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For 15 years, I have attended the World Economic
Forum in Davos. Typically, the leaders gathered
there share their optimism about how globalization,
technology, and markets are transforming the world
for the better. Even during the recession of 2001,
those assembled in Davos believed that the downturn
would be short-lived.
But this time, as business leaders shared their
experiences, one could almost feel the clouds
darkening. The spirit was captured by one speaker
who suggested that we had gone from “boom and bust”
to “boom and Armageddon.”
The emerging consensus was that the International
Monetary Fund (IMF) forecast for 2009, issued as the
meeting convened, of global stagnation - the lowest
growth in the post-war period - was optimistic. The
only upbeat note was struck by someone who remarked
that Davos consensus forecasts are almost always
wrong, so perhaps this time it would prove
excessively pessimistic.
Equally striking was the loss of faith in markets.
In a widely attended brainstorming session at which
participants were asked what single failure
accounted for the crisis, there was a resounding
answer: the belief that markets were
self-correcting.
The so-called “efficient markets” model, which holds
that prices fully and efficiently reflect all
available information, also came in for a trashing.
So did inflation targeting: the excessive focus on
inflation had diverted attention from the more
fundamental question of financial stability. Central
bankers’ belief that controlling inflation was
necessary and almost sufficient for growth and
prosperity had never been based on sound economic
theory; now, the crisis provided further scepticism.
While no one from either the Bush or Obama
administrations attempted to defend American-style
free-wheeling capitalism, European leaders argued
for their “social market economy,” their gentler
form of capitalism with its social protections, as
the model for the future. And its automatic
stabilizers, with spending automatically increasing
as economic woes increased, held out the promise of
moderating the downturn.
Most US financial leaders seemed too embarrassed to
make an appearance. Perhaps their absence made it
easier for those who did attend to vent their anger.
The few labour leaders who work hard at Davos each
year to advance a better understanding of the
concerns of working men and women among the business
community were particularly angry at the financial
community’s lack of remorse.
A call for the repayment of past bonuses was
received with applause.
Indeed, some US financiers were especially harshly
criticized for seeming to take the position that
they, too, were victims. The reality is that they
were the perpetrators, not the victims, and it
seemed particularly galling that they were
continuing to hold a gun to the heads of
governments, demanding massive bailouts and
threatening economic collapse otherwise.
Money was flowing to those who had caused the
problem, rather than to the victims.
Worse still, much of the money flowing into the
banks to recapitalize them so that they could resume
lending has been flowing out in the form of bonus
payments and dividends. The fact that businesses
around the world were not getting the credit they
need compounded the grievances expressed at Davos.
This crisis raises fundamental questions about
globalization, which was supposed to help diffuse
risk. Instead, it has enabled United States’
failures to spread around the world, like a
contagious disease. Still, the worry at Davos was
that there would be a retreat from even our flawed
globalization, and that poor countries would suffer
the most.
But the playing field has always been unlevel.
How could developing countries compete with United
States’ subsidies and guarantees? So how could any
developing country defend to its citizens the idea
of opening itself even more to America’s highly
subsidized banks?
At least for the moment, financial market
liberalization seems to be dead.
The inequities are obvious. Even if poor countries
were willing to guarantee their deposits, the
guarantee would mean less than that from the United
States. This partly explains the curious flow of
funds from developing countries to the US - from
whence the world’s problems originated. Moreover,
developing countries lack the resources to engage in
the massive stimulus policies of the advanced
countries.
Making matters worse, the IMF still forces most
countries that turn to it for help to raise interest
rates and lower spending, worsening the downturns.
And, to add insult to injury, banks in advanced
countries, especially those receiving aid from their
governments, seem to be pulling back from lending in
developing countries, including through branches and
subsidiaries. The prospects for most developing
countries - including those that had done everything
“right” - are bleak.
As if all this were not enough, as the Davos meeting
opened, US’s House of Representatives passed a bill
requiring American steel to be used in stimulus
spending, despite the G20’s call to avoid
protectionism in response to the crisis.
To this litany of concerns, we can add the fear that
borrowers wary of massive US deficits, and holders
of US dollar reserves worried that the US may be
tempted to inflate away its debt, might respond by
draining the supply of global savings.
At Davos, those who trusted the US not to inflate
away its debt intentionally worried that it might
happen unintentionally. There was little
confidence in the none-too-deft hand of the US
Federal Reserve - its reputation marred by massive
monetary policy failures in recent years - to manage
the massive build-up of debt and liquidity.
President Barack Obama seems to be offering a needed
boost to US leadership after the dark days of George
W. Bush; but the mood in Davos suggests that
optimism and confidence may be short-lived. The US
led the world in globalization.
With US-style capitalism and the US’s financial
markets in disrepute, will the US now lead the world
into a new era of protectionism, as it did once
before, during the Great Depression? |
