Tag Archives: World Economic Forum

The Economic Challenge of Climate Change

Bill Gates and the World Economic Forum

Bill Gates and the World Economic Forum

Government ministers and corporate executives descended on Davos, Switzerland, to meet at the World Economic Forum last week. While the world faces numerous challenges, ranging from the threat of an internet meltdown to the situation in the Middle East, the topic of climate change quickly took center stage. Delegates agreed that climate change posed a major threat to the global economy, with Coca-Cola’s Chief Environmental Officer, Jeff Seabright, noting that “Increased droughts, more unpredictable variability, 100-year floods every two years—we see those events as threats.” Seabright also noted that access to water, sugar cane, sugar beets, citrus juice and other key ingredients was also threatened by climate change.

But while the World Economic Forum is noting the importance of addressing climate change, individual governments appear unwilling to make significant strides towards real action. A report in the New York Times last week noted that the European Union is moving to ease climate rules in an effort to alleviate some of the economic pain associated with the global downturn. The United States has refused to sign most international climate change accords, usually citing the threat to the national economy as the reason. Economic growth and a clean environment as thus often cast as rivals in a tradeoff—to get more of one, you have to accept less of the other.

But is this accurate? Are environment and economy in constant competition? Al Gore, Bill Gates, and others are hoping not. In a conversation on climate change and development at this week’s World Economic Forum, Gates raised the connection between climate change and development, noting that, “As the poorest are being lifted up, as they’re getting lights and refrigerators, we are going to use more energy. There’s not a scenario here where we use less energy. We have to make the energy we use not emit any greenhouse gases, particularly CO2.” But Gore and others are hoping that “clean development” can create jobs and reduce carbon emissions around the world, removing the tension between economy and environment. If they’re right, the future looks a lot brighter. If not, there are some real challenges ahead.

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The World Economic Forum today released its annual Global Competitiveness Report. The report makes for interesting reading. While Switzerland and Singapore hold on to the number 1 and 2 positions respectively, the United States fell from fifth to seventh place. … Continue reading

Explaining Global Capital Flows

The World Economic Forum  [glossary] released its annual Global Competitiveness Report earlier this week. This year’s report is the first to take account of the impact of the global economic crisis. The report is intended to outline and measure those factors which facilitate economic growth and make national economies more competitive. The index is thus developed from twelve “pillars”: the strength and stability of political institutions, the extensiveness and effectiveness of infrastructure, macroeconomic stability, access to health and education, the efficiency of goods markets, the efficiency of labor markets, the sophistication of financial markets, technological readiness, the overall size of the domestic market, business sophistication, and innovation. A number of variables are then used to weight and rank each of the twelve pillars (readers who are interested in this aspect of the rankings can read more about the process in the appendix to the full report.

This year’s rankings saw some minor shifting in positions but few dramatic changes. Some countries (e.g., New Zealand and Taiwan) improved their rankings, and a number predictably declined. Iceland, for example, saw its overall ranking fall from 20th place to 26th place, largely as a result of the fallout from the banking crisis that undermined financial institutions in the country last year. The top ten performers were:

1. Switzerland (up from 2nd in 2008)
2. The United States (down from 1st)
3. Singapore (up from 5th)
4. Sweden (position unchanged)
5. Denmark (down from 3rd)
6. Finland (position unchanged)
7. Germany (position unchanged)
8. Japan (up from 9th)
9. Canada (up from 10th)
10. The Netherlands (down from 8th)

The bottom ten performers, which also saw few dramatic changes, were:

124. Paraguay (position unchanged from 2008)
125. Nepal (up from 126th)
126. East Timor (up from 129th)
127. Mauritania (up from 131st)
128. Burkina Faso (down from 127th)
129. Mozambique (up from 130th)
130. Mali (down from 117th)
131. Chad (up from 124th)
132. Zimbabwe (up from 133rd)
133. Burundi (down from 132nd)

The differences between the top and bottom performers are probably obvious. But the composition of the top ten performers also tells us something interesting about the nature of global economics. Although the vast majority of foreign direct investment [glossary] occurs between developed countries, the conventional wisdom, particularly among critics of multinational corporations, is that foreign direct investment tends to flow to the countries with the lowest tax rates, lowest wages, weakest environmental regulations, softest labor standards, and so on. But the countries that top the list of “most competitive” according to the World Economic Forum—hardly as bastion of anti-capitalist rhetoric—suggests something very different. Indeed, many of the countries in the top ten (e.g., Sweden, Denmark, Finland, Germany) have incredibly strict labor and environmental standards and among the highest corporate and individual tax rates in the world. Clearly, some other factors are compensating for the higher cost of doing business in these countries.

