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News : International Last Updated: Apr 24, 2009 - 5:31:05 PM


Davos World Economic Forum 2009: Wen and Putin blame US for global crisis; Russian PM warns against State "interference" in the private sector
By Finfacts Team
Jan 29, 2009 - 5:33:27 AM

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DAVOS-KLOSTERS/SWITZERLAND, 28JAN09 - Wen Jiabao, Premier of the People's Republic of China and Klaus Schwab, Founder and Executive Chairman, World Economic Forum, captured during the session 'Special Session with Wen Jiabao, Premier of the People's Republic of China' at the Annual Meeting 2009 of the World Economic Forum in Davos, Switzerland, January 28, 2009. swiss-image.ch/Photo by Sebastian Derungs

Davos World Economic Forum 2009: Chinese Premier Wen Jiabao on Wednesday, at the World Economic Forum in Davos, Switzerland, blamed the U.S.-led financial system for the world's recession, saying "excessive expansion of financial institutions in blind pursuit of profit," a failure of government supervision of the financial sector, and an "unsustainable model of development, characterized by prolonged low savings and high consumption" Russian Prime Minister Vladimir Putin said: "I would only like to remind you that, only a year ago, from this rostrum, we heard the words of American representatives about the fundamental stability and cloudless prospects of the US economy. But today, the pride of Wall Street - the investment banks - have practically stopped existing." Putin warned against State "interference" in the private sector.

China is the US government's largest creditor and it has been a huge beneficiary of American consumption. China holds about $2 trillion in foreign exchange reserves. As regards Putin's warning against State interference, the BBC reported last year that many private Russian businesses faced increasing levels of government interference. The New York Times reported in December 2008, that the "Kremlin seems to be capitalizing on the economic crisis, exploiting the opportunity to establish more control over financially weakened industries that it has long coveted, particularly those in natural resources."

Addressing participants on the first day of the World Economic Forum, Wen Jiabao said: “From late last December, we have seen signs in the recovery of the Chinese economy; the signs are small ones but they give me hope.” He pointed to increases in bank lending, prices of industrial products and consumption.

He noted that the increase in bank loans was Rmb900 billion (USD$132 billion) in the first 20 days of 2009 compared to Rmb700 billion in December and 400 billion Rmb in November. Prices of major industrial products have also picked up while the inventory of goods held up in ports in China has declined. In addition, despite falling commodity prices, growth in consumption was maintained at between 20% and 21%.

The premier revealed that at the start of the Lunar New Year, consumption rose 21% compared to the same period last year.

In his address, Wen admitted that the global financial crisis has a “rather big impact” on China’s economy. “We are facing severe challenges, including notably shrinking external demand, overcapacity in some sectors, difficult business conditions for enterprises, rising unemployment in urban areas and great downward pressure on economic growth,” he said.

However, he expressed confidence that with hard work, it should be able to meet its 2009 target of 8%. The Chinese economy grew 9% last year.

Finfacts Report: China's economic growth plunges to annual 6.8% rate in fourth quarter of 2008

New York University economics professor Nouriel Roubini, commented last week: "Indeed if one were to convert the 6.8% y-o-y [year over year] figure in the more standard quarter over quarter annualised figure Chinese growth in Q4 [the fourth quarter] would be close to zero if not negative," he said."Other data confirm that China was in a borderline recession in Q4 and that it may be in an outright recession in Q1: production of electricity plunged 7.9% in y-o-y basis."

In Davos, Wen blamed “inappropriate macroeconomic policies of some economies and their unsustainable model of development” for some of the causes behind the current crisis, and warned that trade protectionism would only worsen and prolong the crisis.

US Trade with China : 2008  -- US Census Bureau

NOTE: All figures are in millions of U.S. dollars, and not seasonally adjusted unless otherwise specified.

Month Exports Imports Balance
January 2008 5,854.9 26,167.7 -20,312.8
February 2008 5,773.9 24,128.6 -18,354.7
March 2008 6,354.1 22,432.0 -16,077.9
April 2008 5,680.6 25,919.3 -20,238.6
May 2008 6,614.3 27,663.6 -21,049.4
June 2008 6,413.7 27,843.3 -21,429.6
July 2008 6,437.3 31,314.0 -24,876.8
August 2008 6,506.7 31,840.2 -25,333.5
September 2008 5,320.4 33,086.4 -27,765.9
October 2008 6,071.6 34,028.3 -27,956.7
November 2008 5,223.4 28,280.6 -23,057.2
TOTAL 66,250.9 312,704.0 -246,453.1

Prime Minister Vladimir Putin of the Russian Federation told the opening plenary of the World Economic Forum Annual Meeting 2009 that his country will work with the US, Europe and other countries to resolve the global financial crisis. “We cannot afford to be isolationist and egotistic,” he said, promising that Russia will not resort to protectionism and erect trade barriers that will simply worsen the global financial crisis.

