Reflections on the World Economic Forum
Davos, Switzerland, January-February 1998

I have attended these meetings every year or two for the last fifteen, and they have grown steadily in attendance (between 1,200 to 1,500 this year) and in character. Davos still represents the premier meeting place of the global political, academic and business elite. Sessions are off-the-record and, although my notes may be stretching that definition, I am trying to protect specific quotes.

Often it is the change that is important to note. The meetings used to be informal in dress and style, and you would sit at ease with world figures in sports clothes. Now it is coats and ties, with more of the content in the formal presentations and less in the serendipitous coffee gatherings. America used to be underrepresented but now, with America in the forefront of globalization, the American population seemed almost half. Japan was hardly present but was bashed by almost every speaker for failing itself and failing to take leadership in Asia. Emerging markets, normally a big group, seemed small . . . this, perhaps, in response to an expectation that raising money from the West this year will be a tough sell.

There was a lot of networking (read "selling") going on in the clear. Normally it has been present but the subtlety has disappeared-perhaps it is the American influence. The most obvious were the large consulting firms who were omnipresent. Strangely, they seemed to be pushing consolidations to keep up with technology at a time when today's technology is empowering individuals not large organizations. They have it backwards.

The US fielded a top government team headed by Hillary Clinton, Larry Summers (a regular), Gingrich (brilliant job), Bill Richardson and various cabinet ministers, as well. Mrs. Clinton demonstrated her flawless, impressive speaking style but mostly on generalities and mostly on domestic issues. The US retort to the accusation that we are turning isolationist was undermined by the domestic content of her speech (and remembering that the fifteen major points of her husband's State of the Union address were also all domestic). In general terms, the US delegation agreed that the US must exercise its power from a position of humility and care for the pride of others. But in the specifics, however, each came boldly out to lecture the audience on human rights where we selectively apply it, trade practices, environment and so on.

Much of the discussion was on the evolution in the US of the knowledge economy although, curiously, no one picked up on the features of the US Tax Code which promotes it. (Investments in "knowledge" are typically expensed which amounts to an instant writeoff . . . a big boost.) Somewhere under the layers of service agents, there has be to a shoemaker working on his last without thinking it is easier and cleaner to go public.

George Soros was working very hard promoting his idea of credit insurance for Asia-a bad idea-and explaining the non-equilibrium and dynamic nature of markets-a good idea and similar (with different terminology) to the ongoing work at Santa Fe Institute.

Lots of sessions on Asia but little was said that has not been widely covered in the press. The answer is . . . no one knows the answer. In that case, my best fallback is that we are in a period characterized as a Kondratieff fourth phase: a pullback for integration to individualism, repudiation of old institutions, volatility, search for miracle solutions (technology), and little political leadership. If so, investors buy bonds, speculators have a wonderful time with markets that are disconnecting from fundamentals . . . not a time when there is profit to ask "why".

Into this gap, China is apt to step in a few years. The Chinese vice premier made a strong assertion, as expected, that the Hong Kong peg would be maintained. (It makes no sense to me. If we believe in free currency markets, why should this be an exception? An interim peg to the Chinese RMB might be a face-saving way out.) Japan's reserves may be needed for domestic purposes. (Fortunately, lower interest rates in the US have reduced the need for governmental borrowing at a time when Japan is unlikely to be following its normal buying pattern.) I could visualize, at a stretch, China coming in to fill the leadership vacuum with its reserves thereby confirming regionalization for Asia. rather than globalization, and maybe sealing Taiwan's fate.

One of the clearest cases I have heard on Africa was by one of the African heads of government: "The only things we can export are commodities which are highly protected by tariffs and restrictions in advanced economies. Since we can't sell our butter and beef in "free" markets protected for farmers, we shall have to continue to borrow money at cheap rates from the World Bank, fail to repay and borrow again. The cycle is endemic." He is right and points out one of the weaknesses of the US endorsement of "free trade" for others but managed trade where we wish. Another weakness is US support of the multilateral trade policy in WTO, with a provision that economic weapons will not be used as an instrument of foreign policy. However, the US exhibits a steadily increasing reliance on bilateralism-clearly, economic weapons are one of our first choices, even to friends like Canada and Mexico.

There was not a single mention made in my hearing about the Mideast peace process . . . I think it is accepted as frozen or dead. The only person present, who is identified with it, was Hanan Ashrawi talking about education.

Russia was not at center stage. The Prime Minister gave a well-presented statement of his government's position but it was clear from informal conversations with my Russian friends that all is not well beneath the surface. The best measure is that capital flight continues unabated at about US $7 to $8 billion a year with the same prospect for 1998. Although Russia is the second most interesting of the emerging markets, behind China, it is best not to have an American face. Nationalism (our old friend Kondratieff again) is a global influence everywhere.

On an even longer-term note, I sensed a quest among the participants at this meeting for another definition of capitalism than the Adam Smith "pursuit of individual achievement." Peeling back the layers from even the best economies in Asia has brought out some unacceptable costs. Western (i. e., American-in Switzerland, the anti-drug road signs are in English) capitalism is blamed for the corruption in Russia and Africa. In a sense, that may be correct because the money likely comes from the richest source. So the hunt is on for a new Capitalist Manifesto that will reform economies by going beyond the financial service sectors down to the most impoverished sectors of countries like India. Finding ways to close the income gap now could be our task for the next decade or two. Failure to do so in a climate of terrorist empowerment could have implications that none of us would want to imagine.

This meeting has reached a size and scope that readily lends itself to a virtual conference format. The organizers demo'ed a re-launch of WELCOM which, while still in its rough stages, is very promising. I think they will succeed in reaching the critical mass of informed people to make it go. I hope so because I am one. 

Dean LeBaron
Weesen, Switzerland
February 6, 1998

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