ll just add quickly, the countries you’re in with the Generation Initiative, it’s USA, Mexico, Kenya, Spain, India, is that right?
BARTON: Yeah, that’s right.
GALLAGHER: Yeah. OK. We have a question right here.
Q: Thank you very much. Mahesh Kotecha.
I’m actually in finance, but I’ve been reading a book about the city you mentioned, Dadaab, on the border of Somalia and Kenya. It’s the largest refugee camp. And you mentioned 60,000—60 million displaced people in conflict zones. And my question to you is have you looked at supporting efforts to take care of and resettle people such as this, who very often become a political football between the conflicting parties, such as you see currently in Syria. The conflicting—the protagonists or the antagonists are using people as—you know, killing them, essentially, keeping supplies from going there. How do you help these new cities that are coming up that are settlements—that are temporary settlements to become more effective, more efficient, and be less politically hostage to the parties that are contending for power around them?
BARTON: Well, we’re doing some things. There’s others, again, like Mercy Corps, the IRC, and others. Actually, the IMF, Christine Lagarde, is also someone looking at this in a significant way. So I don’t want to overplay what we’re doing. But what we found is that there’s a lot of, if I could call it, bureaucracy that’s required to get it to work. So even just having a mayor. You know, it’s not that these—one in particular in Jordan we’ve looked at. You know, you have to have—you actually need a mayor to be able to get it to operate. Then you need the departments to be able to move it forward. And we had one request, which was to actually—from Christine Lagarde, saying, why doesn’t someone go and become a mayor? Get a person, one of your partners, they should go and do that. I don’t know if we’d be qualified, but I think there are ways to be able to find people.
What we focused on are pieces of it. So, providing, like, the education requirements in some of these places. And I don’t know enough detail about the one in Kenya, but I do know a couple in Jordan. I mean, you need to develop a school system, right? And this is where I think the private sector can play a role. Where we’re trying to play a role is how do we provide good K-12 education for these kids who are there basically doing nothing. There’s nothing that’s provided. How do you—what curriculum do you put in place? Where do you find the teachers? How do you train them? That’s needed for health care. It’s needed for police. So what we’ve been focusing more is on those capabilities as opposed to the overall leadership. And I think there’s a need for overall, if you will, leadership. And there’s a lot of people that can—that I think could play a role in that. Because I agree, I think it’s a—you know, the gang—there’s gang violence in these refugee camps that actually is not even related to factions, if you will, of political—it’s just what happens in a city that’s not managed well.
GALLAGHER: Right here.
Q: Thank you. Merit Janow, Columbia University.
I guess the obvious question is how are you partnering with the great universities of the world that have so many faculty who are working on just these same issues?
BARTON: We could do way more. The one we have been—and that’s more from the U.K., as I’ve been primarily based in the U.K., I’ve just moved to New York—but is actually with the Blavatnik School in Oxford. Ngaire Woods has been very much part of the program, because there’s a sense of—A, there’s a lot of great research, thinking, experience that can be tapped into. But it’s also a great meeting ground, if you will, to get people together. So convening people through the universities has actually been a very helpful part of it. And the universities are more long term, in a way, too in the programs.
One of the conflicts has been sometimes there’s been—people want to do research as much—so it’s more about the research as opposed to what I’d say the immediate here and know. That’s where some of the—there’s some conflicts at times. We’re saying let’s get going, they’re saying we’re not really sure if this fits our research agenda or the qualifications of where it is. But I think universities are definitely a big part, and haven’t been tapped into enough, you know. But there are people working on that.
GALLAGHER: We have a question over here. Let me shift so I don’t ignore this side of the room.
Q: Hi, Rob Radtke with Episcopal Relief and Development.
I’m interesting to understand how McKinsey or how you calculate the impact of climate change on refugee migration flows and as underlying causes of some of these conflicts.