DAVOS-KLOSTERS/SWITZERLAND, 28JAN09 - Vladimir Putin, Prime Minister of the Russian Federation captured during the 'Opening Plenary of the World Economic Forum Annual Meeting 2009' at the Annual Meeting 2009 of the World Economic Forum in Davos, Switzerland, January 28, 2009. Copyright by World Economic Forum swiss-image.ch/Photo by Monika Flueckiger

"In a very real sense Russia has been kicked to the margins, while China has become pivotal to any resolution of the financial crisis," Bob Lo, Director of the Russia and China programs at the Center for European Reform in London told the Wall Street Journal.

The Journal says the rapid collapse of oil and commodities prices has hit Russia hard on top of the ripples of the financial crisis. The government now forecasts the economy will shrink for the first time in a decade this year, after growing 6% last year.

Putin's government has spent $200 billion of hard currency reserves to defend the Russian currency, the ruble. It has spent as much again in a bailout package that amounts to 15% of gross domestic product, one of the largest responses to the financial crisis in the world. Unlike China, Russia's economy is too dependent on commodities exports and too small to play a significant role in any global recovery, says Lo.

Putin said in Davos, that as governments pump billions of dollars into financial institutions and other companies in their effort to save them and the jobs they provide, Putin warned against state interference in the private sector. He added that this error was made by the Soviet Union with disastrous results and the Russian Federation will not make the same mistake, even though it has set aside US$ 50 billion to help its crisis-affected companies. He pointed out that while the government will help with debt servicing and lending, the key initiatives will be lower taxes, boosting domestic consumption and other ways of creating an attractive environment for investment.

The prime minister also called for international action to promote global energy security, pointing out that the extreme volatility of energy prices helps no one. He said Russia will do its part by building new gas pipelines across the North and Baltic Seas, thus avoiding problems with gas supply, an apparent reference to Russia’s recent face-off with Ukraine over pipelines that pass through Ukrainian territory.

Like Putin, Hans-Rudolf Merz, the President of Switzerland and Finance Minister, believes that the unprecedented crisis also creates opportunities to remake the global financial system. In his welcome address, the president called for a return to the basic values of trust and sustainability, and the development of a new philosophy for regulation of the financial sector and global rules for global players.

DAVOS-KLOSTERS/SWITZERLAND, 28JAN09 - Hilde Schwab (FLTR), Chairperson and Co-Founder, Schwab Foundation for Social Entrepreneurship, Recep Tayyip Erdogan, Prime Minister of Turkey and his wife Emine Erdogan are captured during the 'Opening Plenary of the World Economic Forum Annual Meeting 2009' at the Annual Meeting 2009 of the World Economic Forum in Davos, Switzerland, January 28, 2009. Copyright by World Economic Forum swiss-image.ch/Photo by Monika Flueckiger

The World Economic Forum is ready to help, said Klaus Schwab, Founder and Executive Chairman, World Economic Forum. “What we are experiencing is the birth of a new era, a wake-up call to overhaul our institutions, our systems and, above all, our thinking and our actions, and to adjust our attitudes and values to the needs of a world which rightly requires a much greater degree of responsibility and accountability,” he said. With the engagement and leadership of the Annual Meeting participants, “Davos can act as it has done already a century ago, as a healing and revitalizing force, as a magic mountain, as a true sanatorium for the world, its economy and society.”

2009 World Economic Brainstorming: What Happened to the Global Economy?

Maria Bartiromo, Anchor, CNBC's Closing Bell, and Host and Managing Editor, Wall Street Journal Report, CNBC, USA; Young Global Leader, put three critical questions concerning the ongoing financial crisis to the participants:

1. What was the most damaging policy mistake leading to the crisis?
2. What regulatory failure produced the largest systemic shock?
3. Where did a genuine market failure occur?

