Global Economy: A Changing Order
On the afternoon following the close of the annual meeting of the World Economic Forum in Davos, Switzerland, the town starts to return to normal. Local children, bundled up against the cold, play in the snow; a man who a few days ago was managing tables in a frantically busy restaurant runs up the Thomas Mann Weg, a steep path that I have trouble walking down; ski boots appear outside hotel bedrooms; tour guides are overheard describing the best runs to new arrivals. And on their way to Zurich and flights home, some of them dozing, some of them nursing sore heads, those who have spent the last week in this alpine valley try to make sense of what they've heard.
They won't all come to the same conclusions; at Davos, there are too many competing attractions for that. "My London is not your London," the novelist Paul Theroux once wrote, "though everyone's Washington, D.C. is pretty much the same." Davos is a London, not a Washington, so take my sense of what happened there at a discount of your choosing. That said, this is Davos, perhaps the only place on earth where packed crowds jostle outside a room — "Just like English soccer fans," said Robert Hormats, U.S. Undersecretary of State for Economic Affairs — to hear six academics and George Soros muse on the need to "rebuild economics." The dismal science, and its real-world applications in the global economy, are properly at the heart of the week.
As to that central topic, the overwhelming mood at Davos was one of relief. After the financial crisis took hold in the fall of 2008, the world did not sink into a miasmic depression, though more than one senior official present thought it had come very close. Massive and coordinated fiscal stimuli and efforts to prop up global banking systems averted the worst. But nobody, at least from the developed world, thought the crisis was over. The key sound bite of the week was provided by Larry Summers, the director of President Barack Obama's National Economic Council. The U.S. and other leading economies, Summers said, were experiencing a "statistical recovery and a human recession." Unemployment, especially in the U.S., remains intolerably high; 1 in 5 men of prime working age in the U.S., Summers noted, were unemployed; in the mid-1960s, the figure was 1 in 20.
More than that, there were few voices arguing that the rich world would see a sustained burst of growth, the kind of expansion needed to make the recession a dim memory and bring jobs aplenty. There was something of a consensus that the stimulus packages that have fueled the economy can't be scaled back too soon — that way lies the dreaded double-dip recession — but at some point, enormous deficits will have to be addressed, and the belt-tightening that implies will have an impact on social expenditures.
That looming reality in turn fed a sustained anger at those who made out like bandits during financial capitalism's glory days. Certain "indecent behaviors will no longer be tolerated by public opinion," said French President Nicolas Sarkozy in a fire-breathing opening address, saving particular scorn for "excessive profits" and "remuneration packages that bear no relationship to merit." Worse, according to some, was the fact that some of those who once enjoyed those fat paychecks have had to be bailed out at the taxpayer's expense. "People are outraged and angry," said Philip Jennings, general secretary of the international labor union UNI, "that taxpayers' money has been diverted from education, health and social safety nets to bankers."
The Senate of Lords
Ah, the bankers. Not all of them turned up — no Jamie Dimon of JPMorganChase, no Lloyd Blankfein of Goldman Sachs. In public, those who did mostly repeated the standard line, with which investigating committees have become familiar. They understand why people are angry; they recognize that something went wrong with the global financial system; they see that there has to be a fresh look at regulatory structures; they get it.
But I'm not sure that they do. Perhaps the most authentic insight into the banking mentality came in a comment made by Josef Ackermann, the CEO of Deutsche Bank. "Seldom," he said, in a line with Churchillian echoes, "have so few done damage to so many." By "so few" he meant the financial institutions who had either failed or been rescued by government action. But by "so many" he did not — as you might think — mean taxpayers or those who had lost their jobs in the economic downturn; he meant other bankers whose reputation had been unfairly sullied. More than once in private (many of the most interesting comments on Davos, one should say, are off the record) I was assailed by bankers whose message was, in essence "We did everything right; it was they who are to blame."
At one level, that reaction is understandable. It must indeed be irksome if you work honestly for an institution of which you're proud, which has oiled the wheels of capitalism with credit, only to be pilloried for your pains. The point even "good" bankers miss, I think — especially American ones, who take refuge in the bedrock conviction that the politics of envy doesn't play in the U.S. — is those "remuneration packages that bear no relationship to merit" of Sarkozy's speech. Many in the financial-services industry, good, bad or indifferent at their jobs, got as rich as Croesus in the last 20 years, at just the time when middle-class wages have stagnated. They can't really be surprised that those who have not done as well as bankers now want their pound of flesh; nor does it suffice to dismiss public ire at the bankers' good fortune as nothing more than (dread word) "populism."
