Three-and-a-half questions for the Davos gurus
For the last several years, the World Economic Forum (WEF) has published an annual report on global risk, as part of the run-up to the storied annual meeting in Davos. The 50-page report makes for gloomy reading: it is a dense collection of some of the major threats to the world’s security — from asset price collapse to weapons of mass destruction — and the interconnections between them. And they’re all carefully mapped in terms of their perceived likelihood and perceived economic impact.
You’ve got hand it to WEF: their report is thorough and sobering, and makes a great reference tool for later in the year. Last year’s report said that “there is a rising risk of sovereign defaults,” and that proved more accurate and expensive than anyone wished.
Yet for all its insistence on a big-picture, global perspective, the WEF risk report can seem internally contradictory or just hollow, as if pieces of cloth were produced in separate quarters with no one sewing them into a coherent quilt.
And so, for those who want the big picture to be even bigger, here are three-and-a-half major questions raised, but not answered by the WEF risk report.
Why do global institutions break down?
The WEF is very worried about the failure of “global governance.” This is unsurprising, since the WEF is very similar in outlook to other global-reach institutions, like the IMF, World Bank, United Nations, etc. The report finds “a growing sense of paralysis in responding to global challenges,” and cites as examples ineffective UN climate change negotiations; the stalled Doha round of trade talks; lack of progress on some UN Millennium Development goals; the ineffectiveness of Security Council reform and moves to curb nuclear proliferation.
Yet the WEF is much less clear about what is causing these institutions to fail. It is temperamentally prone to blame individual nations, and in some instances (such as nuclear proliferation), that may well be appropriate. But what about trade and currency policy? The report acknowledges that enforced economic globalization in emerging markets might harm employment and “potentially threaten social stability.” Why, then, should emerging nations want to inflict political and economic damage on themselves that their more enlightened developed brethren would never accept? Another way of saying this: maybe global governance isn’t working because the cures global institutions offer (and sometimes enforce) are often worse than the disease.
How can they be fixed? (Half question.)
Reading the report, you get the strong sense of a circular argument along these lines: “My tools are broken. How will I fix them? I will use my tools!” About as close as the WEF gets to a solution for broken global governance is “a well-informed and well-mobilized public opinion sharing norms and values of global citizenship.” Yes, well … good luck with that.
Where does inequality come from?
This year’s report makes a big deal about “economic disparity,” which it helpfully defines as “wealth and income disparities, both within countries and between countries.” We used to call this “inequality.” The WEF report rightly points to OECD data indicating real income growth of the top income quintiles in wealthy countries (Finland, Sweden, the United Kingdom, Germany, Italy and the United States) was twice as large as that of the bottom quintiles between the mid-1980s to mid-2000s. The poor may not be getting poorer, but the rich are getting richer at a much faster pace than everyone else. That situation is not only immoral, but dangerous, as it can lead to open conflict between nations and internal political turmoil.
But wait — why is this happening? The WEF report cites “the erosion of employment culture, the decline of organized labor, and failures of education systems to keep pace with the increasing demands of the workplace.” That all sounds plausible, but the time frame cited marks the heyday of the very global governance institutions the WEF seeks to support. You don’t have to accept a causal relationship — though it certainly suggests itself — but at a minimum, global governance institutions have been demonstrably ineffective in addressing the economic structural issues that the WEF now worries about.
What’s creating all the debt?
There’s a really scary chart in the report showing the average government debt-to-GDP ratios of G7 economies over the last 60 years. It’s somewhat surprising that a period that many consider an absolute economic doldrum — the mid to late 1970s — was actually the period of lowest relative debt. (Clearly, debt is only one factor in overall economic health.) Today, though, gross debt has climbed over 100% of GDP, for the first time in the postwar period.
Why? As noted in the previous question, it doesn’t seem to be because of excessive spending on the poor (or, if so, that spending is *really* ineffective). Rather, the debt and inequality issues taken together strongly imply that capital has been shifted over the last 35 years or so from public treasuries and into the pockets of the wealthiest people in the wealthiest countries (and maybe the wealthiest people in poorer countries too, but that data isn’t in the report). If that is the case, it only reinforces the impression that, at best, existing global governance institutions are useless when it comes to the economic issues the WEF wants us to worry about. At worst … well, maybe the breakdown of global governance, as practiced to date, isn’t such a bad thing.
Photo: A logo at the congress centre of the Alpine resort of Davos, the venue of the World Economic Forum (WEF), January 31, 2010. REUTERS/Christian Hartmann