Davos, the Poor, and the Crash of ’08
from Global Economy in Crisis

Davos, the Poor, and the Crash of ’08

CFR Senior Fellow Laurie Garrett says the recent Davos economic forum failed to provide any blue print for reconciling the financial crisis and development aid needs. She predicts donor nations will "face tough sells, trying to convince their voters that it is vital to spend money feeding starving masses abroad."

February 9, 2009 3:40 pm (EST)

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There was fear in the air at this year’s World Economic Forum in Davos, Switzerland. Neither the snowy, gorgeous Alpine setting nor the festivities could offset the acrid tastes of desperation, confusion, and panic that seemed to result from every single discussion and speech. Between September and early January, four American banks had lost a combined $335 billion, and a spiral of bank and credit crises had unfolded all over the world. Suddenly, nobody--not even a country--could get a loan. Special senses of foreboding and doom pervaded Davos sessions devoted to the interests of Africa and the poorest two billion inhabitants of the world. As South African Finance Minister Trevor Manuel pointed out, this may not seem a good historic moment for Detroit automakers, but before they start weeping the U.S. Big Three ought to take a look at how the economic catastrophe feels in Durban, Lilongwe, Bangkok, and Bogota.

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After hours of listening to Wall Street investors and Western and Asian economists bemoan the market downturns, World Bank Managing Director Ngozi Okonjo-Iweala reprimanded the Davos audience:

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"The crisis is not finance, it’s people--millions who are at the bottom of the one billion hungriest people. Who is going to take care of them?"


On the eve of the Davos forum, World Bank President Robert Zoellick proposed that the historic unraveling of capital could usher in an "Age of Responsibility," in which the needs of the poorest citizens of the world are addressed vigorously by the wealthiest. Specifically, Zoellick admonished, "As a first step, developed countries should agree to devote 0.7 percent of their stimulus packages" to support the most needy.

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What would that look like? Including the pending stimulus bill, combined bailout and spending for the United States since the spring 2008 Bear Stearns and AIG efforts is $1.96 trillion. Under the Zoellick formula, the United States already owes the poor world $14 billion, over and above authorized (but not yet appropriated) FY09 foreign assistance spending, for a total aid package of about $50 billion. It seems a trivial sum in a world in which $6.9 trillion of global gross domestic project (GDP) has disappeared in less than six month’s time, amid a 5 percent global GDP drop in thefourth quarter of 2008. Zoellick concluded, "International action or beggar-thy-neighbor policies? Age of Responsibility or Age of Reversal? The choice is clear."

When South Africa’s Manuel turned to the Davos audience and said, "We can’t just focus on bailouts. This is a seminal moment. We have to think differently," an instant electronic voting poll found 83 percent of the listeners in agreement. Former Microsoft CEO Bill Gates announced that his foundation would increase its support for health and development activities by half a billion dollars, despite loss of core equity. And Gates predicted that the Obama administration and Congress would follow suit, boldly supporting overseas aid programs.

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But it’s not that simple.

The World Economic Forum found the men (and a few women) who are considered the financial and economic whizzes of the early twenty-first century completely unable to agree on the basics: Why did the Crash of ’08 happen? How much longer will the markets and economies of the world keep falling downward? How deep are the real debts and artificialities that started this mess, and will the bailouts now contemplated in some rich countries and China be enough to forestall a Great Depression? Without answers to these questions it is difficult to predict whether 2009 will, in Zoellick speak, usher in an Age of Responsibility or lead to a complete reversal of all health and development achievements made over the last sixty years in Africa, South Asia, Central America, and the Caribbean. Such an Age of Reversal, as Zoellick dubbed it, would almost certainly lead to regional conflicts and wars over scarce resources, religion, ethnicity, and other sources of power disputes.

Overall, three main scenarios were espoused by Davos business leaders and economists:

Scenario One: Optimists argue that the Crash of ’08 was all about the banking and financial sectors, and if the rest of the world follows America’s example, painfully spending now to bail out those sectors, this will all be over in two to five years. This is the rose-tinted glasses perspective, most vigorously argued by economists from the financial sectors. In such a forecast, it would seem reasonable to argue, as Zoellick has, that a small boost in annual foreign assistance from the European Union, Britain, Canada, the United States, and Japan each year until 2015 would adequately offset stress to poorer countries and the bottom billion neediest people in the world.

