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Perhaps most serious of all, the developing world — where economic growth is the difference between comfort and an empty stomach — is feeling real pain. A central meme of Davos was the cry from emerging economies that they were being starved of capital, as domestic stimulus packages in the rich world sucked up financing and bankers retreated to local markets. The Institute of International Finance predicts that private capital flows to emerging markets will tumble this year to just $165 billion, a drop of more than 80% from the $929 billion of private money that flowed into them in 2007. "Countries that have done everything right can no longer raise money," complained Indonesia's Minister of Trade, Mari Elka Pangestu.
Dialogue and Coordination
Less noticed were two other knock-on effects of the recession in the rich world. First, with less money to spend, its consumers will be taking fewer trips overseas. Thailand's Prime Minister Abhisit Vejjajiva expects tourism in his country to contract by 20%, and African nations such as Kenya will be hit, too. Yet tourism is a major driver of wealth creation and entrepreneurship in destination nations. Second, as those in developing-world diasporas lose their jobs on automobile lines in Detroit and Germany, or as domestic servants in places such as Hong Kong and Singapore, so the remittances that have become important to nations as far flung as Mexico and the Philippines will shrink.
In senses narrow and broad, this is a truly global economic crisis, which is why global solutions are required. Twice this year, world leaders are going to gather to address problems that cannot be solved by any one of them alone. The meeting that has caught the public imagination, so far, is the conference that takes place in Copenhagen in December, charged with finding a successor to the Kyoto accord on climate change. But the more pressing date is April, when leaders of the G-20 leading economies will meet in London, continuing a dialogue they began in Washington last fall.
In Davos, there was a consensus that the London gathering needs to lead to more international coordination of a global economic stimulus and better regulation of international financial markets — and, indeed, that such an outcome is possible. "This is not like the 1930s," said Britain's Prime Minister Gordon Brown, when world leaders could not respond together to the Great Depression. Jean-Philippe Courtois, the Paris-based president of Microsoft's international operations, says that developing economies in particular are demanding a greater say in how the global economy is managed. "They want to have more dialogue on some of the core issues of the planet," Courtois says, "and there's a lot of expectation that this dialogue will happen."
To be sure, there were skeptics. Some market fundamentalists, such as Václav Klaus, President of the Czech Republic, will always be suspicious of attempts to regulate capitalism. Looking to the G-20 meeting, Klaus said, "I am more afraid of the reforms than I am of the crisis itself." But that was a minority view. Most political leaders showed a bias toward action. Any proposals for reform, said Christine Lagarde, the French finance minister, should be "politically sellable, technically sound and enforceable."
Sounds great; but such broad language leaves a lot of leeway. The agenda for the G-20 meeting is potentially vast and keeps changing. How far can national plans to stimulate demand be coordinated? What should be done with the toxic assets still on bank balance sheets and still destabilizing domestic financial systems? When the G-20 first met in Washington, it looked as though a short-term fix for the chronic instability of the banking system was bearing fruit, and swift government action to recapitalize banks in France, Britain, Germany and elsewhere was seen as a brilliant stroke. But it has become evident that the initial rescue packages didn't address the fundamental underlying problem of the toxic assets. Britain, the U.S. and Germany are among those who are implementing a second round of rescues. They are likely to sequester bad assets in special state-guaranteed banks or funds that will sort through them, discarding the junk and holding on to the rest in the hope that they will one day have value.