Davos 2010: Themes and Review

As the 2010 World Economic Forum, perennially held in Davos Switzerland, comes to an end there will be a lot of scratching of the heads concerning what was achieved and what was concluded concerning the state of world affairs. While billed as nothing more than an economic forum, the policy discussions at Davos often concern topics besides purely economic matters, and have over the last decade included conversations regarding changes in the world geopolitical structure, as well as funding for global health initiatives and the application of new technologies.

Due to the lagging effects of the global recession, conversations trended towards the growing sovereign debt issue, as well as pondering new regulations for banks. At least publicly this was what the conference was supposed to be about. The official theme of the conference was "Improve the State of the World: Rethink, Redesign, Rebuild."

(While there was a couple of excellent forums on establishing a new values based foundation to build a new set of financial regulations on, brain storming sessions were not nearly as productive as they would need to be for this type of change. No, we haven't entered the post-capitalistic world yet).

Obviously, some financial instruments and regulations will need to be, and will be, changed. However, this falls more under the purview of individual countries than the WEF, which in actuality is more effective in creating consensus and setting what could be called a "global agenda" than with hammering out the finer points. It may be years before meaningful economic reform is passed, in part because the recession is not yet over and the effects and causes of the recession have not been pinpointed with the accuracy needed for major financial reform.

Indeed, some of the discussions at Davos concerned the ability to recognize when intervention can actually make things worse.

Davos became somewhat politicized this year as bankers were singled out for criticism by politicians hoping to get a good sound bite or two. Indeed, Massachusetts representative Barney Frank who was in Congress during much of the time before and during the current recession sought to deflect attention away from his role on the House Financial Services Committee as he spat vitriol at bankers in public. It really doesn't matter that politicians tell bankers at Davos that new regulations are coming. This is to be assumed, and the politicians don't need to convince bankers of their decision (which some don't welcome), but rather politicians need to convince voters back home as well as fellow politicians of the importance of enacting new regulations. During good economic times Davos doesn't make nearly as many headlines as when there is a recession caused by the misdeeds of bankers.

Davos in the past has been more about consensus building than a forum for attacking bankers. Indeed, much of the reform that politicians like Barney Frank now want relies upon global cooperation. Stiff financial regulations in New York, without reciprocal changes in other major banking countries, will cause many corporations to flee New York for London and Hong Kong. Indeed, London and a couple other financial centers may become the new financial capitols of the world. As the breadth of consensus at Davos is greater than any country, the behind the scenes discussions may do more to shape the economic recovery than any regulations passed in the United States or elsewhere.

Some of the more interesting themes at Davos included the economic development of eastern countries such as China, and how they will be integrated into global financial markets. Indeed, this has been a sub-theme at Davos for over a decade. It has even been planned for, to a great extent, at Davos and at other conferences. Though this year the fear of a housing bubble in China has truly global implications. Other themes included keeping the world on pace towards an economic recovery, in addition to building a way to monitor, and decrease, systemic risk to global financial systems. While many people may march against increased globalization, globalization has been increasing for the past several centuries and recessions often have lead to domino effects in markets on the other side of the world.

The mood at Davos is much better than the 2009 Davos theme, which I believe had to do with rebuilding after the financial meltdown, obviously that is still a major theme being discussed behind the scenes. If major new financial regulations are passed in the United States, Japan, Germany, the UK and a number of other major players, then obviously some will profit and others will see their profit margins slide. While there will always be unscrupulous businessmen who will look for every loop hole to make a profit, an emerging trend is stabilization and decreased systemic risk as almost every financial institution has taken a hit during the Great Recession. In fact, social and economic welfare in addition to construction of responsible financial markets and institutions has become an important theme at Davos.

In years past, aiding the economic development of poorer countries, in addition to funding for global public health initiatives, had been a major theme. This same attitude of acting for the common good may be transfered to market regulation, though the details of how to actually do this may different significantly depending on who you ask.

Interestingly, there has been some buzz over the internet about "political instability" in the United States, and this invoking some fear in the rest of the world. Obviously, China due to the purchase of treasury bonds in the United States, had used the United States as a safe piggy bank where they could store funds. Personally, I think that the buzz is due more to the fact that the United States has been on a spending binge and that the largest national debt in terms of GDP in over half a century is expected to be piled on in 2010. Indeed, there has been buzz about no longer using the Dollar as the world's reserve currency.

France's president, Sarkozy, floated the idea of using something other than the U.S. dollar during a speech at Davos. While certainly other currencies will become in greater usage over the years, it might be unpractical to set up a new currency to eliminate perceive favoritism in the U.S. dollar. Though this could be done through a Special Drawing Rights which could base a new reserve currency on the strength of several of the major currencies such as the Dollar, yen, euro and others. (Though China has profitted by devaluing the yen when compared to the dollar). However, speculations about "political instability" as well as discussions about the pending financial regulation expected to be unveiled by President Obama, may be propaganda or at least justification used by those who wish to shift away from the U.S. dollar as the reserve currency of choice. Sarkozy is also looking to make political brownie points by bashing United States bankers during a time of economic recession.

While the global recession has hit every country, the United States has in absolute terms been hit less than other countries such as China and Russia. While the American stock exchanges have recovered, those in other parts of the world have not. The specter of economic disaster and rioting in countries such as China due to starvation is a real possibility. For the global economy to once again "gel" this may require major changes in regulation in several countries, including the United States. With the election of Scott Brown in January of 2010, this may have produced a stalemate which makes the passage of major and meaningful economic reform difficult before the November mid-term elections. Or in other words, due to "political instability" in the United States, the country will be less able to lead the world out of the current economic recession. Many in Davos noted that the United States was under-represented this year, and many have taken that as a sign that isolationism might be a major theme circulating in Washington over the next year.

Nature abhors a vacuum, and indeed, several Asian banking conglomerates are presented with what could be a rare opportunity to take a leading role in shaping the post-recession world.

At many Davos conferences in the past, global health efforts in the developing world were a major draw and discussion point. Unfortunately, despite Bill Gates's 10 billion dollar donation to vaccine research, development and distribution efforts; nations around the globe may be scaling back their contributions to public health programs in developing countries. Although the effects of such as scale back have not been reported in the media to date, it is rumored by many that it will occur. While every country is suffering during this Great Recession, it would have been interesting to hear more about plans for sustainability of global health programs.

Davos did take up the issue of the greying of the populations in many developed countries such as Japan and the United States, and how to pay for the health care and retirements of seniors which are expected to increase substantially over the coming decades.

Sources:

http://blogs.forbes.com/davos/2010/01/31/davos-is-done-bankers-are-stung/

http://www.kansascity.com/438/story/1717173.html

http://www.cnbc.com/id/35145285

http://seekingalpha.com/article/125797-why-china-will-continue-to-buy-u-s-treasuries

http://www.nytimes.com/2010/01/31/opinion/31friedman.html?ref=opinion

http://seeker401.wordpress.com/2010/01/30/davos-2010-sarkozy-the-dollar-should-no-longer-be-the-primary-reserve-currency-in-the-global-economy/

http://en.wikipedia.org/wiki/Reserve_currency