From Davos with Hope
Every year, leaders from industry, government and civil society meet in Davos, Switzerland for the World Economic Forum’s annual meeting. This year’s meeting was held from January 29 through February 1 with a central theme, “Shaping the Post-Crisis World.” The objective was to ensure that we look at the world in a holistic, systemic way going forward.
The meeting started with an examination of the global economy in “Update 2009: the New Economic Era,” followed by a “Special Session with Wen Jiabao, Premier of the People’s Republic of China” about the role and commitment from China in handling the current crisis, which was followed by an “Open Plenary of the World Economic Forum Annual Meeting 2009” with the opening address by Russia Prime Minster Vladimir Putin on Russia’s role in growth, cooperation and energy. These sessions were joined by others covering a wide range of topics in six themes: growth, governance, sustainability, values and leadership principles, innovation, and industry business models.
A total of 36 risks across the spectrum of politics, economics, social, environment and security were identified to be addressed in order to achieve growth sustainability. This Davos meeting explicitly endorsed collaboration among G20 countries (in place of G7/G8) in their efforts to deal with the systemic risks in the financial system and to revive the global economy. A session by former UK Prime Minister Tony Blair, Israel President Shimon Peres and several business leaders about values behind market capitalism was particularly thought provoking.
I came here with a hope that after a year and half of financial crisis, leaders may have gained a better understanding of the problems we are facing and the measures required to solve them. My hope was realized. It is a common understanding that we are now in a deep global recession and the governments need to step in as the last (and the only in some countries) resort to reflate the systems. This understanding is anchored by strong commitments from the U.S. and the Chinese governments and echoed by almost all government leaders at the meeting. The leaders also recognized the need for a moral compass to guide actions.
Here are 10 takeaways:
- The “seven deadly sins” described by Mahatma Gandhi are something important to be remembered in principle-centered leadership (as brilliantly argued in Stephen Covey’s management book). These seven sins are: wealth without work, pleasure without conscience, knowledge without character, commerce without morality, science without humanity, religion without sacrifice, and politics without principle;
- Economy is more about how to create wealth than how to distribute wealth;
- Value is key to long-term sustainable growth, it is far beyond transaction and legality;
- Capitalism has three elements: competition, regulation, and morality/ethics;
- We cannot rely solely on regulation to protect markets and consumers;
- As the crisis is global in nature, the current domestic-centered agenda in policy responses may need to be adjusted to include more global coordination;
- Constructive Sino-U.S relations hold the key for successful global coordination;
- The fundamental value of financial services is in providing liquidity to and processing payments for the real economy;
- A market-based economy cannot function without a normal credit market;
- How the crisis would change us is more important than when the crisis will end.
With the above said, the wealth loss has been tremendous in recent months. About 40% of total global wealth, including stocks, bonds, commodities and real estate, was lost during this crisis period! Real sector data indicate that consumers and businesses continued to pull back in an alarming way. Free fall since last September may be slowing, but downside risks remain extremely high in the very near-term. These situations have weighed heavily on confidence.
This was demonstrated in a workshop called “financing industry in an era of capital scarcity.” Over sixty people participated with about half of them being leaders of the financial sector and the other half from the real sectors. We were divided into seven groups covering seven major industries. Our job was to make a pitch to secure $1 billion capital from a hypothetical family office and then act as an investment committee to allocate the fund for a justifiable return over five years. The combined result of the investment decisions was quite revealing: about 30% of the fund was put in cash (under the mattress), another 30% in foods and beverages. This is an extremely pessimistic position – there was no trace of any expectation about recovery and no trace of any animal spirit.
Remember the classic story about perspective: Two shoe salesmen went to Africa individually to explore sales opportunities. After witnessing the local conditions, one person called his office: “I can’t sell shoes here. Nobody wears shoes here.” The other person was very excited and dialed his office: “I can’t believe what I am seeing. Send me ten thousand pairs of shoes immediately! Everyone is barefooted here!” What this story tells us is that it is not the circumstance that is crucial; it is what we say about the circumstance that is crucial. We can look at the current crisis as value destruction; we can also look at the current crisis as an opportunity to correct some missteps in the value creation process and strengthen our system of market capitalism for better days ahead.
I was pleased to see that the need for confidence was clearly emphasized in many sessions at the Davos meeting. Indeed, as John Keynes stated in his General Theory “whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition” and “recovery requires the revival of both” (credit and confidence).
So the hope is there; the resolve and means are there; but the lack of confidence is also there – a combination for us to chew in this Year of Ox.
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June 3, 2018
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