Five Stories You Might Have Missed

The annual meeting of the World Economic Forum took place in Davos, Switzerland, over the weekend.  The forum is intended to provide world economic leaders an opportunity to meet to discuss issues of global importance.  The meeting is normally incredibly cordial, as the economic focus of the conference provides an opportunity to move beyond traditional political wrangling that characterizes official meetings of heads of state.  This year, however, the Gaza crisis prompted the Turkish prime minister to leave the meting in protest and tension filled the air.  In general, this year’s forum has been dominated by discussion of the global economic crisis  British Prime Minister Gordon Brown warned against a rising tide of protectionism similar to the trend that occurred leading into the Great Depression, while bankers cautioned the U.S. government against political interference in banking operations

In news outside Davos this week:

1.  Provincial elections in Iraq on Saturday were generally peaceful.  Although the final tally will take more than two weeks to complete, preliminary results indicate voter turnout was 51 percent, a slight decline from 2005.  Turnout in Sunni provinces, which had previously dismissed the electoral process as biased against their interests, was particularly high.  With more than 14,000 candidates competing for just 440 seats, there are bound to be a large number of disappointed political parties and candidates.  The question that worries observers now is: how do those who lose the vote respond?

2.  A last-ditch effort to craft a government of national unity in Zimbabwe appears to have been successful, as Morgan Tsvangirai’s Movement for Democratic Change agreed on Friday to join Robert Mugabe’s ruling Zimbabwe African National Union, Popular Front to govern the country.  Once one of the wealthiest and most productive countries in the region, Zimbabwe has gradually collapsed into economic chaos.  With the unemployment rate at an estimated 95 percent, the World Food Programme estimates that up to 70 percent of the country’s population may require food aid in the next six months.  In an effort to deal with the crisis and bring the country’s rampant inflation—currently believed to be running as high as a quadrillion percent (that’s 1,000,000,000,000,000%, incase you’re wondering) under control, the government last week also removed restrictions on using foreign currencies for economic transactions within Zimbabwe.  It is now possible—indeed likely—that bread, gas, and other basic commodities will be priced in U.S. dollars, pound sterling, South African rand, or other foreign currencies.

3.  The crisis over the future of South Ossetia and Abkhazia, which was at the heart of a diplomatic standoff between the United States and Russia lat year, has once again reemerged on the international stage.  Russia has announced plans to construct a new naval base in Abkhazia, a move which Georgia claims will undermine its national sovereignty.  Meanwhile, in an apparent overture to the west, Russia has suspended plans to deploy a missile station in Kaliningrad.  Russia had announced its intention to deploy cruise missile batteries in the enclave last year after the United States moved forward with plans to deploy its missile defense shield in Eastern Europe. 

4.  The Mexican government announced on Tuesday that the country is likely headed into recession, with the economy estimated to contract by as much as 1.8 percent in 2009.  The Mexican economy is heavily dependent on exports to the Untied States, with exports to the U.S. accounting for 80 percent of all Mexican exports and representing about 25 percent of all economic activity in the country.  Already, Mexico’s central bank has cut interest rates in an attempt to stimulate the domestic economy.  Meanwhile, an ongoing conflict between powerful drug cartels and the central government has led some analysts to forecast that Mexico could achieve “failed state” status if it is unable to assert control over the cartels.

5.  Although the fragile ceasefire in Gaza has officially held, a number of fractures are beginning to appear.  On Thursday, Hamas launched rockets into Israel in response to an Israeli airstrike against a suspected arms factory in Gaza on Wednesday.  President Barack Obama named George Mitchell his Middle East envoy, and Mitchell appears to have his work cut out for him.  Arab states are demanding an investigation into alleged war crimes committed by Israel during the conflict in which more than 1,300 Palestinians were killed and more than 5,000 were injured. 

And in a bonus story this week:

6.  A moderate Islamist leader, Sheikh Sharif Ahmed, was declared the winner of Saturday’s presidential elections in Somalia.  Ahmed was the head of the country’s sharia court system that brought stability to southern Somalia in 2006.   But the withdrawal of Ethiopian troops earlier this year has led to even more instability in Somalia, and the political process, now to be led by Ahmed, has been dislocated from the country, now based in neighboring Djibouti.  Somalia has become a haven for piracy in recent months, and the World Food Program was forced to halt shipments to the country due to insecurity.

Does the Welfare State undermine economic competitiveness? No, just ask Ford.

There’s been a great deal of debate in the presidential campaign about the role of taxes.  McCain has argued that the United States has the highest corporate taxes rate in the world, and that companies are therefore driven out of the United States searching for better opportunities in lower-tax countries.  Obama has argued that smart taxes are the way to go, using tax policy to promote investment in new sectors, such as green energy.  As is often the case in politics, both sides overstate the strength of their own arguments.  McCain is correct that the United States officially has one of the highest corporate tax rates in the world…but due to the effective use of loopholes, deductions, and tax credits, few corporations actually pay that tax rate.  And Obama’s plan to use tax incentives to create green jobs sounds promising, but it remains to see if it could be effective.

