Pointing Fingers at Davos
The
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.