No way of getting away from the R-word

Hardev Kaur
The New Straits Times
25 Jan 08

The planned agenda, “The Power of Collaborative Innovation”, of the World Economic Forum in Davos, which has taken the organisers months of agonising and time-consuming discussions, is being hijacked by the developments in the capital markets.

Even before the opening of the week-long annual forum, the word “recession” is overwhelmingly being used to describe the United States’ economy, as the world’s equity markets slumped across the globe. This year, the World Economic Forum is actually going to be about the world economy.

The US Federal Reserve “panicked”, according to some economists, and has been led by the markets, instead of the other way round. It is behind the curve. It cut its key interest rates by 75 basis points, described as the largest single cut; a “once in a generation” cut.



Undoubtedly, the severity of the situation was reflected in the scale and timing of the Fed’s action. The announcement by the US Central Bank was made ahead of its scheduled meeting at the end of the month, and observers think there is likely to be another cut next week.

While some nerves might have been calmed, as evidenced by the behaviour of the markets in Asia following the US cut in interest rates, market observers say the move by the Fed could be “too little, too late”.

Steven Roach, head of Asia for Morgan Stanley, noted: “We have a market-friendly Fed possibly injecting a lot of liquidity in the system, which will set us up for another bubble economy.

“I’m sort of worried that all they (the US Fed) did was to hit the snooze button. This is excessive monetary accommodation that just takes us from bubble to bubble to bubble.”

The gloom of the markets was also reflected in the outcome of a chief executive officer survey conducted by PriceWaterhouseCoopers, which for the first time showed that CEOs are not optimistic of the economy going forward. Fears of recession have replaced those of terrorism and regulation.

But it is a tale of two worlds; CEOs in US and Europe are less confident than their counterparts in Asia, especially those in India and China.

The fall in business confidence was more pronounced among American CEOs, with only 35 per cent “very confident” about economic growth, down from 53 per cent just a year ago.

The survey among 1,150 senior executives was conducted at the end of last year and before the latest “bloodbath” in the equity markets.

Last year, panellists at one of the opening sessions of the WEF were more optimistic about the economic outlook.

The state of the world economy going forward then was described as a “Goldilocks economy”, not too hot and not too cold, but certainly the word “recession” was not used. Today, the R-word is everywhere. A participant at this year’s opening session cheekily observed that none of those who spoke of the economy last year were here today.

The question now is if the US sneezes, does the rest of the world still catch a cold? Another participant said that perhaps the question should be rephrased to: “If the US catches viral pneumonia, where does the rest of the world hide?”

A prominent banker told the world’s movers and shakers among the participants that the world today is facing very large secular trends, and the crisis in July and August was far deeper than the central bankers and regulators understood at that time. Have central bankers been caught asleep at the switch? George Soros says “central banks have lost control”.

Will the latest move by the world’s largest economy, which “manufactured” the subprime problem, have a positive impact on the global economy, or will other regions such as Asia take up the slack and act as the engine of growth?

Participants at a session on the “New Actors in Asia” expressed confidence that the region will not be as badly affected by the downturn as the US. Yes, growth will slow, but a slowing from an average 11 per cent for the Chinese economy to about eight or nine per cent would still be very healthy growth and nothing to sneer at.

A participant at the World Economic Forum said the meltdown in the global markets earlier this week debunked the theory that there had been a decoupling of the economies. What the downturn in the markets shows is that the financial markets are still very interconnected.

Nonetheless, there is a discernible shift in economic gravity towards Asia. For example, major banks in US such as Morgan Stanley, Merrill Lynch and Citibank Group going out with a begging bowl in hand, turning to Asia.

South Korea’s and Singapore’s sovereign wealth funds have come to their rescue, as have some Middle Eastern funds. Note that this is the opposite of what it used to be. In the past, Asian countries sought loans and financial assistance from the West. Today, the developed West is seeking assistance from Asia.

Of the world’s 20 most valuable companies as of Oct 7, eight were Chinese, seven American, two British, one each French and Dutch.

Just a decade ago, there was hardly any Chinese company on this list. In 1989, of the 20 most valuable companies, 14 were Japanese; today, there is none.

Asia is also beginning to increasingly co-operate and trade with itself. Japan’s exports to the US, for example, now account for about 20 per cent of its total exports against almost one-third previously.

It exports more to China now than it does to the US. China, a major exporter to the US, is likely to see its exports to the US decline, and this may in turn affect its imports from other Asian countries.

Fred Bergsten, director of the Peterson Institute for International Economics in the US, is of the view that instead of decoupling there is “reverse coupling”.

By that, he means that the rest of the world is propping up the US economy. Citing examples, he said while IBM and Caterpillar had recorded lower sales in the US market, their sales in emerging markets had increased by as much as 20 per cent. This indicates how the rest of the world will pull the American economy along, and with it the global economy.

There was agreement among some participants that while the downside for the economy had increased, it would not have such an adverse impact on the rest of the world as feared.

David McMormick, US under secretary of the treasury for international affairs, said growth in emerging markets would offset the slow growth in the US.

“There is much to celebrate and it’s a great story. It will reverse the impact of the US economy, but not totally, as the US remains the 800-pound gorilla,” he added.

Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy, said: “Everybody is responding to the competition from China and India.” And this may not be such a bad development.

The world economy is far too complex today. With the US and its numerous problems going into the presidential elections, the rest of the world cannot just stand by and watch. “The Rise of Asia” is good for the global economy, and for Africa, as the demand for commodities from the continent will rise as is evident.

The increased demand to fuel the rapid growth of China has led to increased investment flows from China in infrastructure and resource industries in Africa. This could provide the impetus for the economies on the continent that have lagged behind the rest of the world in almost every area.

Mahbubani said the world had still not figured out how to jump-start economic development in poor countries.

He said development and economic progress in Asia, with many Asian countries attaining developed-nation status, could have a psychological impact on others.

In India, for example, there is increased confidence among the youth who believe that the future belongs to them. This was not the case not too long ago. This confidence among youth in emerging economies also bodes well for the global economy.

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