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from Chrystia Freeland:

Canada’s top central banker on the Volcker Rule

In an interview at the World Economic Forum in Davos, Bank of Canada Governor Mark Carney tells Chrystia that the implementation of the Volcker Rule in the U.S. will have unintended consequences in the international bond markets and that JPMorgan Chase chief Jamie Dimon is wrong to say that the Basel Committee's decision to increase capital requirements is "anti-American."

from Ian Bremmer:

The world’s year of reckoning

DAVOS--If 2011 was the year of the protestor, 2012, at least where the World Economic Forum is concerned, is the year of the reckoning. Through the events of the Arab Spring, major power vacuums have been created in countries all over the Middle East. More governments, such as Syria’s, are likely to topple. But the time to start thinking about what’s next for countries like Egypt is already here.

The thing is, it’s coming at an inconvenient time for Western democracy. Having long held themselves as the global models for governance and economic structure, Western Europe and the U.S. have in recent years shown their warts as never before. That has opened the door for state capitalist models -- like China’s -- to take the stage. And the simple fact that new models for how countries and economies should work are even being considered is a blow to the Western world’s power and prestige. Obviously, well before the G-7 system broke down, China was already on a path of state capitalism, and that has turned out to be a successful course for that country to chart. But here’s the problem: While it has led to wealth and a rise in living standards for the Chinese, it hasn’t led to more democracy.

Here at Davos, and in capitals around the world, the paths countries should chart for themselves in the future is always topic A, and what we’ve learned over these last years is that transforming those countries and indeed the world is about a lot more than simply swapping out the players who legislate and lead. Look at the precarious situation in Egypt. Consider Putin’s long hold on power in Russia. For that matter, look at the situations in many countries on the euro zone periphery. Going down that list, nations that have simply replaced one power-grabbing leader with another are in trouble. (In Russia’s case, that leader has simply replaced himself.) Countries that have revolved leadership without addressing deeper institutional weaknesses are not setting themselves up for success in the long run.

That’s why changing not just the leaders at the table but the system by which the country is governed is such a real and important goal -- it reconfigures the country’s "end result" trajectory. When countries like China and Russia become economically important, they of course support the models that made them powerful: strong authoritarianism and state capitalism. Specifically as China gains more and more economic power, it continues to improve its bargaining position with the West — that is, it can get away with bargaining less and less. And China’s ability to eschew compromise will only grow as its position in the world continues to get stronger -- so why would the Chinese negotiate about anything? When their growth starts to level off or their cost structures begin to match the West’s -- a change that will be measured in decades, not years -- they’ll be willing to cooperate more. But not before.

If you believe in the values of Western democracy -- equality, fairness, opportunity and freedom -- that’s precisely why the West must rise to the occasion and continue to challenge state capitalism and press Arab Spring countries to fight for democratic institutions in their new national orders. Otherwise the fate of the West will be to represent an important but diminishing subset of the global economy -- and to have almost no sway over a group of countries whose economic fortunes are on the rise. And that’s not just about prestige -- those are the countries with weaker values. For example, the New York Times has published a devastating series on the Foxconn factories that assemble Apple products, highlighting worker abuses, deaths and practices that would have been outdated in the U.S. even a century ago. Those workers might be making state-of-the-art products, but they live as though they are indentured servants, or worse. It would be naive to think Foxconn is an isolated incident. In China, Foxconn is a success story of state-directed capitalism. Will the West tolerate Foxconn? And if so, how many more Foxconns will it tolerate?

It’s pointless to worry about China stealing U.S. manufacturing jobs -- China has taken far more jobs from Mexico than it has from the U.S., by some measures. What the West should worry about is the manner in which those jobs are performed and what our tolerance of that says to the parts of the world that are today at a crossroads.

This essay is based on a transcribed interview with Bremmer.

from David Cay Johnston:

The siren call of austerity

The World Economic Forum opened in Davos amid choruses of central bankers and economists calling for governments to cut spending.

This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck.

We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call.

Austerity supporters are selling the idea that governments, like families, must cut back when income shrinks. But economically, governments are not like families.

