Background to the WEF's Global Risk Report 3 ... Freed o

1
2009 World Economic Forum Annual Meeting
Shaping the post-crisis worldDavos,
Switzerland, 28 January to 1 February Davos
2009 deep dive

• Man can live for minutes without air,
• days without water,
• weeks without food,
• and forever without thinking
• Davos delegate on the reason for the
  financial crisis

External report Disclaimer The opinions of
those quoted herein are theirs, not Zurich's.
Regarding individual WEF sessions, whilst we have
attempted to give a reasonable and balanced
representation of some sessions herein, for a
more complete picture readers should consult WEF
webcasts / podcasts / session summaries available
at http//www.weforum.org/en/index.htm
For queries about Zurichs association with the
WEF contact Gregory Renand 41 44 625 26 23 or
gregory.renand_at_zurich.com For queries about this
report contact Mike McPhee 44 7841 562 767 or
mike.mcphee_at_zurich.com
2
ContentsBackground to the WEFs Global Risk
Report 3Global Risk Report (GRR) what
moved over the last year? 4Deep dive into this
years Annual meeting, including key discussion
and quotes under 5 Shaping the post crisis
world (the Davos 09 overarching
theme) 6 Promoting Financial Stability
(contributory theme) 9 Effective Governance
(contributory theme) 14 Sustainability and
development (contributory theme) 18 Post
crisis world values and principles (contributory
theme) 23 Catalyzing the next wave of growth
(contributory theme) 27 Industry
implications (contributory theme) 32

• Acknowledgements
• Without the assistance of a variety of people
  this report would not have been possible. We
  would like to acknowledge and thank in
  particular
• - our six delegates
• - our media, events, brand and marketing teams
• - our on-site core support team
• the many people from the wider Zurich who
  provided input and assistance to our delegates
  and core support team in the lead up to,
• during and after the Annual Meeting
• - Rainbow Insight, a Swiss think tank, with whom
  we collaborated on some of our Davos 09 thinking

3
Background to the WEFs Global Risk Report

• If events of the past year have taught us
  anything it is that in an increasingly complex
  and interconnected global environment, risks can
  no longer be contained within geographical or
  system boundaries. The Forum, with numerous links
  to business networks, policy-makers, governments,
  non-governmental organizations and think tanks,
  is in a unique position to advance new thinking
  on global risks, to generate risk mitigation
  measures and to integrate current knowledge on
  global risks.
• The Global Risk Network was founded by the WEF in
  2004 in response to concern that the
  international community and the global business
  community were not yet able to respond adequately
  to a changing global risk landscape. Zurich
  became a member in 2006. The Network aims to
  bring together policy-makers, business and non
  governmental organizations to help align
  assessments of risk, to understand institutional
  gaps and to better grasp the interconnectedness
  of sectors and risks. The networks Global Risk
  Report1 (GRR), an annual publication now in its
  fifth year, was once again this year released
  shortly prior to the WEFs annual meeting in
  Davos in order to help focus the meetings
  consideration of risk.
• Zurich is one of the five strategic partners of
  the WEFs GRR (and our work on it is sponsored by
  Axel Lehmann our Group Chief Risk Officer, with
  the technical work coordinated by our Group Chief
  Economist Daniel Hofmann) The core of the report
  is an analysis of the likelihood, severity and
  inter-action of 36 global risks grouped into five
  main categories economic, geopolitical,
  environmental, societal, and technological.
  Following the media launch of the report in
  London on January 13 many column inches in
  newspapers such as The Daily Telegraph (UK) and
  The Wall Street Journal Europe were devoted to
  quotes from Daniel.

Source Picture taken from the WEF website

• To obtain a copy of the GRR 2009 report contact
  the Office of the Chief Economist 41 44 625 2151
  or email daniel.hofmann_at_zurich.com

4
Global Risk Report (GRR) what moved over the
last year?
2008
2009
The overall message of last years report was
that 2008 would display the highest levels of
political and economic uncertainty for a decade,
with the four top risks identified as being
systemic financial instability and the threat of
a US recession food (in)-security and its
implication for political stability an emerging
vulnerability of cross-border supply chains and
the high price of oil and its consequences for
access to viable energy for all. The key
question raised in the 2008 report was, who owns
the risk? This message was heavily reinforced
in the 2008 WEF annual meeting sessions
addressing economic and financial risk exploring
the role of governments, businesses and
regulatory authorities in their joint
responsibility to prevent future financial crisis
and economic instability in addition to being
played out in the events that unfolded during the
latter part of 2008.
This years report focuses on the effects of the
global financial crisis and its implications for
a number of risks which have come to the fore.
They include a sudden further drop in Chinas
growth to 6 or below deteriorating fiscal
positions further asset price falls increasing
resource-related risks due to climate change and
the failure of global governance to mitigate
global risks. The highly interconnected nature of
these risks means that their impact is truly
global. The report links discussion on the
financial crisis discussion with the risk of
over-regulation and lack of a coordinated
approach to regulation globally. Global risks
can only be understood when explored in the
context of interlinkages with other risks, and no
one group acting alone can mitigate them
effectively. These aspects of global risks are
also why they pose such challenges for
policy-makers and business leaders alike. In
trying to resolve the current situation quickly,
leaders must also be mindful of the long term
implications of todays decisions.

• We showcased full-time at two strategic Davos
  locations throughout the course of the week our
  new Global Risk Assessment Module1 (GLORAM). Our
  GLORAM database, developed as a proprietary
  extension to our work on the Global Risk Report,
  comprises 160 countries and 24 global risks. The
  data is then fed into a variant of a multivariate
  cluster analysis, allowing us to compare the
  overall risk characteristics of the countries.
  The tool also allows a scenario analysis showing
  the impact of changes in one or several selected
  risks for individual countries. GLORAM received
  significant media and customer attention at
  Davos.

