“Man can live for minutes without air, days without water, weeks without food,

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2009 World Economic Forum Annual Meeting “Shaping the post-crisis world”

Davos, Switzerland, 28 January to 1 February

Davos 2009 deep dive

“Man can live for minutes without air, days without water, weeks without food, and forever without thinking”

Davos delegate on the reason for the financial crisis

External report

Disclaimer: The opinions of those quoted herein are theirs, not Zurich's. Regarding individual WEF sessions, whilst we have attempted to give a reasonable and balanced representation of some sessions herein, for a more complete picture readers should consult WEF webcasts / podcasts / session summaries available at http://www.weforum.org/en/index.htm

For queries about Zurich’s association with the WEF contact Gregory Renand +41 44 625 26 23 or [email protected] For queries about this report contact Mike McPhee +44 7841 562 767 or [email protected]

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Contents

Background to the WEF’s Global Risk Report 3

Global Risk Report (GRR) – what moved over the last year? 4

Deep dive into this year’s Annual meeting, including key discussion and quotes under 5

“Shaping the post crisis world” (the Davos 09 overarching theme) 6

“Promoting Financial Stability” (contributory theme) 9

“Effective Governance” (contributory theme) 14

“Sustainability and development” (contributory theme) 18

“Post crisis world values and principles” (contributory theme) 23

“Catalyzing the next wave of growth” (contributory theme) 27

“Industry implications” (contributory theme) 32

AcknowledgementsWithout the assistance of a variety of people this report would not have been possible. We would like to acknowledge and thank in particular:- our six delegates- our media, events, brand and marketing teams- our on-site core support team- the many people from the wider Zurich who provided input and assistance to our delegates and core support team in the lead up to, during and after the Annual Meeting- Rainbow Insight, a Swiss think tank, with whom we collaborated on some of our Davos 09 thinking

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Background to the WEF’s Global Risk Report

If events of the past year have taught us anything it is that in an increasingly complex and interconnected global environment, risks can no longer be contained within geographical or system boundaries. The Forum, with numerous links to business networks, policy-makers, governments, non-governmental organizations and think tanks, is in a unique position to advance new thinking on global risks, to generate risk mitigation measures and to integrate current knowledge on global risks.

The Global Risk Network was founded by the WEF in 2004 in response to concern that the international community and the global business community were not yet able to respond adequately to a changing global risk landscape. Zurich became a member in 2006. The Network aims to bring together policy-makers, business and non governmental organizations to help align assessments of risk, to understand institutional gaps and to better grasp the interconnectedness of sectors and risks. The network’s Global Risk Report1 (GRR), an annual publication now in its fifth year, was once again this year released shortly prior to the WEF’s annual meeting in Davos in order to help focus the meeting’s consideration of risk.

Zurich is one of the five strategic partners of the WEF’s GRR (and our work on it is sponsored by Axel Lehmann our Group Chief Risk Officer, with the technical work coordinated by our Group Chief Economist Daniel Hofmann) The core of the report is an analysis of the likelihood, severity and inter-action of 36 global risks grouped into five main categories; economic, geopolitical, environmental, societal, and technological. Following the media launch of the report in London on January 13 many column inches in newspapers such as The Daily Telegraph (UK) and The Wall Street Journal Europe were devoted to quotes from Daniel.

1. To obtain a copy of the GRR 2009 report contact the Office of the Chief Economist +41 44 625 2151 or email [email protected]

Source: Picture taken from the WEF website

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Global Risk Report (GRR) – what moved over the last year?

The overall message of last year’s report was that 2008 would display the highest levels of political and economic uncertainty for a decade, with the four top risks identified as being: systemic financial instability and the threat of a US recession; food (in)-security and its implication for political stability; an emerging vulnerability of cross-border supply chains; and the high price of oil and its consequences for access to viable energy for all.

The key question raised in the 2008 report was, “who owns the risk?”

This message was heavily reinforced in the 2008 WEF annual meeting sessions addressing economic and financial risk– exploring the role of governments, businesses and regulatory authorities in their joint responsibility to prevent future financial crisis and economic instability – in addition to being played out in the events that unfolded during the latter part of 2008.

This year’s report focuses on the effects of the global financial crisis and its implications for a number of risks which have come to the fore. They include: a sudden further drop in China’s growth to 6% or below; deteriorating fiscal positions; further asset price falls; increasing resource-related risks due to climate change; and the failure of global governance to mitigate global risks. The highly interconnected nature of these risks means that their impact is truly global.

The report links discussion on the financial crisis discussion with the risk of over-regulation and lack of a coordinated approach to regulation globally.

Global risks can only be understood when explored in the context of interlinkages with other risks, and no one group acting alone can mitigate them effectively. These aspects of global risks are also why they pose such challenges for policy-makers and business leaders alike. In trying to resolve the current situation quickly, leaders must also be mindful of the long term implications of today’s decisions.

2008 2009

1. For more information contact contact the Office of the Chief Economist +41 44 625 2151 or email [email protected]

We showcased full-time at two strategic Davos locations throughout the course of the week our new Global Risk Assessment Module1 (GLORAM). Our GLORAM database, developed as a proprietary extension to our work on the Global Risk Report, comprises 160 countries and 24 global risks. The data is then fed into a variant of a multivariate cluster analysis, allowing us to compare the overall risk characteristics of the countries. The tool also allows a scenario analysis showing the impact of changes in one or several selected risks for individual countries. GLORAM received significant media and customer attention at Davos.

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Deep dive into this year’s Annual meeting “Shaping the Post-Crisis World”

WEF Davos 2009

“Shaping the post crisis world”

1. Promoting

financial )

stability

6. Industry

implications

3.

Sustainability

and

development

4. Post-crisis

world values

and principles

2. Effective

governance

5. Catalyzing

the next wave

of growth

The primary theme “Shaping the Post-Crisis World” was explored through almost 300 sessions1 , broken down into the six supporting themes shown at the left.

In deriving the content for this report our six delegates attended as many official sessions as possible, and talked to as many people as possible (including WEF employees) at private events and on the fringe of the Congress Centre. Our support team viewed in addition a large number of sessions by webcast and reviewed all WEF session summaries. It is the synthesis of this multi-faceted approach which we now bring to you.

In distilling the most pertinent insights from numerous hundred sessions we have had to be subjective. We now go on provide a deep dive examination of key issues and quotable quotes from the sessions conducted around these themes at the left. Because it is subjective it is told as a story, and is designed to be read as such if you have 20 minutes. If you prefer to skip to a particular section, if viewing this as a powerpoint slide show you can use the hyperlinks on the themes at left. At the end of each section you can click on the Zurich HelpPoint icon to skip back to this page.

1. For one page summaries of most WEF sessions see http://www.weforum.org/en/knowledge/Events/2009/AnnualMeeting/index.htm

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Doom and Gloom – A very real sense of despair prevailed during Davos 2009. It was above all a Davos full of doubt. Participants seemed in search of an intellectual, moral and policy compass. Both publicly and in private, a great number of participants agreed not only that “the system has failed” or “is broken” but that “radical change is on the way”. Indeed, the capability of individuals and companies alike to adapt to what is going to be a radically different global environment will differentiate the winners from the losers.

Exactly what that radically different global environment would look like was less clear, as was consensus on the issue of the practical steps needed to be multilaterally taken to get there. It is in our view therefore too early to use the title 'shaping the post crisis world", because the world is still gripped by crisis, and it is not yet clear where it will bottom out. CNBC used a different theme for their Davos coverage “Restoring Trust - Rebuilding Confidence” which is better aligned with the current situation.

Shaping the post crisis world (1/3)

“We are all in some way responsible for not recognizing the risks of a world completely out of balance. We should have listened much more to those who saw the signs on the wall, and to those who also spoke out here (last year). What we are experiencing is the birth of a new era, a wake-up call to overhaul our institutions, our systems, and, above all, our way of thinking,” Klaus Schwab, Founder and Executive Chairman, World Economic Forum

“My main impression of Davos this year is that everybody is lost”. Kishore Mahbubani, Dean of the Lee-Kwan-Yoo School of Diplomacy in Singapore and currently one of the foremost global thinkers from Asia

“Shaping the post crisis world” was the overarching theme for Davos 2009. The message from Davos is that the world’s business and government leaders only have a short time to develop effective solutions to the current economic crisis. Global challenges demand global solutions, and leaders must continue to develop a swift and coordinated policy response to the most serious global recession since the 1930s.

