Global: The Davos Debate
morganstanley.com
By Stephen Roach (New York)
Morgan Stanley
Jan 26, 2004
There’s really nothing like it. The annual meeting of the World Economic Forum provides the best medium for an exchange of views on global issues that I know of. For four days, Davos brings together a broad cross-section of businesspeople, academics, politicians, policy makers, religious leaders, artists, and social activists. The discussions are deep and wide-ranging, and there is great passion to the dialog. The stresses and strains of globalization always seem to provide a common thread to the discussions. Yet each year, the context changes as an ever-tumultuous world pushes the debate in different directions. For me, the meetings are invaluable in challenging my perceptions of the key issues likely to shape world financial markets in the year ahead. As I look back on this year’s proceedings, five such themes emerged from the Davos debate of 2004.
First, the world is desperate for another fix of US-centric global growth. Despite the ongoing love-hate relationship with the United States, the rest of the world concedes that it needs yet another boost from the all-powerful American growth engine. Never mind the global and US-specific imbalances that could well be exacerbated by such an outcome. Today’s uni-polar world can see no other way out. And with the US economy now on the rebound, there is a growing conviction that maybe some of us — especially yours truly — have been making too much out of these imbalances. This Brave New World, goes the Davos logic of 2004, may have figured out a new way to stay the course of US-centric global growth for a lot longer than might have otherwise been the case (see my January 23 dispatch, “The New Paradigm Comes to Davos”).
Second, Europeans are up in arms over having to bear the brunt of what they believe is a highly disproportionate share of the dollar’s downward adjustment. This hints at what is likely to be an active debate over “currency burden sharing” — a debate that could break out in the open as soon as the upcoming G-7 meeting on February 7 in Boca Raton. Indeed, tensions are mounting between Europe and the bipolar currency regimes of Asia — namely a manipulated Japanese yen and a pegged Chinese renminbi. Europeans know full well that if these Asian currency arrangements remain intact, the likelihood of further significant dollar depreciation could boost the euro into the danger zone. With the broad trade-weighted dollar having fallen only about 13% over the past two years, this is hardly idle conjecture. Based on current-account adjustments of the past, the dollar could be only half way down the road of the depreciation that may be needed to restore some semblance of balance to America’s external position. The math of such an adjustment scares Europe: If Asian currencies don’t adjust, the requisite further depreciation of the US currency could easily take the euro through the $1.50 threshold against the dollar.
The debate over currency burden sharing gets right to the heart of one the toughest issues of globalization — the disparities between the reformers (China and the United States) and the unreformed (Japan and Europe). Not surprisingly, this was a highly contentious and sensitive issue in Davos this year. Both the Europeans and the Japanese speak proudly of reform. But they are equally quick to concede that the pace of such change is very s-l-o-w. That could be the biggest catch of all. With a country like China on an exceedingly rapid growth track and with an IT-enabled US economy seemingly more nimble than ever, the slow reformers are, in effect, now falling behind in relative terms. Add in the pressures from Eastern and Central Europe coming from EU enlargement, and the speed of enlargement in structurally impaired “old Europe” is starting to seem slower than ever. I argued that in the aftermath of the now-defunct Stability and Growth Pact, a super-strong euro may well be the only means left to put pressure on the structural reform process in Europe. Needless to say, the Euro-centric Davos crowd didn’t take too kindly to that suggestion.
Third, perceptions of China have changed dramatically from last year’s World Economic Forum. In early 2003, the world was thrilled with its belated discovery of the Chinese growth story. Now it is seen as more of a threat. The currency issue is a case in point: The RMB peg is seen not just as the key to unfair Chinese competitiveness but also as the lever that puts unacceptable pressure on Europe in a weak-dollar climate. Persistent jobless recoveries in the wealthy developed world have further distorted perceptions of China’s global impact. The all-powerful Chinese export machine — with exports up some 35% in 2003 — is seen as the smoking gun behind job losses in the West. Never mind that fully 65% of the cumulative increase in China’s exports over the past decade can be traced to Chinese subsidiaries of multinationals from Japan, the United States, and Europe. Nor does China’s import surge — up 40% in 2003 — seem to temper the negative image that the world is forming of the Chinese threat. In a jobless and unbalanced developed world, there is increasingly less tolerance for China’s growth miracle. I suspect this will be a key source of global tension for some time to come.