• For more information contact contact the Office
  of the Chief Economist 41 44 625 2151 or email
  kerry.karageorgis_at_zurich.com

5
Deep dive into this years Annual meeting
Shaping the Post-Crisis World
The primary theme Shaping the Post-Crisis World
was explored through almost 300 sessions1 ,
broken down into the six supporting themes shown
at the left. In deriving the content for this
report our six delegates attended as many
official sessions as possible, and talked to as
many people as possible (including WEF employees)
at private events and on the fringe of the
Congress Centre. Our support team viewed in
addition a large number of sessions by webcast
and reviewed all WEF session summaries. It is the
synthesis of this multi-faceted approach which we
now bring to you. In distilling the most
pertinent insights from numerous hundred sessions
we have had to be subjective. We now go on
provide a deep dive examination of key issues and
quotable quotes from the sessions conducted
around these themes at the left. Because it is
subjective it is told as a story, and is designed
to be read as such if you have 20 minutes. If you
prefer to skip to a particular section, if
viewing this as a powerpoint slide show you can
use the hyperlinks on the themes at left. At the
end of each section you can click on the Zurich
HelpPoint icon to skip back to this
page.
WEF Davos 2009 Shaping the post crisis world
2. Effective governance
1. Promoting financial )stability
3. Sustainability and development
4. Post-crisis world values and principles
6. Industry implications
5. Catalyzing the next wave of growth

• For one page summaries of most WEF sessions see
  http//www.weforum.org/en/knowledge/Events/2009/An
  nualMeeting/index.htm

6
Shaping the post crisis world (1/3)
Shaping the post crisis world was the
overarching theme for Davos 2009. The message
from Davos is that the worlds business and
government leaders only have a short time to
develop effective solutions to the current
economic crisis. Global challenges demand global
solutions, and leaders must continue to develop a
swift and coordinated policy response to the most
serious global recession since the 1930s.
We are all in some way responsible for not
recognizing the risks of a world completely out
of balance. We should have listened much more to
those who saw the signs on the wall, and to those
who also spoke out here (last year). What we are
experiencing is the birth of a new era, a wake-up
call to overhaul our institutions, our systems,
and, above all, our way of thinking, Klaus
Schwab, Founder and Executive Chairman, World
Economic Forum
Doom and Gloom A very real sense of despair
prevailed during Davos 2009. It was above all a
Davos full of doubt. Participants seemed in
search of an intellectual, moral and policy
compass. Both publicly and in private, a great
number of participants agreed not only that the
system has failed or is broken but that
radical change is on the way. Indeed, the
capability of individuals and companies alike to
adapt to what is going to be a radically
different global environment will differentiate
the winners from the losers. Exactly what that
radically different global environment would look
like was less clear, as was consensus on the
issue of the practical steps needed to be
multilaterally taken to get there. It is in our
view therefore too early to use the title
'shaping the post crisis world", because the
world is still gripped by crisis, and it is not
yet clear where it will bottom out. CNBC used a
different theme for their Davos coverage
Restoring Trust - Rebuilding Confidence which
is better aligned with the current situation.
My main impression of Davos this year is that
everybody is lost. Kishore Mahbubani, Dean of
the Lee-Kwan-Yoo School of Diplomacy in Singapore
and currently one of the foremost global thinkers
from Asia
7
Shaping the post crisis world (2/3)
We cannot underestimate the challenges and the
dangers that we face in 2009. We are in a global
recession the likes of which we have never seen.
But there is no quick fix. Stephen S. Roach,
Chairman, Asia, Morgan Stanley, Hong Kong SAR
A new world order - Davos closing plenary was
without doubt the most sombre ever. A bleak
picture was painted by delegates a of a rapidly
deteriorating economic landscape, where the pain
of rising unemployment, home foreclosures,
bankruptcies and poverty are only beginning to be
felt. As a result of this business and
governmental leaders face the very real prospect
of destructive social backlash that could
catalyze political instability and revive
protectionism. Failure to develop effective
solutions to the current economic crisis could
reverse the trend towards globalization. Concerns
were aired that stimulus packages being approved
by developed nations would not be enough to pull
the world out of the current crisis, with some
calling instead for a co-ordinated fiscal
response with a greater role for multilateral
institutions like the Group of 20 (G20) wealthy
and developing nations. In fact, a broad
consensus emerged that not the G8 but rather the
broader G20 grouping must now become the main
forum for decision making - both in the global
financial crisis, and more broadly going forward
- and that China in particular will now almost
certainly be at the table for nearly everything.
Leaders of the G20 countries, who will meet in
London in April for an emergency meeting that is
being billed as the new Bretton-Woods, must
therefore quickly develop and deliver on a
coordinated policy response.
It is important that leaders who come here go
back and work on ways of finding far-reaching
policies that will allow us to create sustainable
economic growth, create jobs and coordinate
macroeconomic policies Kofi Annan,
Secretary-General, United Nations (1997-2006),
Member of the Foundation Board of the World
Economic Forum and Co-Chair, Annual Meeting 2009
The likelihood of this happening is questionable.
In London the G20 leaders will focus on
immediate, technical responses to the financial
and economic crisis. For the meeting to deliver
on its billing as the new Bretton-Woods it would
have to achieve a far reaching, coordinated
global response backed by consistent regulation.
What remains to be seen is how the differing
ability of member countries to match the US
fiscal stimulus package, and the variation in
member country responses to both overt and covert
domestic protectionist pressures, play out.
8
Shaping the post crisis world (3/3)
This is the time to see courageous leadership on
the part of the G20. The time for words is over
this is the time for implementation and action.
If we come back in six months or a year and are
still talking about the same things, we will have
failed. And the social unrest we will have to
deal with will be absolutely dramatic. Maria
Ramos, Group Chief Executive, Transnet, South
Africa, and Co-Chair of this years Annual Meeting
The threat of protectionism - Indeed at Davos,
delegates cited numerous signs of a policy
response that is already in danger of going badly
off the rails, including efforts in the developed
countries to direct fiscal stimulus funds to
national producers through domestic content
requirements and other protectionist measures,
the withdrawal of state-supported lenders from
emerging financial markets and a reluctance to
recapitalize the IMF and other multilateral
lending institutions on the scale required by the
crisis. Whilst such developments pose a
particular threat to the developing world,
developed countries are already responding with
fiscal stimulus measures which may be covertly
protectionist as they concentrate a shrinking
pool of capital on key domestic constituencies.
