The new global context

This was the theme for the World Economic Forum gathering held at the end of January in Davos. The WEF [committed to improving the state of the world] has 1000 core members who are the largest corporations in the world. This year, in addition to hundreds of journalists, there were over 2500 participants from 140 countries, 1500 being business leaders. Enda Kenny was one of 40 heads of government and state, together with numerous other politicians, attending – presumably to impart the secret for successfully exiting Ireland from the Euro bailout. He was part of a panel discussing economic growth and political stability, alongside the German vice-chancellor and the prime ministers of the Netherlands, Finland and Latvia. He was able to narrate how Ireland had evolved from a crisis country to a recovering economy to a growing one. He faced accusations that companies like Google and Facebook, who are big employers in Ireland, have avoided paying tax through elaborate arrangements with the Irish government. Nearby Zürich airport was overflowing with private jets for the five-day event. If there is any possibility of obtaining the collective view of the private sector then this should be it.

If they intend to improve the state of the world there should be some debate of the pressing issues and resolution of the action to be taken. This does not happen because of the way the Forum is structured. It is more like an economics version of the Edinburgh Festival, along with the fringe events. There is no main conference and with hundreds of small events organised at many hotels (10 to 14 at any one time) it would be impossible for any participant to attend everything and just as easy to miss something that was really important and forecast what lay ahead. The sad fact is that the annual gathering of the WEF is not forward-looking in terms of finding solutions. Two years ago there was a feeling of pessimism with no inkling of any improvement in the world economy. The next year they were optimistic following a surprise recovery from recession. This year they are pessimistic again. A survey of 1300 chief executives confirmed that only 37% expect world economic growth this year compared with 44% last year. New issues of concern related to events in the Middle East, Ukraine and Hong Kong, and a feeling that the pendulum had swung away from the emerging markets.

The wonder is why does the WEF receive so much media coverage and why do tax payers fund the attendance of elected officials, such as Boris Johnson the London Mayor?  The same question must be asked of the BBC who provide daily coverage, with Robert Peston hoping to interview the main movers and shakers.  This is entertainment, not economics or politics.  In previous years campaigners and protesters have gathered to make a point to the participants.  Security is very tight with police in much evidence and physical barriers in place.  The prospect of standing holding a placard, with snow up to your kneecaps is not enticing especially when the participants do not get the message.  If those same participants do not reach agreement on anything or take any decisions, what is the point?  The campaigners have realised that the WEF is pointless and they now stay away.  They are now more likely to attend the alternative World Social Forum, which is more holiday-camp and held in warmer climes.

This year there was discussion about the continuing problems of the Euro following the decision that month of the European Central Bank to embark on Quantitative Easing and of the Swiss National Bank to decouple the Swiss Franc from the Euro currency, but no forecast of what the consequences might be.  The operation of the currency market and traders did not come into it.

The dramatic drop in the world price for crude oil was also discussed and did produce some forecasts that indicated how the various oil interests viewed developments.  The oil companies had already reacted by cutting back on exploration and development until the price of crude returned to a profitable level.  In particular, BP forecast a time scale of three years with an even higher price of $200 per barrel when the glut is eliminated.  The low price was blamed on a drop of manufacturing output in China and demand for energy along with their expansion of coal-fired electricity production, the refusal of OPEC to cut oil production and stabilise prices, and the glut caused by the US production of shale gas and oil that now made them self-sufficient and an exporter instead of an importer of energy.

The Leader of OPEC did protest that criticism of their countries was unfair as they had maintained output at the same level for ten years and some member countries were suffering from market prices that were having a detrimental effect on their economies.  He was clear that the US was to blame although the world glut of oil was resulting in US companies cutting back on shale fracking because it was no longer profitable.  There did not seem to be any examination of the oil market mechanisms and the actions in the market of by middle-men, speculators and hedge funds whose only concern is to turn a profit.  These people do manipulate the price of oil and the ultimate price paid at the pumps by motorists, and the cost of gas and electricity to households.  For an example; a tanker full of oil on its journey to the UK will not dock until the market price is right.  It will anchor of the east-side of Gibraltar waiting for the price to reach a profitable level.  During its journey the content of the tanker will be traded and might change ownership five times.