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“We cannot underestimate the challenges and the dangers that we face in 2009. We are in a global recession the likes of which we have never seen. But there is no quick fix.” Stephen S. Roach, Chairman, Asia, Morgan Stanley, Hong Kong SAR

“It is important that leaders who come here go back and work on ways of finding far-reaching policies that will allow us to create sustainable economic growth, create jobs and coordinate macroeconomic policies” Kofi Annan, Secretary-General, United Nations (1997-2006), Member of the Foundation Board of the World Economic Forum and Co-Chair, Annual Meeting 2009

A new world order - Davos’ closing plenary was without doubt the most sombre ever. A bleak picture was painted by delegates a of a rapidly deteriorating economic landscape, where the pain of rising unemployment, home foreclosures, bankruptcies and poverty are only beginning to be felt. As a result of this business and governmental leaders face the very real prospect of destructive social backlash that could catalyze political instability and revive protectionism. Failure to develop effective solutions to the current economic crisis could reverse the trend towards globalization. Concerns were aired that stimulus packages being approved by developed nations would not be enough to pull the world out of the current crisis, with some calling instead for a co-ordinated fiscal response with a greater role for multilateral institutions like the Group of 20 (G20) wealthy and developing nations. In fact, a broad consensus emerged that not the G8 but rather the broader G20 grouping must now become the main forum for decision making - both in the global financial crisis, and more broadly going forward - and that China in particular will now almost certainly be at the table for nearly everything. Leaders of the G20 countries, who will meet in London in April for an emergency meeting that is being billed as the new Bretton-Woods, must therefore quickly develop and deliver on a coordinated policy response.

The likelihood of this happening is questionable. In London the G20 leaders will focus on immediate, technical responses to the financial and economic crisis. For the meeting to deliver on its billing as the new Bretton-Woods it would have to achieve a far reaching, coordinated global response backed by consistent regulation. What remains to be seen is how the differing ability of member countries to match the US fiscal stimulus package, and the variation in member country responses to both overt and covert domestic protectionist pressures, play out.

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“This is the time to see courageous leadership on the part of the G20. The time for words is over; this is the time for implementation and action. If we come back in six months or a year and are still talking about the same things, we will have failed. And the social unrest we will have to deal with will be absolutely dramatic.” Maria Ramos, Group Chief Executive, Transnet, South Africa, and Co-Chair of this year’s Annual Meeting

The threat of protectionism - Indeed at Davos, delegates cited numerous signs of a policy response that is already in danger of going badly off the rails, including efforts in the developed countries to direct fiscal stimulus funds to national producers through domestic content requirements and other protectionist measures, the withdrawal of state-supported lenders from emerging financial markets and a reluctance to recapitalize the IMF and other multilateral lending institutions on the scale required by the crisis. Whilst such developments pose a particular threat to the developing world, developed countries are already responding with fiscal stimulus measures which may be covertly protectionist as they concentrate a shrinking pool of capital on key domestic constituencies. One could look as examples to the US automotive industry support package, or to UK pressuring of nationalised banks to offer preferential residential and small commercial lending. If countries collapse back into protectionism then we need to recall what happened in the 1930's, and specifically how that precipitated WW2. Perhaps ironically it was then WW2 which ended (or began the end) of the great depression. Many of the ingredients for another great depression, and indeed great global conflicts, are once again in play. By avoiding protectionism and moving forward multilaterally and across the various interlinked financial and non financial crises the world can perhaps move onto the "war footing" needed to restore financial stability and promote economic growth, perhaps with climate change as the common global enemy.

A coalescence of crises - during 2008 we witnessed a coalescence of issues in addition to the financial crisis which were previously seen as separate (energy crisis, food crisis, the imminent water crisis, the environment, poverty etc) but which are now seen as intrinsically interlinked. If the fiscal stimulus planned to get us out of the economic crisis fails to address these issues in a coherent and synthesized way, then it will fail. As our work on the Global Risk Report highlights, global risks can only be understood when explored in the context of interlinkages with other risks, and no one group acting alone can mitigate them effectively. These aspects of global risks are also why they pose more challenges now than ever before for policy-makers and business leaders alike. In trying to resolve the current situation quickly, leaders must also be mindful of the long term implications of today’s decisions.

"I haven't yet seen people get all the right people into the room and close the door and put a solution up on the wall.” Jamie Dimon, CEO, JPMorgan Chase

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Promoting Financial Stability (1/5)

What started as financial turmoil has now gripped the real economy and spread throughout the world, fuelled by undesirable spillovers, distortions, opacity and imbalances. A host of Davos sessions were focused on understanding what went wrong, and how to restore the financial stability needed to kick start the global economy.

"The whole world is a closed economy” Justin Yifu Lin, Chief Economist, World Bank

Tepid growth - The Davos consensus is that there will be tepid global growth in 2009 followed by a slow recovery commencing in 2010, equating to global economy growth of about 2.5% over the next three years. Nobody will be spared, including the economies which had apparently “de-coupled”. There are no contrarian voices on the upside saying that the rebound will come earlier than the consensus expects, but there are many on the downside. In this camp, people affirm that global growth will continue to contract late into 2010 as well. How long the recovery will take is anyone‘s guess, with some venturing that we will witness a “lost global decade“

Supply contraction - Martin Wolf’s (and others’) central thesis, which is now seen to be generally agreed, is that the current global crisis is primarily caused by a “malign interaction between some countries’ propensity towards chronic excess supply and other countries’ opposite propensity towards excess demand”. Since excess demand in deficit countries is rapidly coming to an end, the excess supply of surplus countries can only collapse. The adjustment has to occur either via offsetting increases in demand or via a brutal contraction in supply. Since an increase in demand is highly unlikely in the short term, it is supply contraction that will prevail, dragging down all exporting countries.

"If you believe that the world economy will turn the corner at the end of this year, or in [the first quarter] of 2010, I tell you … we have not turned the corner, we can't see the corner, we don't even know where the corner is." Top money market manager

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China? Everyone wanted to know how China will be affected, and there were two China stories at Davos: an official and unofficial one. Chinese Premier, Wen Jiabao, expects growth of 8% this year, a contraction of only 1% on last year “an attainable target through hard work” as he said. The unofficial one had some economists declaring that China’s GDP has been dropping like a stone. Official Chinese statistics are notoriously unreliable, so if one uses electricity output as a proxy for GDP movements, 3 month y-o-y moving average indicate that as electricity output is already falling, GDP is also falling. Another pointer that China is already in recession is the fact that manufacturing –undeniably already in very sharp recession - represents 40% of GDP.

If China does contract more than Wen Jiabao expects, it doesn’t have to go far to start badly impacting other countries which have, in developed country terms, fared relatively well so far. According to its Deputy Prime Minister Julia Gillard Australia for example will suffer more from a 2% contraction in China than from a full blown US recession.

USA - an update North America session focused more on what the election of President Obama will mean to the world rather than on economic or financial stability specifics (see “post-crisis world values and principles”). Whilst Obama’s biggest challenge will be the economic crisis, it is unclear how successful the strategy of loans and stimuli will prove. Nor is it clear how the Chinese will respond to his desire for them to assume a stronger leadership role, with views from some quarters that Obama will try to lead a “de-facto G3” of the USA, Europe, and China. Another question pertaining to financial stability is whether Obama supports market protectionism at the behest of a Democrat-dominated Congress. One of the best sessions examining the US causes of the crisis, and potential solutions to it, was by ex-President Bill Clinton.

"There is no fundamental change in the external environment for China's economic growth.” Chinese Premier, Wen Jiabao

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Excess leverage - With the exception of Bill Clinton no one made a big deal of excessive leverage being the key problem. Without addressing the role leverage has played it is a little like saying that the proximate cause of a house fire was a little fire in the corner. The fact that the house was built out of polystyrene meant that what should have been a small and controllable fire quickly burnt the entire house down. In Clinton’s parlance this “proximate cause” of the crisis was the excessive leverage associated with sub prime mortgages and the related asset backed securities. There was a failure to create new places for money to go following the burst of the tech bubble. People chased yield, policy encouraged it, risk was inadequately analyzed and priced and regulation failed. All of these things enabled leverage to grow to the point where, at the time of the Lehman Brothers collapse, some hedge funds were operating at a leverage of over 40 to 1, up from about 12 to 1 a decade earlier.

