Inside Power, Inc.

Taking stock of Big Business vs. Big Government.

The sales revenues of the world's largest company, Wal-Mart Stores Inc., are higher than the GDPs of all but 25 countries. At 2.1 million, its employees outnumber the populations of almost 100 nations. The world's largest investment manager, a low-profile New York company named BlackRock, manages $3.5 trillion in assets -- greater than the national reserves of any country on the planet. In 2010, a private philanthropic organization, the $33.5 billion-endowed Gates Foundation, distributed more money for causes worldwide than the World Health Organization had in its annual budget.

The statistics are eye-popping, but this is no parlor game. Over the last century, the world's biggest private-sector organizations have come to dwarf all but the largest governments in resources, global reach, and influence. At the same time, even wealthy countries are now struggling with overwhelmed bureaucracies, budget crises, and plummeting confidence in government. And governments everywhere are compromised by the limitations of their own borders in an era when the issues that affect their people are increasingly transnational.

Striking the right balance between private and public power is the fundamental challenge of our age. Find the sweet spot -- prudent regulation, empowering citizens to compete, fostering economic dynamism, and fairness for all -- and your society will thrive in the 21st century. Get the equation wrong, and the results will be measured in social instability, diminishing prosperity, and declining ability to shape your destiny. Choices that seem entirely domestic in nature will have massive geopolitical consequences.

In the United States, it is the defining political issue of the moment. Is government too big, a burden to society, and a threat to individual liberties? Or is it too ineffective a protector of average people, co-opted by big business and moneyed interests? Is it contributing to the general welfare, or is it institutionalizing inequality, serving the few -- the 1 percent -- rather than the many?

In Europe, such controversies also roil furiously but are joined by an intense argument over how much power individual countries should pass on to a collective European Union, and about whose interests are best served by such collaborative governance -- a departure from the traditional idea and role of the nation-state. Ask a German and a Greek this question, and you'll get vastly different answers. 

In China, the public-private tug of war is visible at every level of a society reinventing itself at such a breathtaking pace that stability and growth often seem as irreconcilable as they are essential to each other. It is a challenge faced elsewhere in the emerging world, from the pitched battles between Russia's oligarchs and its political leaders to the ongoing social tumult in the Arab world, where the uprisings of the last year have been as much against cronyism and governments that have served the economic interests of elites as they have been for individual freedoms and opportunities.

We must get this balance right. A decade and a half ago, the United States was celebrating the triumph of American capitalism and the defeat of state power by the forces of the marketplace. It was a victory dance on the graves of communism and socialism. But it is clear today that the party was premature.

Companies Aren't Just People -- They're Actually Whole Countries.
Employees vs. populations.

We have since gone from a battle between capitalism and communism to something even more complex: a battle between differing forms of capitalism, in which the distinction between each is in the relative roles and responsibilities of public and private actors. As the freewheeling market model promoted by Washington is reeling from self-inflicted wounds, other approaches are gaining ground. Rising models are vying with one another for influence -- from Beijing's "capitalism with Chinese characteristics" to the "democratic development capitalism" of India and Brazil, from Northern European economies with strong fiscal discipline but also a strong public-private compact to the small state "entrepreneurial capitalism" of places like Israel, Singapore, and the United Arab Emirates.

In the United States and in other countries that have adopted the U.S. model, the sense that the heavy thumb of the economically empowered rests on the legal, legislative, and regulatory scales fuels complaints that the balance has tilted too far in favor of private power. Inequality has grown in terms of both economic outcomes and apparent privileges of a super-empowered elite within -- and beyond -- the law. Nothing has illustrated flaws in the American system so well as the recent financial crisis, in which a few big institutions shrugged off regulation, abused their freedoms, persuaded the government to bail them out (but not their victims), and then managed to forestall real reform and return to almost all the practices that got them in trouble in the first place. The result is a backlash seen in everything from Occupy Wall Street to nationalist protests against globalization. 

