By Radithebe Rammutle
The World Economic Forum (WEF) summit, the gathering of both state and non-state actors was once again held in person from May 22 to 26, 2022, after a two-year break in compliance with global travel restrictions imposed to curb the spread of the COVID-19 virus.
The mood at Davos was expectedly gloomy. Investors were worried about the unabating geopolitical tensions between Russia and the United States-led Western countries that might stall recovery from the COVID-19-induced economic meltdown and the rising inflation across the globe.
“You see every day how the world is falling apart with the different crises that we have to manage. You can exchange in small circles ideas, you can take certain decisions, but it was so important to bring the global stakeholder community together in person again because it is only the personal interaction that creates trust or recreates trust” said Professor Klaus Schwab, founder, and executive director of WEF organisation in a CNN interview with Richard Quest.
The global political and economic context is the antithesis of what Prof Schwab and his wife tried to build since 1971. He authored a book, Modern Enterprise Management in Mechanical Engineering, in which he argued that firms should prioritise the interests of all their stakeholders not exclusively shareholder interest. To promote his ideas, he founded the WEF, an international organisation recognised for its efforts in forging global Public-Private Cooperation through dialogue.
WEF became a platform that offered an opportunity for diverse stakeholders to discuss and produce responses to global, regional, and industry challenges and opportunities. It is an annual pilgrimage of business, government, cultural, civil society organisations, and other leaders throughout the world who want to be part of WEF’s mission to forge global cooperation.
As usual, the Global Risks Report, set the agenda for the 2022 summit. Published on 11 January 2022, the authors of the report could have never predicted what was to unfold on 24 February 2022. While the report correctly identified geopolitical tension between the United States and China as a source of global divergence, they could never have foreseen that the regional risk arising from tensions between Russia, and Western Europe over the expansion of the North Atlantic Treaty Organisation (NATO), could morph into a full-blown open conflict between Russia and Ukraine. This crisis became a topical issue during the summit as attendees wanted to find out what will happen next.
“I am not surprised that this room is completely packed. Despite the fact that there are no Russians attending everyone at the forum is deeply interested in what they are up to,” said Ian Arthur Bremmer, chair of a WEF discussion session titled Russia: What Next?
The panel of experts that included, Karin Von Hoppel, Samir Saran, and Alexander Stubb said that there was no clear picture of what will happen next in the few months to come. The potential working solutions to the conflict, they said, were not desirable for the main stakeholders involved in the conflict. Moscow will not agree to Russia’s complete withdrawal from Ukraine and Kyiv will not accept the annexure of Ukraine’s territory.
Another potential outcome that the panel pointed out was regime change in Russia. Yet they were not convinced that the person who takes over will undo what the current administration under President Vladimir Putin has already done.
At the time of publication, the conflict between Russia and Ukraine had been ongoing for more than 100 days. The panelists identified some factors that could prolong or shorten the conflict.
First, there was continued encouragement from the West for President Volodymyr Zelenskyy to continue fighting the Russians. Secondly, the political instability in Russia, which Von Hoppel, Director-General of the Royal United Services Institute, believed existed, could suck the energy to continue with the war amongst Russian elites. Von Hoppel echoed Western sentiments that the conflict was “Putin’s War”, and that the general population did not support the government’s agenda in Ukraine.
These sentiments were perhaps motivated by protests at the start of the conflict which have since died down. Reflecting on this issue, Saran, President of Observer Research Foundation, said “…one of the trends we need to watch as we look ahead is [whether] the distance [of sentiments between Putin and Russians over the conflict] will increase or will now start converging. If it starts converging, then we are in for a terrible decade in Europe.”
Finally, the lack of dialogue with Russia and its exclusion from the world financial systems through sanctions and weaponization of the international settlement system is unlikely to bring an end to the conflict.
Western moves to deglobalising Russia were a concern to Saran who argued that if he were a government leader in an emerging economy he would be seriously concerned about such actions.
In an interview with CNN, Richard Quest challenged Professor Schwab on WEF’s reasons to exclude Russia from the 2022 summit.
“You are right, but in the end, the decision on what Russia will do depends on Putin. And you have seen Guterres, Macron, and so on trying to build a bridge. So, the time is not yet right. We are ready, as soon as the time is right [we will offer our bridge building] capabilities again…”
Whilst it is unclear what trajectory the conflict will take; it has disrupted global economic recovery from a COVID-19 induced recession. Six months ago, the Organisation for Economic Cooperation and Development (OECD) forecasted that economic growth amongst the largest economies will return to the pre-COVID level, led by China, Europe, and the US.
It forecasted a 4.5% growth in developed countries, however, it was pessimistic about low and middle-income countries, with growth predicted to be 5.5% below the pre-pandemic level in 2024. Latin America and Sub-Saharan Africa were trailing even further behind.
However, the world is not where it was six months ago. During the summit, WEF once more surveyed chief economists at leading corporates and central banks around the world to provide their future assessment of the global economy and inflation.
“The majority of respondents [in the survey expected] weak growth in the United States, China, Latin America, South Asia, East Asia, sub-Saharan Africa, and the Middle East and North Africa. In Europe, the majority expect the economy to be very weak,” according to the WEF forum website
The forum further warned about inflation that lurked behind the monetary systems throughout the world. Exhibit 1 above shows that most of the chief economists surveyed see inflation in Europe, Latin America, and Africa as a major problem. In many of those regions, it’s not just inflation but food insecurity that is concerning.
A WEF panel on inflation showed that whilst inflation is worldwide, its causes are distinct across countries and regions. In the US, inflation is more homegrown than it is in other parts of the world.
“In the United States, a much higher ratio of the inflation is demand. Yes, there have been supply problems, but people are buying ten to fifteen percent more goods than usual. So, the problem is…. that supply can’t keep up with the unbelievably voracious demand of American consumers that has raised goods prices worldwide. So, part of [other regions’] inflation is the [US] fault,” said Jason Furman, an American economist and a WEF panelist in the Outlook for Inflation session held on 25 May 2022.
The high price increases in the US that cascaded down to other parts of the world, coupled with the supply chain blockages in oil, food, and commodities meant that consumers in other parts of the regions will bear more of the brunt.
The positive news is that the monetary authority in the US, the Federal Reserve (or the FED) increased the benchmark interest rate by 0.5 percentage points to a target rate range of between 0.75% and 1%.
The hike is the largest since 2000 and follows a 0.25 percent point increase in March. The Economist Intelligence Unit expects further tightening of the monetary policy in the US and expects them to reach 2.9 percent in early 2023.
Monetary authorities in other jurisdictions have not relied on the US actions and have since tightened their monetary policy even though inflation rise is not a result of demand shocks. In these jurisdictions, monetary policy must contend not only with goods inflation arising from the US but also with energy supply shortages because of Ukraine-Russia conflict and local drivers of inflation. Echoing these sentiments during the monetary policy announcement, the South African Reserve Bank (SARB) Governor, Lesetja Kganyago, said “Russia’s war in Ukraine is likely to persist for the rest of this year and may have significant further effects on global prices. Oil prices increased strongly from the start of the war and may rise more as stresses in energy markets intensify. Electricity and other administered prices continue to present short- and medium-term risks. Higher diesel and coal prices may result in upward revisions to our electricity price forecast for 2023. Given the below-inflation assumptions for public sector wage growth and higher petrol and food price inflation, considerable risk attaches to a still moderate nominal wage forecast”. The downbeat mood at the WEF summit was a sign that it is a long way to the heady days of prosperity unless the forum’s discussions ignite a new response that will reverse the worst that may come.