Commentary: Harmony And Belly Dancing At Davos

This year, anti-Americanism was a faint memory, and practical concerns reigned

The World Economic Forum in Davos, Switzerland, was remarkable for what didn't happen this year. The virulent anti-Americanism that defined Davos in 2003 in the runup to the Iraq war was gone, along with the violent demonstrations. The economic gloom hanging over the annual meeting of global elites since 2001 lifted. The Saturday night gala was back, with black-tie CEOs and their begowned wives hoofing it to a belly-dancing singer backed by an eight-piece band.

Even this year's theme, Partnering for Security and Prosperity, lacked the usual edge and vigor of previous conference topics. Perhaps it was the exceptionally heavy snowfall blanketing the Swiss ski resort that muted a sharp point of view. Beneath the surface, though, away from the large plenary sessions, in smaller panels, at lunches, dinners, and nightcap discussions, extremely important issues were discussed. Here's how three in particular -- China, technology, and growth -- defined Davos this year.

GOT A PROBLEM? CHINA'S THE SOLUTION. China's growing size and importance insinuated itself into practically every session at Davos. The dollar is weak: China should revalue. The huge U.S. budget deficit has to be financed: China is buying billions in Treasury bills. Faster global economic growth? China is a locomotive. The euro is too strong: Change the Chinese currency. Where is high tech going? Better figure in China (and India). North Korean nuclear proliferation is a threat: Washington counts on China to lean on Pyongyang.

There were also surprising revelations about doing business in China at Davos. Victor Chu, chairman and chief executive officer of First Eastern Investment Group in China and a well-connected, significant investor in that nation, predicted that Beijing will revalue the yuan within nine months by pegging it to a basket of currencies, not just the dollar. That would be a shocker -- everyone expects China to wait much longer to revalue the currency.

Chinese engineers are proving to be no fools. They're looking at what engineers earn in Silicon Valley and Europe and are charging more for their work. Today, it costs as much to hire a first-rate engineer in Shanghai as it does to hire one in the Czech Republic or India. And tomorrow? Global labor markets are pushing up wages in Asia, and the high-tech wage gap is closing fast. CEOs, take note.

Carlos Ghosn, head of Nissan Motor Co. (NSANY ), says his car company makes big profits as the largest foreign investor in China. But Ghosn says it is still cheaper to export a world-class auto from Japan than from China. Why? Demography is destiny. Japan's exceptional productivity and quality control more than compensate for its expensive labor -- for the moment, at least.

A panel on global demographic trends suggested that China may have an aging problem. Unlike India and other developing countries, China's population is aging quickly due to its one-child-per-household policy. By the time China begins to rival the U.S. economically in 2040, it could face a sharp decline. Demography is destiny.

TECHNOLOGY: THE KILLER APP IS ROI. Hewlett-Packard's (HPQ ) Carleton S. Fiorina and Cisco Systems' (CSCO ) John T. Chambers were ubiquitous at Davos, as were other high-tech CEOs such as Dell's Michael S. Dell, 3Com's (COMS ) Bruce L. Claflin, Akamai Technologies' (AKAM ) Paul L. Sagan, and, of course, Microsoft's (MSFT ) William H. Gates III. The good news is that the high-tech elite believe the shape of the tech recovery is now in view, after three years of "no visibility." The bad news is that there will be no repeat of the boom years in the '90s. This time around, it's not speed, capacity, or coolness that counts. Every dime now being spent on technology has to improve the bottom line. "CIOs will spend money on information technology only to raise [return on investment]," said Fiorina.

Moreover, companies have learned that information technology isn't a silver bullet. New IT must be combined with organizational changes to achieve real productivity gains.

What kind of technology are companies and consumers buying? Think security, simplicity, and mobility. Security is at the top of the list for companies as virus attacks on networks grow. But as more software is added to block hackers, networks are slowing down -- one reason making technology easier to use was a key theme. HP's Fiorina reminded people that consumers don't have a help desk in their homes. And big money is going into Wi-Fi, the technology du jour.

GROWTH: WILL THE TWIN DEFICITS UNDERMINE THE U.S. RECOVERY? The sustainability of the U.S. economic recovery was a key topic at Davos. The buzzword heard everywhere was "imbalances." George Soros told a media audience at dinner that he expects 2004 to be a boom in America but 2005 to be a bust. Why? Rising budget deficits may scare off foreign investors, seriously hurt the dollar, and send interest rates higher.

Morgan Stanley's (MWD ) Stephen Roach, that perennial bear, said that the jobless recovery and growing budget and current account deficits make the U.S. recovery extremely weak. He cited a new "global labor arbitrage between high-wage and low-wage countries" as the source of the unusual lack of job creation in this phase of the business cycle. Many at the conference pointed out that the only dollar-buyers these days are the central banks of China and Japan. Foreign investors are avoiding stocks and bonds. That leaves the dollar in a vulnerable position.

So the big debate at Davos was over whether or not the U.S. will be able to finance its growing twin deficits -- and at what cost. Laura D'Andrea Tyson, dean of the London Business School (and Economic Viewpoint columnist for BusinessWeek), summed it up neatly by saying either Alan Greenspan or Robert E. Rubin will eventually be proved right. Greenspan says that global financial markets will provide all the capital needed to finance the U.S. as long as the economy remains productive. Rubin says a crisis of confidence may well occur among investors if there is no improvement in the twin deficits. That could send the dollar crashing down, spike interest rates, and trigger another downturn.

These are positively Davosian issues to ponder. Not many problems are solved at the meeting, but the most important questions are certainly raised.

By Bruce Nussbaum

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