Firing teachers, cops and government clerks will, for sure, reduce public spending. But budgets, like the song of the Sirens, are only part of the story. Listen only to the alluring lyrics and, like the many voyagers before Odysseus, we will suffer disastrous consequences - in our case falling incomes and worsening economies.

The full economic story begins with this principle taught to every economics student: spending equals income and income equals spending. Cut spending and incomes must fall; cut incomes and spending must fall.

from Davos Notebook:

China’s economy absent from concerns on Davos panel

If policymakers and financial markets outside the Swiss alps are concerned about China’s economic outlook, those worries were missing from a panel discussion at the World Economic Forum in Davos. While delegates to the meeting of the rich and powerful surfaced a host of challenges facing China’s new leadership later this year, the pace of growth wasn’t one of them.

The panel talked about political cronyism, pollution, and the need for a more robust safety net for migrant workers. But there wasn’t any talk of crisis or hard landing. Despite the fact that China is still very export dependent, defenders and critics at this session betrayed no concern about the impact that the euro crisis and slow U.S. growth could have on the Asian powerhouse.

Many economists expect China to grow at 8 percent or more this year, slowing from 9.2 percent in 2011, as authorities seek to avert inflation and ensure more sustainable expansion. China is comforted by having the world's biggest foreign reserves, which lets it cope with weaker demand for its products. Li Daokui, Director of the Center for China in the World Economy in Beijing, and an advisor to the Chinese central bank, is sticking to his 8.5 percent growth projection this year and insists the economy, the world's second largest, will grow by "at least 8 percent" in 2013.

Stephen Roach, Chairman of Morgan Stanley Asia and senior research fellow at the Jackson Institute for Global Affairs at Yale University, shared the optimism. The current five-year Chinese plan will be a "watershed", he said. The shift from investment and exports to consumption leaves him positive further out into the future. "China has demonstrated it's up to the task."

Perhaps the biggest concern among panel members is the need to develop a safety net that can support the masses of migrant workers who head for China's cities, struggling to make ends meet, and maintain social peace.  Housing has been expensive, leading to a bubble, and rental costs are dear. Roach dismissed talk of ghost towns. He recalled Shanghai in the 1990s, relatively empty then, booming today. "Ghost towns are built in anticipation of the people who come." Housing has spooked the markets. “They’re expecting the worst,” he said. “They will be pleasantly surprised.”

Other problems: pollution, which will impact health and be a burden on the state; and what Roach describes as "the financial repression" created by a gap between deposit and lending rates.

But there was not a word about the value of the yuan, and it took until question time for this to be raised. So how would Chinese authorities respond if Mitt Romney wins the U.S. election and declares China a currency manipulator? "You can expect a strong reaction from the government," Li said. He, in turn, countered that the yuan was fairly close to "equilibrium".

from Davos Notebook:

Tackling healthcare for the very poor

This year in Davos, there is a lot of talk about transformations and new business models that will be important in our global economic recovery. In healthcare, new models will be a significant part of expanding access to patients in need. While it is clear there is lots of growth potential in emerging markets, it’s also important to address the larger societal challenges associated with this growth. This is especially true in the developing world where access and affordability are major issues.

Nearly half of the world’s population lives on less than $2 per day. I was recently in India, where I got to see firsthand what this means. According to the latest estimate from the World Health Organization, there are more than 835 million people across rural India -- more than twice the entire population of the United States. Only 35 percent of these people have access to essential medicines. For those of us in the developed world, this is a seemingly unimaginable gap.

As CEO of a global healthcare company, I believe it is critically important to help improve the health of people everywhere by expanding access to medicines in a sustainable way. However, there are many obstacles to delivering care in developing countries, and overcoming them requires adapting to local needs. Poor infrastructure, poverty, inadequate sanitation systems, unclean drinking water and a lack of trained health workers all compound the problem. The question is: With problems so large, how can we be part of the solution?

At Novartis, we realized it was important to take a step back and consider not just how we can enter a market but also how we can adapt to better consider local conditions. We saw that there was a need for a new model in emerging markets like India. That is why we developed Arogya Parivar, meaning “healthy family” in Hindi. This is what we call a "social business" model, meaning it blends corporate citizenship with entrepreneurship.

