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From Davos with Hope

Every year, leaders from industry, government and civil society meet in Davos, Switzerland for the World Economic Forum’s annual meeting.  This year’s meeting was held from January 29 through February 1 with a central theme, “Shaping the Post-Crisis World.”  The objective was to ensure that we look at the world in a holistic, systemic way going forward.

The meeting started with an examination of the global economy in “Update 2009: the New Economic Era,” followed by a “Special Session with Wen Jiabao, Premier of the People’s Republic of China” about the role and commitment from China in handling the current crisis, which was followed by an “Open Plenary of the World Economic Forum Annual Meeting 2009” with the opening address by Russia Prime Minster Vladimir Putin on Russia’s role in growth, cooperation and energy.  These sessions were joined by others covering a wide range of topics in six themes: growth, governance, sustainability, values and leadership principles, innovation, and industry business models.

A total of 36 risks across the spectrum of politics, economics, social, environment and security were identified to be addressed in order to achieve growth sustainability.  This Davos meeting explicitly endorsed collaboration among G20 countries (in place of G7/G8) in their efforts to deal with the systemic risks in the financial system and to revive the global economy.  A session by former UK Prime Minister Tony Blair, Israel President Shimon Peres and several business leaders about values behind market capitalism was particularly thought provoking.

I came here with a hope that after a year and half of financial crisis, leaders may have gained a better understanding of the problems we are facing and the measures required to solve them.  My hope was realized.  It is a common understanding that we are now in a deep global recession and the governments need to step in as the last (and the only in some countries) resort to reflate the systems.  This understanding is anchored by strong commitments from the U.S. and the Chinese governments and echoed by almost all government leaders at the meeting.  The leaders also recognized the need for a moral compass to guide actions.

Here are 10 takeaways:

  • The “seven deadly sins” described by Mahatma Gandhi are something important to be remembered in principle-centered leadership (as brilliantly argued in Stephen Covey’s management book).  These seven sins are:  wealth without work, pleasure without conscience, knowledge without character, commerce without morality, science without humanity, religion without sacrifice, and politics without principle;
  • Economy is more about how to create wealth than how to distribute wealth;
  • Value is key to long-term sustainable growth, it is far beyond transaction and legality;
  • Capitalism has three elements: competition, regulation, and morality/ethics;
  • We cannot rely solely on regulation to protect markets and consumers;
  • As the crisis is global in nature, the current domestic-centered agenda in policy responses may need to be adjusted to include more global coordination;
  • Constructive Sino-U.S relations hold the key for successful global coordination;
  • The fundamental value of financial services is in providing liquidity to and processing payments for the real economy;
  • A market-based economy cannot function without a normal credit market;
  • How the crisis would change us is more important than when the crisis will end.

With the above said, the wealth loss has been tremendous in recent months.  About 40% of total global wealth, including stocks, bonds, commodities and real estate, was lost during this crisis period!  Real sector data indicate that consumers and businesses continued to pull back in an alarming way.  Free fall since last September may be slowing, but downside risks remain extremely high in the very near-term.  These situations have weighed heavily on confidence.

This was demonstrated in a workshop called “financing industry in an era of capital scarcity.”  Over sixty people participated with about half of them being leaders of the financial sector and the other half from the real sectors.  We were divided into seven groups covering seven major industries.  Our job was to make a pitch to secure $1 billion capital from a hypothetical family office and then act as an investment committee to allocate the fund for a justifiable return over five years.  The combined result of the investment decisions was quite revealing: about 30% of the fund was put in cash (under the mattress), another 30% in foods and beverages.  This is an extremely pessimistic position – there was no trace of any expectation about recovery and no trace of any animal spirit.

Remember the classic story about perspective:  Two shoe salesmen went to Africa individually to explore sales opportunities.  After witnessing the local conditions, one person called his office: “I can’t sell shoes here.  Nobody wears shoes here.”  The other person was very excited and dialed his office: “I can’t believe what I am seeing.  Send me ten thousand pairs of shoes immediately!  Everyone is barefooted here!”   What this story tells us is that it is not the circumstance that is crucial; it is what we say about the circumstance that is crucial.  We can look at the current crisis as value destruction; we can also look at the current crisis as an opportunity to correct some missteps in the value creation process and strengthen our system of market capitalism for better days ahead.

