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Good morning, everybody. Welcome to this traditional opening
morning session at Davos on the global economy. I'm Michael Elliott, the editor
of Time International. This session is done in collaboration with us and Time
Magazine and I've had the great honour for doing this, I think, for seven years.
I look forward to it enormously because I'm always surrounded by people who have
fantastic insights and experiences that they can share with us on a snowy opening
morning at Davos. Those of you who've been to this session in the past will know that
we're notorious for mangling metaphors; we've had the goldilocks economy,
we've had the congealed porridge economy, we've had a positive alphabet soup of recoveries
from recession, Us, Vs, Ws - all sorts of stuff. And we're gathered here today at
what I think is a historic moment in the world economy where what I have christened
the 16-70 economy, where 16% of the world's population controls 70% of world
economic output, may be shifting to a new model. To help us think about what's
likely to happen in the year ahead, we have a panel with me up here of which it
really can be said they need no introduction, but I'll quickly run through
them. Azim Premji, the Chairman of Wipro in India, we're delighted to have with us
this morning. Nouriel Roubini, Professor of Economics
and International Business Editor at the Stern School at NYU. Zhu Min,
whose fantastic contributions at these panels in years gone by have now led him to be
a special advisor at the IMF - that must be the reason?
Because of your recommendation!
Zhu Min joins us again. Martin Sorrell from WPP.
You should be in advertising. I'm next to the master.
And Jim Turley from E&Y. As we've done in the last few years I'm going to ask
Nouriel to kick us off with a synoptic view of where we are and then we'll go one
from there. It's a pleasure being here again this
year. If I had to characterize the global economy, I'd have here in front of me
a glass that's half empty and half full and I think that's a fair representation of
the global economy. There's some positives and some outside
risks; there's some negatives and some downsides. So, I would like to cover both
of them. I would say that if you want to emphasize
the half of the glass that is full and positive, there is a global economic
recovery both in advanced economies and emerging markets.
It's stronger in emerging markets, that's the first positive and it's ongoing.
And the recent data is showing some global economic growth acceleration.
The second positive is that the tail risk of a outright double-dip recession in
advanced economies and the risk of outright deflation are lower than they
were last year and of course that's a positive. Even if the latest data from the
United Kingdom, even from the periphery of the Eurozone, suggests that the risk of
a double-dip or even a long-term stagnation are not gone forever.
The third positive is that the balance sheets of the high-grade corporates in the
United States and other advanced economies like Europe are strong;
they've been slashing cost, especially labour costs, they are flush with profits,
with cash and if they want to do more capex spending and more hiring they have
the money to do so. And their confidence is rising,
therefore that could be generating greater economic growth.
The fourth strength of the global economy is that emerging markets are doing well,
both cyclical in structure - there is still economic growth, In China, in India.
Not just in Asia, but also in Latin America and also in parts of the Middle
East and even in sub-Saharan Africa. And the fifth positive about the global
economy is that last year there was a period of risk on, risk off;
risk was off was after the Greek crisis, the Irish crisis, when there were worries
about double-dip recession. Right now risk aversion has been
increasing, where in risk on mode there is asset inflation in equity markets,
credit spreads have fallen; that means that there is going to be an
improvement in balance sheets through positive wealth effects and through
reduction in credit cost. So those are the positives of the global
economy. What are the potential negatives and the
downside risks for the global economy? First of all, in my view, economic growth
in most advanced economies, US, Europe, Japan, is going to be anaemic,
sub-par, below trend because this painful process of public and private sector deleveraging
is still ongoing and is going to continue for the next few years.
The second problem we have in advanced economies is the rise of sovereign risk,
large budget deficit, rising stocks or public debt and within specifically the
case of the Eurozone it's not just sovereign risk but also risk of further
trouble. You have public debts that are high but also private debt that are high.
We have low competitiveness, we have low economic growth;
actually outright contractions in Spain, in Ireland and in Greece and barely
positive economic growth in Portugal and Italy. So, what's happened in the Eurozone
is certainly, is one of the biggest risks to the global economy.
The third downside risk to the global economies comes from the recent rise in
oil, energy, food and commodity prices - has three negative effects: leads to
a rise in inflation, especially in high growing emerging markets;
is leading to a reduction in disposable income around the world among commodity
importers especially advanced economies and that's a negative for consumption
and economic growth; and now it's also leading to social
and political instability - look what's happened in Tunisia, in Egypt,
Morocco, Algeria. This rise in food prices is becoming a serious social and political
problem. And this rise in inflation in overheating emerging markets, where growth
is too high, inflation is rising, there's excessive credit growth, asset bubbles
leading to another challenge: will these emerging markets, starting with China
and India, be able to heighten enough and fast enough and have a soft landing of their
economy, maintaining high growth and controlling inflation.
That's a question mark; it could be a risk for the economies
and the markets. A fourth downside risk to the global
economy comes from the US. US, this year, might grow close to potential, but there
are four potential downside risks from the US; high unemployment rate, since there's
not going to be much job creation; two, the housing market is already
double-dipping; three, there is a significant problem at the level of state
and local government, risk for the money bond market and;
four, the US is doing very little about its long-term budget deficit.
Even what the President proposed last night in State of the Union is not going
to go in the direction of significantly reducing the budget deficit.
So there are even downside risks for the United States.
Two final downside risks is that the global current account imbalances are not
shrinking; they're not shrinking because commodity prices are rising and there
is not enough exchange rate adjustment. And in a way the world in which 10% is the
growth rate of China and 10% is almost the unemployment rate of the United States,
in which China is very much slowing down the rate of its own currency appreciation,
is a world where there is global imbalances. In which this currency tension can lead to
currency wars and eventually to trade wars and protectionism.
And finally, I would say the glass is half full be cause for the last three years,
with a massive amount of monetary liquidity injection in the global economy
and with a massive amount of fiscal stimulus. But, right now, from the policy
point of view, fiscal policy is going in the direction of austerity in advanced
economies. In part because the markets are forcing it, bond vigilantes, and part
because politics is forcing it. So, we're not going to have fiscal
stimulus and there's going to be fiscal austerity and because of the rise of
inflation in both advanced economies and emerging markets, there is not going to be
further significant quantitative easing in advanced economies and emerging markets
will have to tighten. So, the policy stance is going to go in
the direction of more austerity on the fiscal side, less liquid stimulus and that
could be a negative for the markets and for the economies.