That term was heard a lot in Davos, sometimes in reference to the new proposals for banking reform that Obama, with Paul Volcker by his side, had announced just days before the meeting began. Summers apart, there were few top American officials present in Davos this year. But the state of the U.S. political system was a constant theme of public and private meetings. The proximate cause of the chatter was the loss of the Democrats' supermajority in the Senate as a consequence of the Massachusetts special election, but it went deeper than that. Whether discussing climate change, or regulatory reform, or progress on trade issues — bilateral as well as multilateral — delegates worried about an institutional paralysis in the U.S., and a political system that had got so gummed up that it was hard to get anything done. It wasn't just non-Americans who voiced such concerns. When, at a BBC debate, I asked Barney Frank, chairman of the House Committee on Financial Services, about the chances of getting financial-services reform through Congress this year, he said he thought such legislation would pass into law. But Frank made no bones about the state of Washington or the impact of the supermajority rule in the Senate. "We are suffering a constitutional crisis in the U.S.," Frank said. "To some extent, we are England in 1910 before they reformed the House of Lords."
The Two Faces of China
If the U.S. were Sweden, worries about the health of its political system would be an interesting topic for a Ph.D. thesis. But the U.S. is the U.S. — the nation without which no item on the global agenda can be addressed. Its internal political difficulties spill outside its borders, affecting those far away. Moreover, there was a clear sense in Davos that just when the U.S. is looking like a hobbled power, a rival is galloping along. In Britain after 1945 it was common to hear that such and such a man — Denis Healey, say, or Ian Fleming — had had a "good war." China has had a good crisis. Buoyed by spectacular economic growth, basking in its role as America's banker, modernizing its infrastructure at sci-fi speed, a large Chinese delegation arrived at Davos expecting — one assumes — to have a good conference.
They did, sort of. There was a self-confidence to the Chinese in Davos I have never seen before. Immediately outside the conference hall, a chalet which in the old days had been the headquarters of Sun Microsystems had been taken over by CCTV, China's state broadcaster. Inside, young journalists, dressed as if they were ready to hit one of Beijing's smarter nightclubs, poured tea and took photographs of their interviewees. Yet that strange defensiveness that so often typifies official Chinese interventions in international arenas was on display, too. Vice Premier Li Keqiang, a member of the Standing Committee of the Politburo, and the man who is expected to be China's next Premier (the second-ranking position in the leadership) gave a long speech at a plenary session and said ... not very much. The usual platitudes about China's growth strategy and commitment to peaceful development were trotted out. On the topics the audience turned up to hear — exchange-rate policy, Google — Li said nothing. As a Chinese friend lamented to me after the speech, it was hardly inspiring.
Why are China's leaders (with the exception, in my experience, of economic boss and former mayor of Beijing, Wang Qishan) so stilted when they address foreign audiences? Part of the reason, I think, is the confusion that flows from the fact that China projects itself internationally in two different styles. In the first, China's leaders — as Li did at Davos — never miss an opportunity to say that it is really just a big developing country, with massive challenges, regional disparities of wealth and hundreds of millions of poor people. It's only just started to modernize; it shouldn't be asked to do too much. As Zhu Min, who recently moved from the Bank of China to become deputy governor of the central bank, pointed out, Britain took 150 years, and the U.S. 80, to develop the consumption-driven economy that comes from having a mass middle class. China's been going at it for only a quarter century.
One understands the point, even if it ignores the fact that pre-communist China was developing a middle class in the 1920s and '30s. But it's hardly the whole story. Plenty of business leaders — though not all, as a well-known European CEO emphatically told me — say that China, of late, has been tough as nails with investors. The China style they see is less that of a poor, developing country and more that of a bully. Beijing's unveiled warning on Feb. 2 that for Obama to meet the Dalai Lama "would damage trust and cooperation between our two countries, and how would that help the U.S. surmount the current economic crisis?" falls squarely into the second style of dialogue. Besides, developing country though it may be, China now has a position of great power in the global economy, and with that power comes responsibility — a responsibility that is not discharged by a nakedly mercantilist, cheap-currency economic policy, or by free-riding on an international system in which the U.S. carries a heavy load. There were some in Davos who thought the world has been too polite to China since the financial crisis took hold, and my guess is that the tone of Beijing's comments on the Dalai Lama will have added to their number.
