Davos 2010

The World Economic Forum in Davos, Switzerland, ran from January 27 to 31 this year under the theme; Improve the State of the World: Rethink, Redesign, Rebuild.

Davos focussed on the global economic payers which now include the USA, Europe, China, and India. In addition, the discussions challenged the global banking sector to come up with some prescriptions to support the global economy to come out of the global crisis with as little damage as possible. Another overriding major discussion at Davos was around energy sources, energy prices, and clean energy.

Prominent world leaders voiced their concerns including French President Sarkozy who said…"Either we are capable of responding to the demand for protection, justice and fairness through cooperation, regulation and governance, or we will have isolation and protectionism." and, "We will continue to make the economy run unbearable risks, encourage speculation and sacrifice the long term to the short term unless we change banking regulation, prudential rules and accounting rules."

Deputy Governor of the Peoples Bank of China, Zhu Min noted…."Risk for sovereign debt crisis is real. It seems to me the real risk for the global economy is very weak and volatile economic growth. Currently people tend to be optimistic..."

US President Obama highlighted his State of the Union Address that job creation would be at the top of his agenda in 2010 and that his focus would also be the overhaul of the healthcare system. He tactfully left the financial sector aside since he had been beating up on it all year long through 2009.

China has lamented on the USA, Canada, Australia, and Chile blockade on Chinese state owned firms from making resource investments in those countries due to supposed labour opposition and national security concerns.

China states that protectionist practices will only amplify the economic crisis and retard any recovery process in the countries that apply such measures. All in all, China continues to source for more markets around the world to export the vast range of products coming out of factories across the country.

The banking sector in Switzerland had suffered some upheavals in the last 24 months when several banks were forced to reveal sources and balances of funds in accounts connected to political leaders and grey area business operations.

However, Swiss regulators quickly moved in and imposed more stringent banking regulations which include capital ratios in an effort to stabilize the sector.

The Bank of England estimates that governments around the world have spent as much as 14 trillion US Dollars since 2008 to support the financial systems and maintain some monetary stability across the globe.

This sort of investment raises concerns amongst some financial analysts who note that much of the support is in the form of government bonds and other securities. There is a fear that many banks will soon hold huge amounts of these government papers in their vaults and should anything go wrong, then the world would experience yet another financial crisis even bigger than the current crisis that is slowly drifting away.

The Bank of England is making available 185 million pounds to the banking sector through a government guaranteed debt program. Many banks are building their portfolios with long term government paper, financed with government money, and leading to a record world ‘carry trade’.

Some banks see themselves being forced into this corner due to the lower demand for credit from their customers, the desire to reduce risk in their balance sheets, and the pressure from regulators to ensure that banks can withstand shocks in the capital markets through greater reserves of liquid securities – government bonds.

Although government paper has traditionally been respected as risk free, the experiences of Greece and Ireland start to tell another story of cracking financial systems.

Renewable and clean energy is high on the global agenda as the Kyoto Protocol expires in 2012. National measures to reduce emissions are the current debates, with China surprisingly showing much more commitment than any other country. China and the developed western countries are racing to dominate the wind energy sector. China has doubled its installed capacity each year, every year, since 2005 and now places third after the USA and Germany in installed power.

The British government has announced that Britain will install around 32 gigawatts of off shore wind power by 2020.

Africa looks forward to a brighter future as most economies are growing steadily. The IMF suggests that sub Saharan growth will register 1 percentage point above the world average in 2010 and places 8 African countries out of 20 on its fastest growing economies of 2010 list.

Experts state that for Africa to develop alongside Latin America and Asia, a lot of work must be done to move Africa from a commodity supplier to a value addition continent.

In a recent survey it was assessed that out of the 44 large companies from the USA, Japan, and Europe with operations in Africa, less than 1 percent of their equity was allocated to Africa, and about one tenth of a percent of the bond allocation was routed to Africa. The concern for this low investment in the continent was amongst other issues, the weak capital market structures, and the low liquidity to let investments in and out of the continent.

The World Economic Forum at Davos highlighted some important lessons for Africa. Africa is where much of the world’s resources are.

Africa must build its socio economic infrastructure. Africa must develop its human resource capacity. Africa must develop its trading mechanisms such as banking and insurance to world class standards. Africa must recognise that there are several new emerging economies that can symbiotically work with the continent to develop it from extractive commodity supplier status, to a value addition supplier of goods and services to the rest of the world.

Davos may not have offered some easy solutions to Africa’s economic and social development, but it certainly highlighted the imbalances and inequities of the world development order, such that Africa is challenged to not only consider the Davos theme, but to also regroup, innovate, realign, and employ new routes to development.

Published 2 February 2010