While many have highlighted the cost of medicine, there is not enough emphasis on solving the associated distribution and social challenges. Arogya Parivar addresses what I believe are the two most important issues in developing countries: healthcare education and infrastructure. The program works by recruiting and training locals to become health educators and tour villages, schools, and health centers. They conduct community health meetings and talk directly to patients about disease prevention and encourage them to seek timely treatments. Also, the local teams address the infrastructure issue by organizing health camps -- mobile clinics that provide access to screening, diagnosis and therapies to patients in remote villages who don’t have regular access to healthcare. In 2010, we hosted more than 3,000 health camps, reaching an estimated 140,000 people.

To make treatments more available and affordable, we also sell over-the-counter medicines in smaller packs with doses for only one to three days. While patients need to purchase the packs more frequently, one local doctor mentioned that this helps them better track a patient’s compliance and helps keep weekly out-of-pocket costs low. Importantly, this initiative turned profit-positive this year after four years of losses. This is critical for its sustainability.

Our model is based on the understanding that access to medicines in the developing world is bigger than a pricing issue. Insufficient infrastructure and lack of healthcare access are larger problems that need to be addressed. What is needed is entrepreneurship that creates jobs, expands access to health education and works closely with patients in the context of local customs. Health solutions must be tailored to meet diverse local needs.

from Anya Schiffrin:

The fine art of the Davos snub

To my great surprise this year, the Davos registration forms arrived with a space for Davos Wives to fill in our institutional affiliation. Having written last year about the humiliations of the blank badge, I've decided to take full credit for this major step forward for womankind: the recognition that we have lives outside our existence as the Wives of Davos men. My editor Chrystia Freeland is now waiting for a change in policy that would allow Davos mistresses to also list their affiliations.

When I wrote my column last year, I didn’t expect the outpouring of responses from Davos Wives, but I was delighted to find myself buttonholed by many in my cohort who longed to share their experiences of being snubbed at Davos.

While walking down the Promenade of Davos Platz on a sunny winter morning looking for a place to have a decent cup of hot chocolate (tip: better wait till you are in Zurich), I was approached by a Davos wife I’d never seen before. She thanked me for saying in my Reuters columns what she and other white-badged wives had been thinking for years.

She got the absurdity of our situation and knows that the way to cope is to laugh. “I love the snubs,” she said, and then explained how she handles the working lunches. “My strategy is to sit at the end of the table because then only one man is ignoring me while playing with his smartphone.

“The worst was the time I put my bag down, went to get a drink, and then realized I was sitting next to Abdullah Abdullah, who had just lost an election. He didn‘t come to Davos to talk to me, so I got up and moved to another table to sit with some wives.”

She put me in mind of a few other snubs that my own obliviousness had led me into in the days before. As soon as we arrived at the Caixin magazine breakfast, the organizers grabbed my husband and steered him away from me. It was 2:45 a.m. New York time, and I was not at my best. Not knowing where to go, I followed and then sat down next to him, my laptop balanced precariously next to a plate of old ham and a pot of tepid tea. I didn’t realize that I had cheekily invited myself to sit at the speakers table until a China expert from New York City who was at the panel called one of my friends at home a few hours later to report on my pushiness; said friend kindly relayed his comments back to me on a Skype call.

The next evening, entering the Indian cocktail reception on my husband’s arm, I saw a photographer maneuvering to get just the right angle. Helpfully I turned so as to avoid having my hawk-like profile immortalized -- only to find that all his maneuverings were aimed at getting me out of the way so he could shoot my husband with a group of more important people.

from Breakingviews:

A Van Winkle return to Davos and to real problems

By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.It was well past midnight in late January 2000 when an investment banking contact called my Davos hotel room to share the latest details on Vodafone’s hostile bid for Mannesmann. That was news, but the huge hostile takeover was no longer the largest deal in history. It had been displaced a few weeks earlier by the agreed merger of AOL and Time Warner. Such was the talk of the World Economic Forum. The great and the powerful had gathered together to celebrate the success of business and, especially, of finance.

Exuberance over technology and venture capital was almost limitless back in 2000, thanks to the seemingly limitless rise of the tech stocks. Dotcom startups were all the rage. When Japanese Internet mogul Masayoshi Son finished one panel, he was assailed by a gaggle of entrepreneurs waving business plans for him to peruse. In full disclosure, this columnist two weeks later signed up to establish the online financial commentary business that eventually became Reuters Breakingviews.

