Economic recovery, power shift to dominate Davos talks
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When the world's political and business leaders gather in this Swiss ski resort on Wednesday through Sunday, a still fragile economic recovery and the ongoing power redistribution will be high on their agenda.
In the wake of the latest international financial crisis that broke out in 2008, the world economy is still facing severe challenges, a scenario the over 2,500 participants at the annual World Economic Forum (WEF) have to confront.
A survey released by the International Monetary Fund (IMF) last month showed that a two-speed global economic recovery is likely to dominate 2011, with advanced economies facing a weak growth barely enough to bring down unemployment and emerging markets facing the challenges of success, including how to avoid overheating and handling strong capital inflows.
On the one hand, growth in major advanced economies, including the United States, the eurozone and Japan, is expected to slow down this year, as sovereign debt woes continue to rattle the eurozone and pose a risk to the global economic recovery.
Following the financial crisis, the European single currency club was hard hit, with some of its members embroiled in fiscal problems last year. The sovereign debt crisis has so far forced Greece and Ireland to ask for a bailout, with Portugal and Spain rumored to follow suit this year.
Nariman Behravesh, chief economist of the research group IHS, warned that the debt crisis might strengthen this year and leave the eurozone countries with no other choice but restructuring their sovereign debts.
"Renewed financial jitters vis-a-vis the eurozone's sovereign debt problems have begun to focus minds on the next phase of crisis management," he said.
"This will very likely include a debt restructuring plan, with 'haircuts' for investors and further aid for the European banks holding much of this debt. Financial markets may force such an outcome as early as this year," he added.
When European leaders such as German Chancellor Angela Merkel, British Prime Minister David Cameron, French President Nicolas Sarkozy and European Central Bank President Jean-Claude Trichet speak at the annual meeting, observers will listen carefully to catch every clue on how the crises will develop.
On the other hand, developing countries are showing a much faster growth in sharp contrast to rich nations, but now there are risks of overheating and inflation.
Pushed up by a weak dollar and rising demand created by economic recovery, global commodity prices have recently experienced significant increases, with food prices climbing towards the pre-crisis level in 2008.
Instead of supporting economic growth, developing countries have taken measures to control hot money and contain inflation by raising interest rates.
"The more cheerful economic news during the past couple of months points to a stronger global recovery this year," Behravesh said. "Meanwhile, financial and commodity markets have been volatile. This volatility could develop into major headwinds for the world economy."
Also at the Davos meeting, held under the theme "Shared Norms for the New Reality" this year, world elites will focus on the fundamental changes in the global political and economic realities, notably a power shift toward a more balanced distribution of power.
"The world has fundamentally changed," WEF founder Klaus Schwab said. "One of the most important factors of the new reality is the shift of geopolitical and geo-economics power from north to south, from west to east."
"This has not only political and economic consequences. I think the world will go through some shock waves of adaptation," he added.
The WEF warned earlier this month that the current global system and decision-making models are no longer able to cope with the speed and complexity of all these changes. [ "Twentieth-century systems are failing to manage 21st-century risks; we need new networked systems to identify and address global risks before they become global crises," Robert Greenhill, managing director of the WEF, said.
The discussions in Davos on the new norms for the new reality will focus on the role of the Group of 20 (G20) major economies.
In response to the financial crisis, major developed and developing economies have used the G20 as a principal platform to reform global economic governance, giving a bigger say to developing countries in running the increasingly interconnected global economy.
Sarkozy, whose country holds the G20 presidency this year, will outline his ambitions at the Davos meeting, which will be closely watched.
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