One could look as examples to the US automotive
industry support package, or to UK pressuring of
nationalised banks to offer preferential
residential and small commercial lending. If
countries collapse back into protectionism then
we need to recall what happened in the 1930's,
and specifically how that precipitated WW2.
Perhaps ironically it was then WW2 which ended
(or began the end) of the great depression. Many
of the ingredients for another great depression,
and indeed great global conflicts, are once again
in play. By avoiding protectionism and moving
forward multilaterally and across the various
interlinked financial and non financial crises
the world can perhaps move onto the "war footing"
needed to restore financial stability and promote
economic growth, perhaps with climate change as
the common global enemy. A coalescence of
crises - during 2008 we witnessed a coalescence
of issues in addition to the financial crisis
which were previously seen as separate (energy
crisis, food crisis, the imminent water crisis,
the environment, poverty etc) but which are now
seen as intrinsically interlinked. If the fiscal
stimulus planned to get us out of the economic
crisis fails to address these issues in a
coherent and synthesized way, then it will fail.
As our work on the Global Risk Report highlights,
global risks can only be understood when explored
in the context of interlinkages with other risks,
and no one group acting alone can mitigate them
effectively. These aspects of global risks are
also why they pose more challenges now than ever
before for policy-makers and business leaders
alike. In trying to resolve the current situation
quickly, leaders must also be mindful of the long
term implications of todays decisions.
"I haven't yet seen people get all the right
people into the room and close the door and put a
solution up on the wall. Jamie Dimon, CEO,
JPMorgan Chase
9
Promoting Financial Stability (1/5)
What started as financial turmoil has now gripped
the real economy and spread throughout the world,
fuelled by undesirable spillovers, distortions,
opacity and imbalances. A host of Davos sessions
were focused on understanding what went wrong,
and how to restore the financial stability needed
to kick start the global economy.
"The whole world is a closed economy Justin Yifu
Lin, Chief Economist, World Bank
Tepid growth - The Davos consensus is that there
will be tepid global growth in 2009 followed by a
slow recovery commencing in 2010, equating to
global economy growth of about 2.5 over the next
three years. Nobody will be spared, including the
economies which had apparently de-coupled.
There are no contrarian voices on the upside
saying that the rebound will come earlier than
the consensus expects, but there are many on the
downside. In this camp, people affirm that global
growth will continue to contract late into 2010
as well. How long the recovery will take is
anyones guess, with some venturing that we will
witness a lost global decade
"If you believe that the world economy will turn
the corner at the end of this year, or in the
first quarter of 2010, I tell you we have not
turned the corner, we can't see the corner, we
don't even know where the corner is." Top money
market manager
Supply contraction - Martin Wolfs (and others)
central thesis, which is now seen to be generally
agreed, is that the current global crisis is
primarily caused by a malign interaction between
some countries propensity towards chronic excess
supply and other countries opposite propensity
towards excess demand. Since excess demand in
deficit countries is rapidly coming to an end,
the excess supply of surplus countries can only
collapse. The adjustment has to occur either via
offsetting increases in demand or via a brutal
contraction in supply. Since an increase in
demand is highly unlikely in the short term, it
is supply contraction that will prevail, dragging
down all exporting countries.
10
Promoting Financial Stability (2/5)
China? Everyone wanted to know how China will be
affected, and there were two China stories at
Davos an official and unofficial one. Chinese
Premier, Wen Jiabao, expects growth of 8 this
year, a contraction of only 1 on last year an
attainable target through hard work as he said.
The unofficial one had some economists declaring
that Chinas GDP has been dropping like a stone.
Official Chinese statistics are notoriously
unreliable, so if one uses electricity output as
a proxy for GDP movements, 3 month y-o-y moving
average indicate that as electricity output is
already falling, GDP is also falling. Another
pointer that China is already in recession is the
fact that manufacturing undeniably already in
very sharp recession - represents 40 of GDP.
"There is no fundamental change in the external
environment for China's economic growth. Chinese
Premier, Wen Jiabao
If China does contract more than Wen Jiabao
expects, it doesnt have to go far to start badly
impacting other countries which have, in
developed country terms, fared relatively well so
far. According to its Deputy Prime Minister Julia
Gillard Australia for example will suffer more
from a 2 contraction in China than from a full
blown US recession. USA - an update North
America session focused more on what the election
of President Obama will mean to the world rather
than on economic or financial stability specifics
(see post-crisis world values and principles).
Whilst Obamas biggest challenge will be the
economic crisis, it is unclear how successful the
strategy of loans and stimuli will prove. Nor is
it clear how the Chinese will respond to his
desire for them to assume a stronger leadership
role, with views from some quarters that Obama
will try to lead a de-facto G3 of the USA,
Europe, and China. Another question pertaining to
financial stability is whether Obama supports
market protectionism at the behest of a
Democrat-dominated Congress. One of the best
sessions examining the US causes of the crisis,
and potential solutions to it, was by
ex-President Bill Clinton.
11
Promoting Financial Stability (3/5)
The real cause was excess leverage, inadequate
risk analysis and regulatory failures. Bill
Clinton, ex-President USA
Excess leverage - With the exception of Bill
Clinton no one made a big deal of excessive
leverage being the key problem. Without
addressing the role leverage has played it is a
little like saying that the proximate cause of a
house fire was a little fire in the corner. The
fact that the house was built out of polystyrene
meant that what should have been a small and
controllable fire quickly burnt the entire house
down. In Clintons parlance this proximate
cause of the crisis was the excessive leverage
associated with sub prime mortgages and the
related asset backed securities. There was a
failure to create new places for money to go
following the burst of the tech bubble. People
chased yield, policy encouraged it, risk was
inadequately analyzed and priced and regulation
failed. All of these things enabled leverage to
grow to the point where, at the time of the
Lehman Brothers collapse, some hedge funds were
operating at a leverage of over 40 to 1, up from
about 12 to 1 a decade earlier.