I was pleased to see that the need for confidence was clearly emphasized in many sessions at the Davos meeting.  Indeed, as John Keynes stated in his General Theory “whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition” and “recovery requires the revival of both” (credit and confidence).

So the hope is there; the resolve and means are there; but the lack of confidence is also there – a combination for us to chew in this Year of Ox.

Comments (12) 

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This gives us hope that there is mutual understanding of the problem and shared goals to overcome the crisis. My colleagues and I are doing our small part to rebuild confidence by starting web site focusing on positive stories and advice - (still in beta stage). We will highlight your article as another bright spot in a sea of gloom-and-doom news.

Thank you for the post. You stated "Our job was to make a pitch to secure $1 billion capital from a hypothetical family office and then act as an investment committee to allocate the fund for a justifiable return over five years. The combined result of the investment decisions was quite revealing: about 30% of the fund was put in cash (under the mattress), another 30% in foods and beverages. " Where was the other 40% allocated? Thank you!

Great summary. Do you have any thoughts on what it will take to bring back confidence- both in businesses and in individuals?

Gene, it was refreshing to see that the overall spirit of the forum rested on that as painful as the economic condition is right now, that it will in the end make us all better, stronger and closer. I think as we are forced to work closely together to address our crisis, we are recognizing that we allowed some of our fundamental principles to get out of bounds and now we need to regroup and bring order back with a new sense of humanity.

I see that you quoted Keynes at the end of your post. Do you lean toward a more Keynesian approach to state spending as the needed stimulus? I think that the second, "takeaway" as particularly instructive. Great Post! Thank you.

I found this by chance and I consider myself very lucky. There are a lot of ideas that will keep me busy for a while ... Like, when we read the newspapers, do our politicians act in a way that pushes this notion that the world is a whole unit? Also, I like the thought "How the crisis will change us is more important than when the crisis will end." This period of instability has made me more aware of the world and the resources I consume. It has made me more aware of the fragile footing that many families live daily on. So with these two, I see that I teeter back and forth. And To me, when the crisis ends is just as important as how the world will change.

Gene, I found your "From Davos with hope" to be interesting-it is somewhat reassuring that the public sector elites there still support a market based economy. I do think however that we need to understand that government/central bankers caused this mess not the free market. Irrationally low fed funds rates by Greenspan caused the subprime bubble and along with govt promoting an industry (home ownership) by subsidizing risk (Freddie and Fannie) allowed this to spiral down. Your quote of Keynes was also a bid disconcerting since Keynsian economics (easy money, rapid expansion of the money supply, large govt) has been the problem not a solution. Currently America is based on a consumption funded by debt economy. That is not a sustainable model. Sooner or later China or SA will stop buying our debt and then the dollar is finished. I do wish all the "experts" in Davos actually read Adam Smith or followed the advice of the Austrian School (which is the only macro economic school which has any predictive power)-we would be out of this mess much quicker.

Excellent perspective! Thanks for conveying to us the hope and promise from the leaders around the world.

Gene, Thank you for your post. I found the 10 take aways to be right on target. I was slightly disappointed to read your quote from Keynes. I firmly believe Keynsian economics caused many of the problems we face in the first place (easy money policies at the Fed and government promoting specific industries like home ownership). As for dealing with this crisis, again I think the Austrian Economists had a better take-you have to let prices fall and maleinvestments be wrong out of the system. I am also very concerned over the bailouts and stimulus plans..flooding the world with more dollars and hoping China will continue to buy our debt (and I guess just roll over the principle in perpetuity) is a huge gamble. We need to go to a more balanced economy (savings and production) in the long run. I see nothing central bankers or Washington is doing which will promote this. I think in times like this we should listen more to Hayek than Keynes. Thanks for reading my views..

This is one of the best analyses of the state of the world economy and the steps that must be taken to correct it that I have read in any venue. Thanks for putting things into a manageable perspective with the 10 Takeaways.

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About This Blogger

Gene provides insight and commentary on the global economy.