core sector communique

Emerging Markets Can’t Drive Global Recovery without Growth in the Developed World, Leaders Say

• Large emerging markets such as Brazil and China are unlikely to be able to maintain rapid growth without a stronger economic recovery in the developed world
• Despite massive fiscal and monetary stimulus, and inventory restocking, sustained growth is still difficult to find in most of the developed world
• Greater regulatory coordination between the developed and developing countries is needed. However, a proposed global tax on financial transactions would be counterproductive
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Davos-Klosters Switzerland, 28 January 2010 − While most emerging markets have proven remarkably resilient to the effects of the global financial crisis, they cannot act as the locomotive of global recovery unless the developed countries revive their own economies and address the structural problems that led to crisis, current and former leaders from several emerging economies told participants at this year’s Annual Meeting.

While many economists and corporate strategists look to emerging market giants such as China, India and Brazil to be the primary drivers of global demand over the next few years, it is not realistic to expect those countries to sustain their current rapid GDP growth rates without stronger recovery in the developed world, noted Mexico’s former president, Ernesto Zedillo Ponce de Leon in a session on the “New Growth Narrative”.

“We need to see sound domestic macroeconomic policies in the main players in the global economy, said Zedillo, now director of Yale University’s Center for the Study of Globalization and a Member of the Foundation Board of the World Economic Forum. “Everyone needs to work very hard to clean up domestic messes in practically every country.”

While noting the stabilization of economic conditions in the developed world over the past year, several leaders expressed scepticism over the prospects for a more rapid recovery going forward, as the unprecedented fiscal and monetary stimulus measures applied during the crisis are reduced or withdrawn. “It’s difficult to talk about stability at this point,” said Aleksey Kudrin, Deputy Prime Minister and Minister of Finance of the Russian Federation. “If you look at the US and European economies, yes, inventories are growing, but private demand is still very weak. It’s hard to see sustainable growth.”

Smaller, export-dependent countries are particularly vulnerable to economic malaise in the developing world, said Danilo Türk, President of Slovenia. Exports now account for 70% of Slovenia’s GDP, with the country’s fellow EU members absorbing the lion’s share. Türk praised the European Central Bank’s efforts to revive European growth with massive liquidity injections and credit supports, but predicted EU growth would remain sluggish for an extended period despite these efforts, forcing Slovenian producers to seek alternative markets.

Economic cooperation between the developed and developing countries is needed to overcome the barriers to global growth, leaders agreed. Kudrin, for example, suggested the financial crisis demonstrated the need for more effective management of the major reserve currencies, such as the US dollar and the euro. This, he said, might require the creation of new international regulatory institutions. However, efforts to impose a global tax on financial transactions – commonly known as the Tobin tax – would be counterproductive and a waste of political capital, Zedillo argued. “What we need most are regulatory systems that would prevent the kind of excessive risk taking behaviour that we saw in financial institutions in recent years,” he said.