GeoLegal Weekly #24 - Bright Spots
This week it's all good news - from economic resilience to corporate and law firm intra-preneurship. There are even 2-way pagers and an insurance claim drafted in the style of The Notorious BIG.
I’ve been making the rounds with a new keynote that lays out the different ways politics and technology are simultaneously undermining rule of law and threatening to rewrite exactly what we think the law is and will be, with significant risks for citizens and companies. The upshot of this is that companies are going to face new, different and potentially much higher volume of legal risks than at any time in the past. At the conclusion of my keynote at LegalESG, the first question I was asked started off with “well, that was depressing.” A number of people came up to me at lunch and said something similar. Good thing I got a chance at optimism when joining a panel with Paul Clements-Hunt (who coined the term ESG), David Alfrey (who won the LegalESG Young ESG Lawyer of the Year award) and Pamela Cone, who chaired the conference. As you can tell from the photo, we don’t look depressed.
That’s because there’s real reasons for optimism. Yes, I write a weekly focused primarily on geolegal risk. But one person’s risk is another person’s opportunity. When I was a political risk analyst advising hedge funds and large global corporations it always struck me how instinctively political analysts focus on downside risk while their clients look for opportunities. Telling a client to watch out because there’s a lot of uncertainty due to regulatory change misses the fact that such changes could be a really bad thing for that customer or it could be absolutely splendid. For instance, if the customer is miles ahead of their competitors and can afford to comply with new regulations while their competitors will all be held back - well, that’s a good scenario. The shutting down of shipping channels could create material advantages for companies that have invested in redundancy and optionality when their competitors haven’t. An unpredictable and bombastic president coming into office could still result in lower taxes, massive subsidies and other protections.
In that vein, I’ll step back and give a few reasons for optimism as we look out at a world that may, on a day to day basis, feel like it’s falling apart. I’ll cut across how the world is doing materially better on pretty much every economic and standard of living metric you can name; economic and market resilience in the face of geopolitical turmoil; how AI is sparking intra-preneurship in low innovation industries; the fact that we’re about to get a huge AI productivity boost; and some thoughts on energy transition.
What a Wonderful World
The world is complex and often depressing. But if we take a historical look at where we are today relative to 30 or so years ago, literally every outcome we care about is dramatically better at a global level than it was in 1990. The last three decades show how much prosperity can be created under tough conditions, and there is plenty of headroom for further progress on every metric of human flourishing. Where roadblocks and risks appear, humans are increasingly showing resilience and creativity. To take a recent example, Houthi rebels appeared to have a grip on a major shipping artery, and military solutions didn’t appear to be working. But markets are adaptive and people are creative; global shipping has continued almost uninterrupted.
So - for evidence that things are better than ever, I’ll focus on the 1990 to 2024 timeframe, since it illustrates the progress made within the adult lifetimes of today’s senior leaders. The world was good in 1990: With the Berlin Wall freshly down, free markets were doing their thing. The data below, all from The World Bank in constant 2022 dollars, shows the effects despite, like today, wars in Eastern Europe (Yugoslavia) and wars in the Middle East (Gulf Wars, War on Terrorism) not to mention many other places.
The global economy produces three times as much value per person as it did in 1990. That year, per capita GDP was about $4,000 in constant 2022 dollars. By 2022, it was $12,687. The value growth is even more dramatic in Purchasing Power Parity (PPP) terms: in three decades, per capita incomes almost quadrupled from $5,300 to $21,500.
Per capita GDP is a ratio involving two things, and in 1990 the near-universal assumption was that the “per capita” denominator would far outrun the “GDP” numerator. Demographers did not predict what would happen next. It is true that inverted demographics - South Korea, Italy and others are often mentioned - are a problem, but they are nowhere near the catastrophic problem we expected. There is reason to be optimistic that we’ll creatively respond to our demographic challenges, perhaps by fully harnessing and integrating favorable demographics across the 54 countries in Africa (as Hence has done with our pan-African engineering hub in Rwanda).
Fundamental economic growth comes from the adoption of fundamental technologies - like electricity. In 1990, 73% of people had electricity in their homes. By 2022, 90% did. Increased GDP increases life expectancy, too, as people score more victories over malnutrition and treatable diseases. In 2019, global average life expectancy was 73 - eight years higher than in 1990. Covid shaved two years off of life expectancies - which is to say, during the pandemic we were still six years better than we were in 1990.
The thing that moves life expectancies the most is reductions in child mortality. In 1990, a stunning one in ten children born globally would be dead before her or his fifth birthday. Since children in developed countries had far better chances, this really meant that in much of the world, a baby might have a 20% or higher chance of dying in her youth. By 2022, child under-5 mortality had been cut by 2/3rds, to 36 per 1,000 births. But we can - and probably will - do better. Japan’s under-5 mortality is currently 1.5 and continuing its asymptotic path towards zero.
