Failed states
Fixing a broken world
The planet’s most wretched places are not always the most dangerous
IN ALMOST any discussion of world affairs, there is one thing on which doves and hawks invariably agree: much more needs to be done to shore up states that are failing, in a state of collapse, or so poor that they are heading in that direction.
For development-minded people, such benighted places are an obvious concern because of their desperate suffering; and for hard-nosed strategists, states that hardly work are places where terrorists could step into the vacuum. Indeed there is a certain convergence between these points of view: aid workers agree that security is essential to prosperity, and generals want economic development to boost security.
In America these days, defence planners say they worry more about weak states, even non-states, than about strong ones. “Ungoverned, undergoverned, misgoverned and contested areas” offer fertile grounds for terrorists and other nefarious groups, says the Pentagon’s National Defence Strategy, issued last year. The penning of that document was overseen by the defence secretary, Robert Gates, who will remain in charge of defence policy under Barack Obama. Large chunks of its language could have been issued by bleeding-heart aid agencies or the United Nations: it speaks of the need to “build the capacity of fragile or vulnerable partners” and to address “local and regional conflicts” that exacerbate tensions and encourage drug-smuggling, gun-running and other illegality. To the chagrin of old-school sceptics, nation-building is now an integral part of American strategy.
Similarly, the European Union’s declared security strategy sees state failure as an “alarming” phenomenon. It opines that: “Neighbours who are engaged in violent conflict, weak states where organised crime flourishes, dysfunctional societies or exploding population growth on its borders all pose problems for Europe.”
A rather precise taxonomy is offered by Robert Cooper, a British diplomat and Eurocrat, in his book, “The Breaking of Nations”. He splits the world into three zones: Hobbesian or “pre-modern” regions of chaos; areas ruled effectively by modern nation-states; and zones of “postmodern” co-operation where national sovereignty is being voluntarily dissolved, as in the European Union. In his view, chaos in critical parts of the world must be watched carefully. “It was not the well-organised Persian Empire that brought about the fall of Rome, but the barbarians,” he writes.
Strategists have worried about failing states ever since the end of the cold war. At first, zones of war and chaos were seen primarily as threats to the people living within them, or not far away. But since the attacks on America in September 2001 such places have increasingly been seen as a threat to the entire world. Western intervention is now justified in the name of fighting terrorism, not just of altruism.
Take the case of Somalia: America sent troops there in 1992 to help the United Nations stave off a humanitarian catastrophe, but the armed chaos of Mogadishu soon drove it out. In recent years, America has again been active in that region, carrying out air strikes in Somalia against suspected jihadist camps. It supported Ethiopia’s military invasion in 2006 to defeat the Islamist militias that had taken power in Mogadishu (arguably causing even more chaos) and is now backing an African peacekeeping mission for the same reasons. The waters off the Somali coast, moreover, have become one of the prime zones of piracy at sea, disrupting shipping through the Suez Canal. Even China has felt the need to send warships to the Gulf of Aden to protect its shipping.
Afghanistan, too, is often seen as a classic example of the perils of collapsing states: acute poverty and years of civil war led to the rise of the Taliban and allowed al-Qaeda to turn into a global menace. After the American-led intervention in 2001, both have rebated themselves across the border in Pakistan’s lawless tribal regions, from where they wage a growing insurgency in southern Afghanistan, destabilise Pakistan and plot attacks against Western targets around the world.
Western intelligence agencies say that, with the recent improvement in security in Iraq (a totalitarian state that became a failed state only after the American-led invasion), the world’s jihadists now prefer to head for Pakistan, Somalia or Yemen.
Misrule, violence, corruption, forced migration, poverty, illiteracy and disease can all reinforce each other. Conflict may impoverish populations, increase the availability of weapons and debilitate rulers. Weak governments, in turn, are less able to stop corruption and the production and smuggling of arms and drugs, which may in turn help finance warlords, insurgents and terrorists.