The world needs a new framework that reflects this new reality. Most countries have had so many of their sovereign prerogatives stripped away or diminished that their real authority is not what it once was. Take basic pillars of state power like controlling borders, printing money, enforcing laws, or projecting force. All have been irreversibly changed. Thanks to the Internet, modern transportation, and globalization more broadly, states can no longer see, quantify, or manage much of what crosses their frontiers. Only a few countries produce truly tradable currencies, while the quantities of privately issued instruments of value, like derivatives, vastly outstrip the world's supply of government-issued cash. Global companies now have the ability to shop venues when it comes to tax and regulatory regimes, simply shifting locales if governments impose legislation they don't like. And fewer than 20 countries have any real ability to project force beyond their borders for any extended period of time.

Meanwhile, a big company like ExxonMobil, with sales around $350 billion in 2011, operates in more than twice as many countries as a significant, wealthy country like Sweden has embassies. In 2010, Sweden's defense expenditures were about one-sixth of Exxon's budgeted expenditures. The energy behemoth has more free capital to distribute worldwide, plays a much bigger role in the economic lives of more countries, and mobilizes more resources to influence political outcomes than do the Swedes. Ask yourself: Which entity, Sweden or Exxon, probably has a greater impact on the outcome of global climate talks? On the adoption of environmental policies worldwide?

Comparing the sizes of companies with those of countries is a fraught business, with imperfect metrics, but consider this: The 1,000th-largest company in the world has annual sales greater than the GDPs of 57 economies. That company, Owens-Illinois, makes glass bottles; its sales exceeded $7 billion in 2010, more than the GDPs of Benin, Bermuda, Haiti, Kosovo, Liechtenstein, Moldova, Monaco, Nicaragua, Niger, Rwanda, Tajikistan, and dozens of others. In fact, of the world's 500 largest companies, according to Fortune magazine, all 500 would rank among the top 100 economies on the planet. (GDP is a complex, if misleading, value-added metric, and it does not directly compare with a company's sales. But the comparison does give a sense of scale.)

The phenomenon of corporate power is, of course, hardly new. The British East India Company ran the Indian subcontinent and managed one of the world's largest armed forces; Andrew Carnegie and Henry Ford built small cities for their thousands of workers, complete with employee housing and schools. Over the past century, however, the state-like roles of companies have grown and changed, becoming more common and more complex as multinational corporations themselves have grown bigger. Today's corporations often conduct something very much like their own foreign policy. They launch active political advocacy campaigns, such as ExxonMobil's lobbying to kill U.S. acceptance of the Kyoto Protocol. They undertake significant security initiatives, as in the company formerly known as Blackwater's defense contracting during the Iraq war. They also provide health care, training, shelter, and other functions that states ought to but can't or won't provide.

The result is societies that are profoundly out of whack, with far too much power in the hands of massive, often distant corporate entities that are only accountable, fundamentally, to their shareholders. Meanwhile, the public is seeing that the increasingly weak institutions designed to give them a voice are unable to meet some of the most basic terms of the social contract, as the issues that need to be addressed are effectively beyond their jurisdiction.

This is not a call for revolution. If the bloodshed, social experimentation, and ideological polarization of the 20th century have offered us one lesson, it is that extreme solutions do not work when we try to square public and private power. No society can flourish without a balance between the two. For some Americans, it may be unsettling to realize that we have lost some of our ability to influence how that balance is struck. But for the majority, the disenfranchised who make up today's 99 percent, the hybrid capitalism likely to emerge from the current competition in the global marketplace of ideas may well be a fairer, more sustainable alternative.

Herman Wouters/Hollandse Hoogte/Redux

Prime Numbers

Boomtown 2025: A Special Report

By 2025, 136 new cities -- all from the developing world -- will take their place among the world's leading urban centers. But these new engines of global economic growth hold some surprises.

More and more each year, we live in an urban world. Half the global population already lives in cities and generates more than 80 percent of global GDP. And each week, the urban population increases by more than 1 million people, an amount equivalent to adding seven Chicagos to the face of the planet each year.

Futhermore, the center of gravity of the urban landscape is moving south and east, and growth is increasingly coming from second-tier cities. Companies looking for growth and governments engaged in diplomacy, need to build their efforts on an understanding of this urban world at a more granular level. Country-specific thinking may no longer be specific enough.

The New Urban Leaders

On the face of it, the urban world might seem static. Today, 600 cities generate 60 percent of global GDP, and our research suggests that 600 cities will also account for about 60 percent of world GDP in 2025. Fifteen years from now, however, they will be a dramatically different set of cities.

