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Martin Wolf chief economics commentator, speaks to James Montgomery, editor of FT.com, in a preview to the World Economic Forum on January 22 2007
James Montgomery: I'm James Montgomery, editor of FT.com, and I'm joined today by Martin Wolf, chief economics commentator for the Financial Times. The World Economic Forum Annual Meeting at Davos takes place next week under the headline of The Shifting Power Equation. Martin, tell us, what do you think that's about?
Martin Wolf: Well I immediately think about changes in the balance of power in the scale of different national economies. There are enormous events going on in the world, perhaps the biggest story in the world. That has, of course, big implications for power, in the medium to long run, so there are political changes associated with that. And then there are changes, again, in a predominantly economic sphere, with political implications in the balance of power between energy producers and energy consumers. There are big changes, clearly, in markets in capitalism as well. The private equity business is overtaking, not overtaking, but it’s becoming very significant against public markets. Derivative markets are becoming more empardoned against the traditional stock markets in particular, and other financial markets.
Technology is changing quite radically the competitive environment for the world, and created new giants in a relatively short period. Google was just unheard of not so long ago. It’s already become a very major player. So there are big shifts in power in the corporate world as well, and of course there are big changes in technology. One might say it was ever thus, but I think it’s reasonable to argue that some of these shifts are really of a gigantic kind, and I think the most gigantic, the two really gigantic ones are what technology is doing, the fact that we do now live in a world in which information technology has made communication and disseminating of information cost less. It’s an incredible change.
And the other is the return of Asia, which has been, for most of the last 3,000 years or so, probably the dominant region in term of human wealth, and certainly human population. It contains, just in east and south Asia, more than half of the world’s population. So the return, the rise of China and India is obviously just a gigantic event.
JM: A lot of these changes you mentioned are changes that are coming up from the bottom, from below, but Davos is classically a meeting of the global power elite. How much do you think the delegates at the Annual Meeting will feel threatened by some of the changes that are going on in the world that you’ve just described?
MW: Well I could say, at least in terms of business, it’s slightly less true, interestingly, in the countries. In terms of business, it represents the establishment. And that's another way of simply saying it represents the past, because the one thing we do know about economies, it’s a very clear evidence, is that the fastest growing entities in any economies are new businesses.
They're precisely the businesses that won't be represented there. So they may seem, and indeed they are, as it were, the Masters of the Universe today, but in a very competitive and open world economy, they're all under threat from, in often cases, quite unpredictable challenges. Some of them have done astonishingly well. The financial companies, who see all their clients there, will be very much in force. They're making astonishing amounts of money. But they also must be worried about what will happen to them, in competition.
Now, replacing companies is much easier than replacing countries. Countries last longer. China has been around a couple of thousand years. It goes up and down, but it’s rather more difficult to change them, but even so, there's no question that the established, developed countries, which have dominated the world economy, for most of the last century, or in fact really century or two, are now under threat, and the, China is not going to be really heavily represented there. It usually isn't, at a high level. India, somewhat more so. But it’s of course true even there that many of the countries, particularly the European countries, which were where they started. The World Economic Forum was initially a meeting of Europeans. Well, they're clearly on the slides. Every year the share of Europe in world economy is diminishing. So yes, this is, we are seeing possibly the legacy business.
JM: You mentioned India just now. Last year’s Annual Meeting was dominated by the emergence of India on the global stage. I suppose in the 12 months since we've seen lots of other emerging markets come to the fore on the back of the commodities boom in Africa and Latin America. Brazil has become a very big player as well. Say a few words about that.
MW: I think there is a sense that there's more to the developing world than just China and India, although actually there isn't much more. The point is they're simply so incredibly big, and they have now become very dynamic. Their growth potential is limitless. It is obviously true that there is nowhere else that is either performing as well, big place, or Brazil is a very slow-growing economy, in fact, by comparison with these countries, which is very sad, actually, because they’ve done a lot that’s right. And in any case it’s much smaller.
Brazil’s population is not much larger than that of the larger states or provinces of China or India. But it is important to note, risk premia fall on everywhere, the markets love everywhere. Stock markets have tended to do well everywhere. Everybody wants to get into this emerging market phenomenon. We've been there unfortunately before, and I've seen it before, so I always get very nervous about this, and I actually would like some more of the countries in the world to do better. I always felt that the brick formulation, which Goldman loves is really, I wouldn’t say intellectually dishonest, let's say, very misleading, because India and China are really quite different things. But the other thing that really is important of course is the energy producers. There really is a power there, with prices of oil anything like this, and it’s changed the world. Clearly to take just two not unimportant examples, Iran wouldn’t be doing what it is now without what energy prices are doing, and nor would Russia.
JM: And thinking about Davos itself, as an event, is it still important? It generates a lot of headlines, but does much get decided? Is it still an efficient and meaningful gathering, would you say?
MW: There have been occasions, I've been told, I wasn’t in the room, when quite important decisions were made, people mentioned things in the past, often things that happened in private meetings of various kinds. There have been particular stages when it can play an extraordinary role, but it’s obviously in the past, because, for example, when the Soviet Empire fell, there was suddenly a vast number of new countries, essentially, or not new countries, some of them were new countries, many were old countries trying to suddenly become capitalist countries. They wanted to meet the capitalists.
They all came in a great rush in the early to mid 90s to Davos to meet the businesses they wanted to attract, to their countries to tell them what; to tell them, and also to learn from them. Similarly, when the Latin Americans opened up, this was a getting to know you process, and Davos facilitated this. If you like it was one of the midwives of the globalisation process. But these are all now, as it were, old stories. All the businesses that are represented in Davos are already working in these countries. They know what they want doing, there are normal relationships.
They have emerged into the world economy, about as far as they're going to do. So that excitement is gone, and the excitement about globalisation with that, has gone, not because it’s stopped, it hasn’t, but of course it’s just there, it’s becoming a normal part of the background of our lives, and Davos, as a system, as the World Economic Forum, as it were, who’s main contribution was making globalisation an exciting and happening sort of thing, and it has happened. Another thing I think, a couple of other things that have made it become less significant, one is that we've become much more interested at the global level in security questions, and geopolitics, that sort of thing. And though these things are discussed in Davos, a meeting of business leaders with politicians is not the natural place to focus on these questions.
It’s not central in the way that economic globalisation was a central policy theme of the time in the 90s up till 2001, so that's taken a bit of the excitement out of it. And I think in addition, it is obviously true, and it is quite important that this administration is much less comfortable, as a set of people, with the whole globalisation, international integration, we're all playing in a cooperative world together sort of mood of the World Economic Forum, and they certainly haven't made anything like the same impact, as the Clinton administration did, and the engagement is not the seem, and that takes a lot out of it, because it remains the super power.
China has really not played a very signify can't role in it now, for some time. India is still well represented. So I would say at the political level, in terms of the engagement between political people at the very highest level and the business leaders, it’s deflated somewhat. I think it remains, for business leaders, a very useful way of meeting basically all of their peers at once, talking to one another, learning what each of them is worried about, and of course talking to and learning from interesting experts. But the sense that it’s the centre of the policy-making world, where business and government gets together, and is in the process changing the world, seems to have been quite naturally, the air has gone out of that a bit.
JM: Martin, thank you very much.
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