Quotes of the Day

Here's a piece of advice for those of you fretting about the economy: enjoy the good times while they last. Growth in the U.S. has slowed, the price of oil and other commodities is yo-yoing, and scary geopolitical risks abound, from Iraq to North Korea . But, at least for the next year, global growth is sufficiently strong that it should be able to withstandmany of these challenges easily. If you insist on worrying, however, there's plenty to agonize over. A number of longterm economic and social issues could bring trouble, ranging from too much money sloshing around the world's financial systems to rising protectionist pressures in the U.S. and Europe, as the middle classes there feel squeezed by global competition.

That mixture of short-term optimism tempered by longer-term worries emerged from a vibrant discussion of Time's Board of Economists at the World Economic Forum in Davos, Switzerland, on Jan. 24. Four of the five panelists agreed with the forecast that 2007 is likely to be "another Goldilocks year" made by Laura D. Tyson, a former chairman of the White House's Council of Economic Advisers, who has just left her position as dean of the London Business School to return as a professor to the University of California, Berkeley's Haas Business School. The world economy, the four concurred, seems set to continue its virtually ideal — not too hot, not too cold — performance. While the U.S. is slowing, Europe and Japan will continue performing solidly, and there's no sign of any letup in the torrid pace of growth in emerging markets. China, the economic marvel of the world, continues to expand at around 10% a year. Even if there are some unexpected setbacks, said Jacob A. Frenkel, vice chairman of insurer American International Group, financial markets are now "so wide and so deep" that they will help to absorb the shocks. "In a fundamental sense," he added, "we are immune to bad policies."

But even if this upbeat scenario does come true, 2007 will also go down in history as a year of transition, in the phrase of Zhu Min, vice president of the Bank of China. High among his worries for the future are growing imbalances in the structure of the world economy, as Asia produces ever more of the goods that the U.S. consumes, and ends up investing ever more of the proceeds in U.S. government debt.

These lopsided trade and financial flows are particularly acute between China and the U.S.: China's central bank currently holds $1 trillion in reserves, and that amount will probably swell by another $200 billion this year. "I am more and more convinced that we'll have a much tougher situation in the coming years," Zhu said, uneasy that policymakers around the globe have not yet begun addressing critical structural issues. Top of his wish list: some action by the U.S. to end its consumer-spending binge and encourage saving. As a banker, Zhu is also concerned about an explosion of complex and potentially perilous new instruments in financial markets, as hedge funds and many others leverage their investments worldwide.

"Overliquidity is killing everyone," Zhu said, estimating that the amount of money represented by these derivative financial instruments now totals an amount equivalent to eight times the entire world economy. "People have no idea of the risks they are taking."

Any assessment of the likely direction of the global economy is bound to turn on the near-term performance of its key driver: the U.S. And on that question, the panel was divided. Nouriel Roubini, professor of economics at New York University's Stern School of Business and chairman of New York City-based Roubini Global Economics, was the most pessimistic, predicting that the U.S. economy will perform far worse than most pundits, including the other panel members, expect this year.

Roubini thinks that the housing-market slowdown will continue, and he sees other signs of fragility that could bring a prolonged period of minimal growth between 0-1%. That would be a sharp deterioration from last year's 3.4%, according to Goldman Sachs, and, in turn, it would cause problems across the globe, since countries everywhere else are still, for now, dependent on the buying power of the U.S. consumer.

"Goldilocks is threatened by three bears," Roubini said — a housing recession, the beginning of a credit crunch and continued high oil prices. (He pointed out that, while it may be true that crude prices have fallen in the last few months, they are still high in historical terms.) Roubini was open in his use of language that others avoid: "I worry about a U.S. hard landing," he said. That forecast was vigorously contested by Frenkel, who pointed out that interest rates remain low by historical standards, unemployment is falling in the major industrialized countries, and profits are the highest in a decade. "I'm an optimist, but not sanguine," Frenkel said. While it's important to heed warnings, he maintained, the U.S. consumer engine that has driven growth worldwide "is still there."

Whoever ends up being right about this year's prospects for the U.S. economy, there was no dispute that the world is undergoing monumental shifts that will affect everyone, and in the not-sodistant future. Tyson described last year as "a landmark" because, as measured by purchasing power, emerging market economies for the first time overtook the developed world as a share of the global economy. But that rebalancing process still has a long way to go. Frenkel cited statistics showing that China and India together account for about 40% of the world's population but only 6% of world economic output. By contrast, the U.S., Japan and Western Europe make up 15% of the global population but account for 80% of its output. "There is a great gap, and it is going to be bridged over the next 20 years," he said. "We are going to see fundamental changes in the center of gravity and the center of power."

