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turnaround was near complete. A year back the annual
World Economic Forum meeting at Davos of political,
social and business leaders was overcome with gloom.
This year, most participants were complacent, if not
upbeat.
Last year's gloom was directly related to America's
seemingly unsustainable current account and budgetary
deficits that were widening because of a consumption
splurge induced by the wealth bonanza that a speculative
housing boom was delivering. To finance those deficits
the US was relying on inflows of the large foreign exchange
surpluses accumulating in countries like China and India,
who seemed to be growing wary of their excessive dollar
exposure. A dollar crash and the end of the American
bubble seemed a real possibility. If that did transpire
a global slow down and even recession could be the outcome.
Last year's gloom was attributable to the fact that
with the US unwilling to make the adjustments needed
to correct its twin deficits and the rest of the world
reluctant to take on the burdens of adjustment an engineered
'soft-landing' seemed an unlikely possibility.
Fortunately, the expected crash has not yet come, providing
more time to work out a solution. But the dominant mood
in Davos this year was to underplay the problem. Those
like Stephen Roach, the Chief Economist of Morgan Stanley,
who refused to argue that the problem had gone away,
were dismissed as perennial pessimists who never learn.
The lesson from the past year, it was argued, was that
while imbalances exist, they are not of the crisis-producing
kind. The unusual ''equilibrium'' in the global economy
was sustainable, even though it possibly needs correction.
In the end the battle was won by those like Laura Tyson,
Dean of the London Business School, who in noncommittal
fashion predicted that there ''was a good chance of another
goldilocks year'' – neither too hot nor too cold, so
that the world can muddle through with a reasonable
rate of growth and no calamity.
The perception of the temporal optimists was sought
to be strengthened by reference to the currently popular
choices as global winners: India and China. These two
countries are seen as the source of the solution in
two rather divergent ways. To start with, buoyancy in
India and China are expected to provide the demand to
spur global growth and substitute for the US consumption
splurge when it registers a much needed decline. Recently
released data establishes China as the fourth largest
economy in the world, which the Chinese vice premier
Zeng Peiyan promises will keep growing. "Over the
next five years, China's development will bring more
opportunities to the rest of the world," Zeng reportedly
said. "The total import of commodities alone is
expected to exceed $4 trillion."
This view was advanced forcefully by Jim O'Neill, the
chief economist of Goldman Sachs. Citing estimates which
showed that a third of total global domestic demand
over the past five years originated in the BRIC group
of countries (Brazil, Russia, India and China), he argued
that these countries would be able to cover any reduction
in consumption spending in the US. He is quoted as having
optimistically held that the world is today in a position
to ''cope with a US slowdown better than at any time
over the past decade.". In particular, growth based
on higher technology is expected to create more big
spenders in these economies who would generate the jobs
in the US and Europe to neutralise the effects of the
offshoring boom on developed country employment.
The second way, in which China and India, especially
the former, are seen as being able to contribute to
global adjustment is through the appreciation of their
undervalued currencies. Such adjustment would reduce
the bilateral trade surplus that China has with the
US by making its exports more expensive and cheapening
imports from the US. In fact, the US chose to campaign
for such a process of adjustment. According to reports,
when speaking at a panel session, the US undersecretary
of the Treasury for International Affairs, Tim Adams,
held that a big question for the IMF was "what
do you do with countries that are attempting to thwart
balance of payments adjustments"
As of now the managing director of the International
Monetary Fund, Rodrigo Rato, seems unwilling to fall
in line and serve as a tool for the international economic
designs of the US. "There is a trade-off between
our role as confidential adviser in our surveillance
work and our role as transparent judge ... I think that
trade-off is well balanced," he reportedly argued.
But this was not because he, and presumably his organisation
were not in agreement on the need for appreciation of
the Chinese yuan. It was because he felt that the Chinese
were complying. Noting that the IMF had been among the
first to publicly advocate a move away from a fixed
peg, he expressed satisfaction that China was moving
in that direction: "We like what they did this
summer, but they have to let it work."
