Europe’s miracle years of the 1950s and 1960s were still fresh in the memory. The opening-up of the European Union as a single internal market had a long way to run. Prospects for markets in the EU (then just the European Economic Community) appeared excellent, because there was still plenty of catching up with America to do.
American companies and their bosses were happy to come to the Swiss mountains to explore ways of tapping into that market. It was called a world economic forum but it was really a dialogue between America and Europe.
Now the focus has shifted. The Americans still come, in ever larger numbers, but now they come — particularly this year — to interact with businessmen and officials from China and India. That the forum is still in Europe may come to be seen as a historical accident, a passing moment before the world’s economic centre of gravity began to shift inexorably to the east.
This time last year the air was thick with warnings about the global economy, not least fears that high oil prices would derail growth in the industrial countries, just as America’s twin deficits were producing a disruptive dive for the dollar. Something had to give, and many thought it would do so in 2005.
Those fears haven’t gone away. One session at Davos looked at the consequences of a series of big terrorist attacks on sensitive oil targets, concluding that in those circumstances oil would rise to $120 a barrel and stay there.
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Stephen Roach of Morgan Stanley, a longstanding bear on the American economy, continues to expect something nasty to happen, a deflating of the American housing bubble bringing to an end what he describes as “the great American spending binge”.
America is normally ahead of us but the debate over housing is reminiscent of Britain’s great housing-crash debate of a year or so ago. I can’t say whether the result will be the same, although some of the factors pushing house prices higher are common to both economies.
But there’s no sense of panic. Sessions on the risks of global terrorism attract less interest than those dealing with bread-and-butter business issues. Last year’s love-in with Hollywood stars and rock musicians has been replaced by something more practical. The view among business people here seems to be that you can only deal with what you know. Things you don’t know — and that includes bird flu — are best left to the experts.
What businesses do know, of course, is about the global economy’s shift to the east. This story is not new, it is just becoming more obvious by the year. China grew by 9.9% last year, passing Britain to become the fourth-largest economy in the world. Only America, Japan and Germany are bigger.
On a purchasing-power-parity basis, adjusting for relative prices and the Chinese currency’s undervaluation, China is already in second place to America and closing fast.
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China’s ambitions have, however, barely scratched the surface. Zeng Peiyan, the country’s vice-premier, said China’s growth rate over the past 27 years had averaged 9.4%, and the aim was to double per capita gross domestic product over the period of the next, 2006-10, five-year plan. That looks overambitious. It would imply a significant acceleration in China’s growth rate at a time when there are already overheating worries and most economists are looking for growth to moderate to about 8% a year.
It is worth putting China’s ambitions into perspective. The country has a population if 1.3 billion and its per capita GDP is a mere $1,700 (£950). If it were to rise to $3,500, say over eight to ten years, that would leave China’s income per head at only a tenth of Britain’s now.
The fact that China still has a five-year plan tells us much about the nature of its regime, as does last week’s agreement with Google to restrict Chinese users’ access to pro-democracy, anti-regime websites.
Such fears over politics are being exploited by the other emerging Asian giant, India. It has spent £3m sending 150 top businessmen and politicians to Davos.
While stressing that its development is complementary to China rather than in competition with it, India sells itself as the “world’s fastest growing democracy”. So far, while India’s growth has accelerated over the past 15 years from 2%-4% to something closer to 7%-8%, it has not matched China, largely because it has attracted only a tenth of the foreign investment. That was what the pitch to the World Economic Forum was intended to address.
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The shift to the east creates challenges as well as opportunities. In 1990 China accounted for 3.5% of global crude oil demand. Now it is 9%. China’s oil demand is rising 8.8% a year and India’s 4.5%, at a time when demand from the advanced countries is rising 1.6% a year. That shift has energy and environmental consequences.
It also raises important questions. Do China and India carry on growing until they have closed the income gap with the advanced world, or will they reach some kind of ceiling, as large middle-income, rather than high-income economies? Are we getting too excited about the prospects for China and India’s development when businesses have had their hopes of making serious money there dashed many times before? And can these countries develop mature, corruption-free political systems, necessary for long-term success? Nobody in Davos was doubting the way things are heading. But fashions, even megatrends like this, come and go. I’ll be looking in more detail at some of these questions in the coming months.
PS: Is nothing sacred? Last week I reported on unfavourable international comparisons between Britain and Germany, although officials at the Department for Work and Pensions have got the Paris-based OECD to retract one of them, their statistic showing that Germany has a higher proportion of its workforce in jobs than Britain.
Now Thierry Breton, France’s finance minister, has been going around Davos telling everybody who will listen that, thanks to recent French reforms (and Britain’s rising tax burden) business pays less tax in France than in Britain.
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He has also been drawing attention to his plan to balance France’s budget over five years. As the Institute for Fiscal Studies pointed out last week, that is a long way from the chancellor’s intention, and even if he sticks to tough spending plans from 2008 onwards, he will still need higher taxes, of at least £2.5 billion, to meet his fiscal rules. Those rules do not involve a return to a balanced budget — the government will continue to borrow to fund public investment.
To add insult to injury, the European commission no longer regards the Anglo-Saxon model as the reform template to follow.
Commission president Jose Manuel Barroso’s new plan, released in Brussels last week, cited instead the record of Scandinavian economies like Finland and Sweden, notably on research and development, and successful policies that have encouraged small and medium-sized firms.
All is not lost. Angela Merkel, the German chancellor, cited Britain in her speech at Davos, speaking approvingly of the policies that had given the UK a flexible labour market and fewer regulations. Mind you, she appears to have been talking about the Britain of Margaret Thatcher.