All of this raises questions about the role of the state and the impact of taxes on corporate decision making.  And here, the relationship is less clear than is often assumed.  It seems obvious that corporations will relocate to countries where taxes are low.  Yet if this were true, we’d expect a flood of companies relocating to tax havens.  In reality, we see very little of this.  Why? 

There are two reasons.  First, capital is not as mobile as is often assumed.  Companies do relocate, but they cannot relocate anywhere.  And relocation costs money. 

Second, and more importantly, taxes are just one of a number of factors that influence corporate decision making.  Indeed, corporations may sometimes choose to relocate to higher-tax countries in exchange for other benefits.  In 2005, for example, Toyota chose to build a factory in Canada rather than in the United States because, despite having to pay higher corporate taxes, the Canadian health care system reduced corporate expenses for health care.  U.S. auto manufacturers have long complained that worker health care costs are undermining their global competitiveness.  According to some estimates, General Motors pays an average of $1500 per car to cover the cost of health insurance for its employees.  For Ford, its $980 per car.  Not surprisingly, workers health insurance costs have been at the centre of union contract negotiations for all major U.S. auto manufacturers.  German and Japanese auto manufacturers do not have to pay these costs, which are instead borne by the government.

This specific example is confirmed by more general studies.  The World Economic Forum, an independent organization which provides global discussions among the world’s business leaders, produces an annual Global Competitiveness Report, in which it ranks the business environment in countries around the world.  If low taxes were the driving force for corporate investment decisions, we would expect the countries with the lowest taxes (and therefore the lowest level of social welfare services) to be the most competitive.  The results?  Not even close.  According to business leaders, the most competitive countries in the world are:

1. The United States
2. Switzerland
3. Denmark
4. Sweden
5. Singapore
6. Finland
7. Germany
8. Netherlands
9. Japan
10. Canada

Hardly a list of low tax havens!  Clearly, other factors must enter into the decision.  In the real world, it appears, corporations are willing to operate in countries with higher marginal tax rates (e.g., Denmark, Sweden, Finland, Germany, the Netherlands, and Canada) when there are social welfare benefits associated with higher taxes.  Corporations, just like people, expect something for their tax money.

Five Stories You Might Have Missed

Here’s this week’s installment of Five Stories You Might Have Missed, with a special bonus entry on Tuesday’s Canadian elections!  Enjoy!

1. The Bush administration has removed North Korea from its terror list.  In exchange for its removal, North Korea has agreed to allow nuclear inspects into its facilities to verify compliance with the agreement produced in the six-party talks.

2. World economic markets continue to be turbulent, as demonstrated by the global market selloffs last week, including the largest single-largest day decline for the U.S. stock market since 1987.  In a move intended to address the crisis, most of the world’s major central banks last week announced simultaneous cuts in inertest rates.  But despite the ongoing financial crisis, the United States remained the most competitive country in the world, topping the World Economic Forum’s Global Competitiveness Index.  The remaining countries in the top 10: Switzerland, Denmark, Sweden, Singapore, Finland, Germany, the Netherlands, Japan, Canada, Hong King, and Britain.

3. Concerns over the continued development of Iran’s nuclear program sparked discussions between the U.S. and its allies last week about imposing sanctions on Iran without the support of the United Nations Security Council.   Action by the Security Council seems unlikely given the strength of objections raised by China and Russia.  The proposed sanctions would be imposed on a voluntary basis and would likely target Iran’s petrol imports and refining sector.

4. The tentative settlement of the crisis in Zimbabwe  reached several weeks ago now appears to be in limbo, as the Mugabe government has unilaterally moved to seize control of key positions within the government of national unity.  Mugabe announced his party, the Zimbabwe African National Union, would control several key ministries, including justice, media, home affairs (police), foreign affairs, defense, local government, and finance.  The opposition parties would be given control of relatively less important ministries, including constitutional affairs, energy, health, labor and social welfare.  No word yet on the response from South Africa, which had mediated the original settlement.

5. In local election results last week, Mexico’s Institutional Revolutionary Party (PRI) performed above most expectations, nearly capturing a majority of seats in two districts, while the ruling National Action Party (PAN) placed third.  The results suggest that Mexico may be in for a political transformation in its next round of mid-term, scheduled for summer 2009.

6. And in a bonus story for this week, Canada may be the first country to experience a political transition due to the current global economic crisis.  When a snap election was called six weeks ago, Stephen Harper’s ruling Progressive Conservative party had been projected to cruise to victory, perhaps even winning a majority in the parliament.  It now appears that Stéphane Dion’s Liberal Party may be positioned to play spoiler.