Irregular forces, highly irregular wars: come to Taliban countryInstability breeds instability. The chronic weaknesses of civil institutions in Sierra Leone and Liberia contributed to the outbreak of devastating civil wars in both countries, fuelled by the profits from the illegal smuggling of “blood diamonds”. Meanwhile war and genocide in Rwanda contributed to the collapse of the Democratic Republic of Congo in the 1990s. The chaos there, sustained in part by fighting over mineral resources, sucked in Rwanda, Burundi and Uganda. Chad and Sudan support rebels in each other’s countries.
At the very least, there is evidence that economic growth in countries next to failing states can be badly damaged. And if a poorly functioning but important oil-producing state like Nigeria were to fall apart, the economic fallout would be global. Moreover, weak governments may lack the wherewithal to identify and contain a pandemic that could spread globally.
That said, the interplay of these factors is hard to describe, and the very definition of failed states and ungoverned spaces is anything but simple. Few states have completely failed, except perhaps for Somalia. And even here, the territory is not completely ungoverned. A part of the country, called Somaliland, is more or less autonomous and stable—and another bit, Puntland, is relatively calm, although it is the source of much piracy. The region to the south is dominated by warring clans, but even here some aspects of normal life, such as mobile telephone networks, manage to survive.
Lesser breeds before the law
One starting point in any analysis of failed countries is the theory of Max Weber, the father of social science. He defined the state as the agency which successfully monopolises the legitimate use of force. But what does legitimate mean? In some places, state power is exercised, brutally but effectively, by whoever is top dog in a perpetual contest between kleptocrats or warlords whose behaviour is lawless in every sense.
If definitions are elusive, what about degrees of state failure? Perhaps the most detailed study is the index of state weakness in developing countries drawn up by the Brookings Institution, a think-tank in Washington, DC. This synthesises 20 different indicators and identifies three “failed” states—Somalia, Afghanistan and the Democratic Republic of Congo—along with 24 other “critically weak” ones. One striking feature of such tables is that states fail in different ways. Among the ten worst performers, Iraq is comparatively wealthy and does well in social welfare, but is highly insecure; Zimbabwe is comparatively secure, but ruined economically and politically. The next ten-worst performers are even more mixed.
The collapse of states is as varied as the states themselves. Some were never functioning states at all, just lines drawn on maps by colonisers. Many African borders encompassed lots of ethnic groups and divided some of them. When the colonialists left, so did the bureaucracies that supported these entities, abandoning them to poverty, civil war or both. The cold war helped fuel many conflicts, for instance in Angola and Mozambique, where superpowers backed rival factions. Other parts of Africa, such as Somalia, fell apart after the withdrawal of superpower support.
The conflicts of Central America died down in the years following the end of the cold war. But the fighting in Colombia has dragged on, as the FARC guerrillas finance themselves through drugs and kidnapping. The end of Soviet communism freed or created many countries in Europe. Some prospered as they were absorbed into NATO and the European Union, while others fragmented bloodily, notably Yugoslavia. Enclaves of “frozen conflicts” remain on Russia’s periphery—for example Abkhazia, South Ossetia and Transdniestria which survive as unrecognised statelets with the Kremlin’s support.
Whichever way state collapse is assessed, it will always be an imperfect measure of priorities for policymakers. On a map of the world using the Brookings index of weak states, the epicentre is self-evidently sub-Saharan Africa, particularly around Congo, with blobs of red in Iraq, Afghanistan and Myanmar. But this overlaps only in part with, say, the ungoverned spaces that America’s State Department regards as the nastiest havens for international terrorists, such as al-Qaeda.
On that list, Iraq and Afghanistan figure prominently—but in these countries, arguably, the problem is more one of national insurgencies than international terror. Once the tribes of western Iraq (whose grievances were local) had been induced to switch sides to the Americans, al-Qaeda was quickly evicted from that area. Al-Qaeda’s senior leaders are sheltering in Pakistan, yet this ranks as only the 33rd- weakest state on the Brookings index.
One area of concern is the Sahel, a vast semi-arid area south of the Sahara desert. The Americans fear that in this region Islamist terrorists could begin co-operating with existing rebel outfits, such as the Tuareg, or with drug smugglers. The Pentagon has created a new Africa Command to help monitor the area more closely and train local government forces.