Fourth, the “offshoring” debate finally broke out into the open. From an economic point of view, this was the hottest new topic at Davos this year. Here, as well, context is key: Against the backdrop of persistent jobless recoveries in the developed world, rapid growth of outsourcing in goods (i.e., China) and services (i.e., India) is now viewed as a serious threat. The services piece of the equation is the hot button in this debate. The industrial world has long conceded the secular decline in manufacturing, drawing comfort from the job security of a seemingly sacrosanct non-tradable services sector. However, courtesy of the IT-enabled global labor arbitrage, that is turning out to be a false sense of security. Moreover, offshoring is rapidly moving up the service-sector value chain — having started with low-value-added functions such as data processing and call centers but now increasingly shifting to software programming, engineering, design, and the professional expertise of lawyers, accountants, actuaries, financial analysts, and doctors. Cross-border labor transfer — long accepted as one of the mainstays of globalization — is now encroaching on the sacred ground of the white-collar worker. That wasn’t supposed to happen.
The counterpoint to the offshoring threat was well articulated in Davos. Researchers from the McKinsey Global Institute argued that the impacts of such activities are relatively small, hardly sufficient to explain the jobless character of recoveries in America and elsewhere in the industrial world. The evidence in support of that view is a well-known study by the IT research firm, Forrester, claiming that a total of only 3.3 million US business processing jobs will have been shifted overseas by 2015. I must confess to being highly suspicious of this estimate. First, it pertains only to the offshoring of processing jobs — the tip of the iceberg insofar as the globalization of the full range of white-collar functionality is concerned. Second, recent experience tells us that the speed of any IT-enabled transformation is usually underestimated by a wide margin; that’s been true of Internet usage as well as the growth rate in corporate IT spending. Anecdotal evidence suggests that could be the case in offshoring, as well. In my discussions with a broad cross-section of business executives, I was hard-pressed to find any who weren’t contemplating white-collar offshoring. In a no-pricing-leverage era, the global labor arbitrage of high-priced white-collar employment costs has become an essential aspect of corporate cost-cutting strategies. As one corporate leader put it to me, “We really have no choice — we can’t afford to miss this opportunity.”
The fifth theme I took away from Davos this year is the most worrisome of the lot — the mounting risk of a protectionist endgame. Former senior policy makers were especially worried about the ramifications of the rapid emergence of China and India. One argued that the pace of change, to say nothing of the scale and scope of such development, shatters any semblance of globalization’s status quo. Another stressed the precedent of agriculture as an example of how badly the modern world has bungled secular declines in core economic activities; the fear is that today’s protectionist web of farm subsidies could well be a harbinger of what’s to come in the aftermath of the secular decline in manufacturing. Needless to say, pressures on services would only exacerbate this risk.
Concerns over mounting protectionist sentiment in the US Congress were especially evident in Davos. Japan and the US have led the way in China bashing, and there is fear that Europe is about to follow suit. History does not speak well of the world’s ability to cope with large entrants in the arena of global commerce. The darkest fears of Davos pertained to the lessons of such episodes in history and how they may apply to a world that is now attempting to cope with the rapid emergence of China and India — nations that collectively account for more than 35% of the world’s population. Trade liberalization, the mainstay of globalization, cannot be taken for granted in this climate.
Yes, there was an improved tone in Davos this year. But it came off of “easy comparisons” — a world that a year ago was weak economically and on the brink of a serious war. A rebound in the global economy and world financial markets has certainly tempered any residue of angst — at least for the time being. Moreover, there was a nearly unanimous view that nothing bad could happen to this US-centric world between now and the November 2 American presidential election. At the same time, there was a palpable sense of unease as to what might then follow in the post-election climate. This tug-of-war between a constructive near-term outlook and the ever-mounting strains of globalization was the essence of this year’s debate at Davos. |
