The view from Davos

The World Economic Forum is committed to improving the state of the world. Alex Edmans gives his view from Davos.

The World Economic Forum in Davos was an incredible opportunity to learn from leading policymakers, executives, and commentators on the current macroeconomic climate. Europe was a major topic of conversation, and the overall sense was one of relief. This time last year, we were looking back at a 0.4% fall in GDP in 2012, and there were very real concerns about the future of the Euro. These tail risks have been significantly reduced, and the European Union is now back to positive growth.

However, we’re far from out of the woods. The current outlook for Europe is positive only relative to the difficult past few years. There remain substantial challenges ahead.  GDP growth is still only 1%, far too small to alleviate governments’ budget deficit or ongoing unemployment challenges, and uneven across Europe, being concentrated in the poorest countries. 

Moreover, this short-term growth has principally resulted from substantial monetary and fiscal stimulus. The long-term economic outlook will depend on structural issues, such as innovation, trade, and supply-side factors, which are weak. Youth unemployment exceeds 50% in Spain and Italy, and the failure to get a job a year or two after leaving school or university substantially reduces the chances of getting one later. While governments are often ready to increase expenditure (boosting the demand side), they are notoriously sluggish at implementing supply-side reforms. In this light, France’s recent announcement of €30 billion of payroll tax cuts is very welcome (and long overdue), as it demonstrates pragmatism for a Socialist government, although a big question mark remains over how the government is going to cut expenditure to finance it.

These long-term growth concerns lead to deflation risks in some countries, with most being significantly below the typical inflation target of 2%. We only need to look at Japan to see how damaging sustained deflation can be. The growth in the last decade was predominantly fuelled by household debt.  Policymakers find it very hard to achieve growth without leverage.  Again, supply-side reforms will be key. The financial crisis has led to a flurry of regulations – many of which have been welcome, to increase the solvency of the financial system. However, deregulation will be critical to promoting growth, particularly to increase labour market flexibility. Significant barriers to laying off workers can ironically increase rather than decrease unemployment, as they deter firms from hiring in the first place. The French minimum wage at €9.53/hour is beyond the productive potential for many workers, and France’s 35-hour workweek also places constraints on enterprise.

I also learned a substantial amount about the future of monetary policy (in particular the UK now putting less weight on “forward guidance”); challenges to the US’s competitiveness; and how to foster greater cooperation between China, the US, and Europe. My highlight was a bilateral meeting with Mark Rutte, the Prime Minister of the Netherlands, to discuss my research on corporate governance and executive compensation. Academics invest many years into researching an issue, so it is gratifying when others can benefit from the findings.

However, I was particularly grateful for the chance to explore non-finance topics. I tried compassionate meditation with a Buddhist monk; learned about the benefits of attentiveness and mindfulness from Goldie Hawn; heard Bono and David Cameron discuss world poverty; participated in an interactive dinner about stretching yourself beyond your boundaries with Celine Cousteau (Jacque Cousteau’s granddaughter) and Lewis Pugh, the first person to swim across the North Poll; watched Kofi Annan and Rick Perry debate the case for legalising drugs; attended a workshop on creativity by a virtuoso pianist; and saw 3D printing in action at MIT’s “fab lab” (fabrication laboratory). 

While I knew of the World Economic Forum before Davos, it wasn’t until I got there I actually noticed its mission statement, which appears on its logo: “committed to improving the state of the world”. This mission transcends way beyond economics – it extends towards topics such as technology, pushing one’s boundaries, and showing compassion.  And it’s far from just a set of words – I saw it in action at the conference, as very senior people were willing to talk to junior attendees and were truly interested in what they do.  The movie Spiderman taught us “with great power comes great responsibility”.Davos features some of the most powerful – and also most privileged – people in the world. The mayor of London, Boris Johnson, described it as “a constellation of egos involved in massive mutual orgies of adulation”, and the likes of Warren Buffett, Steve Jobs, and Jeff Immelt do not attend. However, I sincerely believe that the topics discussed at Davos – and the genuine engagement of world leaders in these topics – provide us with great hope. Of course, the key challenge is to ensure that these discussions do not stop at Davos but translate into actions as we return to our day jobs and are tempted to get focus on short-term pressures.

The closing speech asked each of us “What’s the one thing you’ll commit to right now to support the World Economic Forum’s mission to improve the state of the world?” Regardless of whether we had the privilege to attend Davos, this is a question that each one of us can think about.