Davos 2016: The 4 big themes facing the World Economic Forum

Annual conference to be dominated by talk on automation, China, emerging markets and Brexit

© AFP

On Wednesday, the world’s elite will convene in Davos, Switzerland, for the annual conference of the World Economic Forum.

The 2,600 attendees, who pay $25,000 for the privilege, range from Christine Lagarde, the head of the International Monetary Fund, to David Cameron, the UK prime minister, and Leonardo DiCaprio, the actor.

Here are the four biggest issues they will be addressing.

1. Automation

The theme of this year’s conference is “The Fourth Industrial Revolution”, referring to the advent of economy-changing technologies, and to a book by the founder and executive chair of the WEF, Klaus Schwab.

Technological innovations are already nibbling away at the structure of our economies. Crowdsourced cab drivers and odd-jobbers using platforms such as Uber and TaskRabbit work without the usual protections companies traditionally give employees, such as healthcare and unemployment benefits in the US.

Increasing numbers of humans may disappear from the workplace with the arrival of mass automation. Google is looking for an auto industry partner to build its first driverless car, while Toyota expects its own model to be navigating highways by 2020.

Economists speculate over what kinds of workers are most likely to be laid off, and what this means for income and gender equality. Carl Benedikt Frey and Michael Osborne at the University of Oxford estimate that about 45 per cent of jobs in the US are susceptible to automation.

More broadly, automation increases the productivity of machinery so that less investment is needed to produce the same or higher returns over the long term. Although this sounds like good news, it could contribute to a long-term growth slowdown in rich economies, a phenomenon known as secular stagnation. The worry is that while rich households continue to pile up their savings, investors will be investing ever less, since a smaller amount of capital earns a higher return with automation. This results in a savings glut, which leads to a contraction in the size of the economy.

2. China

After speeding along at 10 per cent real gross domestic product growth in the first decade of this century, China has now put on the brakes — and looks like it is taking other emerging markets with it on a downward trajectory. Although the World Bank’s projection of 7 per cent growth for this year is respectable, the contrast with China’s headier years will hurt domestic workers, businesspeople and investors who had all banked on faster growth.

Foreign investors, too, have been spooked by the past six months, from last August’s exchange rate gyrations and first stock market crash, to the second bout of stock market panic that opened this year. Beijing’s communiqués have come too little, too late to soothe investors’ anxieties. Davos presents a chance for better explanations and guidance.

The session at Davos on Thursday morning — “Where is the Chinese Economy Heading?” — will feature securities regulator Fang Xinghai, real estate magnate Zhang Xin and Jiang Jianqing, chair of China’s (and the world’s) biggest bank, ICBC.

3. Emerging Markets

Emerging markets were slowed by a series of roadblocks in 2015 — a trend which many predict is set to continue. As China’s thirst for raw materials to fuel its heavy industry and construction sector starts coming to an end commodity prices have slumped to a 10-year low. India, which unlike most other emerging economies is not a net exporter of commodities, has managed to escape the squeeze.

In addition, the US Federal Reserve raised interest rates at the end of 2015, in turn raising the value of the dollar. International financial markets had already seen this coming. During the past year, money flowed out of emerging market investments into dollar-denominated ones, in anticipation of a stronger dollar and better interest rates in the US. Net investment portfolio inflows to emerging markets became negative for the first time since during the global financial crisis in 2009.

A stronger dollar means trouble for developing countries with high levels of dollar-denominated debt combined with fewer tax receipts from commodities exports to pay it off with. Brazil, for example, has already seen its credit rating downgraded to junk by both Standard & Poor’s and Fitch Ratings.

4. Brexit

The UK is expected to hold a referendum at some point this year on whether to stay or leave the EU. There is substantial uncertainty over what exactly a Brexit would entail for the UK economy, and whether the UK would re-enter into the same trade agreements. Despite this, the majority of economists surveyed by the Financial Times believe Brexit would damage the UK’s medium-term prospects.

The political motivation for the referendum, which has split the ruling Conservative party, centres on anxieties over immigration and top-down control from EU chiefs in Brussels. The Conservatives have pledged to reduce net immigration to the “tens of thousands” but critics say this target is all but impossible to meet while respecting the freedom of borders within the EU.

Prime Minister David Cameron and chancellor George Osborne will be rubbing shoulders at Davos with pro-European leaders from the continent. It is widely seen as a shame that Germany’s Chancellor Angela Merkel, who boldly defended her country’s policy of accepting refugees, will not be present to press British leaders on border issues.

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