It's the job of panelist Montek Ahluwalia, deputy chairman of India's Planning Commission, to make sure that India contributes to closing that gap. India's economy grew by 8.3% in 2006 and, he said, "We're hoping to do better than that in 2007." Indeed, the nation is seeking to boost its growth rate to 10% annually over the next five years. The key ingredient for such a performance will be a big surge in investment, including in the nation's often dilapidated (or nonexistent) infrastructure such as roads and telecommunications. Such investment is needed. There is a growing consensus that poor infrastructure is a real impediment to India's chances of securing sustained fast growth. In China, too, the government is taking steps to ensure it can continue its strong momentum.

Among other measures, it last year sought to boost domestic demand and cool its export sector by raising export taxes and reducing import tariffs. Both countries still face considerable pressure to make further policy moves.

India's foreign partners and potential investors are pressing it to open its market to foreign goods and services more rapidly, while China is under pressure from Washington to revalue its currency more aggressively in order to reduce the yawning U.S. trade deficit.

Buoyed by a belief that the major emerging markets will handle the challenges facing them, and that the U.S. — despite the worries over the housing sector — will have a soft landing, business leaders made their way to Davos in the sunniest mood that they've been in for years. (Literally: the day before the conference started, the Alpine town was as warm as you'd expect it to be in April, not late January.) A survey of 1,100 ceos in 50 countries by consultants PricewaterhouseCoopers showed that more than 90% were confident about their revenue growth for the coming year and for the three years ahead. Those numbers are record highs. Indeed, business leaders are so bullish that PricewaterhouseCoopers' ceo, Samuel DiPiazza, worries about hubris. "It's such a high level of confidence, we're wondering: Is it overoptimism?" he asks.

Oddly, given the fearsome state of global politics, the main concerns of these executives are business related rather than geopolitical.

One factor that also doesn't show up large on the polled ceos' list of concerns, but which was a big worry for the economists on Time's panel, is the growing backlash against globalization in the U.S. and Western Europe. In the rich world, wages have remained largely stagnant even though productivity has been rising. Governments have made several moves to address such dissatisfaction this year. In the U.S., the new Democratic-majority Congress is proposing to increase the minimum wage, while, in Germany, unions are pushing for pay raises substantially above inflation. Consumer purchasing power has also emerged as a key issue in the French presidential election.

Even though Europeans and Americans are worried about globalization, they may not be well-informed about its true ramifications.

All the panelists said they were concerned that the big questions relating to globalization, including the huge power shifts under way from the developed economies to the developing ones, were not being well explained in the West. "There isn't adequate intellectual or political debate," said India's Ahluwalia. Pointing to a growing concern in the West about a widening disparity between rich and poor, he said, "For the past 20 years, you told the developing world: Don't worry about inequality, worry about poverty. Now it's the developed world that's worrying about inequality."

The point, of course, is not just that some sectors of the population within developed economies are doing so much better than others. It is, rather, that all the developed economies are watching their relative power decline. Sure, Germany is showing signs of life after years of weak growth. In Britain, the Bank of England unexpectedly raised interest rates in January in another sign that European economies are rebounding faster than forecast. But the longer-term prospects for Europe are clouded by the fact that its population is set to shrink. Addressing the Forum, German Chancellor Angela Merkel acknowledged that, "for the past 200 years, we got used to a Eurocentric view of the world, but today we can see that this type of overview is over." As for the U.S., the rise of China, India and maybe even Russia as economic forces demanding attention will pose questions that the American political system and society have not even begun to address. "I do worry how the U.S. will respond to the fact that its hyperpower status in terms of finance and wealth has to be reduced over the next 25 years," said Tyson. She has reason to worry: most Americans have no idea so elemental a shift of power is now under way.

But for now, barring an unexpected crisis, the world economy should keep growing at more than 4%, the fourth year in a row at that level. Tyson, for one, bases her optimism on a variety of signs that the world economy is becoming more balanced, from the convergence of European, Japanese and U.S. growth rates at around an expected 2% annually to the growing importance of world trade, which last year for the first time accounted for more than 30% of the global gross domestic product. She and the other panelists aren't becoming cocksure, even in the short term, however. "The Big Bad Wolf is often hiding in the forest where we economists can't see him," Tyson cautioned. But for now, the wolves of the world economy are lurking far afield — and all you can hear is their howling in the distance.

• PETER GUMBEL
• TIME's panel of experts predicts continued growth for 2007. But the U.S. and Europe remain unprepared for their long-term decline in power