CNBC's Davos 2011: Downside of Globalization Tests Economic Cooperation
Political and business leaders invited to the World Economic Forum's annual meeting in Davos this week will sift through the blessings and curses of global interdependence that not only brought the world’s economies to a collective low three years ago but also provide the only realistic return to prosperity.
Economic growth has resumed in much of the world, but recovery has been slight and fragile.
"The world is no position to face major, new shocks," concluded the World Economic Forum’s annual risk survey. "The financial crisis has reduced global economic resilience, while increasing geo-political tension and heightened social concerns suggest that both governments and societies are less able than ever to cope with global challenges.”
The report, meant to set the table for Davos’ attendees, set an ominous tone underscored by WEF founder Klaus Schwab.
“We should not look to old-world recipes, since unfettered capitalism and state-directed collectivism have both been bankrupted as guiding ideologies,” he sais in a recent media briefing. “Our only way out is the stakeholder concept. The pursuit of our own interests can only be substantially realized by incorporating the interests of all those with whom we have a mutually dependent relationship.”
Two Sides Of Globalization
Over the past 50 years, the global exchange of information, goods, services, capital, technology, ideas and people has fostered a rise in standards of living throughout much of the world.
Yet, as the editors of a new book, "The Dark Side of Globalization," point out, “The growth in transnational flows has not been matched by an equivalent growth in global governance mechanisms to regulate them.”
Jorge Heine & Ramesh Thakur, two political science professors from the University of Waterloo, Ontario, write, “The notion that endless liberalization, deregulation and relaxation of capital and all border controls (except labor) will assure perpetual self-sustaining growth and prosperity has proven to be delusional."
The new year finds the European Union still mired in its first major test—stronger members like Germany and France propping up debt-heavy ones like Greece, Ireland and Portugal.
“The EU has a monetary union but not a fiscal or regulatory union,” says Jamie Metzl, executive vice president of the Asia Society. “That puts pressure on countries like Germany that have to bear enormous responsibility for the well-being of the whole union. It’s going to cause enormous problems since there are such diverse regulatory environments.”
Push Vs. Pull
As French President Nicolas Sarkozy observed: "We can't share the same currency and have different economic strategies."
China, India and other emerging countries struggle to restrain inflation that is driving up the cost of goods and labor in ways that threaten their reputations as low-cost havens.
In November, China posted a 5.1-percent annual gain in its consumer price index, the largest in more than two years. Defensive measures brought it down to 4.6 percent in December.
The United States and China accuse each other of engaging in currency wars that threaten to undermine the cooperation needed for global recovery.
And while engineering its own economic recovery, the U.S. continues to increase its deficit while largely ignoring calls to cut spending.
“The bond crises we’ve seen in Greece and Ireland may not be unique to them,” says Metzl, a National Security Council staffer in the Clinton Administration. “If the U.S. continues to amass debt like we have, we’ll have a bond crisis here. It may not be the same, but it won’t be entirely different.”
The current global order is built around the notion that some countries will be consumers and some will be producers, said Armagan Gezici, a Turkish-born economics professor at Keene State College in New Hampshire.
“This order is fed by an increasingly fragile global financial order,” she says. “Countries that can still export and generate exports revenues seem to emerge as strong ones, while the economies of the others have been struggling. The latter group now includes the U.S. and the U.K., which have not been known as the weak countries in the world.”
Signs Of Teamwork
Such countries should accept that they cannot go on living on debt forever, adds Gezici, “especially if the debt creation is completely left into unregulated hands of a global financial industry. Finance capital is a too dangerous of a beast to be the engine of long-term, stable growth.”
The Davos risk survey refers to “the threat of a new economic crisis, which could arise from the tension between the increasing power and wealth of emerging economies and the high levels of debt in the west.”
Teamwork Emerges
Despite continued economic turmoil, various frameworks for global governance continue to grapple with its causes, as evidence of global teamwork emerges.
In recent weeks, Japan pledged to buy 20 percent of the EU bonds that will be issued soon to support Ireland. Also this month, China agreed to buy debt from Spain, the EU’s fourth-largest economy, after agreeing last year to buy bonds issued by Greece.
Earlier this month, banking regulators representing 27 of the world’s largest economies agreed to raise worldwide capital requirements whenever a country declares its economy is overheated.