In sum, the complacence generated by the unrealized
forecast from Davos 2005 that global imbalances are
likely to lead to a growth slow down is being used to
locate the source of the global imbalances problem outside
the US and transfer the burden of adjustment to the
rest of the world. Those who were calling for immediate
action, including from the US, were in a minority. Stephen
Roach reportedly raised a note of caution about ''a dangerous
degree of complacency,'' since ''out of complacency comes
the surprise that does most damage to global markets
and economies.'' But there were few takers.
Having set aside the threat of a global recession, the
focus shifted to the seemingly never ending potential
of new technology to deliver profits. According to official
Forum figures, among the more than 2,340 participants
from 89 countries, were 735 who were chairmen, chief
executives or chief financial officers of their companies.
Betting on technology to raise profits either through
innovation or by reducing costs through offshoring,
they exuded a confidence that strengthened the overall
air of complacency. Such confidence also came from the
belief that better performance in EU countries and Japan
and sustained buoyancy in China and India would spur
global demand which they could exploit with facilities
located at home and abroad. To legitimise the forecast
link between technology and profit, much was made of
the benefits that can flow from science to the rest
of the world, as for example by reducing the world's
oil dependency.
There seem to be others who are interested in a technology
focus. Beleaguered by a never-ending war in Iraq that
cannot be won, and days after the Davos meet came to
end, President Bush took up the baton in his State of
the Union address. Pointing to the threat from new competitors
like China and India and dangers of dependence on imports
from ''unstable'' parts of the world, he pledged to spend
$50 billion on research aimed at strengthening US competitiveness.
Among his stated priorities is research into alternative
energy, aimed at dealing with the problem that: ''America
is addicted to oil, which is often imported from unstable
parts of the world.'' His target is to replace 75 per
cent of Middle East oil imports by 2025.
The $50 billion pledge would help double federal spending
on research in the sciences and harness US talent and
creativity by the training of 70,000 new science and
mathematics teachers. According to one estimate, the
full cost of the competitiveness initiatives would be
$136 billion over 10 years, of which the remaining $86
billion would come from the cost of an additional proposal
to make permanent the tax credits for private sector
research and development. Bush manages to achieve his
tax cut objectives even while pursuing technological
superiority of the kind that the world leaders endorsed
at Davos.
Were there no problems and dangers discussed at Davos
then? There were: terrorism, an oil-price spike, natural
disasters and a bird-flu pandemic among them. Interestingly,
in keeping with its effort to focus on areas that are
not in its remit, the World Economic Forum spent much
energy discussing the last of these. Holding the view
that the avian flu has the potential to develop into
a global pandemic as devastating as the Black Death
of the 14th century, a report released at Davos argued
that: "An outbreak of H5NI [avian flu] human to
human transmission could have devastating impacts globally
across all social and economic sectors, disrupting efficient
processes, severely degrading response capabilities
and exacerbating the effects of known weaknesses in
different systems." While this is no doubt an important
global problems, it also serves to deflect attention
from the main problems that should concern a Davos-style
meet.
Where does India stand in all this? Indian delegates
at Davos seem to have been driven by two, perhaps even
conflicting, objectives. The first was to play down
the image that India was a haven for cheap labour waiting
to be exploited by offshoring initiatives. The idea
was to declare that the country was emerging as a technological
leader with a global manufacturing presence. According
to the Financial Times, London, business delegates from
India were arguing that the country was not simply an
offshore back-office and software service centre but
an emerging manufacturing power.
The second was to declare that India was a better investment
destination than China, which does not have a monopoly
over manufacturing. Rather, India was presented as developing
technology-related manufacturing in which it could establish
an advantage over China, with its focus on cheap mass
production. "If you want to make Barbie dolls,
don't come to India," Anand Mahindra, vice-chairman
of Mahindra & Mahindra reportedly declared. Many
also read a not to veiled reference to China in one
of the hoardings advertising India's attractiveness:
"India, the preferred democracy for global investors."
As Jeremy Warner of The Independent put it: ''If that's
not a side swipe at China, I don't know what is.''
Everybody at Davos seemed to have fingers to point and
a clear direction in mind.
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