DAVOS 2010: CORRECTION OF MISTAKES

"Rethink, reshape, rebuild" are the most frequent words on the agenda of the 40th World Economic Forum in Davos, which was organized at the end of January.  More than 2,500 participants in the forum discussed issues across all sectors in four days:  energy security and models of consumption; financial risks and philanthropy, Alzheimer's disease and even the cult movie Avatar. Round numbers usually increase people's expectations:  possibly, the beginning of a new phase of history, or radical solutions to global problems.  It is too early to say whether or not the results of the meetings at Davos 2010 will be breakthroughs for the global economy, but it has to be said that this forum was at least as rich in loud statements and policy statements as previous summits.

In keeping with the best traditions of the economic crisis

The main accent in topics at the forum in the Swiss town of Davos was placed on the financial sector and on what the global economy can and must look like after the crisis.  In particular, French President Nicolas Sarkozy, who made an opening speech at the summit, called for lessons to be learned from the current crisis.  "The situation in the global economy and finance sector has a dangerous past, the opinion has gained currency that the market is always right and, therefore, no objections can be made to it," Sarkozy noted and, in his opinion, it was precisely the process of globalization that caused the recession.  "All this gave rise to a capitalism in which it was normal to play with other people's money, earning a great deal without much effort," said Mr. Sarkozy.  At the same time, he admitted that there is no alternative system to the market economy at present.  We cannot abandon capitalism, but it has to be "changed" and altered.

However, Sarkozy slammed not only the present-day economic system, but also the bankers who were in focus in Davos.  He promised that he would not tolerate bloated profits and extravagant bonuses if no added value or new jobs were created in the process.

Then the French president's main thesis followed:  he said that he unequivocally supported President Barack Obama's tough proposals to limit speculative dealings by the major credit institutions and his idea of banning commercial banks from owning hedge funds and direct investment funds.

Let us note that Obama's statement, which was made a few days before the Davos forum, was immediately criticized by the international banking community and sparked heated debates among the economic elites of all developed countries.  The US president's plan also created a rift at the Davos summit:  on the one hand, the financial leaders, who proudly resist new regulation and, on the other, some governments which had decided to combine their efforts.  Sarkozy spoke on behalf of the latter and said that he would use France's presidency of G8/G20 in 2011 to start reforms in the global financial system.  Addressing the bankers, the French president said that unless "we intervene in governance, our system will be wiped out by new economic and political crises and gusts of protectionism."

The bankers, however, described as illusory the opinion that these types of measures will prevent financial collapses in the future.  Furthermore, they believe that stiff regulation might hinder the already slow recovery of the global economy.  "If we limit the size of banks, the consequences for the creation of new jobs and for the global economy will be negative," Barclays Bank President Bob Diamond said at a meeting at which the financial risks were discussed.  "Deciding what our own financial operations are (which the governments propose to ban) and distinguishing them from operations which are effected on behalf of clients, is impossible."

The leading economists of the world fear two extremes:  excessive political fuss, which stands to do more harm than good, and reluctance by governments to carry out necessary but unpopular reforms.  For example, renowned investor George Soros maintains that Obama wants to rush through banking reform, which is why it will turn out to be inadequate.  "I believe that some banks will shunt off their investment and banking subsidiaries as separate businesses, but these investment banks will still be large enough to make it impossible to let them go broke," Soros said.  He warned that deploying multibillion-dollar anti-crisis programmes too quickly might affect the global economy and cause another recession.  The financier suggested the continuation of measures to stimulate the economy until all doubts about the sustainability of growth are dispelled, although the markets fear that governments might default on their debts.

Euro to disappear?

It has to be said that the most popular point of view among participants in the forum is that the worst of the global financial crisis is already over, but the trend towards economic recovery remains weak, and that during the post-crisis period there are still many uncertain factors on the way to recovery of the global economy.  "We tend to look at the markets, look at the very moderate pace of growth in the economy and argue that the process has come full circle.  But let us not forget that the world has changed fundamentally," Klaus Schwab, founder of the forum, said one week before Davos 2010.  And, therefore, forecasts are not as optimistic as everyone would like them to be.