So, it's a balanced situation in which there are some upside risks, but there are
also a number of significant downside risks.
Thank you Nouriel. Zhu Min, can you come in and - Nouriel made a couple of points
on the performance of large emerging economies, particularly India and China;
the question of inflation there, the need for a soft landing as Nouriel put it,
how do you see things? Well, I, as always - I always agree with
Nouriel. He's a professor. And for the emerging market, I think the
growth is still going strong, although there's a little bit of a slowdown,
which is fair and good and healthy. I think in Asia, roughly India and China
still lead. China probably will end up with 9.5% of
GDP growth, obviously still lower than 10.3% last year.
India probably will be 8.5 to 8.7, a little lower than 8.8/8.9 last year.
So, still have a very strong - overall, if you're looking for all the regions in
emerging markets the growth can be very strong because what happened in the last
years, we've observed the trade pattern happen quite a bit.
Because the inter-continental trade more become inter-trade;
the trade become the Asian emerging market within themselves, for themselves to the
level that the Americans, from the Middle East - that's really increased
dramatically. So, I think there's a reduced dependency on an advanced-economy
demand. I think liquidity is a big issue - the investments really picking up.
We expect to see that further pick up this year - become the main drive force for
year 2011, particularly on infrastructure investment wealth;
I think that's a big and a huge business opportunity as well for the world.
But obviously, as Nouriel says, there also a few concerns.
Obviously, the first issue is the food price and energy price's reasonably high.
I mean, the issues not only there, because, in India for example, the food
compose of 47% of CPI, China, 34. Pork, one item, accounts for 9% of Chinese
CPI. So, if you have a food price, you know, volatility, it will have a huge
impact on the CPI. The real issue is on the supply side because the labour cost
increases, land cost increases, environmental cost increases, so the
supply cost increases. So, that's really back to the second
round, with general increase pressures for the emerging markets, particularly in
Asia. I think that's a really big issue. Particularly because the output gap
is very much close in Asian emerging markets. So, what do you anticipate to be the
policy response in India and China to rising prices across the board?
Energy, food, labour shortages, what have you?
Well, I think there's two some things; on the margin side - both countries work
for a tight margin policy, tighter liquidities and further raise interest
rates. I think that's important. But also, on the supply side, provide more
supply on the food side. I think, on the food side you would be
able to do that; always on the commodity side you need more
international cooperation which is the reason you try to pick it up.
I think this is very important. China probably would be able to maintain
the food and the commodity price increase. If we can get that, then I think the
general inflation pressure will be released. But In Asia also - I mean,
in Asia, the second risk is for the capital flow. Because we observe the liquidity as
ample last year and the capital flow is a huge move in emerging markets,
given emerging markets have a much strong growth, less deficits and the environment
- interest rates are so much higher. So, all the money goes one way, expects to
see some more portfolio capital move into the emerging market.
This would be a real shift for global capital relocation.
If that's the case, capital is huge. Capital inflow for emerging markets
is always good news, always good news. And the need for the financial sector,
for the infrastructure, for the investments - but you've got to be very careful if
there's a short-term volatile capital flow - can cause an active impact on the
financial stability and the macro stability as well.
I think this is obviously the most important issue.
But one thing I would really like to pick out is the new issues for this year.
Because the last year we really had two speeds of recovery.
Because an advanced economy is much lower, 2.5% of GDP growth rates.
And emerging markets have roughly 7.2% GDP growth, so way leap.
But what happened is this year we're going to have a three-speed recovery.
Because, an advanced economy more or less remains 2.5/2.8.
emerging markets lower to 6.8% of growth rates, but between them we have the US.
The US with probably get the 3% GDP growth rate which is quite strong.
What does that mean for emerging markets? For the global economy?
The whole thing is, is you're really looking for US economy, all the stimulus
come from demand side; because it's a QE2, because of fiscal
policy. So, that will push the whole demand, domestic demand, of the United
States - will push growth and we expect to see a strong growth occur, but it also
means US probably will increase more. This will make the emerging markets export
more which, there's the potential risk for the world to go back to the old normal,
which it was before the 2007/08: emerging markets keep exporting, advanced economies
kept importing and balance remains. I think that this is the most big risk for
the emerging markets because they have been successfully transforming their model
from an export dependent model to a domestic. But, now there's a big import
demand there and we need exports from emerging markets.
So, whether the emerging market will be able to keep the transit further structure
reform, keep the model to the more domestic management model, I think that's
the key of all year 2011.
Azim Premji, give us the perspective from India.
Just to pick up what he said, inflation is really our key priority at the moment.
It's really right on top of government priority. And the hope is that we don't
get a lot of major reactions and a lot of freebies which go out, to be able to
contain some of the rising agitations of the very poor people.
I think what is really happening is the slowdown of the Western world
and continued acceleration of the emerging world; it's really shifting balance of
power in terms of where the consumption lies. And you know, the way the trends are
going in 10 years, the economies of the emerging worlds will be in excess of USUS$
20 trillion, which is equal to the size of the US economy today.
Roughly, in fact, larger than the size of the US economy.
And in terms of households with disposable incomes above USUS$ 10,000, in five years
from today, there will be more than the households in US and Europe combined.
I mean, that's dramatic shift. This is also putting a new trust on top -
on multinational corporations - of getting emerging countries like India in addition
to China, much higher on focus. That's where they see the growth coming
from. And the good thing is that the end result is it has to result in some amount
of reciprocity; that what they sell into India they have
to buy from India. Whether that be in terms of services, whether it be in terms
of products, whether it be in terms of services other than information
technology. So, certain selected industries can get interesting market
opportunities coming out of it going forward.
Well, let's turn to two chief executive officers of extremely well known
multinational companies. So, both of you've heard about the growth
in the developing markets and I'd like you to talk about opportunities there, but I'd
like both of you also to say how you see your businesses in the Atlantic core as it
were, developing in the US and Western Europe. Martin, do you want to go first?
