Davos and the anti-Davos Man (Trump)

posted by Karim Pakravan on January 22, 2018 - 3:32pm

The annual World Economic Forum (WEF) will convene this week in the ski resort of Davos.  The WEF, which was founded in 1971 by Klaus Schwab (who at age 80, continues to run the organization) is an annual meeting of the global economic, business and political power elites. (Tidbit: the aggregate annual compensation of the two dozen global leaders of industry attending Davos is estimated at $300 million).  While uber-elitist, the Davos meetings do reflect the major issues of the day and are useful sounding boards for discussing global economic and financial matters.

Fig.1: IMF projections


The Davos meeting this year is characterized by a contrast between optimism over medium-term growth prospects and concerns over the rapidly changing global political and policy landscape.  The IMF just issued an updated global economic growth forecast by to 3.9% per annum in each of this year and next, a 0.2% upward revision relative to its October projection, The IMF forecast underscores the strength of the synchronized and accelerating global economic performance, revising global growth prospects upwards by 0.2% for this year and next.

President Xi Jinping of China was the star of the show last year, emerging as the new champion of the global economic architecture in the aftermath of the election of President Trump on a nationalist and anti-trade platform. This year, the focus will be on President Trump, the first American leader to speak at Davos since President Clinton. 

Trump goes to Davos after spending his first year in office undermining the global economic and financial order and eroding the U.S. global leadership, de facto creating an opening for China’s ambitions to become a dominant force in the global economy. President Trump achieved this by walking away from the TransPacific Partnership, disparaging NAFTA and the WTO, as well as other trade agreements, alternatively challenging and cajoling China and badmouthing long-time allies and key international institutions that were at the core of the post-World War Two U.S.-led global architecture.  Moreover, chaotic policy-making at home and abroad (as exemplified by the latest government shutdown) has further undermined U.S. credibility. President Trump is likely to use the opportunity at Davos to double down on a hard line, economic nationalism agenda, further casting doubts about the U.S. global commitments.

The Davos 2018 agenda includes a list of continuing and new policy issues. 

Global Economy:  Is the world economy on a sustained path of economic growth, or are there clouds in the horizon?  Fast economic growth and record corporate profits (which will be boosted by the U.S massive corporate tax cut) have created ideal conditions for investors, with stock markets on a tear. At the same time, the IMF has warned that the current rapid pace of growth cannot be sustained in the longer term without significant structural reforms. Furthermore, there is the risk of complacency and uncertainty about the impact of monetary tightening and geo-political shocks on the markets. 

Trade issues:  This year could be the make-or-break year for U.S. trade policy, with NAFTA and the U.S.-China trade relation at the center of global concerns.   Even in the best of cases, the undisciplined and contradictory approach to policy-making by the Trump administration will pose challenges to the global trade system.

Populism, Economic Policy and Inequality:  In his introductory statement, Klaus Schwab states: “….But still, we are stuck in a social crisis and there is no doubt that we are living in a fractured world. The big concern is that our optimism lets us forget that economic growth without restoring the social contract will not be sustainable.”   The world saw populism contained in 2017, but the powerful forces at the root of populism have not disappeared. 

Technology: the leaders of the largest technology forms will be attending Davos after a year when they have been under increasing attack from both the left and the right about everything from the role of social media in the U.S. election to the promises and perils of artificial intelligence.

This Davos meeting could be the most consequential since the one following the financial crisis of 2008. The erosion of U.S. leadership, the concomitant rise of China’s financial and soft power, and the challenges posed to the global trade system are the background to major shifts in the global economic and financial architecture, with unpredictable consequences.