More wealth also equals more education. Global literacy rose from 75% to 87% over the last 30 years. More wealth also increases gender parity; female literacy rose from 67% to 84%. Not yet equal to men, but much closer. And let’s not forget how backward things were as recently as 1990. Global “tertiary school” (for American readers: college) enrollment for women was a measly 12%. In 2022, it was 46% - an increase of almost 400%. Massive progress, and massive room to grow.
Increasing value in the global economy will generally involve greater global trade, and indeed exports as a percent of GDP grew from 19% in 1990 to 31% in 2022. Yes, exports dipped during the pandemic, but they bounced back instantly - as they did after the GFC in 2009. It may be that the world plateaus at around 30% - but this is still a lot of global exchange, and it doesn’t fit the narrative of the death of global economies.
All of this integration and improvement has created a massive demand for legal work and the experts that do it. While often we think about the need for legal work in risk or crisis scenarios, a boom in cross-country investment, transactional work, and new markets have lifted some of the biggest law firms to ever increasing heights.
Recent Economic Growth and Market Resilience
It’s all fine and good to say the era of globalization helped everyone grow, but that is only a cause of optimism if we think it will continue. In recent years, the world has suffered a number of shocks. There was a global pandemic of a scale no one could imagine. There are wars raging in Europe, the Middle East and elsewhere - the first of which caused an energy and agricultural supply shock and the second of which threatens an oil and shipping shock. But when you look at where the economy is today versus where we thought it would be post-pandemic, you can see that the global economy has suffered less of a shock than we thought it would - and that’s with all the geopolitical risk on top. Perhaps that’s down to the resilience and creativity point above - when the world shut down, we innovated better ways to keep everyone working online, for example.
In fact, US growth is past its pre-pandemic trend while other advanced economies, China and emerging markets more broadly are doing less badly than the IMF thought they would. People feel poorer amid significant inflation, but central banks have successfully kept inflation under control without tanking their economies. With the exception of a couple technology-concentrated banks, we haven't had much of a banking crisis. While we can note that lower income countries are still reeling from some of the pandemic shocks and higher interest rates, to see the global economy on such strong footing given everything going on in the world is a sign that the lessons of past currency crises and financial crises resulted in countries being more prepared to be resilient amid shocks.
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And, of course, AI driven optimism is keeping US stock markets at all time highs. Which sets us up nicely for the next bright spot.
Productivity Gains
The global economy is already starting to experience the next great productivity leap due to AI. While I spend a lot of time thinking about how this will change the world of law and broader professional services, the reality is that in the short-term this is going to be a boon for market participants. An optimistic view of AI is that it doesn’t really get good enough in the near-term to replace humans - in fact it powers humans so one lawyer does the work of two and does it better than those two human lawyers would have done in the first place. And that humans play a key, employable role training AI and getting their knowledge into related systems.
Now repeat that dynamic across every sector in the economy and we have one teacher doing the work of two; one air traffic controller doing the work of two; one city planner doing the work of two and so on. It’s not hard to see how this increases productivity across the whole economy, with much more potential output per employee enabling us in the first instance to achieve more and do more (before potentially assessing whether humans are required.)
Some people see this as an obvious precursor for the collapse of employment in fields like law and accounting. As my colleague Dan Currell wrote for Legal Evolution, we don’t have to see it this way. One analogy often used is to fields like agriculture, where a hundred years ago around half of all people worked in food production - and now it’s less than five percent. This is a generally sensible analogy, and it describes a common economic phenomenon. But there’s a critical distinction. Some areas of the economy – and agriculture is a good example - have a natural upper limit to how much consumers can consume. We have done our best to consume more calories, but we simply don’t need more food production at this point. Many families have two or more cars, but there’s a limit to how many more we can use.
In fields like law, however, we are nowhere near an upper boundary to how much value can be consumed. The vast majority of potential legal work is never begun, because it is economically implausible to do the work under current conditions. Anyone who’s ever been involved in a major acquisition knows that the due diligence carried out is a fraction of the whole. Few people, even in rich countries, ever retain a lawyer for a personal matter except in the most desperate circumstances. Most people don’t have a will; most small companies have only the most basic legal arrangements in place. Any in-house lawyer knows that many legal arrangements within large companies aren’t nearly as tight as they should be, since the full legal tapestry of a multinational corporation is almost infinitely complex. We take for granted that it can’t all be done, so we do what we can. In that sense, lawyers are still in the pick-axe era. If we give every lawyer a jackhammer, we will only begin to do all the legal work that could or should be done.
Now, there’s a real question about whether ALL that work can eventually be automated and whether customers will satisfice with AI solutions that can not only handle traditional work but also this more complex latent work over time. And it is worth remembering that even if the aggregate amount of work increases, there will be massive distributional effects that leave many of today’s successful practitioners out of a job. But today is a day for optimism - and the optimistic case is compelling - so we won’t go deep on the downside.