Models killed Wall Street Nassim N. Taleb
Models - A lot of the discussion on the subject
of financial engineering was yet again dominated
by the formidable presence of Nassim Taleb
(author of The Black Swan). Talebs timely
presence seemed to have a profound effect on many
participants at Davos. He believes the
mathematisation of finance is in deep trouble.
His view is that in future quants will be
regarded with suspicion, opaque instruments will
be rejected and simplicity and transparency will
prevail. Whilst many participants at Davos agreed
that the era of benign ignorance is over, we were
shocked to hear that many more still believe that
simply fine tuning financial models will fix the
crisis, as opposed to major adjustments to
business principles. The whole financial system
is going to be "reset" - people who believe that
adjustment will take place at the margins are in
denial. Clinton and others underscored the need
for US leadership in quelling the downturn. He
highlighted the opportunities afforded by a
fundamental review of the global financial
system, and stressed the interdependence in the
world economy.
12
Promoting Financial Stability (4/5)
This financial crisis proves, as nothing else
should or could, the fundamental fact that
global interdependence is more important than
anything else in the world today. We cannot
escape each other. Divorce is not an option .
(but) the main thing is to get through this as
fast as we can Bill Clinton, ex-president USA
Toxic assets - It is now generally accepted that
the only truly toxic assets are the bundled sub
prime mortgages. The problem, particularly
evident in private conversations, is that no one
really knows how to value the complex packages of
loans and securities sitting on the balance
sheets of banks. Developing transparency in such
conditions is a daunting task. In the US alone,
it is estimated that an additional 1.5 trillion
is required to adequately recapitalize the banks.
Globally, there is no consensus about the way
ahead. A small group thinks that a
nationalization of the banking system is
inevitable. A majority of others advocate a good
bank/bad bank model in which toxic assets would
be deferred into a special unit while healthy
assets would remain in the original bank. Like
all complex policy decisions, this is very much a
quest for the least bad solution, but it needs to
be decoupled from the rebuilding process because
bottoming out asset prices may still take a long
time.
The problems are, at one level, mind numbingly
complex, and yet at another level very simple. We
have a global crisis of asset deflation and we've
got to put a floor under those assets. America
has to lead the way because it started there.
Bill Clinton, ex-president USA
Russia - As with Wen Jiabao, much was made of
Vladimir Putins first ever attendance at Davos.
The thinly veiled underlying theme of his speech
as part of the opening address was Russias
return to pre-eminence as a world power as a
result of the diminishing US clout that will
result from the global meltdown. Putin called for
the expansion of the range of reserve currencies
and said that the diversification of financial
centres was an assault on the historical
pre-eminence of the US dollar. The dollar is
still perceived as a safe haven and indeed
consensus of discussion elsewhere at Davos was
that the US dollar will remain the global reserve
currency for the foreseeable future. However
there were some contrarian voices saying that as
the economic situation continues to deteriorate,
with the monetary easing that goes with it,
foreign investors could start losing patience
with the US and repatriating dollar assets. The
Euro is the obvious shorter term option, with the
Chinese RMB a potential longer term option.
13
Promoting Financial Stability (5/5)
As winter comes to Russia unexpectedly every
year, it happens this time again with the global
economy. Vladimir Putin, Prime Minister of the
Russian Federation, who drew laughs for his
mockery of government and business leaders
failure to predict the crisis
The need for actionable multilateral consensus -
Davos provided a global platform for four heads
of government from the G8, the Chair of the G20,
and four other heads of government of G20 members
from Africa, Asia and Latin America, yet it ended
with no actionable multilateral consensus about
what to do about the crisis. The Davos meeting is
not designed to achieve one all-encompassing
statement of beliefs at its conclusion, such as
those seen at G8 summits. Rather, it brings
together leaders from around the world who would
otherwise not meet one another in the normal
course of business, providing a platform for
debate. That the meeting ended on such a sombre
note is perhaps not surprising when viewed in
this light , however its lack of concrete,
actionable multilateral consensus does load extra
pressure onto the London emergency G20 summit in
April, the stalled Doha round of trade talks, and
the Copenhagen Climate Change summit in November
to achieve real results. Such results will need
to be immediate, far reaching and sustainable in
effect. Following Davos from 13th to 14th
February the G7 met at Rome resulting in a
communiqué
working toward multilateral actions to restore
normal credit flows to the economy following
three approaches as needed to 1) enhance
liquidity and funding through additional and
newly created instruments and facilities 2)
strengthen the capital base of financial
institutions and 3) facilitate the orderly
resolution of impaired assets and to taking any
further action that may prove necessary to
re-establish full confidence in the global
financial system. G7
The WEF will be facilitating a private meeting of
central bankers, finance ministers and other
government leaders with the private sector to
brainstorm on systemic financial issues in the
run up to the London Emergency G20 summit in
April. Much of how 2009 and beyond will play out
hinges on the consensus reached at this meeting
and on the execution against any resultant global
action plan. Everyone will be looking towards
Obama for global leadership in driving truly
multilateral consensus and action, having watched
the crisis unfold during his Presidential
campaign.
14
Effective Governance (1/4)
A systemic failure of risk management and risk
assessment has been exposed by the current
financial crisis, both in the private and public
sectors. This exposure has raised questions about
rating agencies, financial institutions, investor
practices and the role of watchdog agencies.
Ineffective financial governance is at the core
of the current economic failure. Many Davos
sessions were focussed on understanding how
governments, corporations and regulatory agencies
can rebuild public and political confidence in
the financial system, and the elements of todays
financial governance regime should that be
retained, discarded and replaced.