BARTON: All right. We haven’t done any specific sort of calculation, but it definitely, I think, is a driver of it. One of the—I saw this with ignorance, but it was just a comment I heard from one of the people that we’re working with in the Jordanian refugee camp. The argument was that actually the instigation of the Syrian crisis, you could argue, was climate change, because what you had was a drought—a significant drought occurring in the agricultural areas. There was a very significant migration of people from the agricultural areas to the cities. There then was—when the drought went away, there weren’t enough workers to deal with. So you had—you had food price inflation. And that—because what this person basically said was—and I forget—I know this is on the record. What he said, I’m going to say it this way, is Assad has always not been a—has been a bad guy, if you will. So why did it just—why did it boil up now? He would argue it’s because of—it was—sort of the trigger was that.
So I do think, you know, droughts and lack of water, these things cause crises. One other comment I’ll just make on it—I haven’t mentioned it here in this session. We were involved in the stimulation program that China put in place in 2009. We were given a very tiny sliver. I kept saying in a McKinsey way, we need to see the whole picture. You can’t—and he said, it’s none of your business. And our job was to figure out whether you could sell more televisions by cutting the price by 25 percent. And these were just in tier three and tier four cities, so it was quite a focused thing. Do you cut the price by 25 percent or keep the price the same, and then the person goes to the mayor’s office and gets a 25 percent refund? That was the very—and I kept saying, look, we need to see the whole picture. This is none of your business.
So we did the work. I was all excited. I actually went to present this to the NDRC. And I said, you know, the answer in this is you keep the price the same and people go to the mayor’s office because they feel like they’re being given 25—and they’ll spent more. And we went through it. We were all excited. And I said, now can you tell us—we now—and they said, no. We’re not going to tell you anything about that. And then he looked at me, and I’ll never forget, and he said: If you studied Chinese history—because I said I’m worried about, you know, if the consumer class doesn’t keep consuming we’re going to have a crisis in China.
And he said: Have you really studied Chinese history? And I said, I think I know a little bit. And he goes, I don’t think you do, because if you did you’d notice that all of our crises in our 5,000 years occurred because of food price inflation. And whenever food prices go over—I’ll never forget—he said—I don’t know why he said it—14 percent, you will have a crisis because you can’t control hungry people no matter what guns you have. And that’s always registered in my mind about—when I think of the importance of food security and where—and that’s just so vital. So again, it’s a long way of saying I do think it’s a factor. And I think in many—again, North Africa, Mali. You know, I don’t think that is driven by climate change so much as just—as religious, you know, political challenges that are going on. But I think it’s a factor that we’re feeling the effect of.
GALLAGHER: Fascinating. Right here.
Q: George Rupp, Columbia and International Rescue Committee.
You’ve mentioned a number of long-term camps, and focused in particular on the requirement for education. The International Rescue Committee has been involved in every camp you’ve mentioned, including Dadaab. And we do have education programs there. There’s a major variable that has to do with whether there are good educational programs, or health programs, or others, or aren’t. And that’s whether the funding targets that the U.N. sets are met. One of the reasons for the tragedy in the camps that are housing Syrians who have fled to Jordan as well as other neighbors, is that funding has simply not been met. So the U.N. has 10 percent of its requested funds have been donated by member countries. I’m wondering whether you could have McKinsey inspire the corporate sector not to give money, but to lobby relevant counties to meet the needs that the U.N. has set, because there is no way to have youth who are unemployed, uneducated, simply sitting around, become productive unless there’s enough of an investment to build an infrastructure.
BARTON: The push. I mean, I think it’s a—I do—as you were talking, what was going through my mind is I think it’s more a—it’s this issue of the public good or the commons, if you will. And I think we are in a world—I guess why I’m personally interested is we—it isn’t an issue—these issues aren’t things you can just isolate now into a corner of the Earth that no matter how you feel it doesn’t affect you. It’s affecting all of us. You know, the Syrian refugee crisis could lead to the U.K. leaving the EU. It’s a driving—you know, the interrelationships of all this going on. So I think it’s in the interests of corporates to—we have to play some role. And I do think it’s going to cost more to be able to make this to work. And if we can deal with the earlier part of it, it will cost us less than if we deal with it when the crisis hits.