The State Department identifies other ungoverned spaces such as Yemen (30th on the Brookings index), parts of Colombia (47th), the seas between the Philippines (58th) and Indonesia (77th), bits of Lebanon (93rd) and the “tri-border area” between Brazil, Argentina and Paraguay (none ranked as particularly weak).
Conversely many of the most wretched places in the world—Congo, Burundi, Zimbabwe, Haiti, Myanmar and North Korea—are not known as havens for international terrorists. Attacks linked to al-Qaeda, moreover, have been conducted in well-run countries such as Britain and Spain. For American counter-terrorism officials, the biggest terrorist threat to the homeland is posed by European radicals who are able to travel to America more freely than, say, a Yemeni. Some scholars worry about social breakdown in poor mega-cities. But to regard the British Midlands and the banlieues of Paris as ungoverned spaces would be stretching a point.
The common denominator for al-Qaeda’s activity is not state failure, but the fact that attacks are carried out by extremists claiming to act in the name of the world’s Muslims. Their safe havens are not necessary geographical but social. Being based in a remote spot, far from government authorities, may be important for training, building esprit de corps and, in the view of intelligence agencies, trying to develop chemical and biological weapons.
But for al-Qaeda, remoteness alone is not enough. Terrorists need protection too, and that has to be secured from local populations as in Pakistan’s tribal belt. International terrorists, moreover, need to be able to travel, communicate and transfer funds; they need to be within reach of functioning population centres. Stewart Patrick of the Council on Foreign Relations, an American think-tank, argues in a forthcoming book that international terrorists do not find the most failed states particularly attractive; they prefer “weak but moderately functional” states. The shell of state sovereignty protects them from outside intervention, but state weakness gives them space to operate autonomously.
Afghanistan’s history is telling. Al-Qaeda was forged from the Arab volunteers who had fought with the Afghan mujahideen against the Soviet occupation of the country. With the end of the cold war and the fall of the communist government in Kabul, the country fell into civil war. Arab fighters largely pulled out in dismay.
Some went to Bosnia and Chechnya. Others intensified insurgencies back home in Egypt and Algeria. Osama bin Laden found shelter in Sudan under the protection of its Islamist regime. What took him back to Afghanistan was the rise of the Taliban. Afghanistan at that time was not an ungoverned space, but a state sponsor of terrorism; indeed, al-Qaeda arguably became a terrorist sponsor of a state.
Terrorism aside, what of other global plagues? Afghanistan is still the world’s biggest source of the opium poppy, despite the presence of foreign troops. Next is Myanmar, also near the bottom of the pile. But Colombia, though not “critically” weak, is the biggest producer of cocaine. The cocaine routes pass through countries of all sorts; Mexico is among the top performers in the Brookings index, but is the main drugs highway to America. Similarly, piracy depends on geography. A non-existent state may allow pirates to flourish, but without the proximity of a shipping route they have no targets to prey on.
Measures of corruption, such as Transparency International’s Corruption Perceptions Index, correlate strongly with the index of state weakness. But here too there are anomalies: Russia is ranked as a middling country in terms of state weakness, but does worse in the corruption index; Italy scores below some African countries.
When it comes to pandemics, there is no simple correlation between disease and dysfunctional states. The countries suffering most from HIV/AIDS are in southern Africa: apart from Zimbabwe, most governments in that region are quite well run. The states that have seen the most cases of the deadly H5N1 strain of bird flu are Indonesia, Vietnam, China and Egypt, none of them among the worst cases of misrule or non-rule.
Everybody agrees that more effective government around the world is desirable, especially for those living in or near broken countries. Failed states always cause misery, but only sometimes are they a global threat. Given that failures come in so many varieties, fixing them is bound to be more of an art than a science.
Israel vows tough rocket response
 Despite Israel's assault on Gaza, the rocket attacks have continued |
Israeli Prime Minister Ehud Olmert has vowed a "disproportionate" response to rocket attacks on Israel from Gaza.
He was speaking at his weekly cabinet meeting on Sunday, soon after at least two rockets hit southern Israel. No casualties were reported.