We allowed a series of near banks and shadow
banks to grow without being regulated. In a new
regime, if it looks like a bank and quacks like a
bank, we have to regulate it like a bank Adair
Turner, head of FSA
State power - The meltdown has pushed governments
to play a greater role in the global economy. The
consensus view is that expanding governments
power is a given, with the need for focus on how
this power should be wielded. It is clear that
governments must act swiftly and vigorously to
stabilize markets. States will also need to
expand their role in regulating markets to reduce
systemic risk. In the past, markets relied on
private sector actors to fill this role, such as
rating agencies like Moodys and Standard
Poors, but the sub-prime mortgage crisis
demonstrated the severe shortcomings of this
model.
It is unfair to use rating agencies as the
whipping boys. It was the regulators who blew it
majestically Angel Gurría, Secretary-General,
Organisation for Economic Co-operation and
Development (OECD), Paris
Regulation - Little clarity emerged as to exactly
what role regulators must play going forward. The
global regulatory framework has no treaty-based,
global agency no equivalent of a World Trade
Organization, for example so regulators must
seek out other ways to harmonize regulatory
regimes within national governments and among
nations. Nevertheless, there is an increasingly
clear need for a set of global rules. There
should be better coordination among regulatory
agencies as well as a consolidation of regulatory
responsibilities among governance authorities. In
addition, the capacity and capabilities of
regulatory authorities should be increased. But
whatever form it takes, and however well or ill
coordinated, more regulation is on the way fast.
15
Effective Governance (2/4)
Regulation is heading at business executives
like a freight train James Saft, media leader
The contours of the future regulatory system
remain unknown. It is in the US that this will
change the most with one of the two following
systems most likely to prevail a single
regulator (FSA-style, even though it suffered
hugely after the UKs Northern Rock failure) or
an Australian twin-peaks variant (in which a
prudential regulator across the financial sector
coexists with a business regulator for
transparency and consumer protection). Two trends
should be followed closely as they will reshape
the regulatory environment in the months to come.
Firstly, there will be much greater global
co-ordination with standardization aimed at
reducing regulatory/jurisdictional arbitrage.
Second, institutions deemed as presenting a
systemic risk primarily hedge funds but also
the whole financial system in more general terms
will be subject to much enhanced oversight. The
greatest risk in this domain is that governments
may be tempted here and there to overplay their
hands.
Free market fundamentalism was a mistake. To go
to the other extreme would also be a mistake.
Ken Rosen, Chairman, Fisher Center for Real
Estate and Urban Economics and Professor
Emeritus, University of California, Berkeley
Macroeconomic coordination - Despite the need for
action, there are serious risks associated with
expanding the role of government. Restoring
public confidence will be essential to rebuilding
healthy markets. Macroeconomic coordination is
essential as governments design stimulus packages
and new economic policies. With many nations
looking to protect jobs domestically, free trade
is likely to be curtailed at a time when the
global economy needs it most. The collapse of
trade negotiations in Doha gives reason for even
greater concern.
Doha was the low hanging fruit. How are we going
to do this much more complex coordination if we
cant get results out of Doha? Angel Gurría,
OECD Secretary-General
16
Effective Governance (3/4)
Threat of protectionism - Concern was expressed
in many quarters that fiscal incentive measures
being adopted by various countries may descend
into protectionism. US plans to aid its
struggling automotive industry were questioned as
it is increasingly clear that a rescue may amount
to protectionism. Given that the US is needed to
play such an important role in the multilateral
effort to address the economic crisis, much was
made at Davos of Barack Obama not being present
but instead sending Valerie Jarrett, who was
widely criticised for largely re-hashing Obamas
campaign and inaugural address material without
addressing any specifics.
Valerie Jarrett reinforced Obamas call on
leaders from all nations - to each other, to our
families, to our communities to seize gladly
the duties of collaborating and boldly embrace a
new era of global financial responsibility.
Valerie Jarrett, US Presidential Assistant for
Intergovernmental Relations and Public Liaison
Role of US - Whatever the criticisms, attempts at
global reform will still be heavily dependent on
actions in the US, comprising one-quarter of the
world economy. The US accepts some of the
criticisms of its regulatory failures but other
key US policy makers, including Treasury
Secretary Geithner, backed out of attending Davos
to focus on passing the 800bn economic stimulus
package which was going through Congress during
Davos and which has since been passed. The US is
also considering new plans to help shore up the
still-fragile US financial system, and to improve
the system of banking regulation. It may not be
until April, when President Obama is expected to
attend the G20 Global Economic Summit in the UK,
that US plans for international economic reform
are revealed.
You will get government out when private
industry has re-established confidence . We all
know government cannot run banks but at the
moment no one has confidence in the financial
institutions. Martin Sorrell, CEO, WPP
Europe - is the other place where action is
absolutely crucial. EU member states must
recognize that discrete national policies will be
insufficient to deal with the economic crisis.
Member states will have to cede a greater degree
of sovereignty and mobilize financial resources
on a massive scale to help out the most
vulnerable among them. The EU may need to loosen
constraints on national budget deficits laid out
in the Maastricht Treaty, to allow countries to
employ fiscal stimulus tools more easily. However
none of this will be easy. If this is going to be
very difficult within the EU, consider the
difficulties on a global scale.
17
Effective Governance (4/4)
To be effective, a multilateral financial entity
needs teeth. The problem is that there is no
enforcement mechanism, no penalties for bad
behaviour. Nobody wants to relinquish national
authority. Without a multilateral entity that can
bark and bite, we will get nowhere. Chairman of
Morgan Stanley, Asia, Stephen Roach
In the long term, global governance will need to
become more inclusive. It bodes well that China
and powerful emerging market players have begun
to assume a more vocal role in the G20. However
there is little sign as yet of the world
leadership that needed to mobilize support for
genuinely global reform.
"All of these issues... need to be enshrined in a
charter for the global economic order This may
even lead to a UN Economic Council, just as the
Security Council was created after World War II."
German Chancellor Angela Merkel
18
Sustainability and development (1/5)
The interlinked nature of a variety of global
crises was woven into the fabric of discussion
about sustainability and development. On
sustainability the view is that the world has run
out of wriggle room and the Copenhagen Climate
Change Conference needs to deliver in November.
