TIME's panel of economists and business leaders discusses the postcrisis world
In 2010 the key question facing the world was whether the global economy would recover. This year it is where that recovery, now that it has materialized, will lead us — and whether the new reality of the global economy is any more stable than it was at the start of the recession. But fear of the unknown was not enough to spoil the feeling at the annual meeting of the World Economic Forum, in Davos, Switzerland, that after three tough years, the global economy was in better shape than many had expected. Top bankers, some of whom had stayed away from the conference the past two years, were back in numbers, striding the streets of this town, covered in 15 cm of fresh snow the opening morning, with confidence.
One theme of this year’s conference was to figure out a way for business leaders and policymakers to embrace a new set of shared economic realities. But at the filled-to-capacity opening-morning session of TIME’s Board of Economists — which includes, this year, three top corporate executives — it was clear that “shared” is a term of art. Not all economies are moving out of recession with anything like equal speed and brio. On the eve of the conference, Britain — which has front-loaded austerity measures to get its fiscal position in order — announced that its economy had unexpectedly shrunk in the fourth quarter of 2010. At the same time, in China and India growth is possibly too fast, stoking inflation and sparking the fear that authorities may raise interest rates before too long.
The U.S. economy, meanwhile, is showing its own sort of division. Growth is once again expected to be in the Goldilocks range — neither too hot nor too cold — but the wide and growing gap between rich and poor emerged as one of the key concerns of Davos. Everywhere, big corporations are pulling in record profits, but those earnings don’t seem to be materializing into significant job growth or wealth gains for the general population. In sum, the recession and financial crisis that many had hoped would lead to a reset have done little to erase the world’s global imbalances. Worse, the very different shape of their countries’ economies may make national policymakers unwilling or unable to work together — a frequent refrain at Davos.
Those concerns aside, there was more reason for optimism at a Davos opening than for some time. The discussion kicked off with a look at the positives for world growth from an unlikely speaker — New York University economist Nouriel Roubini, the Cassandra of the global economy. Roubini outlined the reasons the current recovery may continue — not least, the strength of corporate America and the health of multinationals around the world.
(Read: “Global Economy: A Changing Order”)
Martin Sorrell, head of global advertising powerhouse WPP and one of the three executives on TIME’s panel, said his company’s business zoomed back to growth in 2010. WPP, he said, has returned to pretty much where it was before the recession but with 8% fewer employees. His U.S. business was particularly strong in 2010 — up 8% — and he expected it to be up another 5% this year. The situation he described — more revenue, fewer employees — is to be found at other companies too. As a result, many corporations have been able to pile up record amounts of cash. What’s more, Roubini believes confidence about the state of the economy is growing among executives. Last year, corporations, still stinging from the recession, had a tendency toward what Roubini called a “risk on, risk off” approach: at any sign of a problem, projects and hiring were off. Now the aversion to taking risks may be receding. So those two c’s — cash and confidence — might lead to more robust hiring.
Roubini has not suddenly become a Dr. Boom. He pointed out that there are plenty of downside risks for the global economy, among them debt problems coupled with slow growth in Europe; the high unemployment rate and double-dipping housing market in the U.S.; and the chance that a flood of investment in China could lead to asset bubbles. “Global imbalances are not shrinking,” said Roubini. “We are in a world of 10% economic growth in China and nearly 10% unemployment in the U.S. Those kinds of differences can lead to currency and trade wars.”
Zhu Min, a special adviser to the managing director at the International Monetary Fund and former deputy governor of the People’s Bank of China, argued that the strong growth in Asia and other emerging markets is still a net positive for the world economy. Zhu said investment in infrastructure projects in China, India and elsewhere would be stronger in 2011 than in the stimulus-filled days of 2009 and 2010. That would be a driver of growth. Like others, Zhu worries about the rising price of food and other commodities, but he is optimistic that supply will soon catch up with demand and mitigate the problem. Zhu said fears that “all this money” flowing into emerging markets will lead to bubbles are overblown. “Capital investment into emerging markets is always good news, always,” said Zhu.
Ironically, a major concern Zhu has for 2011 is that the U.S. might grow too fast. If a reset is to occur, emerging markets need to start deriving more of their economic growth from internal demand than from net exports. Domestic consumers are the key to stable growth. But if the U.S. dramatically picks up, Zhu worries, emerging markets could slide back into a business-as-usual focus on external demand.
Few in Davos would disagree that emerging markets are the future. Azim Premji, chairman of Indian industrial conglomerate Wipro, pointed out that if current trends continue, in two decades, the biggest emerging economies combined will be larger than those of the richest countries put together. Premji said many companies had not yet made the right moves to deal with that “major shift.” Premji relayed a story about Ford’s making a car for the Indian market in which — to save costs — power windows were provided for only the front seats. But since most of Ford’s would-be Indian buyers had drivers, the measure flopped. Engineering products in the developed world for the emerging market is no longer going to work, according to Premji.
The shift of power from West to East is already causing some tensions. Premji said Indians and others in emerging-market nations are fed up with being constantly prodded to keep their economies open to trade while the U.S. is protecting its own market, particularly in services. James Turley, CEO of accounting firm Ernst & Young, agreed that protectionism in the U.S. needed to be countered. The U.S., he said, had signed on to only about 3% of the free-trade agreements that have been struck around the world.
The growing stumbling block to cooperation on trade, and fiscal policy as well, stems from the fact that the West and East are having very different recoveries. And economists expect the growth divide to grow in 2011. India, for instance, is rebounding quickly and might benefit from high worldwide interest rates. But weak recoveries in the U.S. and elsewhere call for low local interest rates. As such, getting policymakers to agree on what to do next is nearly impossible. “Global cooperation is only going to get harder, not easier, as the economy recovers,” said Turley. Roubini, echoing that sentiment, repeated the line that these days the world economy does not have a G-7, G-8 or G-20 — but a G-0. “We have no leader and no agreement on economic policy and what to do next,” said Roubini.
That’s genuinely worrisome, as many of the issues that confront the nations of the world — including demographics, pension time bombs and the environment — are shared ones. “Ask anyone in the emerging market what they want, and 3 billion people will say they want the American life,” said Zhu. “They want a big house and an SUV and a pension. But that’s not going to work. We don’t have the resources for that.”
For Zhu, reflecting a much heard trope in the halls of Davos, “the single most severe challenge facing the world” is income inequality — not just in the U.S. and other developed economies but also in emerging markets like China. Citing Tunisia, Roubini argued that much of the world’s instability can be traced in part to the growing divide between rich and poor.
The panel did not have time to discuss how such inequities might be tackled. It won’t be easy. But that is no reason to think it can’t be done. The funny thing about Davos is how great minds and sublime scenery can combine to make even the most intractable of the world’s problems seem soluble.