Well, I think first observation, there's very little left to say.
Pack up and go home!
But, basically I think, if one's honest about it, we're surprised, very surprised
where we are now. If you said to me on September 14th 2008,
would WPP's revenue say in the second half of last year be back to where they were
pre-Lehman or pre-Monoline crisis or pre-sub-prime crisis, I would have said,
‘You need your head examined'. And we're also, regrettably actually,
8% down in terms of the number of people employed in the company,
net. Net down 12% in 2009 when the world was going to come to an end.
2010 we saw a little bit of expansion. Now, 2010 from our point of view, just to
use your acronyms, was LuVVy shaped rather than LUV shaped.
And the difference was that America, the traditional markets, the developed markets
actually, the mature markets rebounded much more strongly than we thought.
We were up 8% America against 2% GDP growth. So America behaved really like
a faster growing market last year. Part of that was dead cat bounce, but part
of it was also due to the fact, I think, that American corporate and Western
corporate are really uncertain. And I don't think last night's speech
really gets us further in terms of removing that uncertainty.
Multinational corporates have about US$ 2 trillion in cash on their unleveraged
balance sheets; their headcounts are down;
there has not been productivity increases; there has been reductions in headcount.
These companies are more efficient. The Administration made the point to us in
Washington at the Business Council, the US Business Council, a few months ago,
that profits actually in the third quarter of last year were 30% better than before
Obama took power. So, they're much more efficient,
but they're much more uncertain. Now this year we think that the world will
move to a more LUV shaped basis, so we'll see Western Europe continuing to be tepid,
tepid growth, western conduit, Atlantic Core; America more U-shaped and the faster
growing markets, BRIC, Next 11, CIVETS - whatever your choice of acronym is - will
be more - will continue to be V-shaped. The risk - the chief risk I think has been
said, is inflation and what the interest rate response will be to that.
The other risk is the political risk, but we've seen in North Africa, Tunis
and Egypt and the fact that that might spread, the residual issues of the Middle East -
of Israel, Iran, etc., are there. And commodity prices impacting on
commodity input. So, net-net, I think corporates are still
uncertain. Our business grew last year, interestingly, because of that
uncertainty; an unwillingness in the West to invest in capacity, in increasing fixed
cross, boards are terrified of making mistakes, the crises that we've seen at
BP, at Goldman Sachs, the product recalls from Toyota, make boards,
non-executive directors extremely cautious - who in their right minds would want to be
a non-executive director of a public company? The risk/reward ratio just
doesn't work. So what you do - and CEOs don't want to
lose their jobs - what you do is you pull in your horns;
you go for growth. And I just leave you with this
observation: the IBC, which I'm chairman of here in Davos, did a survey in August
of last year. Four points: uncertainty at an all-time
high; strategic response is investment in BRICs and Next 11;
biggest shortage is talent, despite high unemployment rates, you know the biggest
challenge we face is youth employment - 25% in the UK, 40% in Spain and other
markets, this is the biggest challenge that we face in the long term and the last
point; green is still golden. The two first points are the key ones:
high uncertainty, what's the response? Investment in BRICs and Next 11, where you
do see relative growth. Very good.
Jim? Yes, Michael, I think as Martin's said, the first speaker's nailed it on the sort
of macro level on the economy. I think that Martin's summary that LUV
continues as far as the L-U-V, I think that's actually true.
I think we believe and think about the emerging markets, there's actually some
changes taking place. You look at the IPOs,
increasingly dramatic numbers coming from the emerging markets as opposed to the legacy of IPOs
in the Atlantic regions, you've called it. I think you're seeing a huge immersion of
E2E trade, just bypassing the developed markets; I think you're seeing on top of
that some real shift in terms of investment and acquisition from the
emerging markets to the developed markets. I think there's a few things that haven't
been talked about that will be real important, not necessarily just in 2011,
but beyond. And one is demographics, no one has talked
about that. But if you look out to 2020, on balance
the average age of the population in China and the US will be about the same, 37 or
38 years old. On balance, the average age of the
population in Western Europe and Japan will be about the same and it's going to
be 47 or 48 years old. And on balance, the average age of the
population in India and the Middle East is going to be 27 or 28 years old.
This has enormous impact on an array of policy issues and certainly on economic
prosperity and growth. Add to that the whole demographics around
gender and I think demographics will be a big issue.
I think we're also going to see, to your comment on sort of the Atlantic region,
we've seen the same things Martin talked about in terms of growth returning,
which is great. But I think you're going to see increasing
tension between public sector and private sector. What it has, in many countries,
been a historic sort of deal that working in the public sector was safer, you didn't
have to run the risk of being separated or out-counciled and wages might have been
a little bit lower and now it's turned around. In many countries in the last
couple of years during the crisis, we've seen job gains in the public sector,
massive job loss in private sector. We've seen total comp and benefits higher
in the public sector, early retirement, bigger pensions, I think that's going to
be an increasing source of tension. Third and final thing is, I think as we
move forward, the role of the entrepreneur is going to get a lot more important.
We've all talked about jobs and the unemployment; nobody builds jobs,
nobody lifts communities, nobody lifts lives like entrepreneurs when they are uncertain.
To Martin's point, they tend to stay on the sideline out of the game.
Making sure that countries do enough to encourage entrepreneurial activity,
making sure that even big companies do enough to encourage entrepreneurship from within
is going to be key. Very good.
I want to come back to your public sector, private sector split in a minute because I
think there are some very interesting points that we can take on that.
Let me come back to Nouriel and just get you to concentrate on one of your downside
risks, which is sovereign debt risk. Because you were very outspoken throughout
the whole of last year on - well, not outspoken, but sharply critical of the way
in which the Europeans were handling their debt crisis.
My guess is that if this meeting had taken place even six weeks ago, it would be
European debt, debt, debt all the time. Are you still as worried as you were in
the middle of last year that something could go badly wrong in the EU?