“The real cause was excess leverage, inadequate risk analysis and regulatory failures.” Bill Clinton, ex-President USA

“Models killed Wall Street” Nassim N. Taleb

Models - A lot of the discussion on the subject of financial engineering was yet again dominated by the formidable presence of Nassim Taleb (author of The Black Swan). Taleb‘s timely presence seemed to have a profound effect on many participants at Davos. He believes the mathematisation of finance is in deep trouble. His view is that in future “quants” will be regarded with suspicion, opaque instruments will be rejected and simplicity and transparency will prevail. Whilst many participants at Davos agreed that the era of benign ignorance is over, we were shocked to hear that many more still believe that simply fine tuning financial models will fix the crisis, as opposed to major adjustments to business principles. The whole financial system is going to be "reset" - people who believe that adjustment will take place at the margins are in denial.

Clinton and others underscored the need for US leadership in quelling the downturn. He highlighted the opportunities afforded by a fundamental review of the global financial system, and stressed the interdependence in the world economy.

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Toxic assets - It is now generally accepted that the only truly toxic assets are the bundled sub prime mortgages. The problem, particularly evident in private conversations, is that no one really knows how to value the complex packages of loans and securities sitting on the balance sheets of banks. Developing transparency in such conditions is a daunting task. In the US alone, it is estimated that an additional $1.5 trillion is required to adequately recapitalize the banks. Globally, there is no consensus about the way ahead. A small group thinks that a nationalization of the banking system is inevitable. A majority of others advocate a good bank/bad bank model in which toxic assets would be deferred into a special unit while healthy assets would remain in the original bank. Like all complex policy decisions, this is very much a quest for the least bad solution, but it needs to be decoupled from the rebuilding process because bottoming out asset prices may still take a long time.

“This financial crisis proves, as nothing else should – or could, the fundamental fact that global interdependence is more important than anything else in the world today. We cannot escape each other. Divorce is not an option …. (but) the main thing is to get through this as fast as we can” Bill Clinton, ex-president USA

“The problems are, at one level, mind numbingly complex, and yet at another level very simple. We have a global crisis of asset deflation and we've got to put a floor under those assets. America has to lead the way because it started there.” Bill Clinton, ex-president USA

Russia - As with Wen Jiabao, much was made of Vladimir Putin’s first ever attendance at Davos. The thinly veiled underlying theme of his speech as part of the opening address was Russia’s return to pre-eminence as a world power as a result of the diminishing US clout that will result from the global meltdown. Putin called for the expansion of the range of reserve currencies and said that the diversification of financial centres was an assault on the historical pre-eminence of the US dollar. The dollar is still perceived as a safe haven and indeed consensus of discussion elsewhere at Davos was that the US dollar will remain the global reserve currency for the foreseeable future. However there were some contrarian voices saying that as the economic situation continues to deteriorate, with the monetary easing that goes with it, foreign investors could start losing patience with the US and repatriating dollar assets. The Euro is the obvious shorter term option, with the Chinese RMB a potential longer term option.

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The WEF will be facilitating a private meeting of central bankers, finance ministers and other government leaders with the private sector to brainstorm on systemic financial issues in the run up to the London Emergency G20 summit in April. Much of how 2009 and beyond will play out hinges on the consensus reached at this meeting and on the execution against any resultant global action plan. Everyone will be looking towards Obama for global leadership in driving truly multilateral consensus and action, having watched the crisis unfold during his Presidential campaign.

“working toward multilateral actions to restore normal credit flows to the economy following three approaches as needed to 1) enhance liquidity and funding through additional and newly created instruments and facilities 2) strengthen the capital base of financial institutions and 3) facilitate the orderly resolution of impaired assets” and to taking “any further action that may prove necessary to re-establish full confidence in the global financial system.” G7

The need for actionable multilateral consensus - Davos provided a global platform for four heads of government from the G8, the Chair of the G20, and four other heads of government of G20 members from Africa, Asia and Latin America, yet it ended with no actionable multilateral consensus about what to do about the crisis. The Davos meeting is not designed to achieve one all-encompassing statement of beliefs at its conclusion, such as those seen at G8 summits. Rather, it brings together leaders from around the world who would otherwise not meet one another in the normal course of business, providing a platform for debate. That the meeting ended on such a sombre note is perhaps not surprising when viewed in this light , however its lack of concrete, actionable multilateral consensus does load extra pressure onto the London emergency G20 summit in April, the stalled Doha round of trade talks, and the Copenhagen Climate Change summit in November to achieve real results. Such results will need to be immediate, far reaching and sustainable in effect. Following Davos from 13th to 14th February the G7 met at Rome resulting in a communiqué:

“As winter comes to Russia unexpectedly every year, it happens this time again with the global economy.” Vladimir Putin, Prime Minister of the Russian Federation, who drew laughs for his mockery of government and business leaders’ failure to predict the crisis

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Effective Governance (1/4)

A systemic failure of risk management and risk assessment has been exposed by the current financial crisis, both in the private and public sectors. This exposure has raised questions about rating agencies, financial institutions, investor practices and the role of watchdog agencies. Ineffective financial governance is at the core of the current economic failure. Many Davos sessions were focussed on understanding how governments, corporations and regulatory agencies can rebuild public and political confidence in the financial system, and the elements of today’s financial governance regime should that be retained, discarded and replaced.

“We allowed a series of near banks and shadow banks to grow without being regulated. In a new regime, if it looks like a bank and quacks like a bank, we have to regulate it like a bank” Adair Turner, head of FSA

State power - The meltdown has pushed governments to play a greater role in the global economy. The consensus view is that expanding governments’ power is a given, with the need for focus on how this power should be wielded. It is clear that governments must act swiftly and vigorously to stabilize markets. States will also need to expand their role in regulating markets to reduce systemic risk. In the past, markets relied on private sector actors to fill this role, such as rating agencies like Moody’s and Standard & Poor’s, but the sub-prime mortgage crisis demonstrated the severe shortcomings of this model.

“It is unfair to use rating agencies as the whipping boys. It was the regulators who blew it majestically” Angel Gurría, Secretary-General, Organisation for Economic Co-operation and Development (OECD), Paris

Regulation - Little clarity emerged as to exactly what role regulators must play going forward. The global regulatory framework has no treaty-based, global agency – no equivalent of a World Trade Organization, for example – so regulators must seek out other ways to harmonize regulatory regimes within national governments and among nations. Nevertheless, there is an increasingly clear need for a set of global rules. There should be better coordination among regulatory agencies as well as a consolidation of regulatory responsibilities among governance authorities. In addition, the capacity and capabilities of regulatory authorities should be increased. But whatever form it takes, and however well or ill coordinated, more regulation is on the way fast.

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“Regulation is heading at business executives like a freight train” James Saft, media leader

The contours of the future regulatory system remain unknown. It is in the US that this will change the most with one of the two following systems most likely to prevail: a single regulator (FSA-style, even though it suffered hugely after the UK’s Northern Rock failure) or an Australian “twin-peaks” variant (in which a prudential regulator across the financial sector coexists with a business regulator for transparency and consumer protection). Two trends should be followed closely as they will reshape the regulatory environment in the months to come. Firstly, there will be much greater global co-ordination with standardization aimed at reducing regulatory/jurisdictional arbitrage. Second, institutions deemed as presenting a systemic risk – primarily hedge funds but also the whole financial system in more general terms – will be subject to much enhanced oversight. The greatest risk in this domain is that governments may be tempted here and there to overplay their hands.

“Free market fundamentalism was a mistake. To go to the other extreme would also be a mistake.” Ken Rosen, Chairman, Fisher Center for Real Estate and Urban Economics and Professor Emeritus, University of California, Berkeley

Macroeconomic coordination - Despite the need for action, there are serious risks associated with expanding the role of government. Restoring public confidence will be essential to rebuilding healthy markets. Macroeconomic coordination is essential as governments design stimulus packages and new economic policies. With many nations looking to protect jobs domestically, free trade is likely to be curtailed at a time when the global economy needs it most. The collapse of trade negotiations in Doha gives reason for even greater concern.