There was no indication that the WEF is questioning the basic precepts of capitalism and free trade, never mind acknowledging the damaging effects of distorted markets and their derivatives.  At any time since the millennium has the WEF given any clue to the future?  Looking back over the period leading up to the financial crisis and recession; and at the records and reports of the WEF makes interesting reading.

In January 2008, before the financial crisis, George Soros told the BBC that it would be very difficult to avoid recessions in the US and UK and he supported the US Federal Reserve surprise interest rate cut.  He also said that the current market turmoil was a sign of global influence shifting to the developing world.  He added that authorities had trusted markets too much over the previous 20 years.  “You do have to rescue markets otherwise you would go into a depression, as you did in the 1930s.  I’m not looking for a worldwide recession, I’m looking for a significant shift of power and influence away from the US in particular and a shift in favour of the developing world, particularly China.  The authorities came to rely on the markets to right themselves, but they ought to have known better because they have in the past come to the rescue.”

It makes you wonder how he made any money, because he got it so wrong.  At the 2009 WEF the theme was ‘shaping the post-crisis world’ with a call for a global redesign initiative that would reform banking, regulation and corporate governance.  There was much discussion but no solutions.  There was widespread uncertainty amongst politicians and corporate bosses, but they were unable to gauge the depth of the economic crisis or how to get out of it.  They were resigned that the global economy was heading into a deep and long recession.  According to the BBC report one top money market manager said; “If you believe that the world economy will turn the corner at the end of the year, or in the first quarter of 2010, I tell you we have not turned the corner, we can’t see the corner, we don’t even know where the corner is.”  And another panicked participant said; “We don’t know what to do; only that we need to do something and we need to do it fast.”

The conscience of the 2009 Forum was provided by South African Archbishop Desmond Tutu who said; “We worshipped in the temple of cutthroat competition, and some cooked the books, because the treasure is so great.  We spend billions on banks, when we know that a fraction of this money could save all the children in the world.”  Even among corporate leaders there were calls for swift criminal punishment of the people who caused the crisis.  There was a consensus that while capitalism needed fixing, it wasn’t irreparably broken.  Speeches by the prime ministers of China [economy at a crawl] and Russia [oil wealth plummeting] proved that the economic crisis was truly global and hurting around the world.  Nouriel Roubini, one of the few economists to actually predict the credit crunch, used a variation of a Churchill quote; “Capitalism is the worst system except for all those others that have been tried.”

This 2009 WEF BBC report – How bad is the crisis going to get? – is a must read:  http://news.bbc.co.uk/1/hi/business/davos/7859179.stm

Any suggestion that warnings were not being put before the participants at the WEF is not borne out by BBC reports going back to 2004.  Mr Roubini together with Stephen Roach, chief economist at Morgan Stanley, have consistently expressed concerns.  They are worth listening to in the future.

2004 – Bullish US could end in global slump – http://news.bbc.co.uk/1/hi/business/3417107.stm

2005 – Economists warn on US debt crisis – http://news.bbc.co.uk/1/hi/business/4209527.stm

2006 – Economists predict sliding dollar – http://news.bbc.co.uk/1/hi/business/4647928.stm

2007 – World economy ‘set for good 2007’ – http://news.bbc.co.uk/1/hi/business/6294661.stm

2008 – Top bosses fear global recession – http://news.bbc.co.uk/1/hi/business/7202998.stm

2008 – Warning about US economic slump – http://news.bbc.co.uk/1/hi/business/7204368.stm

The new context for the world economy is just as elusive in 2015 as it was in 2009.  The problems remain the same, nothing has changed.  The warnings of a minority, pre-2009, were drowned out by the majority who were either not listening or did not want to hear.  Attitudes must change before behaviour will be altered, otherwise there will be consequences too dreadful to imagine.

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