Coming back to this gathering 12 years later is a Rip Van Winklerian experience. The old world and its little worries look positively quaint. Back then, at what in retrospect proved to be the height of the Great Moderation, business was booming, the Nasdaq still had another 20 percent or so to climb, companies were merging like mad; everything looked rosy. President Bill Clinton parachuted in to give a victory lap. Even the demonstrations that took place against neoliberalism and world trade now look quaint. Defacing a McDonald’s is a far cry from overthrowing governments.

The economic moderation turned out to be built on financial excess. That AOL deal – hailed as visionary by all the delegates of 2000 – has become the poster child for foolish corporate finance. The Nasdaq is a third lower than 12 years ago (before adjusting for inflation). And the banks – what can I say? From triumph to tribulation.

The political world also looks much more treacherous. Geopolitics has not yielded to the irresistible forward march of free market capitalism, and peace no longer looks like something to be taken for granted. The 9/11 attacks spawned wars in Afghanistan and Iraq – the kinds of conflicts that in 2000 were supposed to be a thing of the past.

The World Economic Forum has changed with the times. The rise of the BRICs has brought greater diversity to the audience, which is a good thing. It has also brought many more people – so many, in fact, the organizers have expanded their caste system. There is now a dizzying number of different badges, each offering differing levels of access and status. It’s much easier to be here and still be excluded from the elite – much like the feeling of many of the world’s dispossessed.

The most striking difference, though, is in the increased complexity and severity of the questions confronting the collection of top business people, politicians, investors and academics. Europe’s sovereign debt crisis keeps trundling forward, bringing to the fore thorny challenges to sovereignty, the role of central banks and the solvency of nations. Instead of Clinton smiling from the podium, this year’s keynote address came from the troubled German Chancellor Angela Merkel, the leader with the most cards at the debt crisis table.

from Davos Notebook:

A Van Winkle return to Davos and to real problems

It was well past midnight in late January 2000 when an investment banking contact called my Davos hotel room to share the latest details on Vodafone’s hostile bid for Mannesmann. That was news, but the huge hostile takeover was no longer the largest deal in history. It had been displaced a few weeks earlier by the agreed merger of AOL and Time Warner. Such was the talk of the World Economic Forum. The great and the powerful had gathered together to celebrate the success of business and, especially, of finance.

Exuberance over technology and venture capital was almost limitless back in 2000, thanks to the seemingly limitless rise of the tech stocks. Dotcom startups were all the rage. When Japanese Internet mogul Masayoshi Son finished one panel, he was assailed by a gaggle of entrepreneurs waving business plans for him to peruse. In full disclosure, this columnist two weeks later signed up to establish the online financial commentary business that eventually became Reuters Breakingviews.

Coming back to this gathering 12 years later is a Rip Van Winklerian experience. The old world and its little worries look positively quaint. Back then, at what in retrospect proved to be the height of the Great Moderation, business was booming, the Nasdaq still had another 20 percent or so to climb, companies were merging like mad; everything looked rosy. President Bill Clinton parachuted in to give a victory lap. Even the demonstrations that took place against neoliberalism and world trade now look quaint. Defacing a McDonald’s is a far cry from overthrowing governments.

The economic moderation turned out to be built on financial excess. That AOL deal – hailed as visionary by all the delegates of 2000 – has become the poster child for foolish corporate finance. The Nasdaq is a third lower than 12 years ago (before adjusting for inflation). And the banks – what can I say? From triumph to tribulation.

The political world also looks much more treacherous. Geopolitics has not yielded to the irresistible forward march of free market capitalism, and peace no longer looks like something to be taken for granted. The 9/11 attacks spawned wars in Afghanistan and Iraq – the kinds of conflicts that in 2000 were supposed to be a thing of the past.

The World Economic Forum has changed with the times. The rise of the BRICs has brought greater diversity to the audience, which is a good thing. It has also brought many more people – so many, in fact, the organizers have expanded their caste system. There is now a dizzying number of different badges, each offering differing levels of access and status. It’s much easier to be here and still be excluded from the elite – much like the feeling of many of the world’s dispossessed.