“Doha was the low hanging fruit. How are we going to do this much more complex coordination if we can’t get [results] out of Doha?” Angel Gurría, OECD Secretary-General

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Role of US - Whatever the criticisms, attempts at global reform will still be heavily dependent on actions in the US, comprising one-quarter of the world economy. The US accepts some of the criticisms of its regulatory failures but other key US policy makers, including Treasury Secretary Geithner, backed out of attending Davos to focus on passing the $800+bn economic stimulus package which was going through Congress during Davos and which has since been passed. The US is also considering new plans to help shore up the still-fragile US financial system, and to improve the system of banking regulation. It may not be until April, when President Obama is expected to attend the G20 Global Economic Summit in the UK, that US plans for international economic reform are revealed.


Threat of protectionism - Concern was expressed in many quarters that fiscal incentive measures being adopted by various countries may descend into protectionism. US plans to aid its struggling automotive industry were questioned as it is increasingly clear that a rescue may amount to protectionism. Given that the US is needed to play such an important role in the multilateral effort to address the economic crisis, much was made at Davos of Barack Obama not being present but instead sending Valerie Jarrett, who was widely criticised for largely re-hashing Obama’s campaign and inaugural address material without addressing any specifics.

Valerie Jarrett reinforced Obama’s “call on leaders from all nations - to each other, to our families, to our communities – to seize gladly the duties of collaborating and boldly embrace a new era of global financial responsibility”. Valerie Jarrett, US Presidential Assistant for Intergovernmental Relations and Public Liaison

“You will get government out when private industry has re-established confidence . We all know government cannot run banks but at the moment no one has confidence in the financial institutions.” Martin Sorrell, CEO, WPP

Europe - is the other place where action is absolutely crucial. EU member states must recognize that discrete national policies will be insufficient to deal with the economic crisis. Member states will have to cede a greater degree of sovereignty and mobilize financial resources on a massive scale to help out the most vulnerable among them. The EU may need to loosen constraints on national budget deficits laid out in the Maastricht Treaty, to allow countries to employ fiscal stimulus tools more easily. However none of this will be easy. If this is going to be very difficult within the EU, consider the difficulties on a global scale.

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"All of these issues... need to be enshrined in a charter for the global economic order … This may even lead to a UN Economic Council, just as the Security Council was created after World War II." German Chancellor Angela Merkel

In the long term, global governance will need to become more inclusive. It bodes well that China and powerful emerging market players have begun to assume a more vocal role in the G20. However there is little sign as yet of the world leadership that needed to mobilize support for genuinely global reform.

“To be effective, a multilateral financial entity needs teeth. The problem is that there is no enforcement mechanism, no penalties for bad behaviour. Nobody wants to relinquish national authority. Without a multilateral entity that can bark and bite, we will get nowhere.” Chairman of Morgan Stanley, Asia, Stephen Roach

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Sustainability and development (1/5)

"I am in Davos to convince people that there is no competition between ambitious climate change policies and the resolution of the financial crisis.” Prime Minister Anders Fogh Rasmussen of Denmark, the Chair of the UN Conference on Climate Change

Copenhagen - Governments will meet in late November in Copenhagen to agree the successor treaty to the 2005 Kyoto Protocol. As the economic and environmental costs of inaction continue to accrue for a battered world economy, many Davos sessions underscored the need for world leaders to do their utmost to arrive at a shared vision and common goals on climate change in the months ahead. Much was made of addressing climate change and solving the world’s economic crisis not being two separate issues. Governments can address the financial crisis by promoting new technologies that are environmentally helpful, called “green stimulus” by Al Gore – “green efficiency is sound economics”. There was significant enthusiasm, led by Gore and widely supported, for the USA to finally show leadership in tackling the issue of climate change.

“What we most need out of Copenhagen is a clear, shared vision of where the world is going in the future …. President Obama is the greenest person [in the White House]. He is pushing hard for a dramatic and bold move in the right direction. If other governments do the same, then we can make the change to a low-carbon future.” Al Gore, Vice-President of the USA (1993-2001); Nobel Laureate 2007

50 billion tons of CO2 now go into the atmosphere each week. The “world has run out of wriggle room” and there is a need to make drastic cuts in greenhouse gases very quickly, with the developed world needing both to provide the impetus and then maintain the momentum. The agreement of clear targets is a prerequisite for the creation of a private market, in addition to adequate funding and a transparent verification scheme needed for countries to reach long-term goals. Industrialized countries should reduce their emissions by 80% of 1990 levels by 2050, and should help developing countries adapt to climate change through technology transfer and a global fund growth. The current economic crisis presents an opportunity to get commitment on both increasing energy efficiency and reducing the cost of generating power and transferring energy.

The interlinked nature of a variety of global crises was woven into the fabric of discussion about sustainability and development. On sustainability the view is that the world has run out of wriggle room and the Copenhagen Climate Change Conference needs to deliver in November. Development issues need to overcome widespread myopia and funding pressures as the recession hits the developing world the hardest.

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Dislocation and myopia - The process will mean dislocation, and it will require capital flows from rich countries to poor ones, to enable them to get on board. There is a pressing need to begin now so that the pace of change can be measured, rather than waiting until the last minute when disasters will force very disruptive changes. A key challenge is how to deal with the unwillingness of countries and individuals to perceive the real risk of climate change.

“We are gambling with the planet.” Nicholas Stern, London School of Economics, UK

Multiple crises - A billion people lack clean water, one in four lacks electricity, and 25,000 die of hunger each day. Looking ahead, more people, growing ever more prosperous, will demand even more water, energy and food than ever before. Under the pressure of a population that will triple from the 3 billion in 1950 to an estimated 9 billion by 2050, the resource bubble is close to bursting. Unless pressure on these basic necessities is relieved through an integrated and interdisciplinary strategy, delegates argued that resource scarcities may cause widespread insecurity and instability for years to come. The huge increase in food prices in 2008 was seen as symptomatic of the growing stress that our natural resources are under – water being the most critical - and many felt that if resources are not used in a sustainable and responsible way, there will soon be “a point of no going back, a tipping point.” To coordinate strategies, there were calls for world leaders to establish a “natural resource security council” for water and food that can match the UN Security Council for war and peace.

“Crisis is a terrible thing to waste,” Chris Luebkeman, Director, Global Foresight and Innovation, Arup Group, UK

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Demographics - It is not just global population growth which needs to be addressed, but also demographic shifts and their economic, social and political consequences. These vary from the youth “bulge” in the Middle East and North Africa to ageing populations in Europe. In the next decade, 1.2 billion people will come into the age of employability, 90% in developing and emerging markets. The Middle East and North Africa already have the highest rate of youth unemployment in the world, and they need to create 100 million new jobs in the next 20 years. Managing the youth bulge requires investment in job creation, skills training, education and different kinds of investment and banking policies, especially access to capital for small and medium size businesses. The consequences of not addressing education and economic issues to meet this target are daunting. Healthcare systems in developing economies must contend not just with difficult infectious diseases and a rise in chronic illnesses, but with these demographic shifts.

Addressing population ageing is a challenge, especially in the current financial situation. With a growing public pension burden and a shrinking labour force in developed countries, governments needs to rethink retirement, pensions and healthcare. Personal accountability needs to be better understood and individuals need to prepare to be taxed more, work longer and receive less. Healthcare systems in industrialized countries need to manage the rising costs of chronic diseases in an ageing population. We need to stop throwing most private and public resources at the treatment of diseases, and greatly increase the emphasis on health and wellness.

“We have to face the fact that our economic approach benefits a few, but doesn’t bring any benefits for the masses.” Philip J. Jennings, General Secretary, UNI Global Union, Switzerland

“We need to act now to prevent wars over scarce natural resources such as water, food or fuel. We need a new social contract founded upon policies designed to bring about a greater sharing of resources. Without a global consensus over resource management, there will be little worth arguing over, whether in terms of nation states or the way in which we govern our societies.” Kuseni Douglas Dlamini, Head, Anglo American South Africa

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Income inequality - In spite of massive economic growth that produced millions of new jobs since the early 1990s, income inequality grew dramatically across most regions of the world and is expected to increase with the global economic downturn. The legacy of the current economic development model is that a major share of the cost of the financial and economic crisis will be borne by hundreds of millions of people who have not shared in the benefits of recent growth. At the same time, poor education and low skills are preventing young people from being able to lift themselves out of poverty. As world leaders prepare to reshape the global economy, there is an opportunity to explore “stakeholder capitalism” and to reprioritize social responsibility. Access to education provides the greatest chance of all.

