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World leaders come together at the annual forum in Davos to discuss the challenges for 2008 in the backdrop of last years unresolved liquidity crunch writes Sadia Dada
In contrast to last year’s “dialogue in the dark” when delegates at the World Economic Forum deliberated in complete oblivion to the fragility of the global financial system, the agenda for the 2008 gathering was tailored to reflect the reality of the global economic downturn. Business leaders and policymakers flocking to the Swiss mountain resort of Davos seemed to carry none of the surreal jubilation over the strength of the global economy and the prospects for companies and instead focused on the fears of political and economic uncertainty.
The global economy is indeed facing a serious downturn. The financial slide that began in the US in August with the dislocation of key credit markets and losses linked to sub-prime mortgages is continuing, with worrisome spin-off effects around the globe: soaring oil prices, higher commodity prices (particularly for food), a plunging US dollar and billions lost by banks. At the same time, investor and consumer confidence is in a downward spiral.
Session Chair John K. Defterios, Anchor, CNN Marketplace Middle East, CNN International, United Kingdom likened the market reaction to a perfect storm already brewing and called on participants to help "find the light at the end of the tunnel." In the face of the thickening economic crises, emerging markets have all the more reason to pay attention to global risks highlighted by the Forum in its report.
The Global Risks 2008 report calls for new thinking on systemic financial risk in response to the revolution in financial markets over the last two decades. While recommending a set of principles for country risk management the report also expresses fears that the current liquidity crunch will spark a US recession in the next 12 months. On a different note, there are warnings of food security becoming an increasingly complex political and economic problem over the next few years, with issues of equity and trade-offs between security and other issues making the design of global policy both difficult and necessary.
Stressing the need for greater cooperation on managing vulnerabilities associated with cross-border supply chains and concentrations of production along with that of an improved approach to securing viable energy supplies in the years ahead, in the backdrop of the dollar price of oil at record highs, the report captures the key agenda of the Forum. The single most threatening concern identified by world leaders as they put together their heads to propose methods to address the economic issues, is lack of coordinated response and leadership.
Youssuf Boutros-Ghali, Minister of Finance of Egypt explained that coordination on a macroeconomic policy stance is the solution. “Because we do not have the coordination, the financial crisis might spill over into the real economy. Anxiety among developed countries about the effects of globalization could lead to a protectionist stance. Anxiety is the biggest medium-term threat," added Ghali.
Amongst other key disconcerting factors, mismanagement of the current crisis and broad-based collapse of confidence remain high. The US economy seems about to slide into a recession and this, is undoubtedly a concern for the world in general and emerging markets in particular given the fact that this has the potential to be highly contagious. This also explains a similar concern, i.e., overreaction to the threat of recession as another factor that adds to the economic uncertainty in 2008. Contrary to the efforts of socially responsible advocacy groups vis-à-vis rising income inequalities as an economic threat, this seemed to be, as usual, lowest on the Davos list.
What was unusual this year was the inclusion of water and food security as issues affecting economic debate. This could be another sign of the shift in sentiment given last year’s outcome as this is first time Davos is staging a series of debates about food supplies – a topic that could generate lively debate given the recent sharp rise in many agricultural commodity prices, and the political challenges this is generating in emerging economies.
A panel including UN Secretary-General Ban Ki-moon told international business CEOs and civil society leaders assembled in Davos that water stress poses a risk to economic growth, human rights, health, safety and national security. Resonating his words that water is just as critical as climate, Peter Brabeck-Letmathe, Chairman and Chief Executive Officer, Nestlé, Switzerland, said, “The solution to water is more complex than the solution to climate change.” Davos agreed.
The swathe of attendees was also a notable contrast with earlier years. This year’s panelists included officials from the China Investment Corporation and Dubai International Capital, for example, who had responded to the call of a planned debate on their investments. Moreover, sovereign wealth funds overshadowed one topic that was prominent at last year’s event: the role that private equity now plays in the global economy.
In Global Risks 2007, the Global Risk Network of the World Economic Forum warned of a growing under-appreciation of risk in financial markets, provided a snapshot assessment of a range of global risks for the decade ahead, and recommended the institution of country risk officers and flexible issue-based international coalitions to manage the complexity of the global risk environment.
However, this year it will be difficult to manage global risks as both political and economic uncertainties are likely to act as a focus for global discussion and energy. On the economic side, an exceptional period of global growth may come under pressure as the liquidity crisis of 2007 impacts the real economy. On the political side, changes of government in several major countries and an uncertain situation in the Middle East will dominate. Leadership on global risk issues will be an increasingly precious commodity.
Opportunities for a peaceful settlement in the Israel-Palestine conflict may be stronger in 2008 than at any time since the turn of the century. Major emerging economies have increasingly demonstrated their willingness to take a leadership role in managing global risks. New financial products may be increasing the potential of financial markets to diversify and absorb risk. Risk management has become a key element of the management and strategy of both business and government. Recognition of the need to reform the global energy economy has set the stage for a multi-decade shift in direction. But, for many of the global risks discussed in this report, the question of ownership of these risks remains unanswered.
The fragmentation of ownership of global risks and the complexity of interdependencies will make equitable and sustainable management of global risks hugely challenging. Should systemic financial risk lead to a serious deterioration in the world economy, the prospects for collaborative mitigation may be reversed on several fronts simultaneously as attention turns to more immediate concerns. The Global Risk Network will continue to bring together policy-makers, business leaders and nongovernmental organizations to help align assessments of risk, to understand institutional gaps and to better grasp the interconnectedness of sectors and risks.
Yet, the tone of the Forum was set well before the chairs were pulled out. Klaus Schwab, the founder of the Davos meetings, himself was notable downbeat as he reaffirmed that economic challenges would indeed dominate all proceeds – the aftermath of the subprime crisis, the transfer of capital from energy-consuming to energy-producing countries, inflationary tendencies were some of the primary concerns he pointed out.
David Nadler, vice chairman of Marsh & McLennan, the professional services company, echoed Schwab when he disclosed that with so many potential consequences of the 2007 liquidity crunch unresolved, the outlook at the beginning of 2008 is more uncertain than it was a year ago.
It is no surprise that the World Economic Forum Annual Meeting 2008 concluded with a call by business, government and civil society leaders for a new brand of collaborative and innovative leadership to address the challenges of globalization, particularly the pressing problems of conflict, terrorism, climate change and water conservation.
To some this may not seem conclusive or even comprehensive. For other it is ample food for thought. With the state of the financial world having seen a dramatic turnabout in the past year, the World Economic Forum is the first of many in 2008 to debate on global policy responses to the credit crunch - next month’s crucial meeting of the Group of Seven finance ministers and the spring meetings of the International Monetary Fund and World Bank are just around the corner. While it is in those forums that the decisions will be taken, it is at Davos where the main players can see if consensus will be possible in a less formal and more private environment.
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