Two weeks ago, Israel and Hamas - which controls the Gaza Strip - declared separate ceasefires.
They ended Israel's three-week assault on the Gaza Strip, which Israel said was aimed at stopping rocket attacks.
On Sunday Mr Olmert warned Israel would respond forcefully to renewed rocket fire.
"We've said that if there is rocket fire against the south of the country, there will be a disproportionate Israeli response to the fire on the citizens of Israel and its security forces," he said.
One of Sunday's rockets landed between two nursery schools in the Eshkol region of southern Israel, media reports said.
On Saturday, a rocket fired from Gaza exploded near the Israeli city of Ashkelon, with no casualties reported, and at least two were fired in the days before.
No 'tit-for-tat'
"We will not agree to return to the old rules of the game and we will act according to new rules that will guarantee that we are not dragged into an incessant tit-for-tat war that will not allow normal life in the south of the country," Mr Olmert said.
 Israelis go to the polls in nine days |
"The response will come at the time, the place and the manner that we choose."
His strong stance was echoed by Foreign Minister Tzipi Livni and Defence Minister Ehud Barak.
The ceasefires, independently declared by each side, have been violated several times.
An Israeli soldier was killed in a bomb attack on the Gaza border last Tuesday. Israel responded with air raids and a brief ground incursion by soldiers and tanks.
Elections approach
About 1,300 Palestinians and 10 Israeli soldiers were killed in Israel's devastating three-week assault on Gaza. Three Israeli citizens died in rocket attacks.
Israel wants the rocket attacks to end and wants to prevent militants in Gaza from being able to rearm.
Analysts say the politicians who ordered the Gaza attack also have an eye on elections on 10 February.
Hamas wants the border crossings into Gaza to be fully opened to end a 18-month blockade of Gaza which has wrecked its economy.
The Egyptians have been leading efforts to broker a permanent ceasefire by holding separate talks with officials from Israel and Hamas.Davos finds no answers to crisis
| By Tim Weber Business editor, BBC News website, in Davos |
 South African Archbishop Desmond Tutu spoke of cutthroat competition |
The World Economic Forum has ended with a call to rebuild the global economic system.
Founder Klaus Schwab announced a "global redesign initiative" to reform banking, regulation and corporate governance.
For five days, more than 2,000 business and political leaders discussed what some here called the "crisis of capitalism".
However, most discussions described the problems, not solutions.
The forum's official theme this year had been "shaping the post-crisis world", but that turned out to be premature.
Rather, the debates proved the widespread uncertainty amongst both politicians and corporate bosses, as they tried to gauge the depth of the economic crisis and explore ways how to get out of it.
Nobody in Davos tried to refute the prediction that the global economy is heading into a deep and long recession.
One top money market manager said: "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."
 |  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 |
Another participant summed up the state of the discussion as "we don't know what to do, only that we need to do something and we need to do it fast".
With the old certainties of the free market gone, even free marketeers accepted the need for more regulation, quick.
Professor Schwab said the current situation was a perfect example of where banks could take the lead and devise a system of self-regulation, and not wait for governments to regulate it.
It may be too late for that, though, with politicians from Germany's Chancellor Angela Merkel to UK Prime Minister Gordon Brown calling for a global regulator to ensure a smoother running of the international financial system.
Capitalism revisited
South African Archbishop Desmond Tutu said "we worshipped in the temple of cutthroat competition, and so some cooked the books, because the treasure is so great".
| Capitalism is the worst system except for all those others that have been tried Nouriel Roubini |
"We spend billions on banks," Mr Tutu said, "when we know that a fraction of this money could save all the children in the world."
Not every intended recipient of this message was present, though. The top bosses of most Wall Street banks had cancelled their trips to the Swiss mountains and stayed in the office.
It might have been for the better, because even here, in this temple of arch-capitalism, there were calls for swift criminal punishment of the people who caused the crisis coming from fellow chief executives.
Nonetheless, nearly everybody agreed that while capitalism needed fixing, it wasn't irreparably broken.