Development issues need to overcome widespread
myopia and funding pressures as the recession
hits the developing world the hardest.
"I am in Davos to convince people that there is
no competition between ambitious climate change
policies and the resolution of the financial
crisis. Prime Minister Anders Fogh Rasmussen of
Denmark, the Chair of the UN Conference on
Climate Change
Copenhagen - Governments will meet in late
November in Copenhagen to agree the successor
treaty to the 2005 Kyoto Protocol. As the
economic and environmental costs of inaction
continue to accrue for a battered world economy,
many Davos sessions underscored the need for
world leaders to do their utmost to arrive at a
shared vision and common goals on climate change
in the months ahead. Much was made of addressing
climate change and solving the worlds economic
crisis not being two separate issues. Governments
can address the financial crisis by promoting new
technologies that are environmentally helpful,
called green stimulus by Al Gore green
efficiency is sound economics. There was
significant enthusiasm, led by Gore and widely
supported, for the USA to finally show leadership
in tackling the issue of climate change.
What we most need out of Copenhagen is a clear,
shared vision of where the world is going in the
future . President Obama is the greenest person
in the White House. He is pushing hard for a
dramatic and bold move in the right direction. If
other governments do the same, then we can make
the change to a low-carbon future. Al Gore,
Vice-President of the USA (1993-2001) Nobel
Laureate 2007
50 billion tons of CO2 now go into the atmosphere
each week. The world has run out of wriggle
room and there is a need to make drastic cuts in
greenhouse gases very quickly, with the developed
world needing both to provide the impetus and
then maintain the momentum. The agreement of
clear targets is a prerequisite for the creation
of a private market, in addition to adequate
funding and a transparent verification scheme
needed for countries to reach long-term goals.
Industrialized countries should reduce their
emissions by 80 of 1990 levels by 2050, and
should help developing countries adapt to climate
change through technology transfer and a global
fund growth. The current economic crisis presents
an opportunity to get commitment on both
increasing energy efficiency and reducing the
cost of generating power and transferring energy.
19
Sustainability and development (2/5)
Crisis is a terrible thing to waste, Chris
Luebkeman, Director, Global Foresight and
Innovation, Arup Group, UK
Dislocation and myopia - The process will mean
dislocation, and it will require capital flows
from rich countries to poor ones, to enable them
to get on board. There is a pressing need to
begin now so that the pace of change can be
measured, rather than waiting until the last
minute when disasters will force very disruptive
changes. A key challenge is how to deal with the
unwillingness of countries and individuals to
perceive the real risk of climate change.
We are gambling with the planet. Nicholas
Stern, London School of Economics, UK
Multiple crises - A billion people lack clean
water, one in four lacks electricity, and 25,000
die of hunger each day. Looking ahead, more
people, growing ever more prosperous, will demand
even more water, energy and food than ever
before. Under the pressure of a population that
will triple from the 3 billion in 1950 to an
estimated 9 billion by 2050, the resource bubble
is close to bursting. Unless pressure on these
basic necessities is relieved through an
integrated and interdisciplinary strategy,
delegates argued that resource scarcities may
cause widespread insecurity and instability for
years to come. The huge increase in food prices
in 2008 was seen as symptomatic of the growing
stress that our natural resources are under
water being the most critical - and many felt
that if resources are not used in a sustainable
and responsible way, there will soon be a point
of no going back, a tipping point. To coordinate
strategies, there were calls for world leaders to
establish a natural resource security council
for water and food that can match the UN Security
Council for war and peace.
20
Sustainability and development (3/5)
We need to act now to prevent wars over scarce
natural resources such as water, food or fuel. We
need a new social contract founded upon policies
designed to bring about a greater sharing of
resources. Without a global consensus over
resource management, there will be little worth
arguing over, whether in terms of nation states
or the way in which we govern our societies.
Kuseni Douglas Dlamini, Head, Anglo American
South Africa
Demographics - It is not just global population
growth which needs to be addressed, but also
demographic shifts and their economic, social and
political consequences. These vary from the youth
bulge in the Middle East and North Africa to
ageing populations in Europe. In the next decade,
1.2 billion people will come into the age of
employability, 90 in developing and emerging
markets. The Middle East and North Africa already
have the highest rate of youth unemployment in
the world, and they need to create 100 million
new jobs in the next 20 years. Managing the youth
bulge requires investment in job creation, skills
training, education and different kinds of
investment and banking policies, especially
access to capital for small and medium size
businesses. The consequences of not addressing
education and economic issues to meet this target
are daunting. Healthcare systems in developing
economies must contend not just with difficult
infectious diseases and a rise in chronic
illnesses, but with these demographic
shifts. Addressing population ageing is a
challenge, especially in the current financial
situation. With a growing public pension burden
and a shrinking labour force in developed
countries, governments needs to rethink
retirement, pensions and healthcare. Personal
accountability needs to be better understood and
individuals need to prepare to be taxed more,
work longer and receive less. Healthcare systems
in industrialized countries need to manage the
rising costs of chronic diseases in an ageing
population. We need to stop throwing most private
and public resources at the treatment of
diseases, and greatly increase the emphasis on
health and wellness.
We have to face the fact that our economic
approach benefits a few, but doesnt bring any
benefits for the masses. Philip J. Jennings,
General Secretary, UNI Global Union, Switzerland
21
Sustainability and development (4/5)
Income inequality - In spite of massive economic
growth that produced millions of new jobs since
the early 1990s, income inequality grew
dramatically across most regions of the world and
is expected to increase with the global economic
downturn. The legacy of the current economic
development model is that a major share of the
cost of the financial and economic crisis will be
borne by hundreds of millions of people who have
not shared in the benefits of recent growth. At
the same time, poor education and low skills are
preventing young people from being able to lift
themselves out of poverty. As world leaders
prepare to reshape the global economy, there is
an opportunity to explore stakeholder
capitalism and to reprioritize social
responsibility. Access to education provides the
greatest chance of all.