Klaus Schwab, the founder and leader of the World Economic Forum, is an adherent of this perspective; he made the official theme of the Davos gathering "shaping a post-crisis world." Schwab laid out five ethical and economic goals for this new world, which he told the Davos crowd would be a better place when this economic mess was cleared up, having transformed itself from one dominated by what he labeled "ego-capitalism," to a greener, more equitable planet of "eco-capitalism."

Scenario Two: The doom-and-gloom view argues that this is the single greatest upheaval in economics since at least the Great Depression. It has only begun, and though it was sparked by the banking and financial sectors, it will extend to every single facet of business and economics, from American industries all the way down to subsistence farmers in Zambia. It will take a toll at least as severe as the Great Depression and will endure despite government stimulus spending for years, perhaps decades. When it is over the entire structure of global economics, trade, and international relations will have been transformed in ways far more profound than anything the world has seen for well over a century. In such a dismal, ominous view it is hard to see how even a $50 billion aid package from the United States, coupled with billions more from Europe and Japan, will amount to a hill of beans for poor countries: the global ship of state is sinking, and the poor countries are simply the folks trapped in steerage on the Titanic.

Scenario Three: Adherents to this scenario agree with the dire Scenario Two forecast but strongly believe that political and economic actions taken in 2009 will decide what sort of world we live in when this economic horror has passed. Adherents argue that it is every bit as urgent to get the governance of this moment right as it is to pump money into banks and revive the global credit machinery. They insist that avoiding unpopular or controversial political decisions today will lead to lost opportunities, even massive political despair tomorrow. The optimists in this line of thinking insist that this is the historic moment we have all been waiting for to transform globalization into a force for good. It’s time to use economic transformation to push the planet to lower carbon emissions, build "green" industries and renewable energy platforms, create global governance that reflects the poor world as well as the rich one, invest in public goods and services worldwide (e.g. health systems, water, roads, agricultural development, broadband, and essential infrastructure), and set up international systems of monetary and financial regulation.

The cynical side of Scenario Three argues that none of these good things will get done, nations will retreat back into protecting their own economies and workers, and something akin to national socialism (a.k.a. fascism) will emerge. War, gloom, environmental devastation, battles over ever-scarcer resources, and utter despair in poor countries will result. Globalization will be dead, and we will have ended up with a complete breakdown in social contracts, both nationally and globally. Proponents of this horribly dark perspective point to protectionist talk from Washington and the "Buy American" provisions of the House version of the U.S. stimulus package as evidence that nations will retreat into themselves, putting the interests of their own above those of the world population as a whole. Microeconomics will, in this grim view, trump macroeconomics.

Faced with such vast uncertainty, and witnessing the scale of domestic spending some donor nations are pumping into their economies, representatives of the poorer nations in the world can hardly be blamed for being anxious. Rwandan President Paul Kagame warned the Davos crowd that the entire investment made by the wealthy world over the last half century to uplift the poor world would soon be erased, adding that the financial crisis would "provide excuses to those who want excuses" not to give.

Providing evidence for Kagame’s concern, the Italian Parliament voted in December to cut Italy’s foreign assistance for 2009 by 56 percent. Italy is hosting the next gathering of the G8 this summer, amid shrinking expectations for the group of powerful nations that has for three decades served as the focus of aid expectations. Though G8 commitments to global health, African debt forgiveness, and development rose considerably over the last decade, especially for the fight against HIV/AIDS, much of the committed support has never materialized, and the world financial crisis may serve as an excuse to never fulfill promises, much less make new ones.

The Institute of International Finance recently forecasted a 60 percent drop in investment capital flow to developing and emerging market economies for 2009, compared to 2007. Citing the IIF report, South Africa’s Manuel told the Davos audience that African economies are "at risk of decoupling, derailment, and abandonment."

In a Davos session focused on philanthropy, speakers bemoaned that dismal economic trends are pushing private donors from an era of what they termed "philanthrocapitalism," to one of "philanthrocrisis." In an almost pleading tone, former U.S. President Bill Clinton urged the Davos gathering to "prioritize keeping people alive."