The developed world boasts 380 cities in the current list of the top 600 cities, ranked by GDP. These cities account for half the world's total economic output; one-fifth of global GDP comes from the 190 cities in North American alone. Meanwhile, the 220 largest cities in developing regions contribute a mere 10 percent.

But the balance of urban economic power will be transformed over the next 15 years. One out of every three developed cities will drop off the top 600 cities list by 2025, while just one out of every 20 cities in emerging markets will lose their place in this ranking. By 2025, 136 new cities will have entered the top 600, all of them from the developing world.

Asia's Urban Rise

China will be in the vanguard of this new generation of economic dynamos, with 100 new cities in the top 600 including Harbin, Shantou, and Guiyang. India will contribute 13 newcomers, including Hyderabad and Surat. Latin America will be the source of eight dynamic cities that include Cancún, Mexico, and Barranquilla, Colombia.

Growing Up Fast

The population living in cities will rise faster than the population of the world as a whole over the next 15 years -- by 1.6 times faster. Yet this is not the major reason that cities are increasingly important to the world economy. Rising prosperity, measured by GDP per capita, is the key indicator to watch. In the developing world, cities will be enormously important new markets as they become home to new armies of middle classes with considerable purchasing power.

Kid Stuff

In addition, basic services such as education and clean water cost around 30 to 50 percent less to deliver in cities than in rural areas, and delivery is also more effective in urban areas. For this reason, the next generation of urbanites should grow up better educated and healthier, adding to growing prosperity.

People Power

Focusing on economic growth throws up yet another set of cities. The 600 with the largest contributions to global GDP growth -- we call this list the "City 600" -- will account for about 60 percent of global growth over the next 15 years. These 600 cities will increase their GDP by an estimated $34 trillion.

Big Spenders

By 2025, the emerging-market cities of this City 600 will be home to an estimated 235 million households earning more than $20,000 a year -- markedly more than the just over 210 million such households expected in the cities of developed regions. In other words, there will be more higher middle income households in emerging-market cities than in developed-world ones.

The Middleweights

It is a common misconception that megacities (with populations of 10 million or more) have driven this growth. In fact, many of these huge metropolises are already growing more slowly than the economies of their host countries. Today's megacities account for 14 percent of global GDP, but we expect them to contribute only about 10 percent of global growth from now until 2025. Meanwhile, they will lose share to their up-and-coming smaller cousins.

By contrast, half of worldwide growth over the next 15 years is likely to come from 577 middleweights -- cities with populations today of between 150,000 and 10 million. And 12 out of 13 new megacities will be in emerging regions -- seven in China alone. Across the world, we see 407 emerging-market middleweights contributing nearly 40 percent of global growth, more than the whole developed world and developing region megacities put together. The City 600, for example, will include around 230 cities that do not make it into today's top 600. All of these newcomers will be middleweights in emerging regions.

Many of these growth cities are not on companies' or policymakers' radar screens today. How many businesses are including Ahmedabad, Huambo, Fushun, and Viña del Mar in their strategies? How many consuls or trade-focused diplomats are based in these cities?

Rising Incomes

Despite these coming changes, many companies, and diplomatic efforts in support of business, tend to focus only on developed economies and emerging-market megacities. Up until now, this has made sense because this combination generates more than 70 percent of global GDP. However, those same markets will generate only one-third of global growth to 2025. Take the comparison between Wuhan in China and Auckland in New Zealand as illustration: Wuhan is likely to deliver more than 10 times the GDP growth of Auckland over the next 15 years, yet most countries have an order of magnitude more diplomats in Auckland than they have in Wuhan -- if they have any at all. India's Hyderabad will likely post five times the GDP growth of Krakow in Poland, but countries such as the United States have about the same number of diplomats in each.

New Demands

Taking a city-level perspective is important not only for trade, but also for understanding potential future political flashpoints. Revolutions start in cities, not in the countryside. In North Africa, the flames of political unrest have been fed by the stress caused by high unemployment in large cities, especially when combined with food price inflation. Rapid urbanization, without a commensurate growth in jobs, has the potential to create multiple potential flashpoints over the next 10 to 20 years. Foreign-policy strategists will need to understand which cities could enter the danger zone. Traditionally countries have been the unit of analysis for much of foreign policy; looking ahead, cities should receive a much greater level of attention.