So I would subscribe to what you’re saying, but I think there’s something more broad here which is if—this is where I think everyone has to—we all have to be involved in some way, or we’re all going to pay the price over the long term on it. And we’re seeing it, I think, now. And I think more and more businesses—it’s more relevant every day, not just because of the news, because it’s actually affecting our businesses.
GALLAGHER: I saw a hand back here. Yeah.
Q: Thanks. Rachel Robbins.
You’ve talked a bit about China. Can you talk about other emerging markets? And given the China slowdown, the commodity fall, the currency volatility, there have been a lot of headwinds. Where are you and your clients seeing opportunities in the near future?
BARTON: Yes. It’s a good—I like how you’re saying it too, because I think emerging markets is almost too broad of a term now, because there are quite a lot of differences. And I think even the BRIC notion—I’m not so sure how relevant that is right now. But just more to answer your question, I think if you take the non-BRICs, I think Indonesia remains a place. Even though it’s a government that is not very effective right now, they’re struggling to be able to get things done, the strange thing is you still have this very strong underlying consumer growth that’s going on there. And you look at the, you know, auto, retail, financial services, it’s a country I would focus and spend time. And it’s been fairly consistent over the last 15 years. That’s a country we focus on.
India, but I wouldn’t look at India as a whole. I think you have to look at it in terms of its regions. I think India, even though they’ve frankly adjusted to accounting the growth rates, it looks higher than it actually is on a comparable basis from before, there are regions in India that are doing very well. And India’s a place I would—I think it’s a government that’s struggling not because of their intent, but because of the challenges of making change in the place. But I think that that is a place that’s going to move. So India is a place I’d look at. Nigeria is also one. Again, I always make the comment, it’s not the most straightforward of places, but again, it’s—you know, more babies were born in Nigeria this year than all of Europe combined, right? It’s a young population. If you’re in the diaper business, you better be in Nigeria or you’re not going to—(laughter)—you know what I mean? So it’s a place I would be focusing on.
East Africa. It’s interesting to look at the integration going on between Kenya, Uganda, Rwanda. And they’re trying—there’s some attempts with Tanzania. But if you are even thinking about how do you railway lines if you think about it as a region as opposed to countries and so forth. And I think there’s a push there. And then, you know, South America, again—I was going to say Argentina. I worry because it’s had 75 years of disaster, you know, to move through. But the new leadership I think in Argentina, at least from what we see with the activity and the work going on, there’s some very interesting things going on in Argentina. There are other people here who may have a deeper sense—I know you do, Paul—of where it is. But I think our hope is that the governance—a lot of these are around governance issues and to whether they work.
Those are countries that we probably think that there’s some move—one area of the world which I think we’re not paying enough attention to in the West a lot is the silk road. I think we’re way underestimating the investment and the growth that’s going to occur. These are in the areas going from, you know, the western part of China, Turkmenistan, Uzbekistan, Kazakhstan. These are areas I think that are going to—there’s going to be a huge amount of investment being put in by the Chinese. It’s interesting, Saudi Arabia is also looking at what role they’re going to play in terms of investments in those parts of the world. And that’s a—I think there’s something like 81,000 kilometers of railway are going to be built on the silk road over the next seven years. And generally when the Chinese say they’re going to build something, they do it, right?
But that’s a—you know, with ambitions, and this is maybe getting crazy out there, to have a railway link between Beijing and London that would take two days if you had a high—fast train. That’s the kind of thinking that’s out there. But I don’t think we’re spending a lot of time thinking about it. I couldn’t pick a particular country on that silk road, because I just don’t know them enough. But I think it’s an area we should look at. So those would be the ones that I’d look at.
GALLAGHER: Well, we’re just about out of time. And I think that actually opportunities is a really great note to end on. So I want to thank Dom for being here. I’ve taken so many notes, so this has been very helpful. And it’s been a pleasure talking to you. And thanks to all of you for being here today. Please join me in thanking Dom. (Applause.)
BARTON: Thank you.
This is an uncorrected transcript.