After roughly 20 minutes of brainstorming by 18 groups, most of the participants seemed to agree on a range of factors contributing to the worldwide market collapse. Responses from the different groups tended to lump the three questions together and focused on the following factors responsible for the breakdown of the world financial system:

  • A mistaken belief that markets can be expected to efficiently correct themselves, and a failure to take into account the inevitable collateral damage

  • Too much easy money offered on a long-term basis and rampant underpricing of risk, especially when the risk premium dropped to nearly zero

  • An almost religious faith in mathematical modelling based on data samplings which eventually replaced common sense, and which were based on data samplings that were too small

  • A failure to give full disclosure of the risks involved, and the inability of the world financial system to provide global oversight once these risks were marketed internationally

  •  Excessive complexity of new financial instruments, which were often fee-driven and accompanied by go-for-broke incentives

Following an open floor discussion, participants voted on the causes of the crisis. At least 50.8% voted for overconfidence in the ability of markets to self regulate as the major cause. Another 12.9% listed cheap money. Asked what issue the G20 should give highest priority to at its next meeting, 40.6% listed the lack of an international regulatory framework as the key problem; 21.3% listed the non-regulation of leverage, and 18% listed the inability to accurately assess risks as major concerns. For the last question concerning which risk seemed likely to produce the greatest public backlash, 41.9% listed the misalignment of incentives; 20% considered the crisis to be the result of a failure of governance; and 15.3% listed the misquoting of risk valuation and pricing.

The only remark during the discussion that triggered a round of applause was a comment by a participant that the failure to attribute personal blame for the collapse was “intriguing”. The participant observed:“If you sell toxic products in any other field, you go to jail.” There was widespread agreement that policy-makers need to make it clear that there are serious consequences for inappropriate behaviour. At the same time, it was pointed out that it is dangerous to go down that road because no one wants to punish people for ordinary fluctuations in the market.

The bottom line, as expressed by participants during the brainstorming and open floor discussion, is that the world is currently experiencing a paradigm shift, and a way must be found to open up and redesign the global financial system.

Government, business and civil society leaders are at the World Economic Forum Annual Meeting 2009 in record numbers to discuss ways out of the worst financial crisis in eight decades. “Davos fills the vital need for a global and dialogue-based platform where knowledgeable and empowered stakeholders can collaborate to address issues of common criticality. I can’t think of a better time and a better reason to be at Davos,” said Anand Mahindra, Vice-Chairman and Managing Director, Mahindra & Mahindra, India and Co-Chair of the Annual Meeting 2009.

“It is important that leaders who come here go back and work on ways of finding far-reaching policies that will allow us to create sustainable economic growth, create jobs and coordinate macroeconomic policies,” insistedKofi Annan, Secretary-General, United Nations (1997-2006), Member of the Foundation Board of the World Economic Forum and Co-Chair, Annual Meeting 2009, on the opening day of the five-day Annual Meeting.

“I believe we are also facing a crisis of governance at a national and international level. The current architecture of managing global affairs is broken and needs to be fixed. We have new players that have to be integrated and the poor have to be given a voice,”he said. “The world has changed; are we capable of changing fast enough to save the planet?”

Stephen Green, Group Chairman, HSBC Holdings, UK, and Co-Chair of the Annual Meeting 2009, agreed that the Annual Meeting gives leaders the space to share ideas needed to address current challenges. “Talking through what we need to do is important and that is why Davos is more than ordinarily important,” he said.

In the wake of the global financial fallout, re-examining values is key to moving forward, argued Maria Ramos, Group Chief Executive, Transnet Limited, South Africa and Co-Chair of the Annual Meeting 2009. “It is fundamentally important that the issue of values is on the agenda…and also the institutions that underpin these values and how the rules of the game are enforced is important here,” she said.

The world is still in crisis, yet we should treat it “as an opportunity to set goals for how we want to come out of it, such as energy sufficiency, world pollution...and shape policies which will help to solve some of those problems,” said Rupert Murdoch, Chairman and Chief Executive Officer, News Corporation, USA, and Co-Chair of the Annual Meeting 2009. “Don’t let’s lose sight of what creates wealth; it’s open markets, capitalism and we’ve proved this again and again in last century,” he cautioned.

“I do not expect we will find from Davos solutions, but expect that we are able to get a joint understanding of the reasons for the crisis, and that we get a good understanding of how we are really able to overcome such a severe crisis in a globalized world,” said Werner Wenning, Chairman of the Board of Management, Bayer, Germany, and Co-Chair of the Annual Meeting 2009. “We’re talking about growing populations; we have to address issues of how to secure energy supply and of climate change; we’re also talking a lot about sustainability and returning to the basics of sustainable behaviour.”

Earlier, Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum,said that the world was in the midst of a “transformational crisis” where leaders in Davos need to first help manage the crisis and second to shape the post-crisis world. “Because only if we look at longer-term perspectives can we recreate trust in the economic system and in the future,” he said.

More than 2,500 participants from 96 countries are participating in the Annual Meeting held under the theme “Shaping the Post-Crisis World”, including a record 40 heads of state or government. Key finance, foreign affairs, trade and energy ministers will join heads of non-governmental organizations, social entrepreneurs and religious leaders at the Meeting. Around 60% of the participants are business leaders drawn principally from the Forum’s members – 1,000 of the foremost companies from around the world and across all economic sectors.

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