Volatility

Volatility is clearly one of the critical issues at hand: the very nature of this threat provides for uncertainty. Any new development in the war against terrorism will throw the markets into a fairly volatile environment. Second, what we are learning is that there are primary impacts, but more importantly secondary and tertiary impacts. For example, everyone knew immediately that the airline and hospitality businesses would be affected. The recognition spread to aircraft and its key subsystem manufacturers such as Boeing, Honeywell and GE. Very soon the impact spread to hotels, cab companies, food service, etc.

We are reminded immediately of the extreme level of interdependency in the economy. The interdependency spreads across borders in the context of supply chains, money flow and travel. For example, if the United States imposes new restrictions on travel, it does not just affect U.S. airlines, but all airlines coming into the United States. And it is not yet clear how volatile the interrelated sectors will be on a global scale.

Economic Cost

Stock markets are a good indicator of the immediate business impact. People look at the cost of rebuilding New York as the economic cost. That’s not it. More than buildings, a significant portion of the intellectual capital of this country was lost. The stock market, as the barometer of the real economic cost estimated it at a trillion dollars. The stock market is factoring in not only the physical assets that need to be replaced, but the risks associated with markets in terms of growth, innovation and stability. I expect the stock market, for quite some time, to be continuously recalibrating the economic cost. You could argue that it has overdone it, or you could argue that it has not, but the ups and downs reflect the impact on the overall economy.

The New Globalization

The huge loss that the U.S. economy has incurred as a result of the events of Sept. 11, gives rise to an extraordinarily interesting paradox: One can look at the terrorists — totally networked — and come to the conclusion that nations don’t matter and governments don’t matter. These are people all over the world, not answerable to any government or to any nation. The paradox is that the response to the problem suggests exactly the opposite: governments do matter, nations do matter and diplomacy does matter.

This is the next paradox in globalization. On one level we are talking about the decline of the importance of the nation-state with the spread of the Internet, where consumers everywhere all look alike, where size and resources do not matter. In this paradigm it is your imagination and your ability to leverage information that matter. Simultaneously governments, diplomacy and nation-states obviously still do matter. We need to somehow not count either one out. While nation-states and governments do matter, they cannot solve the underlying economic problems that provide a fertile ground for breeding terrorists. Large, global companies have to act in concert with governments, NGOs and others.

Pragmatic Capitalism

So, how do we run a company in this new and unsettled global environment? Three things are extremely critical. First, reasserting the importance of values. You cannot cope with all of this uncertainty without a deep commitment to values, especially values that relate to integrity, diversity, creativity, and knowledge creation within the enterprise.

Second, all companies, especially large companies, need to rethink the idea of a more pragmatic capitalism. Can you have 4.5 to 5 billion people disenfranchised and excluded from the economic benefits of capitalism? The seeds of terrorism cannot survive without a large number of people who have lost all hope.

As I illustrated in last month’s article in siliconindia, “The Bottom of the Pyramid,” large firms, especially global firms, should view the very poor as a market for new products and services and as a catalyst for innovations.

The focus on the bottom of the pyramid becomes more important today than ever before. We need to focus our attention on engaging the poor and the disenfranchised, creating a market out of the poor and offering hope of a better life for the less fortunate. All large companies in their charters need to make an attempt to become more inclusive and not ignore the bottom of the pyramid. Ironically, fundamentalists understand the frustrations and the aspirations of the poor better than large corporations. It’s time to rethink a new Marshall plan.

I do not want to give the impression that poverty is the sole cause of terrorism. Most terrorists involved in the WTC attack were from well to do families from rich countries. However, poverty around the world breeds discontent which terrorists — from rich and poor backgrounds — exploit.

Economic Freedom

The broad question that remains unanswered is a critical one: One of the defining elements of the last 50 years is the global yearning for political freedom. Technically, most of the world is politically free from colonial control. While colonial control has withered, an even more virulent form of political subordination, imposed by governments on their own people, has emerged as a problem in many parts of the world. While political freedom is still a problem in a large number of countries, we do need to think of the next round: the fight for economic freedom and economic security. Should access to economic opportunities be as fundamental a right as basic political freedoms themselves? That’s the big question that the events of Sept. 11 have raised.

In the context of India, which has fostered democracy and political freedom, one must focus on economic freedom. Commitment to universal primary education and a guaranteed quality of life (i.e., water, health and decent living conditions) are critical ingredients to create economic opportunities for the poor and disenfranchised.

Why is it that there are more debates about subsidizing Air India than ensuring primary education for all in India and making it a global model of efficiency and effectiveness? If you take all the subsidies given to the public sector in India every year, it is more than what is required for providing high-quality universal primary education. So, the lesson for India, gleaned from the attacks of Sept. 11, is that ignorance, poverty and loss of hope are the breeding grounds for both dictators and terrorists — the worst enemies of a free society.

Let’s not forget what allowed Hitler to come to power. The depression, unemployment and a loss of self-esteem among common people allowed Nazi propaganda to unite people in hatred of the Jews. Hitler was the last big terrorist. For 50 years we have been very negligent of the poor. It is time we come to terms with poverty, ignorance and economic exclusion — the fertile ground for fundamentalism and terrorism.

C.K. Prahalad is a Harvey C. Fruehauf Professor of Business Administration at the University of Michigan Graduate School of Business, Ann Arbor. He is also Chairman of Praja. His 1990 co-authored essay on "core competence" is the Harvard Business Review's most re-printed article ever.