“Development assistance is a mechanism for creating a middle class in donor countries that will then hold their governments accountable.” Nancy Birdsall, President, Center for Global Development, USA

“Investing in women is smart economics. Investing in girls – catching them upstream – is even smarter economics.” Ngozi Okonjo-Iweala, Managing Director, World Bank

Role of women – Educating girls yields a higher return in improving the local economy than any other type of investment. Various sessions highlighted the role of women in development. An educated girl will use 90% of her future income towards her family, while boys invest only 35. Yet, 70% of children out of school are female. Services need to be extended, and consideration must be given to the barriers that keep girls out of school. Creating programmes that improve the health of women and adolescent girls has a multiplier effect on the economies of developing nations. Women are not only core recipients of these services, but potential providers, as clinics that focus on the health of women, adolescent girls and children also train women to be paramedics and clinicians. Girls are subjected to sexual violence in so many parts of world with absolute impunity. This problem is growing with the global economic crisis, and human trafficking has increased dramatically in the past few months. In many parts of the world, outdated laws fail to protect women’s property and rights. For example, in Indonesia, women must have letters from their husbands to obtain credit or get a passport. According to Mari Pangestu, Minister of Trade of Indonesia, one of the best ways to change these “archaic” rules is to put women in power

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Mobile telephony - gained traction this year as a development subject. Four billion people around the globe today own a mobile phone and by the end of 2010, it is estimated that another one billion new users will have signed up to this ubiquitous tool. This year, Asia will account for over half of all the world’s mobile subscribers. This is not surprising as people in developing countries in that region, one of the fastest growth markets, are subscribing to mobile telephony at a rate of more than 30% annually. The access that this every day, everywhere device has given and the applications, which have been built on the access, have been nothing short of spectacular. Mobile telephony, whether in developed or developing countries, should be seen as an enabler for social and economic activities and vital for economic growth. In developing countries, the mobile phone is no longer just a means for people to keep in touch. In many ways, thanks to the myriad of applications that have been developed in recent years, it has become a liberating tool. Poverty is not just about the lack of access to material needs but also to information. In China, farmers are now reading newspapers on their phones, overcoming the logistical barrier of getting their newspapers on a daily basis. As well, the mobile phone allows them to bypass middlemen to digitally check prices of their produce in other parts of the country. Unemployed blue-collar workers in Kenya can now advertise their availability through text messages. An SMS helpline in Nigeria offers cheap and anonymous counsel to troubled teenagers.

Digital Reagan? The access to information and collaboration afforded by the mobile revolution should be borne in mind when considering how Obama may look to conduct his Presidency. This was the first truly global presidential election, with the entire process played out in a variety of media globally. Obama is playing to his biography, seemingly all things to all people, and as such is a potential unifying force globally. He plays to multiple constituencies at home and abroad in a way that has not been seen before. Nearly 80% of Europeans would have voted for Obama. Africa thinks he is African. Asia thinks he grew up there. His election is seen as some redemption of history and so to a substantial degree allows the USA a fresh start. It should not be forgotten that Obama is a huge admirer of Reagan and Reagan’s style. There are views that given his savviness with technology he might look to conduct himself as something of a digital Reagan. He used the internet exceptionally well in his campaign and he will certainly attempt to use it as an instrument of government.

The huge global expectations of him to provide a bright and tranquil future on multiple fronts provide a major challenge. It is possibly most pertinent to discuss what the election of Obama will mean in the context of “post-crisis world values and principles”, next.


“Mobile telephony, whether in developed or developing countries, should be seen as an enabler for social and economic activities and vital for economic growth.” Wang Jianzhou - Chairman and CEO of China Mobile

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Post-crisis world values and principles (1/4)

If market machinations lead to unpredictable, spectacular crashes, are free markets morally justifiable ways to address social needs? If human nature makes it impossible for us to consistently define and promote our own best interests, then leaving citizens to the mercy of marketers may be unethical. If voters pick candidates for emotional, unconscious reasons, what is the ethical basis for preferring democratic elections to, say, religiously guided government? The moral aspects of business conduct have never been so much in doubt which is why, some say, those ethical issues of values and principles have never been so important. They were certainly given more attention than ever before this year at Davos.

The current global economic slowdown has lead to a crisis in confidence in the private sector’s commitment to good corporate citizenship. It comes at a moment in which religious criticisms of the secular world are sharpening, and likely to appeal to millions of people in need of solace. It also coincides with a growing conviction among scientists that people do not fit the Enlightenment model of conscious, self-knowing, self-directed utility maximizers. As a result, the values crisis will pose a fundamental challenge for the free market ideology that was once hailed as the end-point of history.

“We worshiped in the temple of cutthroat competition, and so some cooked the books, because the treasure is so great” Desmond Tutu, South African Archbishop

“We have reached the crisis in the way we operate some of our institutions and we have got to make sure that they are based on the values that every sensible person would support and not making some exceptions for a financial institution because it is in difficult territory or it's got to take ridiculous kinds of risk. We've got to build them around these values. And then we've got to build the structures of transparency and disclosure, the cross-border supervision as well as the ability of our international institutions to help.” Gordon Brown, Prime Minister UK

A question of values - An inevitable question was given attention at one of the key plenary sessions “the values behind market capitalism”, that being whether the rules and values that were in place to safeguard the capitalist system have failed or whether the system itself is in need of an overhaul. Regulatory and market failures have clearly damaged capitalism, but the ethical and moral lapses that led to those failures will prove to be more pernicious over time. Panellists agreed that a serious reflection of the morals and ethics underpinning the system is clearly warranted and, in particular, the concept of the common good has to be revisited. While the financial system needs to be fixed, the solution is not excessive regulation that stifles innovation and free enterprise.

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The whole system has not failed - The financial system was originally intended to serve the wider economy and the wider economy to serve the wider society, not be an end in itself. Unlike others before, this crisis is global in its impact. But part of the problem is that the integration of the world has moved far ahead of the political capacity to express that integration either institutionally or in terms of the alliances that we have. The financial system has failed, not the free enterprise system as a whole. The solution will need to be borne out of a new world order.

Ethics-based capitalism - Moving forward, there was a strong view that the moral order and not simply the legal order has to prevail. Agreement on the need for ethics-based capitalism was tempered by concerns from panellists that business has sidelined social values up until now. Capitalism has to be tempered by sound values and not just those that worship the “almighty buck”. An un-named audience member said, in a comment which elicited a huge round of applause, that the failure to attribute personal blame for the financial collapse is intriguing, and that “if you sell toxic products in any other field, you go to jail.” There can be laws on the books but personal compliance with those laws that is just as important. This implies a philosophical change in the way private individuals, companies, institutions and governments approach the world. If the crisis results in changing people for the better, fundamentally re-setting our “moral compass”, all of the pain and suffering it has caused may not be in vain.

“Values that once served the system well have seen gradual erosion. We have moved from the old cliché ‘my word is bond’ to a culture and atmosphere where ‘if there’s a transaction, if there’s a market for it, and I have a contract, and it’s legal, that’s it; I don’t need to think about the underlying right or wrong, suitability or unsuitability.’” Stephen Green, Group Chairman, HSBC, UK

“The big question is do we have the right leader in the right place with the right moral compass to restore the confidence and credibility needed at this time?” James J. Schiro, Group Chief Executive Officer and Chairman of the Group Management Board, Zurich Financial Services, Switzerland

“It would be quite bizarre to still talk about the G8 as being the forum for the world’s leading economies and unthinkable for it to attempt to tackle the crisis without involving other countries. A major challenge for the Obama administration is how to unwind the present strategic alliances and put the right ones in place.” Tony Blair, ex Prime Minister UK, UN Middle East Quartet Representative and Member of the Foundation Board of the World Economic Forum

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Neuro-economics - Often, Davos catches important trends with a time-lag. This is certainly the case for neuro-science in general and neuro-economics in particular. These twin disciplines have made tremendous progress over the past few years but did not get the proper attention of the WEF before this year. The 21st century may “be the century of neuroeconomics” and this is likely to have a large impact on the discussion and understanding of values. Indeed, this new discipline has shattered the illusion anchored in traditional economic theory that people always make rational decisions, the so-called “rational agent assumption”. As with a session about extreme events, new discoveries about neuro-economics presented at the WEF are forcing us to reconsider many of the assumptions we make about decision making, risk assessment and risk mitigation. The sentiment of fear is a powerful driver which greatly influences personal decisions in conditions of uncertainty. At the moment, for example, it is obvious that fear is a powerful driver of the markets. Trust - the only antidote to fear and anxiety - has been shattered by the crisis, though it is worth noting that trust in business and institutions was in trouble well before the crisis started.