Yes, I'm worried. I think there is a policy response that
is more aggressive than what it was last year. But I think that there are four
fundamental issues they have to resolve in the Eurozone. The first one is that you
need more liquidity and official resources to avoid runs and there is a risk of the
contagion now spreading from Greece, Ireland, Portugal to places like Spain
and Belgium. Spain is too big to fail, but also too big to be saved without great
official sources; you need that.
The Germans are still resisting. The second one is that there are some
countries that are effectively near-insolvent. Greece, even if they do
everything the EMU programme, they're going to end up with a public of 150% of
GDP in three years. Argentina and Russia defaulted when their
debt was at 50% of GDP, so we need orderly and early restructuring of the market,
oriented of the public debt in the countries that are near insolvent.
The Europeans are saying, ‘We're going to do it after 2013'.
That's a mistake. Three, we decide to socialize the private
losses and put bosses, for example, of the financial system - look at Ireland,
the balance sheets of the government and now it's breaking the back of those
governments, like in Ireland. You need an orderly restructuring of even senior
and secure bank debt. Again, that problem has been pushed to the
future. And finally, there is no growth
and actually, there is outright contraction in most of the periphery.
And if you're not going to have economic growth, you'll have two problems: one
is the social and political backlash against austerity in a form that's going to become
worse because people don't see light at the end of the tunnel;
two you have to stabilize debt and deficit in the private and public sector as share
of GDP. If GDP keeps on falling, stabilising this thing, even with
austerity, is not going to happen. And I don't think there is a strategy to
resuming economic growth in the periphery of the Eurozone. The policy of the ECB
is too tight; the Euro's too strong, there is fiscal
austerity as a negative effect, however necessary, on economic growth and there
is no economic growth; there is continued contraction.
So, the mood in the market is slightly better, but I think that the fundamental
problems of the Eurozone remain unsolved. Just coming off that to Zhu Min and Azim
Premji, very provocative article in the Financial Times this morning by Kishore
Mahbubani, a great friend of many of ours, saying that people in Asia are now fed up
with the West because they can't get their economic house in order, the Europeans
can't sort out their sovereign debt crisis, the Americans can't sort out
long-term budget deficits and that Asians are getting fed up with being lectured to
by Westerners. Do you think that's right, Azim? Do you think that's right, Zhu Min?
Go ahead.
This is a tough question, it's much easier for you to go ahead!
I didn't quite understand your question.
See! Do you think those in Asia are getting fed
up at being lectured by Westerners on how to run their economies?
Frankly, speaking for India, I don't know too much about the rest of Asia, I don't
think so. I think they're being fed up of being
constantly needled to keep opening their economies all the time.
And there doesn't seem to be a two-way traffic on that.
And people don't seem to equate in terms of liberalisation, same principles
applicable to products and services. That's fundamental.
I mean, if you're talking about global trade, global trade is products,
global trade is services. And you cannot have one standards of
opening up economies of emerging countries to products and contra to that you have
policies, particularly in the United States, which put all kind of restrictions
on imports of services.
It just cannot be one-way traffic. So slightly fed up. Slightly fed up.
More than slightly fed up. Zhu Min, you come in.
I don't know how to define a constant state of fed up.
I think the crisis obviously made this very clear;
we need to rethink - think deeply - as Jim pointed out to further to think about what
would be the economic model for this world. If you're looking for the advanced
economy, when the rich is a US$ 30,000 per capita, it become norm, low growth rates,
quite low inflation rates, very high social welfare package, everybody was born
with entitlement and the poor is the big fiscal deficit.
This is very much become the thing and why bother, life is so good,
right? And, yes, then you will see three things I think. Jim had a point, demographic change
is number one and number two is the globalisation. That's a very - number
three obviously is a global resource restrictions. And the crisis made this
very clear, this model does not necessarily work.
I think for the whole emerging market in Asia, they are learning from this crisis,
trying to figure out what will be the good model for the Asian and for the world in
the tomorrow. I think this is really the fundamental
issues. I mean, Nouriel pointed out this correctly because if you're looking for
problem, it's not for today; it's really facing the future.
If you factor into the non-funded liability on the welfare and the pensions
and the Medicare's in the plan - today's budget deficits, you will see the number
are huge, much bigger. So Asians look what the French would call
the 30 glorious years after 1945 in which significant pensions and other welfare
benefits were established while saying to themselves, we can't go down - that road
won't work for us. We can't do that model.
I think this has become a clear message for the whole world.
But Asia, emerging markets in Asia, also got to be very careful because there's one
billion people living in advanced economies, three billion people living in
the emerging market; if you asked everyone in the emerging
market what is your life model in tomorrow, they will say American life:
a big house and a big car, 4x4 SUVs and a pension entitlement,
right? But it won't work, right? Because we actually don't have that
resource to support the whole thing. So, the whole world have to work together
to figure out the model for tomorrow. This question about hectoring,
or lecturing, I mean, I don't think it's just arisen - not in today's Financial Times.
Remember, about two or three years ago, after Lehman, there was a lot of criticism
that the West was not an exemplar for China or India; we saw the growth of
confidence in China or India rise extremely significantly in Brazil under
Lula and now under Dilma. We see it, we saw it and we will continue to see it
and I think this is the issue. The real issue is and again we saw it last
night, an unwillingness to deal with the real gorilla in the room which is the US
deficit issue. Unfortunately, it looks as though we're
going to see postponement of dealing with that issue until after the next general
election in America in 2012. Goodness knows what the position will be
in 2013, so we sit here in Davos hopefully in 2013, I don't know what we will be
saying then. I mean basically, if you're running
a multinational company, the world really divides into four divisions.
The top division is the BRICs and Next 11 - I use a football analogy - Division 1,
is the BRICs and Next 11, the CIVETS. And in our industry it would be the new media.
Division 2 is the USA and Germany, because Germany is extremely strong, high value
added manufacturing, strong exports, has made a remarkable recovery and we're
seeing in Europe a shift to the East as well. A power of Russia driven by energy.
