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January 27, 2011 7:39 pm
On Thursday morning in Davos, the Financial Times co-hosted a breakfast with HSBC to discuss emerging markets. As the guests gathered around the croissants, however, one speaker was missing: Youssef Boutros-Ghali, finance minister of Egypt, had to withdraw at the last minute due to “unexpected” events.
It was a telling metaphor, not just for the 2,500-odd delegates at this year’s World Economic Forum, but for global investors too. When the WEF holds its annual meeting in Davos, the programme is planned with seemingly-clear ideas about the big themes of the day. This year, for example, the hot topics were supposed to include food security, financial reform and the euro; and, of course, the impressive rise of the emerging markets, which are now generating so much optimism among western investors and businesses.
Yet most years at Davos something unexpectedly throws a spanner in the planning works; this year, the issue being furtively debated in the corridors – albeit barely mentioned in the official programme – is the political turmoil afoot in Tunisia and Egypt.
The official rhetoric now emanating from the region’s bankers, business leaders and politicians is that this turmoil will be relatively short-lived and “contained”. After all, the argument goes, the countries across the Middle East differ greatly from each other (let alone the rest of the emerging markets). And being optimistic, it is possible to argue that the current political upheaval could be good for the region’s economic growth in the long run, by forcing structural reform. Or as Masood Ahmed, Middle East director of the International Monetary Fund, observed on Thursday: “There is now rising concern about the chronic levels of youth unemployment in the Middle East, and these events have shown that governments need to address this. If they do, that could unlock human resources and really boost growth.” Investors, in other words, might almost give a cheer.
But, in the short term at least, the events also have a notably darker side as far as markets are concerned. After all, what the shock in Tunisia has in effect done is demonstrate that not only do emerging markets remain exposed to political risk – but investors now live in a world that is increasingly unpredictable in both an economic and political sense. Or to use market jargon, what the Middle East is now demonstrating is the potency of “fat tails” (or events that seem so unlikely to occur that they are usually ignored, until they suddenly strike with a vengeance). This psychological twist matters now, given what has happened in the past four years. Before 2007, developments in the global economy appeared so calm and predictable the period was sometimes dubbed the age of “great moderation”. But (as I have noted in earlier columns) the collapse of Lehman Brothers – not to mention the events in Greece, Iceland or Ireland – shattered that complacency in a dramatic way. More specifically, in 2008 western investors discovered, often for the first time in their lives, that systems and institutions are not always as permanent as they seem. Sometimes the worst case scenario plays out.
These days, most of that shock appears to have faded on the surface; equity markets, for example, have rallied. But irrespective of the outward calm, memories of 2008 remain fresh; it does not take much to make investors feel nervous again – or start fearing that another “worst case” could soon play out in a world still plagued by disequilibrium.
After all, what is striking about Tunisia, say, is that the problems of rising youth unemployment and political anger have been evident for years; but they were hitherto widely ignored, as the region seemed able to defy economic and political gravity.
But now gravity has reasserted itself; just as it did two years ago with respect to subprime loans, or Greek debt. So the question uneasily haunting some observers is where else might gravity reassert itself too? “You start looking at places like Indonesia, or China, and ask: Do we really know what is happening there?” confesses a senior business leader. Or as Simon Williams, an HSBC Middle East analyst, observes: “What happened in Tunisia took everyone by surprise. It has forced us to all re-examine the old certainties [in the region].”
Now, this anxiety is not serious enough to damp the party mood in Davos entirely: as Martin Wolf, my colleague, observed on Thursday, the dominant tone remains optimistic. Tunisia is very small. But it is worth remembering that the mood in early 2010 was also quite upbeat – until the problems in Greece caused a psychological shock. “When Greece happened last spring, our clients froze – they just couldn’t bear the uncertainty,” recalls the head of one Wall Street bank. Little wonder, then, that a recent survey from PwC found chief executives were uneasy about the macroeconomic and political outlook; right now, that looks rational indeed.
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