Nouriel Roubini, one of the few economists that accurately predicted the credit crunch, was not the only one to use a variation of a Churchill quote: "Capitalism is the worst system except for all those others that have been tried."
Power balance
The annual Davos meeting is also a good place to take stock of the geopolitical landscape. It was here that one could track the rise of emerging economies like India and China.
Record numbers of heads of state and government had come to Davos, mostly cloistered away in face-to-face meetings with their counterparts and key business leaders.
It was no coincidence that 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 at a crawl, and the value of Russia's oil wealth plummeting, their speeches proved that the economic crisis is truly global, and hurting around the world.
In April, the spotlight will be on the G20 meeting in London, where leading politicians both from industrialised and emerging economies will debate ways out of the crisis.
Professor Schwab attempted some expectation management. "The G20 will not solve everything," he said, "it won't address the totality of the issue."
Poverty trap
Probably the biggest worry, apart from getting the world economy "out of intensive care" (Prof Schwab), was the threat of protectionism.
Raising trade barriers now, politicians, business leaders and campaigners agreed, would have a devastating impact, for starters on the economies of rich countries, but even more so on poorest people in the world.
The Davos organisers tried hard to ensure that the crisis of the financial system did not take away all the attention from the fight against poverty, but it was difficult.
After all, it was a long list of problems that the global elites had to discuss during their five days of soul-searching.
What had once been seen as a long schmoozefest, a show-off party of the rich and powerful, had bumped into reality.
The strikes in France and the UK had not gone unnoticed, and business leaders were acutely aware that millions of people hurt by the crisis were angry, very angry. And in case they forgot, there were plenty of social activists and trade unionists here to remind them.Banker + gangster = bankster
| A POINT OF VIEW |
Americans are pretty good at adding words to the English language. We owe them pin-up girls, highbrows, killjoys, stooges, hobos, drop-outs, shills, bobby-soxers, hijackers, do-gooders and hitchhikers who thumb a ride.
|  During the time Merrill Lynch CEO John Thain was cost-cutting, he spent $1.1m doing up his office - $86,000 for a rug  |
Hear Radio 4's A Point of ViewThe Americanisms are so much more concise and vivid. Instead of saying "sorry we're late but drivers ahead of us slowed us down when they craned their necks to look at a crash" you can say "we were held up by rubberneckers".
Words pop in and out of our language as social conditions change. The American gangster, which is still with us, has been around as a noun and a reality since 1896 according to my Shorter Oxford, but it seems to have dropped another Americanism from the 1930s and I think now is the time to revive it.
The word is bankster, derived by a marriage of banker and gangster.
 Stunned crowds gathered on Wall St as news of the 1929 crash spread |
It was coined, as far as I can deduce, by an American immigrant, a fiery Sicilian-born lawyer by the name of Ferdinand Pecora. He was the chief counsel to the US Senate Committee on Banking set up in the early 30s to probe the origins of the Crash of 1929.
He exposed quite a lot of the Wall Street practices that Harvard's Professor William Z Ripley had condemned in 1928. The believable Ripley called them - get ready for these Americanisms - "prestidigitation, double-shuffling, honey-fugling, hornswoggling and skullduggery".
The professor had vainly tried to warn President Calvin Coolidge that Wall Street was full of gas and was bound to blow up. To great discomfort all round, Pecora identified Coolidge himself, by then out of office, as one of those who'd been in on the honey-fugling.
The great banking house of JP Morgan had the president on a "preferred list" by which the bank's influential friends were given a chance to buy stock at half price. Shall we say, they made out like bandits?
Today the term bankster perfectly fits Bernard Madoff, whose crooked Ponzi scheme lost $50 billion of what the trade calls OPM - other people's money - invested with him.
Costly rug
But the revelations come thick and fast. People are now struggling for words to describe the latest example of Wall St's money madness. The fabled investment bank Merrill Lynch, run by one John Thain, had so many big zeroes on its balance sheet it would have been liquidated in December but for a merger with the Bank of America.
 A shotgun wedding |
That was actually a shotgun marriage - in the US vernacular - since the Bank of America was forced to take billions of government money when it learned later that Merrill Lynch was down another $15bn.