At US$ 100 a barrel the Russian economy works in spades;
it works at US$ 60-70. Poland and Germany and the German
investment in East Germany is paying off. And in our industry I put fee to air
television in that Second Division as well. Third Division would be western
continental Europe, perhaps the UK moving up into the Second Division, but Nouriel
is a bit sceptical about the front-loaded deficit reduction plan of the UK; but at
least they tried to deal with the issue, or are trying to deal with the issue.
And I'd put newspapers and periodicals and those challenged by new media.
Division 4 is Japan. Japan shows no signs. It's a 20-year sort of stagnation
and shows no signs of getting out of it. When you're faced with that, the message
is clear what you do with a multinational company, where you make your investments
in capacity and growth and you don't make it in the western core.
Jim, come on in and then I'll come back to your other -
This discussion of sort of, are they getting fed up of being lectured turned
into a discussion tirade. I work on President Obama's Export Council
and spend a lot of time talking about trade; it's astonishing, there's some 600
free-trade agreements around the world. The US is party to less than 20 of them.
And he's made a big deal, positive in my judgment, to get the Korean free-trade
deal passed, but it still has to go through the process and not enough
progress on Panama, not enough progress on Columbia. Clearly a whole pan-Pacific
free-trade agreement needs to come and I think trade is going to be incredibly
important. One of the things that I do fear is that global cooperation is going
to get harder, not easier, as the recovery continues to go and so, as Nouriel said,
trade protectionism could creep in whether it's through currency or otherwise and I
think that's something we're really worried about.
Nouriel and I were at a dinner last night where the following topics were raised in
terms of insignificant international cooperation; I made a note.
Trade imbalances, capital flows, water resources, carbon emissions,
innovation and immigration. On all of those points, people were saying
at the dinner that there was insufficient international cooperation.
One of these comments as well, about the US deficit.
You know, there's beginning talk but it does look like we need a heck of a lot
more action on it. The question of whether it's pragmatism or
realism. Exactly.
Is the President idealistically opposed to this or is he moving to the centre?
I think Nouriel feels that it was a bit more centrist speech.
But we haven't seen the meat yet. I think there is -
Zhu Min - sorry, Jim. Zhu Min? Yes, you mentioned global cooperation.
I think this is really the urgent issue. And yes, everybody talk about because the
crisis more or less passed our way although we're not over it yet.
So, the urgency is not there. I would say it's absolutely not true.
Because what do you say. As Martin says, this global policy cycle
is in very different stage, right? If you're looking for advanced economy,
particularly Europeans, I mean they are very much on the fiscal policy, a little
bit of accommodative monetary policy, in most advanced economies.
US is very outlying within the G7. So, US has the most accommodating fiscal policy
and monetary policy as well; they're still on the way.
If you're looking for the emerging market, it's very much a tight monetary policy,
a little neutral fiscal policy now. And so, all the policies in a different
area, the world is still in a very fragile situation. As Martin says, Martin says
that he was surprised we are today we are. I think that's true because, Martin,
you are a big corp, the big corp is in fantastic situations.
You have fantastic situations; you have a very high profit margin,
very high productivities, a lot of cash. But that's not overall picture.
If you're looking for SMEs, as they're pretty challenged today.
If you're looking for the GDP, yes, we had a very strong GDP in the past few years,
but it's very much a rebound. All world, I think we need to look about
output level. If you're looking for the output level,
the end of last year the world output level was equivalent to the output level
of the peak, that's in 2008. This means, in two years we have a zero
incremental growth of GDP. So, that's the real situations.
So in that sense, how do we coordinate a global economic, monetary and physical
policies and move with the whole global economy forward?
I think that's absolutely, absolutely the most important issue today.
Well, I think you're right. The problems we're facing are global,
whether its global imbalances, monitoring global stability, climate change,
energy security, food security, trade issues and so on.
And the G7 or the G8 became obsolete and now we've moved to the G20. But there's
not much cooperation occurring, you know, on monetary and fiscal, on exchange-rate
disagreement. But also on the bigger long-term picture, issues from trade,
climate change to what to do energy. There's no agreement, so instead of having
a G20, I think we're going to the G0 world, which there is no leader and there
is not even a G2 and there's disagreement on all the fundamental shorter, medium
and long-term issues. So, there is no global economic and policy
governance. The G0 world.
Jim, you mentioned tensions between the public sector and the private sector,
particularly in the US. Perhaps another, who knows, million jobs to be lost in
state and local government as they put their budget houses in order as the
private sector rebounds. Nouriel identified high unemployment in
the US as a real risk. Cover of the Atlantic this month,
fabulous article by Chrystia Freeland, ‘The rise of the new ruling class: how the global elite
is leaving you behind'. And The Harvard Business Review,
a terrific piece by Michael Porter and Mark Kramer which starts off by saying,
‘the capitalist system is under siege. In recent years, business increasingly has
been viewed as a major cause of social, environmental and economic problems.
The legitimacy of business has fallen to levels not seen in recent history.'
Crikey! So, as international businessmen like you lie awake at night, I mean,
do you hear the rattle of tumbrels and the clacking of tricoteurs' knitting needles,
do you think revolution is underway? No, you don't,
no. Either of you? Do you lie awake at night?
No, I think it is a serious issue. If you see what is happening in North
Arica and the potential. We were talking before about today as
a crucial day in Egypt and elsewhere in the Middle East. I just came from the Sundance
Film Festival; there's a film called The Flaw, F-L-A-W which picks up on Alan
Greenspan's testimony to Congress and the flaw that he saw in the model.
And what it does, there's a very interesting graph in it which tracks
inequality, the concentration of wealth in United States from 1920 to today.
And the inequality peaked in 1929 and I think I'm right it peaked at about 2007,
maybe even a little later than that.
And this issue about inequality is a matter of economic debate.
They had Shiller and is it Louis Hyman in it as well, Stiglitz, were all
interviewed; and this question about whether inequality;
you know, wealthy people invest in financial assets, they create asset
bubbles, whereas wealth is more distributed, if there's an investment in
more mass-consumption and therefore capacity and economies prosper more as
a result. So, this concentration of wealth, particularly in the United States, I think
is a big issue. And how you deal with it, whether you then
attack it by increasing marginal tax rates, obviously controversial,
whether that's the issue - we were talking about this again before and I think,
Nouriel, you were of the view that that may be one of the policy - to deal with the deficit
you have to increase tax rates. And they have to come either from direct
taxation or indirect taxation. And what this film was talking about was
the wisdom, maybe, of increasing direct rates, particularly on the more wealthy.