In particular, New York University Professor Nouriel Roubini, who predicted the current crisis and earned laurels as an economic seer, said that the economic problems of Spain and Greece will undermine the euro zone and that the common European currency will cease to exist in two years' time.  In this economist's opinion, the main threat to the euro is the financial situation in one of the 16 countries of the euro zone: Spain.  The situation in Greece is no better.  The economies of both countries suffer from lack of balance in government financial sectors and from falling competitiveness of the goods and services they manufacture.  At the same time, participation by these countries in the euro zone rules out the possibility of improving the economic situation by devaluing their currencies.

Greece and Spain did not ignore the accusations made against them and provided counter-forecasts.  For example, Greek Prime Minister George Papandreou said that EU countries should have coordinated their efforts and formed a united front to combat economic crisis.  Then a number of countries, including Greece, would have suffered much less damage.  For his part, Spanish Prime Minister Luis Zapatero expressed the hope that the European financial system would recover soon.  However, he said, this process could not take place at the expense of the system of social security guarantees which are traditional for European countries.

In other words, Europe is obviously still on its way to finding the right solutions to the current global economic problems and there is clearly confusion in the exaggerated assessments of post-crisis possibilities.  It is most probable that some changes will be made to the financial and banking policies of the Old World after the Davos forum, because the current situation does not inspire confidence that the mistakes which resulted in the crisis will not be made again.  This is why the head of the EU Central Bank, Jean-Claude Trichet, called on bankers to concentrate their efforts on financing the working sectors of the economy and not to be guided by considerations of earning excessive profits or, as sad experience of the past showed, by a desire to achieve bonuses and every kind of benefit for the banking elite.

Against the backdrop of European pessimism, representatives of the major Asian powers appeared quite confident.  Chinese Deputy Prime Minister Li Keqiang said in Davos that China would do its best to spur domestic consumer demand.  The Chinese official explained that this would be an additional incentive for the rapidly growing economy because, in his words, exports alone cannot guarantee sustained development.  And South Korean President Lee Myung-bak voiced a plan to create a "global financial safety network" which would become the main item on the agenda of the G20 summit in Seoul in November 2010.  By organizing the summit in his country, Lee Myung-bak hopes to stress Seoul's role in bridging the gap between the developed, rapidly developing and poor countries of the planet.  He stressed that creating this type of safety network would minimize the influence of unforeseen movements of capital on rapidly developing economies.

Example of stability

So, the Davos forum has once again demonstrated the shift in accent in the international economy and how the economic policies of developing but quite successful states had hitherto been underestimated in the international arena.  In principle, Azerbaijan is one of those countries which, thanks to a well-thought-out, conservative economic policy, which is sometimes criticized by international organizations, was practically spared major upheavals during the crisis.

Incidentally, the very number of heads of states and representatives of business elites who wanted to meet President Ilham Aliyev, who also visited the forum this year, testifies to the republic's growing international importance and the increased interest of the business community in the country.  Literally over several hours, the Azerbaijani president met his Polish opposite number Lech Kaczynski, the Duke of York Prince Andrew, Jordanian King Abdallah II, Swiss President Doris Leuthard, Latvian President Valdis Zatlers and so forth.

In his speech at the plenary "Global Energy Panorama" at the forum, the Azerbaijani president discussed the successful results of the above-mentioned thoughtful economic policy and the reserved, conservative, financial and banking regulation during the crisis.  He noted that over the last 6 years Azerbaijan has been one of the world's fastest developing countries:  "The reforms introduced market principles for the development of the economy.  At present, the private sector's share in GDP is 85%.  Despite the crisis, Azerbaijan continued to develop in 2009.  Last year, GDP growth in Azerbaijan reached 9.3% and industrial output growth was 8.6%.  In addition, the national currency has not been devalued," said the head of state.

Discussing the country's role in the global energy security system, Mr. Aliyev noted that the correct policy of Azerbaijan and the combined efforts of its partners made possible the implementation of projects of international importance.  At present, the energy resources of Azerbaijan are transported in different directions.  The pipeline infrastructure has been created for this purpose.  The president stressed the growing role of Azerbaijan in the natural gas market, underlining that proven gas deposits in the republic are quite large:  "At present, Azerbaijani gas is exported to neighbouring countries.  And this happens despite the fact that some of those countries produce more natural gas than does Azerbaijan.  We shall continue to diversify gas exports."

In other words, Azerbaijan, in contrast to many other countries participating in the forum, will not look for new ways of addressing the problems to rebuild its economy or correct mistakes.  And, therefore, the country has a good chance of maintaining its leading position in terms of the pace of economic development in the near future.