Investing in women is smart economics. Investing
in girls catching them upstream is even
smarter economics. Ngozi Okonjo-Iweala, Managing
Director, World Bank
Role of women Educating girls yields a higher
return in improving the local economy than any
other type of investment. Various sessions
highlighted the role of women in development. An
educated girl will use 90 of her future income
towards her family, while boys invest only 35.
Yet, 70 of children out of school are female.
Services need to be extended, and consideration
must be given to the barriers that keep girls out
of school. Creating programmes that improve the
health of women and adolescent girls has a
multiplier effect on the economies of developing
nations. Women are not only core recipients of
these services, but potential providers, as
clinics that focus on the health of women,
adolescent girls and children also train women to
be paramedics and clinicians. Girls are subjected
to sexual violence in so many parts of world with
absolute impunity. This problem is growing with
the global economic crisis, and human trafficking
has increased dramatically in the past few
months. In many parts of the world, outdated laws
fail to protect womens property and rights. For
example, in Indonesia, women must have letters
from their husbands to obtain credit or get a
passport. According to Mari Pangestu, Minister of
Trade of Indonesia, one of the best ways to
change these archaic rules is to put women in
power
Development assistance is a mechanism for
creating a middle class in donor countries that
will then hold their governments accountable.
Nancy Birdsall, President, Center for Global
Development, USA
22
Sustainability and development (5/5)
Mobile telephony - gained traction this year as a
development subject. Four billion people around
the globe today own a mobile phone and by the end
of 2010, it is estimated that another one billion
new users will have signed up to this ubiquitous
tool. This year, Asia will account for over half
of all the worlds mobile subscribers. This is
not surprising as people in developing countries
in that region, one of the fastest growth
markets, are subscribing to mobile telephony at a
rate of more than 30 annually. The access that
this every day, everywhere device has given and
the applications, which have been built on the
access, have been nothing short of spectacular.
Mobile telephony, whether in developed or
developing countries, should be seen as an
enabler for social and economic activities and
vital for economic growth. In developing
countries, the mobile phone is no longer just a
means for people to keep in touch. In many ways,
thanks to the myriad of applications that have
been developed in recent years, it has become a
liberating tool. Poverty is not just about the
lack of access to material needs but also to
information. In China, farmers are now reading
newspapers on their phones, overcoming the
logistical barrier of getting their newspapers on
a daily basis. As well, the mobile phone allows
them to bypass middlemen to digitally check
prices of their produce in other parts of the
country. Unemployed blue-collar workers in Kenya
can now advertise their availability through text
messages. An SMS helpline in Nigeria offers cheap
and anonymous counsel to troubled teenagers.
Digital Reagan? The access to information
and collaboration afforded by the mobile
revolution should be borne in mind when
considering how Obama may look to conduct his
Presidency. This was the first truly global
presidential election, with the entire process
played out in a variety of media globally. Obama
is playing to his biography, seemingly all things
to all people, and as such is a potential
unifying force globally. He plays to multiple
constituencies at home and abroad in a way that
has not been seen before. Nearly 80 of Europeans
would have voted for Obama. Africa thinks he is
African. Asia thinks he grew up there. His
election is seen as some redemption of history
and so to a substantial degree allows the USA a
fresh start. It should not be forgotten that
Obama is a huge admirer of Reagan and Reagans
style. There are views that given his savviness
with technology he might look to conduct himself
as something of a digital Reagan. He used the
internet exceptionally well in his campaign and
he will certainly attempt to use it as an
instrument of government. The huge global
expectations of him to provide a bright and
tranquil future on multiple fronts provide a
major challenge. It is possibly most pertinent to
discuss what the election of Obama will mean in
the context of post-crisis world values and
principles, next.
Mobile telephony, whether in developed or
developing countries, should be seen as an
enabler for social and economic activities and
vital for economic growth. Wang Jianzhou -
Chairman and CEO of China Mobile
23
Post-crisis world values and principles (1/4)
The current global economic slowdown has lead to
a crisis in confidence in the private sectors
commitment to good corporate citizenship. It
comes at a moment in which religious criticisms
of the secular world are sharpening, and likely
to appeal to millions of people in need of
solace. It also coincides with a growing
conviction among scientists that people do not
fit the Enlightenment model of conscious,
self-knowing, self-directed utility maximizers.
As a result, the values crisis will pose a
fundamental challenge for the free market
ideology that was once hailed as the end-point of
history.
We worshiped in the temple of cutthroat
competition, and so some cooked the books,
because the treasure is so great Desmond Tutu,
South African Archbishop
If market machinations lead to unpredictable,
spectacular crashes, are free markets morally
justifiable ways to address social needs? If
human nature makes it impossible for us to
consistently define and promote our own best
interests, then leaving citizens to the mercy of
marketers may be unethical. If voters pick
candidates for emotional, unconscious reasons,
what is the ethical basis for preferring
democratic elections to, say, religiously guided
government? The moral aspects of business conduct
have never been so much in doubt which is why,
some say, those ethical issues of values and
principles have never been so important. They
were certainly given more attention than ever
before this year at Davos.
We have reached the crisis in the way we operate
some of our institutions and we have got to make
sure that they are based on the values that every
sensible person would support and not making some
exceptions for a financial institution because it
is in difficult territory or it's got to take
ridiculous kinds of risk. We've got to build them
around these values. And then we've got to build
the structures of transparency and disclosure,
the cross-border supervision as well as the
ability of our international institutions to
help. Gordon Brown, Prime Minister UK
A question of values - An inevitable question was
given attention at one of the key plenary
sessions the values behind market capitalism,
that being whether the rules and values that were
in place to safeguard the capitalist system have
failed or whether the system itself is in need of
an overhaul. Regulatory and market failures have
clearly damaged capitalism, but the ethical and
moral lapses that led to those failures will
prove to be more pernicious over time. Panellists
agreed that a serious reflection of the morals
and ethics underpinning the system is clearly
warranted and, in particular, the concept of the
common good has to be revisited. While the
financial system needs to be fixed, the solution
is not excessive regulation that stifles
innovation and free enterprise.
