3 thoughts as I fly home from Davos

When you’re on your way home from Davos, it’s time to start to digest all the fresh air and insights that a few days in the Alps have given you. What was the feel of the World Economic Forum, and where are we heading?

I have three overall impressions. First, the tech community is optimistic: if there is a problem, a new app can solve it. It might take a few months of writing code, but a solution is possible. Second, the geopolitical people are deeply worried and see few, if any, short-term solutions. And third, the economic crowd is in better shape, but has an itchy feeling that things could go wrong if we are not careful.

An upbeat tech community

The last few years’ technological development, from ever smarter smart phones to the unknown possibilities for e-commerce, Internet-based learning and a rapid transformation of communication, give the tech community some ground for their optimism.

We receive news, are entertained, shop, do banking and work in ways that could not have been imagined only a short while ago. Entrepreneurs and companies that didn’t exist five years ago are now veterans. The changes this will imply for the coming years will make our lives easier and create new business opportunities – but also disrupt traditional industries. The unbroken optimism of the tech community is reassuring.

The dark clouds of geopolitics…

It is equally easy to understand the pessimism of the geopolitical experts. The conflicts in Syria and Iraq, the war in Ukraine and the Ebola epidemic dominated the discussions and projected a dark cloud of realism over the panels.

Some experts argue that conflicts are about growing nationalism. Others that the lack of economic development, due to government structures undermined by crony capitalism, neopatrimonialism and kleptocracy, are producing the foot soldiers of extremism in different shapes and forms. Still other panelists pointed to the legacy of historical conflicts that have never been given the chance to heal. Some thought leaders argue that conflicts are inherent in faith and religion. Ethnic tensions and clan structures are an alternative explanation.

Whether we are talking about the aggressions in Ukraine, the ravages of the self-styled Islamic terror State of Iraq and the Levant or many other conflicts apparently immune to the global community’s efforts at peace, the interlocking of many different causes is probably the key reason that these conflicts are so intractable. When factor after factor is pointing in the wrong direction, you get the kind of negative spirals of distrust that are so difficult to break.

You cannot leave Davos without a deep sense of gratitude to our different UN organisations and their staff, and the gigantic tasks they and others are struggling with.

…and some rays of light

Good news, however, is also news. The most inspiring events in Davos was the World Bank President Jim Yong Kim’s successful effort to push for public-private-partnership to fight Ebola and to strengthen our global capabilities to deal with the future risks of pandemics. Thanks to Jim Yong Kim’s effort, and the willingness to step forward to take global leadership from insurance companies like Swiss Re, there is a prospect that financial engineering will make a difference.

We already have CAT-bonds – or catastrophe bonds – to be able to better deal with natural disasters, and now we might see PANE-bonds to insure against future epidemics. This would help to prevent epidemics spiralling into pandemics, ensuring that the necessary information and economic resources to make a real difference were available. I must admit that I saw a few health experts and aid-staffers with open mouths, when they realised that behind technical actuarial terms and financial engineering lay a real possibility to fight back against future diseases.

Sometimes the financial sector can do more to help than people expect. As we know from the creation of the alliance for vaccines, GAVI, Davos sometimes actually makes a difference, living up to its mission: dedicated to improving the state of the world.

2015 might be such a year.

What the economic crowd made of the ECB move

When we come to the ritual gathering of my own tribe, the economic crowd, it might be that we are leaving Davos in better shape than we came. The main factor is naturally the person most missed in Davos: Mario Draghi.

There is a strong sense that the way in which the ECB’s decided to take up quantitative easing was slightly stronger than expected. The ECB will buy assets for 60 billion euros per month up until autumn 2016, adding up to 1.1 trillion of assets. The exchange rate, with the US dollar hitting an 11-year high against the Euro, did its part in the deal and moved to push much needed export growth into the Euro area.

When inflation is substantially below the implicit target of a year-on-year consumer price increase of near 2%, it is reasonable that the ECB acts. Given that unemployment is expected to trail well above 10% for both 2015 and 2016, wage pressure is hard to see and Brent oil is well below 50USD per barrel, there is no need to find explanations for what the ECB are doing: they are upholding price stability.