Then what? In the few days in December while he was still in charge, Mr Thain reportedly spent nearly $4bn on staff bonuses. That's peanuts on Wall St. In 2007 Mr Thain himself received $83m.
But a week ago, CNBC's Charles Gasparino, in a detailed scoop on the Daily Beast website revealed that during the time Mr Thain was busy cost-cutting, he spent $1.1m doing up his office - $86,000 for a rug, $35,000 for something called a commode on legs.
Readers bayed for blood, posting comments such as: "Oh how I wish this was Revolutionary France and we peasants could storm the offices…"
The anger about the greed that got us into our mess is, in my view, wholly justified. And now we hear that 10 of the big banks that got $148bn from Uncle Sam so they could make loans to get things humming again have actually reduced their loan totals by $46bn.
Mr Thain now is history, having resigned, but the great Bank of America, the biggest in the US and maybe the world is now on the list of banks that may have to be nationalised - a word no red-blooded American ever thought would be uttered in the land of enterprise.
Have money, will lend
The piquancy of all this is that if the term banker is ever to be restored to its former prestige, the public and Wall St might reflect on one highly relevant example of a banker who was not a bankster.
 Amadeo Peter Giannini |
It is the story of Amadeo Peter Giannini, a big man on the side of the little man. When the transcontinental railway started services to California after the line's completion in May 1869, he was among the very first passengers.
He was in the womb of his newlywed mother, 15-year-old Virginia. His father, having made money in the goldfields, had gone back to Italy for her. It is nice to think that as the young immigrants crossed the Rockies, their adventurous spirits somehow crossed the placental barrier.
Amadeo was born on 6 May, 1870. He grew up on a little farm, whose produce his mother and father sold in booming San Francisco. In 1877 when he was six, he saw his father gunned down. His mother moved to the city to buy wholesale from farmers and sell to shops.
Amadeo - or AP as he became known - grew into a tall, strong man, more than able to hold his own in the rough auctions for fruit and veg on the wharfs where traders met the farmers' boats. He helped to build a thriving business.
When he was 31 he sold his share, saying he had no interest in accumulating wealth. "No man owns a fortune," he said. "It owns him." It was the motto of his life.
 Ask and you shall receive? |
He'd married and on the death of his father in law, was persuaded to take his vacant place on the board of a little bank in North Beach. He was appalled that they'd not lend money to poor immigrants. The rows in the board room reverberated over North Beach until AP walked out and started a little bank of his own to do that, the Bank of Italy.
From his work on the wharves, he'd become a shrewd judge of character, so he'd cheerfully lend money to pay doctor's bills for delivery of a baby if he judged the couple had integrity.
Phoenix from the rubble
On Wednesday 18 April, 1906, San Francisco was devastated by earthquake and fire. AP rushed to get all his gold and paper money out of danger, hid it under orange crates to conceal it from looters, and stood guard all night in his home.
It must have been a debilitating moment the next day to find his baby bank a mass of charred rubble. The bigger banks, who had vaults too hot to open, had no records and were not lending.
 Smoke billows from San Francisco's flattened buildings |
AP instead went down to a wharf close to the smouldering North Beach, flung a plank across two barrels, and with his baritone booming across the desolation, started lending some of his $80,000 to rebuild San Francisco.
He looked for steamship captains he knew, shoved money into their hands, saying "go north and get lumber". AP radiated so much confidence, making a big show of jiggling his little bag of gold, hundreds who'd been hoarding cash and gold banked it with him. North Beach was built faster than any other area.
By 1918 he'd established California's first state-wide banking system. A little local bank in the valley that would have closed in a run after a bad harvest could now keep open by borrowing from the city branch.
He set out to build a nationwide banking system so that distressed areas could be helped by ones that were prospering. Wall St hated him. He beat off their attempts to destroy him. In the Great Depression, he took every opportunity in the New Deal legislation to get California revived in time for the war and the boom that followed.