24
Post-crisis world values and principles (2/4)
Values that once served the system well have
seen gradual erosion. We have moved from the old
cliché my word is bond to a culture and
atmosphere where if theres a transaction, if
theres a market for it, and I have a contract,
and its legal, thats it I dont need to think
about the underlying right or wrong, suitability
or unsuitability. Stephen Green, Group
Chairman, HSBC, UK
Ethics-based capitalism - Moving forward, there
was a strong view that the moral order and not
simply the legal order has to prevail. Agreement
on the need for ethics-based capitalism was
tempered by concerns from panellists that
business has sidelined social values up until
now. Capitalism has to be tempered by sound
values and not just those that worship the
almighty buck. An un-named audience member
said, in a comment which elicited a huge round of
applause, that the failure to attribute personal
blame for the financial collapse is intriguing,
and that if you sell toxic products in any other
field, you go to jail. There can be laws on the
books but personal compliance with those laws
that is just as important. This implies a
philosophical change in the way private
individuals, companies, institutions and
governments approach the world. If the crisis
results in changing people for the better,
fundamentally re-setting our moral compass, all
of the pain and suffering it has caused may not
be in vain.
The big question is do we have the right leader
in the right place with the right moral compass
to restore the confidence and credibility needed
at this time? James J. Schiro, Group Chief
Executive Officer and Chairman of the Group
Management Board, Zurich Financial Services,
Switzerland
The whole system has not failed - The financial
system was originally intended to serve the wider
economy and the wider economy to serve the wider
society, not be an end in itself. Unlike others
before, this crisis is global in its impact. But
part of the problem is that the integration of
the world has moved far ahead of the political
capacity to express that integration either
institutionally or in terms of the alliances that
we have. The financial system has failed, not the
free enterprise system as a whole. The solution
will need to be borne out of a new world order.
It would be quite bizarre to still talk about
the G8 as being the forum for the worlds leading
economies and unthinkable for it to attempt to
tackle the crisis without involving other
countries. A major challenge for the Obama
administration is how to unwind the present
strategic alliances and put the right ones in
place. Tony Blair, ex Prime Minister UK, UN
Middle East Quartet Representative and Member of
the Foundation Board of the World Economic Forum
25
Post-crisis world values and principles (3/4)
Obamas role - So what will the election of Obama
mean in the context of post-crisis world values
and principles? Obamas first actions have been
on foreign policy. It is telling that his first
interview was with Al Arabyia. It sends a
message, particularly to the Middle East, that
the new US leadership is ready to listen and
understand. Obamas first political move as
president was global, notably to close the
Guantanamo Bay detention camp. But foreign policy
is seen as remaining very complex. There is a
question mark as to whether the sunglasses come
off now that Obama is in power, and whether his
foreign policy might end up mirroring Bushs
policy more than expected. On domestic issues,
and particularly economic policy, Obama will have
a difficult time with his own left wing and with
Congress. This is at the same time that issues
such as energy and climate change are being
increasingly perceived as both mainstream and
interlinked with economic issues. Exactly how
Obama will lead from the front on his call on
leaders from all nations to seize gladly the
duties of collaborating and boldly embrace a new
era of global responsibility to each other, to
our families, to our communities, to our country
and to the world remains, therefore, to be seen.
"Poor chap. There's huge expectations on all
fronts. We should all help him by reducing
expectations." Kofi Annan, former U.N. Secretary
General, talking about international reaction to
Barack Obama
Neuro-economics - Often, Davos catches important
trends with a time-lag. This is certainly the
case for neuro-science in general and
neuro-economics in particular. These twin
disciplines have made tremendous progress over
the past few years but did not get the proper
attention of the WEF before this year. The 21st
century may be the century of neuroeconomics
and this is likely to have a large impact on the
discussion and understanding of values. Indeed,
this new discipline has shattered the illusion
anchored in traditional economic theory that
people always make rational decisions, the
so-called rational agent assumption. As with a
session about extreme events, new discoveries
about neuro-economics presented at the WEF are
forcing us to reconsider many of the assumptions
we make about decision making, risk assessment
and risk mitigation. The sentiment of fear is a
powerful driver which greatly influences personal
decisions in conditions of uncertainty. At the
moment, for example, it is obvious that fear is a
powerful driver of the markets. Trust - the only
antidote to fear and anxiety - has been shattered
by the crisis, though it is worth noting that
trust in business and institutions was in trouble
well before the crisis started.
Denial of the unpleasant or politically
inconvenient truth combined with herd instinct
caused us to rely on systems which were
unrealistic and unsustainable and which, in
addition, were undermined and abused by some who
acted in unethical and fraudulent ways. What we
need now is not only to to look forward and
mobilize all people with one mission in mind to
rebuild trust based on the fundamental pillars
of honesty, transparency and predictability.
Klaus Schwabb, Founder and Executive Chairman of
the World Economic Forum
26
Post-crisis world values and principles (4/4)
Trust - In various sessions discussion honed in
on the nature of trust, the extent of the damage
which has been done and, finally, what can be
done about it. Trust is the lubricant that makes
social exchange possible, creating predictability
and lifting performance. It is hard to create and
easy to destroy. Not all trust is good, and
misplaced trust can be damaging (as with the
Bernie Madoff scandal, amongst a host of other
examples). The downward spiral in trust in
corporations mirrors a decline in confidence in
government and institutions. In the US, trust in
companies is down to 38, on par with ratings for
outgoing US President George W. Bush. Things are
likely to get worse before they get better
because everyone is looking for someone to blame.
It is important to differentiate between trust in
Wall Street and Main Street, with the former
being the villain and the latter retaining
respect and to some extent being the victim.
As a Main Street company, we have been tainted
by the other street. We've been tainted by
association." Indra Nooyi, Chairman and CEO,
PepsiCo
In terms of what to do about restoring trust,
governments need to accept responsibility for
setting rules at the international level and for
abiding by them. Many bought into a broadened
concept of shareholder value (i