Obama’s role - So what will the election of Obama mean in the context of post-crisis world values and principles? Obama’s first actions have been on foreign policy. It is telling that his first interview was with Al Arabyia. It sends a message, particularly to the Middle East, that the new US leadership is ready to listen and understand. Obama’s first political move as president was global, notably to close the Guantanamo Bay detention camp. But foreign policy is seen as remaining very complex. There is a question mark as to whether the sunglasses come off now that Obama is in power, and whether his foreign policy might end up mirroring Bush’s policy more than expected. On domestic issues, and particularly economic policy, Obama will have a difficult time with his own left wing and with Congress. This is at the same time that issues such as energy and climate change are being increasingly perceived as both mainstream and interlinked with economic issues. Exactly how Obama will lead from the front on his call on leaders from all nations to “seize gladly” the duties of collaborating and boldly embrace “a new era of global responsibility to each other, to our families, to our communities, to our country and to the world” remains, therefore, to be seen.

"Poor chap. There's huge expectations on all fronts. We should all help him by reducing expectations." Kofi Annan, former U.N. Secretary General, talking about international reaction to Barack Obama

“Denial of the unpleasant or politically inconvenient truth combined with herd instinct caused us to rely on systems which were unrealistic and unsustainable and which, in addition, were undermined and abused by some who acted in unethical and fraudulent ways. What we need now is not only to to look forward and mobilize all people with one mission in mind: to rebuild trust … based on the fundamental pillars of honesty, transparency and predictability.” Klaus Schwabb, Founder and Executive Chairman of the World Economic Forum

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In terms of what to do about restoring trust, governments need to accept responsibility for setting rules at the international level and for abiding by them. Many bought into a broadened concept of shareholder value (in governments, institutions and companies) to embrace all elements of a strategy based on concrete actions to fulfil the mission and value statements, seen as too often being ignored. Sound leadership is seen as being essential - for some Davos participants the whole crisis is seen as a failure of leadership - with key components being a clear vision of the problem and solution; sufficient power to drive the vision; and political courage, with Benjamin Netanyahu, Leader of the Likud Party, Israel, saying “unless you have these three, it won’t happen.” A realignment of business’ goals with their customers’ needs is also seen as being crucial, as is a move away from narrow focus on brand attributes to a broader emphasis on the elements which shape a company’s reputation. Managers can be made more responsible by including reputation-related indicators in their performance assessment, and employees can be better heard by companies actively seeking their opinions and giving them a greater role in communicating about their companies.

Trust - In various sessions discussion honed in on the nature of trust, the extent of the damage which has been done and, finally, what can be done about it. Trust is the lubricant that makes social exchange possible, creating predictability and lifting performance. It is hard to create and easy to destroy. Not all trust is good, and misplaced trust can be damaging (as with the Bernie Madoff scandal, amongst a host of other examples). The downward spiral in trust in corporations mirrors a decline in confidence in government and institutions. In the US, trust in companies is down to 38%, on par with ratings for outgoing US President George W. Bush. Things are likely to get worse before they get better because everyone is looking for someone to blame. It is important to differentiate between trust in Wall Street and Main Street, with the former being the villain and the latter retaining respect and to some extent being the victim.

“As a Main Street company, we have been tainted by the other street. We've been tainted by association." Indra Nooyi, Chairman and CEO, PepsiCo

“Davos needs to develop a conscience. It should not just be a simple talk shop” James Chatepa, 16, a community activist from Malawi

Youth view - Leaders often cite the need to protect future generations from the excesses of the present and the mistakes of the past. In one session a panel of six teenagers from around the globe assessed the state of the world from their generation's perspective, covering issues from the environment to development to HIV. However it was on the subject of values that one participant made perhaps the most powerful comment::

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Catalyzing the next wave of growth (1/5)

Regenerative medicine - The dream of regenerating tissue – enabling the growth of new organs or parts of the body – has become a reality, giving promise to a future of regenerative medicine capable of extending and improving human lives. Examples of some recent successes were tabled at Davos: new blood vessels grown on polymer scaffolds, livers restored and capable of growing, and creation of cartilage that can be fashioned into ears and noses or even a child’s reconstructed chest cavity. Regenerative medicine, once called “tissue engineering”, can also be used for creating new skin for burn victims, growing tissue to replace a damaged spinal cord for victims of paralysis and various forms of plastic surgery. Stem cells, responsible for replacing specialized cells, are the key for the technology. Hopes have been renewed that under the new administration, the US will take a lead in this research.

Everyone accepts that 2009 will be a bad year for business, 2010 may well be a write-off too, and it was therefore an effort to strip away talk about the global recession. There were, however, some sessions at Davos this year devoted to new ideas for growth on social media, design, innovation and new business models, in addition to “ideas lab” sessions hosted by various top tier universities (see WEF website session summaries) —but they are were not connected to the sessions on economic policy, amounting to a disconnect. Whilst the optimists point out that the crisis is likely to spur innovation and new opportunities for growth, a key issue becomes addressing the disconnect mentioned above by sustainably linking the growth opportunities into the solution to the immediate problem. The industrialized world is poised to unlock extraordinary developments in the near future. Biotech, nanotech and cloud computing are amongst the factors that could spur rapid productivity growth and make it easier for more players to innovate at a low cost.

“You have no other choice” William Kelly, CEO of Berkshire Hathaway-owned Netjets Europe, on the need to also focus on innovation when there are more immediate financial concerns

“If we want an innovation economy, one that generates more Googles each year, then we have to invest in our future innovators – by doubling federal funding of basic research over the next five years, training 100,000 more engineers and scientists over the next four years, or providing new research grants to the most outstanding early-career researchers in the country. The total price tag comes out to approximately $42 billion over five years.” Barack Obama, President USA

The challenge now is to get the funding to continue creative research and stimulate the type of curiosity that has resulted in these remarkable techniques, and to apply them to humans. Despite the financial crisis, those who work in the field say this is the time to invest. Across the screen in front of participants in a regenerative medicine session at Davos flashed an excerpt from The Audacity of Hope by US President Barack Obama:

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Social business - Another session, linked partly to some of the discussion under “post-crisis world values and principles”, examined the role that social business can play in both generating growth and providing an alternative model. The discussion focused on the nature of social business, the advantages to entrepreneurs for getting into the sector, and the conditions necessary for expansion. A social business is a company created with the objective of serving poor people and addressing social problems rather than maximizing profits. It makes money but puts it back into serving the poor, and unlike charity, social business does not require replenishment of financial resources. Promising new areas for social business identified by panellists include providing access to information technology, health service delivery and shelter.

Social networking - applications and sophisticated mobile devices are combining elements of the real and virtual worlds, and delivering an augmented experience of reality. This new digital experience is changing consumers and communities. A billion people are now online, more than 4 billion mobile subscribers have been registered worldwide, and development is taking place faster than futurists can write about it. The advent of social networking sites and instant communications has led to changes in business hierarchy, loyalty and organizational structures. Looking forward, mobile devices will be able to augment reality by providing a range of data to the user based on the social setting. So despite the financial crisis, there is still a lot of upside in the technology arena. The ability to upload video directly from mobile phones to the internet, accompanied by improved cameras in phones, that means there will be more people on the street with video technology than network cameramen. They will share experiences, thoughts and ideas instantly. The linear broadcast model will break down sooner than people think, with audiences for online video already of the same magnitude as audiences for traditional broadcast. Monetization models are in their infancy. It is still unclear whether the subscription or advertising-based model will prevail.