Taken together, the aggregate effects of a new productivity boost across the economy will be stunning, which is why markets are where they are while missiles are flying. Of course, we are still dealing with post-COVID debt hangovers that are getting increasingly expensive to finance for many countries. The positive take would be that this productivity boost to growth will enable countries to grow their way out of their accumulated debt (with obviously different stories depending on the particular country).
AI and Intra-preneurship
The potential for economic and productivity growth due to AI can be helped or hurt by the willingness of businesses to adapt. That is to say that as legal leaders, the world may get better around us but our contribution to that world may be underwhelming if we’re not willing to change. AI has done something to shift the mindset of legal in a way no other technology has done before. This might seem surprising but perhaps it makes sense.
One of the surprises of this AI revolution has been that it has come in an arena that many humans (especially highly educated humans with a training in the humanities) believed would be the last that machines might master–using language discursively in a way indistinguishable from the way that a human might (i.e., the Turing Test). One could (and probably should) argue that this facility equates to neither “knowledge” nor “intelligence.” But that might matter less than the fact that the extraction of inferences from language and a reciprocal production of language that leads to a desired result is not just something machines can do; it’s also something lawyers have been doing for centuries.
Technological change is nothing new nor is the creation of new business models in legal. But digitalization and automation are slow processes. Lawyers didn’t want to use email. A few companies today still insist all legal work be done on premises instead of leveraging the power of the cloud. Change management and the nature of technological change in the past made it hard for lawyers to really understand the potential of technological changes that depended to some extent on network effects.
Fears of things like email may look silly in retrospect but it is actually pretty hard to know what technology is the winner - and it can be expensive financially and professionally to invest in losers. After all, I bought a two-way pager in 2000 only to find out it was useless because I was the only one. If I had led a digital transformation of an entity under the assumption this tech was a winner, it would have been a lot more painful. But I didn’t just stop at the two-way pager - I continued to experiment with new technologies until I found ones that work well for my use cases.
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And AI is a winner. Chat-based generative AI products are scaling to 100 million users faster than you can say “wait a minute, was this trained on copyrighted info?” Technological luddites are gobsmacked that they can plan retirement tourist agendas with a few queries into an LLM. In part because the technology “feels” human and in part because of the many risks of falling behind, as I outlined last week in GeoLegal Weekly #23 - Four AI Wars, everyone’s imagination is open to the possibilities.
This is leading to a willingness in legal to embrace technology like never before. When I told potential investors four years ago that Hence was focused on the legal sector, they thought we were crazy. Lawyers don’t adapt. Law firms don’t value or invest in technology. Legal is a corporate cost center that can’t innovate. Today, our focus there looks prescient.
That’s because law firms and companies are making real investments in harnessing the technology, creating new functions - like legal operations or legal technology - that are focused on driving change. While we often focus on entrepreneurs like myself who are trying to build new solutions, I actually think the bigger shift in legal is that this new technology equips intrapreneurs to move their entities along in new ways. Imagine being the first person who explained to their GC that all data should go in the cloud - the conversation probably didn’t go very well because it’s pretty esoteric.
But now you can sit down with the GC and show her that AI is not only capable of drafting insurance claims, but that it can do it in the style of The Notorious BIG. While probably not your core use case, now you’ve at least got her attention. Could you do it in the style of a particular judge? How about in the style of claims that usually win? How about in the style of claims that usually win before a particular judge?
That may seem like a ridiculous example but in reality the accessibility and synthetic creativity opens people’s minds to innovation in new ways. This enables internal champions to have an audience to make the case for transformation in ways they never could have before. Then it becomes a question of actually evaluating the cost of technological transformation, not about suspicion of technology. I’m an optimist that the risks and cost of such transformation are worth it - I’m staking my career on it.
Access to Justice
Finally, as I’ve written elsewhere, breakthroughs in technology finally allow us to imagine solving things like the justice gap. Most cases in the US have at least one side unrepresented by a human lawyer, which leaves self-represented folks to rely on Google Esq or Reddit Esq (i.e. whatever legal knowledge they can find in the universe for free). AI tools are going to dramatically enhance the ability of individuals to understand their legal options and navigate the legal system, significanlty improving their access to justice. Technology is going to enable people to pursue claims that are rightfully theirs to pursue (in the voice of Biggie Smalls, should they so choose), where perhaps they might have simply allowed themselves to suffer harm. And as more professional lawyers are freed up from the tedium of day to day lower-level tasks, we can be optimistic that they will spend more time on pro bono work.
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Thanks to my colleagues Dan Currell for the historical economic survey above as well as thoughts on productive lawyers, and to Karthik Sankaran for insights on the markets.
-SW