February 01, 2010

Dispatch from Davos 2010

(The complete video of panel, “Rebuilding Market Capitalism” )

The mood at this week’s World Economic Forum in Davos, Switzerland was considerably more upbeat than last year’s somber event. Rising expectations of many developing countries offset concerns about stagnation in the U.S. and Europe.

Most striking about this year’s meeting was the growing acknowledgement that we have emerged from the crisis as a multi-polar world. As a result of the 2008-09 global financial meltdown, Wall Street and London no longer dominate the financial world as they did in the past.  Rising financial centers in China, India, the Middle East, Singapore and Russia can make rightful claims to being legitimate powers in the financial world as they now hold much of the world’s currency reserves.  Not that they are trying to use their newfound power for political reasons. To the contrary, they want to use it to build their own capital markets and their domestic economies.

On the panel I chaired on “Rebuilding Market Capitalism,” there were no Americans or bankers, but that didn’t hold the panelists back from offering keen insights on where market capitalism needs to go to regain its footing. In contrast to the U.S. mood that vilifies American bankers for causing the collapse, panelists from Bahrain, Singapore, Belgium, France and Sweden took a much more constructive tack, as did speakers on other panels I heard.

Bahrain’s Crown Prince H.R.H. Salman Hamad Al-Khalifa, who runs his country’s sovereign wealth fund, stated unequivocally that market capitalism is the only solution to the world’s economic problems, as it has lifted billions of people out of poverty. This was somewhat surprising since his government maintains very centralized control over its own financial resources and wealth funds. But Prince Salman went on to say, “Capitalism without social responsibility creates unstable situations that lead to either an economic collapse or social disorder.”

The other panelists, including Dr. Tony Tan, head of the Singapore sovereign wealth fund, heartily agreed. Dr. Tan noted that Asian banks and nations were largely unscathed by last year’s problems, in part due to their more conservative fiscal management.

In the multi-polar world in which we now live, Guy Ryder, who leads the world’s largest trade union confederation (170 million members), argued the world needs a system of global regulations or a global regulator operating much like the World Trade Organization in order to prevent future meltdowns.  Investor AB Chair Jacob Wallenberg said that without a global regulator, banks would continue to take advantage of regulatory arbitrage.

Other panelists worried that such regulations could become bureaucratic and wind up constraining the very investments required to fuel sustainable economic growth. Nevertheless, no one seemed to believe that an ad-hoc approach such as that used in the fall of 2008 would work in the future, with so much uncertainty about where the next crisis might arise.

That led the panel naturally to a discussion about the purpose of capitalism.  The panelists generally agreed with Ben Verwaayen, CEO of France’s Alcatel-Lucent, as he proposed a “cohesive capitalism” through which corporate and government leaders would coordinate their efforts to ensure their organizations served society. He expressed the pressing need to restore leadership and trust among workers and the general population to ameliorate the damage done during the 2008-09 collapse.

The panelists argued that aggressive pursuit of shareholder capitalism over the past twenty-five years has devolved into rampant short-term focus that precludes the kind of long-term investments required to produce better standards of living, sustainable jobs, and a cohesive society. This is especially a problem for U.S. firms where the pressures from Wall Street are the greatest. It is far less of an issue in Asia where historically firms operate with a much longer time horizon. Verwaayen made it clear that companies must perform in the near-term, but that can’t preclude long-term investments that enable them to win in the marketplace and sustain their growth.

If corporations are not created solely to serve their shareholders, then whom do they serve? Panelists agreed with the proposition that corporations are chartered by society and must serve society by providing useful products to their customers, good jobs for their employees, and good returns for their owners. One questioner from the audience suggested that companies should focus solely on providing jobs for their employees, causing Verwaayen to respond, “That’s exactly with General Motors did, and look at the outcome.”

In reflecting back on this intense discussion, one can see how far we have come in accepting globalization and in understanding the risks of unfettered market capitalism. There is broad acceptance that we live in a global world, with open trade, a global labor market, and global capital markets. That said, the world desperately needs coordinating bodies for anticipating and overseeing global problems when fast-moving issues arise.  This need becomes acute as financial power diversifies from Wall Street and London to emerging financial centers in Asia and the Middle East.

The open question deserving much more discussion is who does market capitalism serve, its shareholders or all constituents in the society that charters it? I believe this will become the most important question as we attempt to rebuild market capitalism.