Not a popular message in some sections of the country.
Jim, do you want to come in? Yes, Michael, it is interesting.
Every business person around the world has - we've all been in the same bucket,
demonized over the last several years and maybe it began at the peak of inequality
of earnings in 2007. I think I'm beginning to detect a little
bit of a change, as there became a realisation that the more business
activity and private sector activity is demonized, the less of it you're going to
get and the less job growth you're going to get.
And so, at the end of the day, I think that there has been at least a tone change
from Washington on that point that I think might actually begin to move the cycle
back towards recognising that we all need to figure out how to coordinate globally;
we all need to get across the difficulties between countries around trade and we all
need to figure out that, you know, businesses need to succeed in order to
have employment for people.
But, we don't have the exact path yet. I think the State of the Union did a nice
job of talking about competitiveness around taxes, around trade, talked about
tone, but as Martin said, it lacked details. So, I'm not sure.
It was big on vision. Oh, big on vision.
I just want to come back to what Nouriel said about the G0. I think we should
accredit, was it Ian Bremmer's piece, came out about two or three weeks ago which I
commend everybody to read, where he talks about there isn't a G7, a G8 or there
is the risk there isn't a G7, a G8 or G20; there's really a G0. What he's talking
about is the rise of protectionism, the sort of things that we are seeing in
Africa and elsewhere. And I don't want to blow Klaus Schwab's
trumpet too loudly, but I do think there is - we don't have an international or
a multinational business organisation like a G20 or a G7 or a G8; it doesn't exist.
And one of the things that was discussed in Seoul at the last G20 meeting and got
some momentum was the issue of a voice for multinational business to deal with some
of the issues you're raising, Mike. Because business is not seen in a good
light. If you look at all the trust indices that
PR companies like our own and others put out, business is very much at the low end
of the totem pole; it's not just bankers, it's not just
investment bankers or commercial bankers, it's business as a whole.
And it is a very serious issue. It mirrors the issue we were talking about
in the hectoring of the West or the lecturing of the West to the East or the
South or the South-East. And I think it is something that leading business people are
going to talk about here with, I think, President Sarkozy in the context of his
Presidency of the G20. And it's something that we must wrestle with.
Things like the Business Council are US bodies. And it's all very fractured.
When you get together, one voice, if we can manage to do that, develop a voice to
influence policy in a constructive way. I think it's needed.
Michael? Yes, come on in, Jim.
Sure. You know, Sir Martin mentioned the IBC earlier, that he chairs.
I remember at an IBC summer meeting, this is a group of CEOs of many of the big
companies at the Forum - there was a discussion to your point of,
is capitalism, like, dead and we need to figure out something to put in its place.
The feedback from the IBC members from the emerging economies of China and India were
‘go slow on that'. They said that from their perspective much
of sort of free-market capitalism has been the best thing to help lift economies in
their parts of the world and so they were exercising caution as far as tossing it
out too quickly. It was an interesting dichotomy.
Sure. Zhu Min, then we'll take some questions from the audience.
Thank you. The increasing inequality, obviously the
most serious challenge you are facing today for the whole world.
The most serious challenge. Challenge for the whole world.
Not only for advanced economies, but also for the emerging markets, but obviously
from different causes. I mean, for an emerging market,
because the very strong growth and increase, the distribution issues and income gap
increase, but the events as well. But I would like to follow-up on Martin's
comments. I think it's not only the tax issues. We need to go further.
The first questions, if you see the income really diverging in the past 10 years;
the first question's how and where this wealth has been created.
I think this is most important, you're absolutely right.
And if you're looking for US cases, the inequality peaked in 20 - before the big
crisis. 1% of Americans hold roughly 48% wealth - I'm talking about wealth,
not talking about the wage. After the crisis it was a ginger - in 1968
roughly, 1% of Americans held 28% of the whole US wealth.
Getting up in 2000 to become 42, in 2008 go back to 47% again;
if you see behind that, it's always a parallel with the booming of the stock
market and the financial sector. So that goes back to the fundamental
questions, where the wealth should be created. And then it's the wealth should
be distributed and then redistributed. I think we have to go back to
fundamentals; wealth fits into growth model as we were mentioning before.
It think it is a very important issue; so many issues to tell us we cannot let
the income of disparities increase further; the crisis gave a break, but I
don't think the world paid enough attention this issue.
Just to underline one of your first comments on that intervention, Zhu Min,
inequality is not just a rich developed world problem.
On the contrary, as growth has been speeding up in the developing world,
it's been become a problem everywhere. Yes, it's everywhere.
You have the India Inclusive campaign here in Davos which is dealing with this issue
in the context of - or attempting to deal with this issue in the context of Indian
growth and development, that it's becoming too high and low;
too rich and poor oriented. And the political instability you see
right now, for example, in the Middle East, is not just food prices.
There's inequality, there's corruption, high levels of unemployment among the
young people so this is a very dangerous complication of factors and certainly,
the income and wealth inequality exacerbates those things.
I have a feeling that ‘inequality' is going to be one of the key words of Davos
this year actually. Let's take some questions.
Gentleman over here? I'm sure there will be - I say, that there
will be microphones - I think one is heading your way right as we speak.
One here and then over here. Gentleman in the front row please?
If you could state your name that would be great.
Yes, good morning, Gerard Lyons from Standard Chartered. I congratulate the
panel on their fantastic debate. It's not so much a question as a comment
that I'd welcome the panel's observations on. A couple of years ago, Obama's Chief
of Staff, Rahm Emanuel, or Mr Emanuel, said that you shouldn't waste a good
crisis. What's very interesting is that across the emerging world, it seems to me
they've taken that to heart. One of the most interesting things that
the panel hasn't talked about yet is the fact that in the West, people assume value
will be created in the West and the West needs to stay ahead up the value curve.
