THE downturn in the world economy — led primarily by that of the US — and its impact on the future overshadowed the World Economic Forum 2008 proceedings, with an element of gloom towards management of global risks.

Most of the participants believed the prospects for the US economy — and, by extension, the global economy — have dimmed in recent weeks and that risks were high and growing.

Global warming, poverty, energy, the current liquidity crisis and the political changes in countries of major global players expected over a period of one year or so, appeared to be crucial issues.

“This year it will be difficult to manage global risks”, said the Global Risks 2008 report of the World Economic Forum that expressed the fears that the current liquidity crunch would spark a US recession in the next 12 months. It called for new thinking on systemic risk to the financial markets.

Most of the participants agreed that the global economy appeared to be facing a serious downturn. At the top of the list of concerns, as indicated by the vote in one of the sessions, is lack of coordinated response and leadership (18.5 per cent), followed by mismanagement of the current crisis (18.1 per cent), broad-based collapse of confidence (16.7 per cent), US recession (11 per cent), severe global credit crunch (11 per cent), rise in energy and commodity prices (7.5 per cent), overreaction to the threat of recession (7.5 per cent), rise in protectionism (4.4 per cent) and greater income inequalities (2.2 per cent).

In a debate, 59 per cent of the participants agreed with a motion that central bankers have lost control over the financial system and the economy. “I think the present crisis is the end of the era based on dollar as the international currency. And we need a new sheriff , not the Washington consensus,” veteran financier George Soros told the WEF participants. The lack of coordinated response and leadership was voted as single largest threat to worldwide growth.

Some of the participants also reckon that as the prospect of a US recession overshadowed a tense and drawn-out election campaign, some old realities in the global world may also be changing as shift of power from the West to the East and rising inequalities not only in the rich countries but also among the rich and the poor nations. Or for that matter, the concept of deregulation and globalisation may have been hit by more protectionism and re-emergence of “big government” in a different role.

In the backdrop of such questions about the world economy, Pakistan President Pervez Musharraf asked the business elite to “judge a country from the economic well-being of its people and political stability rather than pressing more on “idealistic and rather unrealistic ideas” of democracy. At the same time he, however, insisted that he had in fact introduced the true essence of democracy by giving more seats to women and minorities and by putting in place local governments to empower the people at the grassroots level.

On the economic side, an exceptional period of global growth may come under pressure as the liquidity crisis of 2007 impacts the real economy. “On the political side, changes of governments in several major countries and an uncertain situation in the Middle East will dominate. Leadership on global risk issues will be an increasingly precious commodity”, the Global Risks 2008 report said. The bigger problem appeared to be lack of ownership of these risks. As such, the fragmentation of ownership of global risks and the complexity of interdependencies will make equitable and sustainable management of global risks hugely challenging.

For countries like Pakistan, who are mostly dependent on imported energy, the situation has been forecast to be depressing as the availability of energy resources would remain the key to the global economy.

With predictions of a 37 per cent increase in oil demand over current levels by 2030, the report sees limited scope for a fall in energy prices over the next decade. This may be good news for oil and gas producers, but it creates an inherent mismatch between those who bear risk and reward, which should be addressed through better dialogue at all levels, the report said.

Anti-poverty and global warming were seen by some as major global concerns. Al Gore, former US vice-president, highlighted a merging of efforts to find joint solutions to both problems. “The Millennium Development Goals can only be met if the climate crisis is taken into the fold of that effort. If the world warms up by two degrees all of the good work done in development will be undone”.

The threat of a US recession poses particularly a difficult policy challenge for China, said Yu Yongding, Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences (CASS), People's Republic of China. While the country must create at least 24 million new jobs a year to keep up with population growth and the migration of rural workers to cities, inflationary pressures are mounting. For now, Mr Yu predicted, policy-makers in Beijing would emphasise fighting inflation at the expense of growth. However, those priorities could change if the US recession proves severe. China’s small budget deficit creates room to stimulate domestic growth with fiscal policy, he added.

A similar dilemma confronts many African countries, observed Ngozi Okonjo-Iweala, a World Bank executive. A global slowdown could cut short the continent’s recent growth spurt by depressing prices for metals and other industrial materials. At the same time, however, global food prices continue to soar, due to relatively inelastic demand and supply constraints.

Kamal Nath, Minister of Commerce and Industry of India, partially dissented from the bearish consensus, arguing that the growth of trade between developing countries could cushion the effect of a US slowdown. India’s growth, in particular, is largely being driven by domestic demand. “If the argument is that the US is going to drive all of the economies downhill, I wouldn’t fully agree with that,” he said.

US Secretary of State Condoleezza Rice said “There is not one challenge in the world today that will get better if we approach it without confidence in the appeal and effectiveness of our ideals – political and economic freedom, open markets and free and fair trade, human dignity and human rights, equal opportunity and the rule of law,” she said.

Klaus Schwab, founder and Executive Chairman, World Economic Forum, asked participants to look beyond the troubling economic issues to seek innovative solutions to today’s global problems. “Irrational pessimism is as damaging for us all as irrational exuberance.”

Dawn’s staffer Khaleeq Kiani is covering the “World Economic Forum 2008” proceedings at Davos.