He did it by putting the community first, himself last. He set up low interest instalment credit plans which enabled thousands to avoid the loan sharks and buy cookers and refrigerators and autos, and he built a whole new electrical industry with his loans.
He financed the Golden Gate bridge, and the Disney movie Snow White and the Seven Dwarfs.
No man could do so much good without being maligned. It was said he wore the mask of populism to create a dangerous instrument of personal power and personal wealth.
The truth is that the man whose life was money had no interest in money. He refused to take increases in pay and spurned every bonus. He banned insider trading. Shortly after retiring in 1945, when he found himself in danger of becoming a millionaire, he set up a foundation and gave it half his personal fortune.
And the little bank for the ordinary man that he founded?
The Bank of America.
Saturday, January 31, 2009
Gloomy Portents for Global Trade
This year's summit at Davos spotlighted fears of chilly trade winds. (AP/Laurent Gillieron)
Davos was different this year. Amidst the worst economic crisis in decades, the World Economic Forum's annual mega-summit in the Swiss Alps found itself at a crossroads. The Financial Times' John Gapper says the prototypal "Davos Man"--the international captain of finance whose prominence and significance has risen meteorically in recent decades--seemed humbled. Many of the financial sector's major players skipped the summit altogether (Bloomberg), and several big banks cancelled the glitzy parties they have traditionally hosted at the summit. The concern for policymakers, however, isn't the subdued party scene. Rather, economists fear this year's Davos gloom could foreshadow a broader shift away from the interconnected economic model the World Economic Forum has traditionally embraced.
Pleas for economic openness rang out at this year's summit, particularly among the leaders of emerging economies. Russian Prime Minister Vladimir Putin warned against reliance upon intervention and protectionism to cure economic ills, saying such policies could backfire (Guardian). Chinese Premier Wen Jiabao backed Putin, saying world leaders must remain vigilant (Xinhua) in their efforts to curb trade protectionism. Egypt's trade minister echoed concerns (Reuters) about protectionism, as did India's (Reuters). "We will only make the crisis worse if we succumb to the lure of protectionism and petty nationalism," added Angel Gurria, the secretary-general of the Organization for Economic Cooperation and Development, in an article published on the OECD's website.
Significant threats loomed for free-trade hawks well before Davos. In a recent op-ed, CFR's Jagdish Bhagwati questioned U.S. President Barack Obama's pronouncements on trade, saying Obama has ignored lessons from the Depression era. Obama aside, the short-term trade outlook isn't particularly rosy. The International Monetary Fund estimates global trade will contract 2.8 percent in 2009 (WSJ), compared to an expansion of 4.1 percent in 2008. The World Bank also projects a contraction--the first decline in global trade since 1982. Trade policy could emerge as a flashpoint in the weeks and months to come, particularly as major developed economies seek to implement stimulus packages to boost their domestic economies. U.S. Democrats are pushing for "Buy America" provisions to be included in President Barack Obama's proposed stimulus package. British policymakers have come under fire (The Times) from the head of the World Trade Organization for a bailout package aimed at stabilizing British automakers, valued around $3.3 billion. French leaders, too, face strong protectionist pressures, particularly following recent strikes (Bloomberg) calling for President Nicolas Sarkozy to alter his stance toward the economic crisis in order to prevent French job losses.
Such movements may entice populist support, but economists in the industrialized world generally view protectionist trade policies as economically counterproductive. Experts have published any number of spirited defenses of globalization, including Bhagwati's book of the same name. Free capital flows across markets must continue, economists argue, in order to encourage division of labor and make the global economy more efficient and more productive. The Economist, summing up this view, argued in a recent analysis that protectionism is "individually appealing" but "collectively futile." Other analysts point out that disruptive trade policies like tariffs and subsidies could disproportionately hurt the developing world. South Africa's finance minister made this case (BBC) at Davos, saying African countries could risk economic "derailment" if they are cut off by trade partners. Former UN Secretary-General Kofi Annan captured the gravest concern (Reuters) in an open letter to the leaders at last November's G-20 summit: " If hundreds of millions of people lose their livelihoods and their hopes for the future are dashed," Annan wrote, "the human crisis will not remain just economic."
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