Global Policy Forum

by Anatole Kaletsky

The world is going to hell. If you are bored with "the war", which has been "weeks away" since at least last September, just think about terrorism or Aids or global warming. And if all else fails, how about the stockmarket?

I spent most of last week sharing the angst of the global good and great at the World Economic Forum in Davos. Some of these people have been reduced from billionaires to mere centi-millionaires in the past two years. Their current pessimism about the state of the world was therefore easy to understand. But what I found much more interesting in my conversations with the dozens of politicians, businessmen and economists was the divergence between the gloom of national politicians and financiers who were focused on their Wall Street tickertapes and short-term economic forecasts, and the much more positive outlook of industrialists and international officials, who could lift their eyes above the horizon and think about developments a few years, or even a decade, ahead.

The recent performance of the stockmarket is certainly a worry, as is the conflict in the Middle East and several other features of the economic and political outlook. But before I consider these, let me point out several encouraging trends in the world economy and geopolitics which will ultimately prove much more important than anything that may or may not happen in the next few weeks in the stockmarket or Iraq. Firstly, the military balance of the world today is much more stable than for decades. There is much lamentation about the rift between America and Europe, but this is largely an illusion. The "transatlantic rift" actually involves just a handful of European countries, since Italy, Spain and most of Eastern Europe have already given America the same unstinting support as Tony Blair. In any case, France will almost certainly end up backing America in the final Security Council vote. Thus President Bush's reliance on the Security Council to legitimise his Iraq adventure will ultimately strengthen the UN system and the international rule of law.

Moreover, tensions in the transatlantic alliance pale into insignificance in comparison with the newly co-operative relationships between the US, Russia and China. It was clear speaking to Chinese and Russian officials that these countries have already decided that it is in their national interests to co-operate with the Bush Administration over Iraq. America's focus on Islamic terrorism, which dovetails with Russia's worries about Chechnya and Chinese anxieties in Central Asia, has encouraged these two nuclear powers to see themselves as US strategic partners, not rivals.

A second encouraging trend at Davos was the maturing of the fundamentalist ideology of global capitalism and free trade into a subtler and more open-minded attitude to the benefits and costs of globalisation. This was evidenced partly by the presence on the programme of dozens of non-governmental organisations, such as Amnesty, Friends of the Earth and Oxfam. It was also symbolised by the powerful speech from President Lula da Silva of Brazil, who pledged himself to a radical anti-poverty programme based on freer trade and co-operation with international financial institutions, instead of protectionism and unilateral default. To reinforce his message of reconciliation between opposing forces in what is still seen as a globalisation "struggle", Lula jetted off immediately to Porto Alegre, to the World Social Forum, a gathering of anti-capitalist movements established as an anti-Davos five years ago. Speeches were not the only evidence of the more constructive dialogue that is developing between businesses and NGOs, between the rich countries of the North and the poor South. There were also practical initiatives on measuring carbon emissions, on monitoring corporate payments to potentially corrupt governments and on funding tropical disease research.

Worthy as such initiatives may be, they will do little or nothing to narrow the enormous gap between the world's rich and poor. Global inequality will, however, be substantially reduced by another trend which could become the single most important economic phenomenon of the decade. This is the shift of economic activity from Europe, America and Japan to the rest of Asia, and especially to China.

Looking at the trends in economic policy, demographics and technology, it seems almost certain that most of the growth in the world economy in the next decade will be seen in Asia. And with most Asian countries, including China, now focusing their economic policies less on exports than on expanding domestic investment, housing and consumer demand, the main beneficiaries of economic growth in Asia will be consumers, rather than exporters. If this happens, then growth in the global economy in the years ahead will be powered largely by Asian consumers, just as the 1990s was the decade of the American consumer. This will have momentous implications, not only for the balance of economic power in the world, but also for the balance between rich and poor. It is now just a matter of time before China overtakes Japan to become the world's second largest national economy. But far more important than such purely statistical milestones are the social effects of one of the world's poorest countries, growing three to four times faster than the industrialised world. China's 7 per cent annual growth rate, in contrast to the near stagnation experienced in Japan and Europe, will automatically result in a steady narrowing of income inequalities around the world. India, whose economy is now growing by about 5 per cent a year, will also narrow the gap, albeit very slowly, with the developed world. This great swing in the pendulum of global growth will have a far greater impact on inequality around the world than any amount of development aid.

Unfortunately, this natural narrowing of income gaps will do little or nothing for the very poorest people in the world, who are mostly in Africa. Countries whose only involvement in the global economy has been through the exploitation of natural resources seem to have a bleak future, but even for some of these could be two reasons for hope. The first is the rapid growth of consumer spending in Asia and China, which may lead to a higher commodity prices. The second is the possibility that Europe and America may finally agree to reduce the protection of their food and agriculture industries in the next international trade round. This would open up unprecedented possibilities foradvancement for the poor farmers of Africa, Latin America and the Caribbean.

So much, then, for the good news from Davos. Clearly these favourable long-term trends do not yet outweigh the short-term problems which face the world economy and financial markets: the fears about war; the soaring price of oil; the falling dollar; the uncertainties about consumer confidence in America; and the broader economic stagnation in Japan and Europe.

Many of these uncertainties may be resolved, or at least partly eased, in the next few months, once the confrontation in Iraq is over — whether peacefully or through a short war. The main exception will be the economic slowdown in Europe, which is now going to be aggravated by the strength of the euro. The overvalued euro has added a potent new element to the toxic brew of over-regulated labour markets, monetarist dogmas at the European Central Bank and the perverse operation of the Stability Pact. The result could well be an economic malaise in Europe, comparable to the one that afflicted Japan in the past decade. Europe, and especially Germany, seems to be following with uncanny precision the Japanese road to economic perdition — a path marked by over-regulated markets, perverse monetary and fiscal policies, political complacency and an overvalued exchange rate. In my view, the real justification for the gloom in financial markets — and the pervasive pessimism so evident at Davos — is the possibility of a long recession in Europe. For Europe is large enough to drag the rest of the world economy down with it, unlike Japan.

Whether you are an investment banker on Wall Street, a stockmarket investor in Britain, a factory worker in China or a peasant in Uganda, a long period of Japanese-style economic paralysis in Europe should be a much scarier prospect than the possibility of a few weeks of war in Iraq.

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