The acute vulnerability that African nations, in particular, face in this crisis was brought home by Mozambique’s prime minister, Luisa Dias Diogo, who said that 52 percent of her country’s budget is derived from official development assistance (ODA). Any decline in ODA will be felt immediately in Maputo, as Diogo will be forced to reduce the size of her government and public services. In many African countries as much as 70 percent of the financing for health services and 90 percent of HIV/AIDS support comes from outside the country. The vulnerability these nations face cannot be overstated.

According to the World Food Program, the numbers of people in the world that are facing chronic starvation rose 10 percent in 2008, largely due to sharp rises in food commodity prices. Thailand’s prime minister, Abhisit Vejjajiva, charged that "the world has never been more advanced in terms of creating wealth, and yet more and more are becoming hungry. The problem we face is a reflection of market and government failures," amid agricultural market distortions. "The root causes are all about distribution and purchasing power. In some countries, despite the food surplus, the very poorest are the farmers."

For those interested in climate and energy issues, however, it was clear that every speaker in Davos, at least on a rhetorical level, felt that green technology and climate change mitigation/adaptation should factor into global recovery. United Nations Secretary-General Ban Ki-moon labeled the economic crisis "a gilt-edged opportunity," insisting that investment in a green economy could forestall deeper recession and transform every society on Earth. A less optimistic Al Gore told the Davos crowd that either they would take this economic moment to target carbon emissions, or the planet would spiral toward the uninhabitable.

Perhaps remarkably, Royal Dutch Shell CEO Jeroen van der Veer argued that a price should be put on carbon emitters--presumably including his petroleum company. Emitters should pay dearly, Van der Veer said, and, "At the end of the day, I see carbon as an opportunity and don’t see the financial crisis as a reason to slow down" efforts to green the planet. Stuart Wallis of the new economics foundation in London argues that the global economic downturn will usher in what he calls a "Green New Deal," with a massive transformation of the entire economy, dramatic reductions in energy use, and fantastic innovation.

In the end, however, change, innovation, agriculture, energy, science, and health improvements all fall on the same issue: trade and its counterpart, protectionism. Climate-change treaty items, such as pricing carbon and capping emissions at specific dates, consistently fold in the face of perceptions that the wealthier world uses such measures to stifle development in poorer countries, preventing their products from competing fairly in the global marketplace. Poor and emerging market nations feel that they are excluded from key global institutions, such as the G8 and leadership of the World Bank and International Monetary Fund. They cannot compete on equal footing in the international food marketplace, as crops from Africa and Asia are barred from sale in Europe. Without such market access, poor countries cannot afford to invest in improving their agricultural and transport systems, and therefore cannot guarantee adequate nutritious food for their own people. Resource scarcities worsen, and poor farming practices exacerbate damage to the environment, including water systems.

Trade negotiations--the so-called Doha Round--collapsed last year, primarily over disputes in patents and access to agricultural markets. Angel Gurria, president of the Organization for Economic Cooperation and Development, asserted in Davos, "We missed Doha! We lost it! How can we coordinate now? It’s much more difficult, and it will require strong leadership from the United States."

At the close of the Davos meeting, attention turned from the 2008 banking crisis to a forecasted 2009 juncture for governance and fears of internal instability amid rising unemployment and financial pain. The poor and emerging market countries now turn anxiously to April 2, when the L20--leaders of the top 20 nations plus the European Union--will gather in London for an economic summit directed by UK Prime Minister Gordon Brown. As the global economic crisis spins toward a depression, the fates of all nations, especially the poorest, hang in the balance.

Given Italy’s example, it is tempting to conclude that Rwanda’s Kagame is correct--the wealthy will use the economic catastrophe as an excuse to cut aid. OECD’s Gurria counters that to date, only Italy has made such a move, and most donor nations claim they will maintain support for global health and development efforts through 2009. But if the gloomiest forecasters prove correct, and the world takes a nosedive into a depression, political leaders in Washington, London, Moscow, and Tokyo will face tough sells trying to convince their voters that it is vital to spend money feeding starving masses abroad while their own domestic unemployment lines lengthen and homelessness escalates.


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