“There is still tremendous fragmentation in mobile phone platforms, but this will change and consolidation in the number of platforms will result in massive innovation in mobile applications. We grew in the last year from 50 million people to 150 million, and we now have more than 400,000 developers around the world developing applications for Facebook.” Mark Zuckerberg, Founder and Chief Executive Officer, Facebook, USA

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Cloud computing - Fast and reliable broadband and mobile connections and massive server farms make it possible to outsource data and applications to remote computers worldwide. Cloud computing allows companies to do away with their in-house data centres and software applications in favour of having external specialists provide them with computing power, data storage and other IT services. This concept was pioneered in the consumer space by social networking sites such as Facebook, e-trade businesses like Amazon and search companies such as Google. Millions of users can simultaneously use e-mail, write on their blogs, update their schedules and do other tasks using the same shared facilities, for free or for a nominal amount. Applied to the business space, cloud computing enables companies to share the same set of servers and applications without, in theory, affecting security and reliability.

Advantages of social business to entrepreneurs are that differentiation can be achieved by underlining their core social values, they can provide an incubator for testing new approaches, new technologies and new markets, and they can offers a good way for CEO’s to think through how to reinvent their businesses. There are some necessary conditions and new opportunities. Social business must stop being considered as exotic and exceptional if more “capable innovators” are to be brought into the sector, requiring more case studies showing how social business works in practice. Business schools also have a role to play in propagating the approach, and governments must respond with tax regimes and regulations that recognize the specificity of social businesses. The current financial crisis poses problems for companies which wish to move into social business but must first convince shareholders. New metrics are needed to measure growth in a way that is more relevant to value creation so the social contract implied by the social business model can realize its potential.

“A social approach to business provides a more sustainable approach than traditional philanthropy and corporate social responsibility.” Kishore Mahbubani, Dean of the Lee-Kwan-Yoo School of Diplomacy in Singapore and currently one of the foremost global thinkers from Asia

In the traditional business model, 70% of the IT budget is typically allocated to the maintenance of infrastructure and applications. This spending can be drastically reduced with cloud computing because the company no longer needs to buy, maintain and update hardware and software. Quality and speed of service will also improve because the external providers are specialists in their particular service areas. Freed of the drudge work, the in-house IT department can focus on supporting marketing, sales, R&D and other core competencies. Key issues to overcome include privacy, connectivity, and service levels.

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On the continuing rise of Brazil in particular, even though the country is likely to be hit hard by the crisis, as everywhere else, it was felt that Brazil will ride the storm much better than other emerging countries, thanks to its prudent policies and very successful exchange rate and monetary policies. The deterioration in the terms of trade is very real, but people feel the country might still grow positively this year (from 0.5% to possibly 2%). Alongside India, but for different reasons, it is expected to perform better than other countries (and certainly than the other two BRICs). It is generally thought that its influence will grow commensurately.

The BRIC’s - It was no coincidence that, given it was their first attendance at Davos, the keynote speeches on the first day had been reserved for China's Premier Wen Jiabao and Russia's Prime Minister Vladimir Putin. However, with even China's economy slowing, and the value of Russia's oil wealth plummeting, their speeches proved that the economic crisis is truly global, and hurting around the world. For the other two BRIC’s – India and Brazil – the growth prospects look more positive.

“Cloud computing will allow companies and individuals to share and collaborate on a massive scale with an almost unlimited number of experts and customers.” David Kirkpatrick, Fortune Senior Editor

Investment opportunities - To other investment opportunities and growth catalysts another Davos session looked for the "silver lining to the financial cloud". It may sound dangerous, but distressed debt (aka toxic assets) was said to present huge opportunities because it trades at sharply discounted prices. The only problem, one participant said, was that doing these deals in the current climate is like doing "hand-to-hand combat". With every government lining up huge spending programmes, infrastructure companies are likely to be a good bet, so expect a boom in building roads, bridges, and digital and electricity networks. And cash is king again. Any company with a good cash flow and little debt was found to be a worthy candidate for investment.

“Brazil is without any doubt a new power broker whose influence is bound to rise.” Quote is taken from a closed session and cannot be attributed

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Organized crime - It would not be fitting to discuss growth catalysts without mentioning organized crime, the huge and growing business that pervades societies, undermines countries, encourages wars and deepens poverty in developing countries. The global economic crisis affects some of its operations, such as prostitution and recreational drugs, as the money available to clients dries up. But organised crime is nimble and quickly moves into other profitable areas.

"Even with our cash, we're still heading for the hills." Response from one cash-rich investor when asked what he would be buying

“As a highly opportunistic conglomerate, organized crime looks for commodities in short supply and is already moving into the credit business, stepping up loan-sharking operations for small businesses that can no longer obtain funds from banks and other legal sources. Counterfeiting of consumer goods will also rise sharply.” Ronald K. Noble, INTERPOL Secretary General

Crime syndicates feed on the imbalances in global wealth, recruiting operatives from all levels, including the highly educated. In Mumbai, for example, an engineer can become a killer for a drug gang because he can earn 10 times more than in grossly underpaid, more conventional occupations. In large areas of big cities or whole regions in some poorer countries where state authorities are scarcely present, the crime business sets up social support networks, building loyalty among its operatives and local people. Where children do not go to school and have little prospects in life, they become easy targets for organized crime recruiters. Unless the issue of global poverty is solved, organized crime will persist and the struggle will be endless.

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Implications for industry (1/7)

Corporate survival in the current global downturn will be harder than in the past as public criticism builds over the effectiveness of market capitalism. There is a substance issue – how corporations should proceed with their business in society – as well as the issue of how those corporations are perceived by society. There are two important backdrops to this: many sectors are not to blame for the current crisis; and capitalism may not be the best system, but as many delegates pointed out “it is still the least-worst system” thus far.

"I believe that when we get through this we'll have a 21st century finance system that will make money the old fashioned way by investing in goods and services that are needed for the modern world. So I think it will be quite a modern economy, but I think we'll go back to a lot more traditional finance. People will still make money, but it won't be like it was in this decade, and I think that will be a good thing.” Bill Clinton, ex-President USA

Too big to fail? It is now generally recognised that imbalances in economies, current account deficits and savings rates that are too low will have to be reversed. The associated general view is that corporations that have been built upon these and other imbalances should be allowed to fail, within the opaque framework that ongoing attention should be paid to corporations “too large to fail.”

Corporate failure is more often a result of poor execution rather than poor strategy, but many companies don’t do enough to establish the difference between the two, providing an opportunity to rethink the fundamentals. Business education to date has been based on two assumptions: that corporations should act to maximize profits for shareholders, and they should do so without breaking the law. It has also been assumed that shareholders bear the risk. Business schools need to reassess both the core responsibilities of business management and how they should be taught. Corporate governance methods need to be remodelled. Whilst shareholders should play a part in setting the rules and values for corporations, responsibility to stakeholders should not just be limited to shareholders.

“A global set of values is required so that corporations adopt a sensible common denominator, rather than the lowest.” Kurt Bjorklund, Co-Managing Partner of Permira

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Talent - There are 3.9 million unfilled jobs in Europe alone, with education, training, gender and legal issues being the hurdles to recruiting the right people for the right jobs. Education is the prime driver of a climate in which companies are the consumers of both local and international talent bases. They are also the creators of a unique corporate pool of individuals, which they hope to retain – both to support the enterprise itself and to transmit their own, individual and company, skills and knowledge. Across the world there is a need to address the training issue of providing not only an educated professional population, but also one that is diversified.

The two major gaps that must be remedied are the age gap and the gender gap. Talent retention in a pool of diversified employees is also a matter of increasing importance: increasing numbers of women are attending business schools and they appear to follow the same career paths as men; but three or four years later, the women depart. This is primarily due to taking on disproportionate family responsibilities, and substantial evidence that women prefer absolute standards of evaluation to competitive forms of assessment may also contribute. A company’s diversified employee base contains both its tried-and-true veterans and the young talent it hopes will learn from them, support them, and later replace them. Emotional maturity is an important factor underlying such inter-generational “conversations” because it is vital to plan for the preservation of leadership and its diversity. With talent as “the gold standard” today, this is an important time for effective and communicative leaders. The best organizations scan for talent in various countries, sourcing strategically and knowledgeably.