One of the most interesting observations that we've seen at Standard Chartered in
the last two years is the extent to which emerging economies have really moved up
the value curve. And this year's twelfth Five-Year Plan
from China is a further sign of that. And just to finish, it's not just China
and India; what's interesting is the infrastructure boom we've seen on the
ground across Africa, in the Middle East, it reinforces this new trade corridor
aspect across the emerging world: intra-Asia, Asia-Africa, Asia-Middle East.
And basically it seems to me the challenges are going to be as great in the
future as Mr Zhu Min touched on for the West and the SMEs. But, it's a very
interesting dynamic that it would be interesting to hear the panel's
observations on. Something that we were touching on in the
green room earlier. Martin, I mean, you and I were talking
about the extent to which innovation and new business practices are being
discovered in the developing world. Yes, I mean, I think we have to get out of
the lexicon the words ‘developing' or ‘emerging'. You know, China is a US$ 5
trillion economy against 15 trillion, it's true for the US, out of 65 trillion -
whatever it is - worldwide, but we must get it out of the lexicon.
There are other countries, absolutely; Vietnam, Bangladesh, Pakistan despite the
political problems. The other thing is, we all talk about
a shift from West to East, it's actually a shift from West to East, West to South;
this is the decade of Latin America. Brazil with the World Cup and the
Olympics, certainly is going to be a very important economy of Latin America.
But other countries, Mexico, Columbia, Argentina, the Andean region - we've seen
the stock exchanges coming together.
And indeed, the South-East. Your point about Africa and the Middle East,
we've seen in our industry great growth. The Chinese really understand, you know,
the suggestion that there are 800,000 Chinese working in African countries on
various infrastructure, energy projects, food projects - suggests that, as usual,
state directed capitalism works. Having a politburo of engineers running an
economy: not a bad system. Azim, do you want to come in?
It's a very interesting concept which is coming up now, whether it be in India or
in China; but I think it's really come up in India. The concept of reverse
engineering of products. The global multinationals wish to address
a vast market which requires high volume, very low price points.
They cannot think in terms of mindsets of an American sitting in Milwaukee or
mindsets of an automobile design engineer sitting in Detroit. And a very interesting
case study on this, which really brings out this contrast, is Ford's entry into
India. Ford's a pioneer into India. Ford is a very successful company globally.
And they wanted to bring a mid-end car to India and they figured the mid-end car
would be more cost effective, if it was more cost effective, to be able generate
more volume. So, a car that was typically selling in
the United States at about US$ 20,000, they tried to re-engineer in India.
Re-engineer in India sitting in Detroit with Detroit engineers.
And figured one way they could bring down - one among many ways they could bring
down the cost of the car - was to see to it that power windows were removed on half
the cars, the back side of the cars. But they didn't realize that a car at US$
15,000 in India would be bought by wealthy people and wealthy people had drivers,
chauffeurs, so you provided power windows for the driver but you did not provide
power windows for the occupants of the car. This is an actual case history.
You know, we have a joint venture with General Electric on healthcare systems
and we have today 1,500 engineers working for, producing products, cardiology equipment,
low-end ultrasound equipment, baby warmers, specifically tailored to the
emerging markets. And the interesting thing is not only do
they cater across the world to emerging markets, whether it be Africa,
China, Latin America, but because of the huge demand of value and cost by global
customers including western customers, is becoming a very interesting re-export
market back to the developed world. Yes, Nouriel, come on in.
I think the point was made about the rise of emerging markets;
they're going to be a source of high economic growth for the global economy.
The question is here are going to be the sources of growth for advanced economies.
And I here see four challenges and four sources of trouble.
One is the demographics, aging of population increases potential growth.
It's a problem in Japan, it's a problem in Europe. The second one is that you need to
structural reforms in all advanced economies. Structural reform requiring
more slowly is the desirable optimum. Look at Europe, look at Japan. Three,
we need to invest into education into infrastructure, to become more productive
and more competitive; that's not occurring at the rate it should
be. And four, these sovereign debt problems; large budget deficits,
rising stocks of public debt and maybe slumping on potential growth.
So, unless the West and advanced economies
address the fundamental problems, it's going to be a big issue.
Question, just back here and then at the front. Question, as quick as we can,
thanks, yes. Yes, Vincent Van Quickenborne, Minister of
Economy from Belgium. I like the idea of putting, Sir Martin, Germany in Division
Two; it has to do with export to emerging markets, especially China.
Well, yesterday, some interesting figures were published about China. Actually that
private consumption contributed 3.9% to the total economic growth of 10.3% in 2010
in China. That is the lowest since 2003 and is not, in fact, not fulfilling what
Mr Wen Jiaboa and Hu Jintao said when they started as Premier and President. So far
for rebalancing I would say. My question to the man known as Nouriel on
Twitter is, is the Chinese state capitalist model in the long term,
sustainable?
Well, I think you are pointing out an important problem;
the model of China so far has been one of export-light industrialisation and growth
based on a cheap currency and relying on net exports and no fixed investment.
And consumption has been very low, around 36% of GDP. So, the challenge that China
is facing is that the US cannot be anymore the consumer first and last resort,
spending more of its income and running a larger current account deficit so that
China can be the producer of first and last resort - spending less than its
income and running ever larger surpluses.
And therefore you need to reduce savings rate and reduce consumption.
There are structural reasons why the Chinese save a lot about the corporate
sector and the housing sector and why the Chinese don't consume.
There is a plan, a Five-Year Plan about changing that - we'll see.
I think that's going to be the biggest challenge that China is going to be
facing; to move away from net exports to greater reliance on consumption
and reduction of savings. We'll see if it can happen.
Do you agree? Yes, because I guess you have China
exports because you can pronounce Hu Jintao and Wen Jiaboa very well in
a Chinese way. I'm very much impressed.
But I do have slightly different data from yours. The last year's China GDP, if you
look overall, consumption contributed of 47.6%. The fixed capital information still
contributed 48.2% so slightly more than consumption. Then exports consume the rest
- little bit of 3%. If you're looking for the net exports
contribution for the GDP gross last year, it was negative.