The most striking difference, though, is in the increased complexity and severity of the questions confronting the collection of top business people, politicians, investors and academics. Europe’s sovereign debt crisis keeps trundling forward, bringing to the fore thorny challenges to sovereignty, the role of central banks and the solvency of nations. Instead of Clinton smiling from the podium, this year’s keynote address came from the troubled German Chancellor Angela Merkel, the leader with the most cards at the debt crisis table.

from Chrystia Freeland:

‘Kumbaya’ capitalism collides with self-interest

DAVOS, Switzerland--George Soros is a traitor to his class. That’s not an insult or a tabloid exaggeration. It is, instead, a direct quote from my conversation with the billionaire investor and philanthropist at the World Economic Forum here.

‘‘I am a traitor to my class,’’ Soros said. ‘‘I think that the income differentials are too wide and ought to be narrowed,’’ he added, which is why he favors a bigger hit on those, like himself, at the very top.

But among his plutocratic peers, he said, that is very much a minority opinion. In fact, Soros, who helped spearhead the muscular Wall Street support for Barack Obama in the 2008 presidential election, particularly among hedge fund and private equity investors, believes the president’s call for higher taxes is the reason he has been ditched by the financiers: ‘‘That has led my hedge fund community to abandon Obama in favor of any Republican, because they don’t like to be taxed.’’

Henry Blodget, a former (and formerly disgraced) Wall Street analyst who has been resurrected as one of the smartest writers on business and politics, agrees that the financial class is strongly attached to its tax breaks. After his Wall Street friends have had a few drinks, he said, ‘‘they are cackling that they have fooled everybody into thinking that there’s some justification for this.’’ ‘‘This’’ is the carried interest tax provision, which allows some private equity and hedge fund managers to pay tax at 15 percent.

But the cackling may be coming to an end — and the hostility toward the president mounting — following his State of the Union speech on Tuesday. A centerpiece of that address, and most likely a central theme on the campaign trail over the next nine months, was Obama’s insistence that the 1 percent must pay up.

‘‘Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households,’’ Obama said, in an oblique attack on the carried interest tax break and on Republican candidate Mitt Romney, who paid an effective tax rate of 13.9 percent on income of $21.6 million in 2010.

‘‘Tax reform should follow the Buffett Rule,’’ the president said. ‘‘If you make more than a million a year, you should not pay less than 30 percent in taxes.’’ And, like Soros, the president has decided not to duck charges of class war: ‘‘Now you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.’’

from Breakingviews:

Uninvited guest, Mr 99 Percent, crashes Davos

By Rob Cox 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The most difficult guest to avoid bumping into at the World Economic Forum this year has no badge. He was not invited to the annual gathering in Davos, but he haunts the panels, hallway conversations and politicians’ speeches. He is Mr. 99 Percent, the specter of the unemployed and disenfranchised.

Not everyone at the Swiss conference is a member of the privileged 1 percent, but the whole point of the endeavor is to bring together the powerful of the world (and Mick Jagger). And the Indian billionaires, Chinese entrepreneurs, Wall Street chieftains and leaders of organized labor agree on one thing. An increase in civil unrest would be bad for business. The only beneficiaries of last year’s confrontations in the streets of downtown Manhattan, north London or Santiago were the makers of tear gas and barricades.

But the power-brokers and plutocrats cannot agree on what should be done. The Forum’s agenda is a bit schizophrenic. A Wednesday panel, “The Seeds of Dystopia,” focused on how to keep the 225 million unemployed around the world from losing faith in capitalism and civic institutions. One idea was to pay more attention to limiting the ratio of executive compensation to average worker pay.

But at the same time, and just down the hall, a hedge fund manager, a consultant and a corporate chairman discussed “The Compensation Question.” Their answer, in a nutshell, was that it’s a matter for shareholders – leave us alone.

Some panels are defensive. “The Dark Side of Connectivity” focused on the security risks created by new technologies such as the social networks that let protesters – from Cairo’s Tahrir Square to Manhattan’s Zuccotti Park – organize in real time. But some people are hopeful. Former U.S. Treasury Secretary Larry Summers sees the cries against wealth disparity as a symptom of the economy’s woes. By that token, the protests will diminish as growth rebounds.