Compensation - The current financial crisis has magnified and increased the urgency of solving the problem of how to best structure executive compensation. Even as the remuneration of top corporate officers exploded upward throughout the past decade, a public outcry intensified over salaries, perks and golden parachutes. Compensation scandals have undermined public confidence in the markets and amplified the disenfranchisement felt by many shareholders, rank-and-file employees and other stakeholders in private enterprise. In 1960, the average chief executive earned twice as much as the president of the United States. Today, the average chief executive is paid 62 times the current president’s salary.

“The transfer of values from one generation to another is as important to a company as it is to a family.” Linda Lorimer, Vice President and Secretary of Yale University (USA)

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“Corporate consultancies should serve either the board or company management, but not both.” Rakesh Khurana, Marvin Bower Professor of Leadership Development at the Harvard Business School

Corporate Boards - The message that “boards are broken” emerged from a session focussed on compensation. Meeting on average only eight times a year and stripped of expertise because of rules meant to guarantee the independence of board members, a view which had some support was that corporate boards have neither the knowledge nor the motivation to halt skyrocketing compensation trends. The ideology that corporate boards exist solely to ensure the maximization of shareholder value needs to be changed. Boards should understand that companies derive their legitimacy from abiding by the highest standards of corporate citizenship, and hold top executives to a balanced scorecard of achievements. Boards also should align chief executive pay with a timeline that exceeds the chief executive’s actual tenure, say 5 to 7 years.

“Corporate boards are broken” William F. Browder, CEO and co-founder of the investment fund Hermitage Capital Management

The bank of the future - In a session on what the bank of the future will look like, two key issues were discussed. Will the bank of the future focus on either commercial banking or investment banking, not both as today’s universal banks do? Given the fact that many banks are being bailed out by governments, will the bank of the future stop operating globally because taxpayers expect them to prioritize domestic lending and investing?

It may be that the bank of the future will specialize in commercial activities such as deposit-taking and lending, or investment bank activities such as operating proprietary trading desks and underwriting derivatives, not both. However, some investment bank products such as advisory services may cross over to the commercial side. If the bank of the future comes under pressure to stay at home, the loss of economies of scale may result in higher costs and a narrower range of products. The happy medium may be a regional business, such as focusing on Europe.

A Democrat Congresswoman from New York said the American banks that have been effectively nationalized will be returned to the private sector, which will then decide how to run the business. But while the banks operate with government money, they will need to be sensitive to taxpayer expectations, including levels of executive pay and bonuses. At least in the US, the bank of the future may see restrictions on how much leverage it can take on and the activities it can engage in, which are among the recommendations to US President Barack Obama by Paul Volcker, the Head of the President’s Economic Recovery Advisory Board.

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“I don’t believe we will go back to Glass-Steagall. What the bank of the future will be is transparent, accountable and regulated by a consistent set of standards that will penalize risky behaviour and encourage strong risk management.” Carolyn B. Maloney, Democrat Congresswoman from 14th District, NY. Glass-Steagall is the 1933 law that banned US bank holding companies from owning other financial firms. Its repeal in 1999 led to the rise of universal banks, which then got into trouble as their self-regulating investment banking arms loaded up on sub-prime derivatives and other toxic products.

A selection of key industry quotes - No single industry has been immune to the global, cyclical or structural changes taking place worldwide. A series of global industry outlook sessions were run to allow industry leaders from key sectors to share their perspectives on today’s and tomorrow’s challenges and opportunities. Some of the more interesting perspectives are shown below.

“We’re in a recession that hasn’t been seen before since World War II … globalization is all about labour, information and trading flows, and that kind of brought us all down together. Although the crisis came abruptly, the recovery will be mild … Regarding the US stimulus package, there is a responsibility to address long-term needs and short-term projects.” Lee A. McIntire, President and Chief Executive Officer, CH2M HILL Companies, USA

“400-500 chemical plants are not operating around the world because their customers in industries such as the construction, electronics and automotive sectors are in trouble. Beyond the economic and financial crisis, we should also look at the real issues: energy, climate and food and continue with R&D in these areas, or risk creating real problems for the world … Cash, trust and push is needed to surmount the crisis.” Feike Sijbesma, Chief Executive Officer, Royal DSM, Netherlands

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“Our industry is historically quite a defensive one. There is no silver lining. There is a little more resiliency on the logistics side, but we expect shakeouts in the shipping industry, for instance, the drop in capacity utilization and because of the financial leverage these players have. There is no way to say yet how things will work out.” Tarek Sultan Al Essa, Chairman and Managing Director, Agility, Kuwait

“I heard a discussion between two eminent economists. One said that China is going through a period when it would ‘buy less of our minerals’, while a very senior Chinese planning expert expressed the opinion that ‘China is committed to spending US$ 500 billion for infrastructure in the next few year’. This represents a huge amount of opportunities for our industry. Although the short-term focus will be on cutbacks and cost reductions, we should not find ourselves in a situation similar to a year or so ago, when there was a super cycle and many were not ready in terms of production. The short term looks challenging, but the future continues to look optimistic… The serious long-term investor [understands] the nature of our business, but also will give you the benefit of the doubt even during difficult short-term periods if you explain to them the challenges and the difficulties, but more importantly, indicate to them a credible, good long-term plan that will allow your company to do well in the future.” Patrice T. Motsepe, Executive Chairman, African Rainbow Minerals, South Africa

“Virtually every forecast shows that the demand for energy is going to grow significantly; the demand has not been cancelled, just delayed. The economies of the world now have the resilience and ability to come back, but quite frankly will come back differently. Building power plants that last 60 years and investing in reserves that produce oil and gas for 10-30 years means that our focus, by definition, is long term. Every company is investing through the cycle. In the power industry, every recession has been followed by a rebound in demand for electricity. Energy efficiency will be the first source in crossing the bridge to a low-carbon world.” James E. Rogers, Chairman, President and Chief Executive Officer, Duke Energy Corporation, USA

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“Discussions at the beginning of the Annual Meeting were marked by pessimism about the financial crisis but quickly changed to a more positive tone. The ITTC sector has always been part of catalysing change and stimulating growth. [The Governors Meeting for IT and Telecommunications 2009] talked about finding ways to stimulate investment, leverage innovation and how we as an industry have to collaborate even harder.” Solomon D. Trujillo, Chief Executive Officer, Telstra Corporation, Australia; Co-Chair of the Governors Meeting for IT and Telecommunications 2009

“Global sensitivity is driving many companies to invest in eco-sustainability. The ITTC sector will see huge opportunities in energy sustainability and bringing systems integration into it.” Azim H. Premji, Chairman, Wipro, India; Co-Chair of the Governors Meeting for IT and Telecommunications 2009

“The Consumers Industry community has been somewhat insulated by the current financial crisis. Our products are for everyday use – cereals, soups and other basic foods. We tend to be resilient and do well in crises… However, there is a change in food consumption behaviour, especially in the US, where more and more people are rediscovering the grocery store and cooking at home rather than spending money in restaurants and on fast food… We would also like to see more regulatory capacity in, not more regulation of, the food industry.” Kendall J. Powell, Chairman and Chief Executive Officer, General Mills, USA

“Despite the current financial situation, it is important to stay focused on the consumer and critical issues, including sustainability. Those companies that understand how important sustainability is will be the companies that are in a better position to continue to be successful. It is a financial imperative.” Mark G. Parker, Chief Executive Officer, Nike, USA; Co-Chair of the Governors Meeting for Consumer Industries 2009

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“The healthcare sector does not need a financial bailout but I am concerned that government programmes will be under-funded due to the crisis. The challenge is the relationship between healthcare costs and the downturn … costs are going up faster than spending… Technology can help transform the healthcare industry, especially managing chronic diseases. Opportunities exist if we can connect patients to caregivers and vice versa.” George C. Halvorson, Chairman and Chief Executive Officer, Kaiser Permanente, USA

Regarding the impact of the financial crisis on innovation, there was a general view that, whilst funding is difficult, R&D remains critical for encouraging innovation and breakthroughs. There will also be a significant amount of innovation in business models as companies restructure. There has been a fundamental shift in the power of relationships between players and industries. Companies should take advantage of this new shift, look ahead, and develop insights into what the future business world will look like, and try to spark change. Companies and institutions best able to rapidly respond to change pressures and operate in a globalized world will be the most successful.

“This crisis is transformational. Those countries that capitalize on this will be the winners.” Jean-Pierre Rosso, Chairman, Centre for Global Industries, World Economic Forum

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