Let's Get Together
For all that, it was good to hear from senior non-Chinese finance officials how impressed they are by the professionalism of their counterparts in Beijing. One very clear impression with which I left Davos was that since the crisis broke, coordination between finance-ministry officials, central bankers and leaders of the international financial institutions has been sustained and effective. (Though I would bet the price of a Swiss watch that not a single non-American official was given advance warning of Obama's adoption of the Volcker rule for bank regulation.)
It's easy to be cynical about the need for international coordination of policy, especially at the WEF, which exists in part to advance that very thing. "At the World Economic Forum," said David Rubenstein of private-equity firm the Carlyle Group, "you should always say, yes, multilateralism is possible and we should come together. But getting national solutions is hard enough." This, though, is one of those moments when cynicism should not determine policy. It really is important that international coordination continue as the world moves from recession into recovery — coordination on when stimulus packages are unwound, on exchange rates and on legal reform, so that banks do not play a game of regulatory arbitrage between different supervisory regimes.
The process of coming to international agreement on policy is bound to be a messy affair. Sarkozy called for "a new Bretton Woods" and promised to place the "reform of the international monetary system on the agenda" when France chairs the G-8 and G-20 in 2011. But I don't think that's going to happen. The unhappy outcome of the Copenhagen summit on climate change last December has soured many observers on the (always foolhardy) hopes for big-bang solutions to complex global problems. Tim Wirth, president of the United Nations Foundation, told me that we were moving into a world of "ad-hocery" in international affairs, with various coalitions of nations coming together to sort out economic, political and environmental issues. That may not satisfy the desire for institutional neatness and clarity that is so marked in Paris, but it's not the end of the world. So far, the G-20 — which few had heard of two years ago and which still doesn't have a full-time secretariat — has performed remarkably well.
Davos wasn't all about the economy, and China, and the G-20, of course; it never is. Often wrongly dismissed as nothing more than a gabfest for fat cats, the annual meeting has, in the last 10 years, become a focus for global philanthropic efforts, epitomized this year by Bill Clinton's call for a long-term commitment to rebuilding Haiti (when he's there, the Davos crowd can feel like Clinton's extended family), the Gates Foundation's pledge of $10 billion to develop vaccines, and Ukrainian mogul Victor Pinchuk's annual philanthropy summit. This philanthropic thrust of Davos may turn out to be one of the most enduring legacies of Klaus Schwab, the WEF's founder and executive chairman.
And there was fun to be had, too. With the football World Cup — the global event beyond all others — due to start in just a few months, an enormous South African delegation took over the town. There have been other nations that have used Davos to "brand" themselves, but — from the ubiquitous scarves in South African colors, the music at the closing night's party, and a screening of Anant Singh's wonderful film More Than Just a Game, about the football played by political prisoners on Robben Island — none have ever done so much with such brio as the South Africans. The "Davos kickoff" of the World Cup, when a collection of luminaries (including Schwab) lined up in South African football shirts and blew vuvuzelas was quite simply the most joyous moment I have ever seen on the main Davos stage — and, thanks to a perfectly judged short speech by Trevor Manuel, Minister in the Presidency of the South African government, one of the most moving, too.
As it enters its 40th year — the event started as the European Management Forum in 1971 — Davos can expect to continue to be overanalyzed, as it has been for years. Whatever you hear, remember that it's not just about economics, it's not a plutocrats' paradise (as anyone who has stayed in a certain type of Davos hotel knows), and it's not a weeklong party. I think of its winter charms, rather, as akin to those that London's frost fairs must have had in the 17th century, when the Thames froze solid and countless stalls were set up on the ice with hot pies, fortune tellers, dancing bears and a hundred other attractions. We really need a latter-day Bruegel to paint Davos, and a diarist as great as Pepys to write about it. But for that, I fear, we will have to wait for more than another 40 years.
With reporting by Barbara Kiviat / Davos