Because China current account surplus dropped dramatically from 10.8%, 2007 to
last year roughly a little bit more than 4%. And very important, we see the Chinese
export surplus were un-downsized this year and the in-year fall.
Because it's very clear, China cannot rely on export growth model.
I mean, in 1998, the big lesson for Asian economies, you cannot rely on external
capital flow. So, the ForEx sped up.
And this crisis gave a big lesson for the Asia emerging markets;
you cannot rely on export external demand. This is very simple, but until you have
been hit, hit badly, you will not take the lesson. So you see, as last year,
it's quite a big change on export importance within the emerging Asian as well - we
will see further the emerging market go more into the domestic consumption,
driven more. Only I concern you, as picked up, more import as it were -
Is it true, Zhu Min, the Chinese consumer has to have some things, for example,
healthcare? What we see with our 12,000 people in mainland China is a concern
about saving for older life, old age, healthcare. And until that is done,
Nouriel referred to the latest Five-Year plan that was referred to before,
until that is in place, the Chinese consumer is not going to feel secure enough to spend
in the way that we in the West would like to see them.
Well, pension and healthcare is all thing. But reforms are the things also on the way.
Adam?
Adam Lashinsky with Fortune Magazine. Jim, if I heard you correctly you seemed to
suggest that the negative tone in the US business community would cause US business
leaders to cut down their activity, which strikes me as the equivalent of saying,
if you don't play nice with me in the schoolyard, I'm going to take my bat
and ball and leave the schoolyard - which, bellyaching notwithstanding isn't how
fiduciaries typically behave. So, my question to you is, with Jeff
Immelt chairing the President's Jobs Council and the President's more
conciliatory tone, are we passed that now? And Zhu Min, if you could comment, how did
the Chinese leadership view this spat between the US administration and the US
corporate community? Yes, well, let me address it first.
I wasn't implying to take your bat and ball and go home.
I think that the combination of the tenor of discussion around the business
community and the uncertainty that existed on a policy level, whether it was the
extensive discussions around healthcare, around financial reform, around cap
and trade, around card check policy, labour policy, around debt-reduction policy,
every one of these policy balls that were being juggled, every businessman who knew
that when the ball hit the table, it would impact down.
A combination of sort of the rhetoric and the policy uncertainty caused companies,
I think in many cases, to quite understandably feel a little cautious.
I do think we're moving in a very positive direction and I think that on both
settling down some of the policy issues and having Jeff Immelt and others work
with the Administration around this tone, I think we're moving the right path.
Do you want to come in, Zhu Min? Well, thanks for the question, but I have
to say the first thing, I am now with IMF, so I'm considering myself very much an
international citizen - I don't pay for US tax so I'm no longer in a position as
a deputy governor in China. So, I'm not properly in a position to answer your
question. But, as a Washingtonian, you know, a thousand miles away, my sense is -
I think Jim laid out certainly the big issues. But I really see US in need of
a growth strategy. Question right at the front and then we'll
try and squeeze one in at the back. Gentleman right here, thank you?
Thank you. Yes, I'm Luigi Buttiglione from Brevan
Howard Investment Products. Two questions, one on risk and second one on US policy.
If I go backward, back to last year and the end of the so called Davos Consensus
with my colleagues, we were a little bit - we came back with the impression that the
so called thinkers or policy makers were a little bit on the pessimistic side and the
corporate sector was more on the optimistic side last year.
Well, it proved - if you look at last year's experience - in the end, I'd say
the latter group of people were more right than the first one.
In the end, last year's growth was close to 5% for the world which is quite good.
Here, I get a little bit different statistics for Mr Zhu Min. I think that
for the year, at the end of last year, world GDP was something like 3% above the
previous peak, so was not that bad. So, if we look forward to this year,
going to the half empty/half full glass of Nouriel Roubini, where do you see risk?
Do you see risk that actually we could be surprised again on the high side?
And I would say especially a glance at inflation. And the second question very
quickly, it's about the policy in the US. What do you think about energy taxes?
Because I think the gorilla, as someone said, is the big thing, the US policy.
And I think it's something we all discuss and I would like to know what you think
about that? Let's just quickly - do you think we're
going to be surprised on the upside? I don't think you do, do you?
Well, I pointed out what could be the upside risk coming from emerging markets,
from the fight of the corporate sector; it's strong, there is a global recovery.
But I do worry about the Eurozone, I do worry about commodity prices rising, I do
worry about housing and labour market in the United States. I worry about the
policy response of China and other countries and how they're going to manage
capital interest. And I also worry about the whole series
of, I would say, geopolitical risk; again food and social and political
instability, Iran, Israel, North/South Korea. Terrorism - look what happened in
Moscow the other day, in Afghanistan, Pakistan and even cyber-terrorism.
So there are lots of things that could go wrong. The markets right now are
optimistic. The CEOs are more optimistic; that's a positive, but we should not
underestimate there are a number of significant, potential downside risks to
the global economy. Martin, do you want to add?
I don't think corporate were optimistic this time last year.
I think we became more optimistic as we went through the year.
I'll just recap. In 2009 we forecast -2 on our revenues,
we did -8. In 2010 we said zero, we did 5;
a little bit better than 5. This year we're budgeting 5.
I think, I hope, we'll be in line with where it actually turns out.
I think this year is the same again as last year except there will be a move more
in our industry, well, in the industries we follow to BRICs and Next 11.
There'll be a rebalancing there and more to digital.
Last year I think was more about - I call it dead cat bounce, it's a bit unfair -
but it was the result of the stimulus. If you put US$ 12 trillion into the
world's economy there has to be a rebound and that came in 2010.
2011 I think will be more balanced and more back to where we are;
maybe not the new reality that we're meant to be discussing this morning.
I'll leave everyone with three of my takeaways. One, it isn't just India
and China, that countries like Bangladesh and Argentina and even, you said,
Pakistan, are showing remarkable growth; secondly, keep an eye on Egypt today and;
thirdly, Zhu Min's comment that inequality is the single biggest problem facing the
global economy, rich countries and poor countries alike.
It's been a fantastic opening panel. Please thank my panellists very much.