The ECB should remain vigilant. If the measures taken are not feeding through to export, growth and jobs, it is possible to front load the action further. Strong early action seems more important than sticking to a pre-set plan.

The fact that the ECB is doing its job should be seen as a strong signal to reinforce the efforts to implement structural reforms in Europe. The estimates of long term growth in the Euro area from the ECB and the Commission are between 1 and 1.5% per year. To push unemployment down to the U.S. level of close to 5% of the labour force, there is a need to increase long-term employment. This will demand that labour market reforms are intensified in many countries. Wage negotiations that take unemployment into account to a higher degree; wage costs that allow for jobs that don’t require long experience and high technical skills; social security and unemployment benefits that gives incentives to search for jobs in broader areas; and measures to motivate and re-train: these would all be most helpful to cut back youth unemployment and counter long-term social exclusion.

The experience from countries that have gone through successful reforms – Ireland and Denmark in the late 1980s, South East Asian countries in the late 1990s or Germany, Sweden and the UK during the last decade – has shown that combining structural reforms with expansionary reinforcement from monetary policy and exchange rates brings results.

Italy, France, Germany and other countries now have the option to use the stimulus from the ECB to reinforce reform efforts.

Structural reforms can turn the actions of Mario Draghis and the ECBs into a much-needed permanent improvement in the prospect for growth in Europe.

Positive signals from China and India

A positive factor in Davos has been the strong signals of further growth reforms in the two emerging market giants China and India (with deep felt reservation of calling two of the oldest civilisations for “emerging”). The speech from Chinese Premier Li Keqiang – argued in a combination of beautiful poetic sayings and clear economic logic all too rare among prime ministers – underlined the necessity to make China more competitive, with mass entrepreneurs as a force of change.

India’s Minister of Finance, Arun Jaitley, gave a strong case for how reforms can lift India to a higher growth path. Incoming reform governments in India have previously used the February budget to lay out the guidelines and measures for economic reforms for their period in office. We can hope that Narendra Modi and Arun Jaitley will set a new hallmark for February-budgets.

My feeling is that there is ground for balanced optimism when it comes to the prospects for reform in China and India.

This is of utmost importance for the global economy. Going to Davos, many felt an anxiety for the quarters ahead. The recovery is picking up pace in the US. One CEO talked about the possibility of U.S. growth between 3.5 and 4.5%. This is the first time that I can recall hearing U.S., 4% and growth in the same sentence in almost a decade.

Against this backdrop, expectations for tighter monetary policy in the U.S. are very logical and nothing to cause alarm. We do know, however, that historically, policy shifts – even when expected – have sometimes caused turmoil.

If China and India are reinforcing reform efforts, the smart money will continue to invest in real assets for the long term, no matters if the Fed is tightening by a few basis points. This would greatly reduce the risk of large capital flows and currency volatility with collateral damage in other emerging market countries.

Growth potential in Asia, Africa and Latin America

In the long run I strongly believe in investment in Asia, Africa and Latin America. Demographics will push growth. The transition of the labour force from informal rural economy to modern urban production will push growth. The increase in openness and deeper regional integration will push growth. A workforce better educated than ever before will push growth. Economic reforms and better governance will push growth. Large deposits of natural resources will push growth. New technologies, that make it possible to leap frog in e-commerce, mobile financial service and e-education, will push innovations to the OECD-area from more countries than Kenya.

Many of the best discussion in Davos focused on the opportunity for long term capital to be invested in energy production, modern ports, new highway corridors and new rail ways. Gordon Brown’s efforts to bring capital investors to the centre of the discussion and to open their funds for growth investments in Africa should get all the support it deserves.

Wheels up from Zurich airport, it might be that we land in a better shape than when we took off.

Author: Anders Borg is a Swedish economist and politician who served as Minister for Finance in the Swedish Government. He is chairs the World Economic Forum’s Global Financial System Initiative.