1. ClosingtheBooks:AnOverviewof Davos
2016
By Juan Pablo Poch
In the 2015 version of the World Economic Forum, businessman Laurence Fink expressed his
concern that leadersandexpertsarrivedat the meetingwitha lot of pessimismfromthe previous
year. The overarchingtopicsincludedtheinstabilityofcommodityprices–especiallyoil –,the power
struggle overthe Crimea,the consolidationof ISISasthe main internationalterroristthreatandthe
expectationsforthe Eurozone recovery.Some of these issues,suchasthe Europeanrecovery,seem
to be ratheroldnews,while several othershave persistedandstill hauntthe world’s headsof state
andtopbusinessexecutives.Hence,theglobaleconomicoutlookdepictedinthis year’seventisone
of cautionforthe recentandevencurrentpolitical andeconomicissues,yet someleadersanticipate
fruitful recovery efforts and future optimism.
A Work in Progress
Even though refugees from various conflict areas have immigrated to European soil in an
unprecedentedway,thishasnot offsetthe effortsof the membernationstogettheireconomyback
on track. Accordingto the IMF, the Eurozone is expectedtogrow by 1.5%, whichdisplaysaslightly
From left to right, economics journalist Martin Wolf, IMF Director Christine Lagarde, British Chancellor of the Exchequer
George Osborne, Indian Minister of Finance Arun Jaitley, Governor of the Bank of Japan Haruhiko Kuroda and CEO of
Credit Suisse Tidjane Thiam. (Photo: WEF)

2. low but still natural growth for the advanced economies (1.98%).1
Moreover, it shows that the
salvaging of debt-infested countries, such a Greece, is becoming a secondary issue.
On the refugee crisis, there has been a lot of criticism by internal political forces within the EU’s
leadingcountries,mainlyGermany,asthey expectoverwhelmingwelfare costsandeven exposing
the security of their homeland. German Chancellor Angela Merkel has championed open
immigration policy at the Bundesrat as well as in public, granting Germany’s full support for the
Syrianandotherrefugees,andinvitesthe restof the EUtojoinherhumanitariancrusade.Germany
receivedone millionrefugeeslastyear,andmany claim that openingdoorsto anothermillionthis
year may come at the price of the ongoing economic recovery. Nonetheless, the President of the
EuropeanCentral BankMarioDraghi claimswithconvincingoptimismthat“refugeesrepresentboth
a challenge andan opportunity.”Althoughhe recognizesthatthe governmentexpenditure will be
immense, he acknowledges the opportunityto encourage growth and jump-start other sectors of
the economy as well.
The slightly low growth rate in
Europe canbe ratherassociated
to a “global downside risk,”
which IMF Managing Director
Christine Lagarde brought into
discussion at Davos. The one
that could compel to the
Eurozone the most is
“asynchronous monetary
policy.” While several countries
are looking to ease their
monetary policy and combat
the global economic slowdown,
the Federal Reserve is aiming to raise the federal funds rate, even in a moment in which the US
economicboomhas regressed. Atthe end of 2015, the Fed finallyincreasedthe interestrate from
0.12% to 0.24%, and todayit standsat 0.37%.2
On the otherhand,throughout2015 the US growth
decreased from 2.87% to 2% by the end of the year, with the possibility of shrinking to 1.5%.3
Accordingto the Chairof the Federal Reserve JanetYellen, these measuresare destinedtocontrol
future inflation given that the wage rate increased by a 2.2% from last period and has been
increasing at a fast pace since 2010.4
Thus, due to the domestic circumstances, the US might be
moving in the opposite direction to the majority of world economies, and may inhibit other
countries from reaching their desired growth expectations.
1 International MonetaryFund, World Economic Outlook Database, October 2015.
<http://www.imf.org/external/pubs/ft/weo/2015/02/weodata/weorept.aspx?pr.x=70&pr.y=7&sy=2013&ey=2020&scs
m=1&ssd=1&sort=country&ds=.&br=1&c=001%2C110%2C163%2C119&s=NGDP_RPCH&grp=1&a=1>
2 Board of Governors of the Federal Reserve, SelectedInterest Rates, January 28, 2016.
<http://www.federalreserve.gov/releases/h15/current/>
3 US. Bureau ofEconomic Analysis, Real GrossDomestic Product, retrieved fromFRED, FederalReserve Bank ofSt. Louis,
January24, 2016. < https://research.stlouisfed.org/fred2/series/GDPC1>
4 Lange, Jason, “Strong U.S. wage growthboosts chancesof Fed rate hikes,” Business Insider, January8, 2016.
<http://www.businessinsider.com/r-strong-us-wage-growth-boosts-chances-of-fed-rate-hikes--2016-1>
Christine Lagarde, Managing Director of the International Monetary Fund,
speaking at Davos. (Photo:EFE)

3. Running Out of Fuel
The state of the BRICS is anotherconcerningissue,as the coalition that accrued for almost25% of
the global GDP is now undergoinganeconomicdownturn.Although itis far fromenteringa crisis,
itssubstantial reductionof demandforimportsandforeigncommoditieshasimpacteditsnumbers
and those of its trading partners. After posting a staggering economic growth of 14% in 2007 and
10.6% in 2010 – following the great financial crisis–, China’s GDP for this period will increase only
by 6.9%.5
According to Christine Lagarde, this reflects China’s “triple transition” of the economy:
from investment to consumption, from import-dependent to domestically self-sufficient and from
manufacture toserviceproduction. Thus,thisparticulardomesticsituationunchainedarippleeffect
that istakinga toll onthe financial sector–due todecreasedinvestment–andon the commodities
market,givenlowerdemandfor imports. Nonetheless,China’stransitioncouldnot take place at a
worse time in which the world risks the possibility of another worldwide recession.
The collapse of oil prices from107 USD/barrel by
July of 2014 to as low as 26 USD/barrel by
January of this year (Figure 1) has wounded the
Brazilian and Russian economies, of which oil
comprises 11.2% and 58.6% of exports
respectively.6
In the case of Brazil, the South
American giant has suffered from reckless
monetary and fiscal policy. The current
administration has pushed the budget deficit to
a worrying 6.95% of the GDP and incurred in a
negligent public debt.7
Such government
spending has drained the national savings and
triggered inflation to historically high 10.67%,
which culminated with the first time in more
than a decade in which Brazil’s consumption
spending – more reliable than that of the
government – decreases. To pump up this
declining sector of the economy, the state
loosenedmonetarypolicyandeven subsidizedcheaploanstoconsumers.8
The evenhigherinflation
suffocatedthe domesticeconomy:peopleare still reluctanttoconsume,unemploymentsurgedto
6.9% and negative growthwasconsistentthroughout2015. In the end,the preoccupyingdeclineof
oil prices has caught the Brazilian economy between the sword and the wall.
On the other side of the world, Russia’s economicdistressis compounded bythe geopolitical crisis
in the Crimea and the corresponding sanctions imposed by the US. The freezing of Russian assets
and the overall mediauproarhas drivenall sorts of foreigninvestmentoutof the country and has
5 The WorldBank, China GDPGrowth(2014).
<http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?display=graph>
6 Trade Map, International Trade Centre. <http://legacy.intracen.org/marketanalysis/default.aspx>
7 Data Team,“Brazilian Waxing andWaning,” The Economist, December 1, 2015.
<http://www.economist.com/blogs/graphicdetail/2015/12/economic-backgrounder>
8 Ibid.
Figure 1 In the past years, the market has been clogged
with cheap OPEC oil, causing an astounding drop in crude
prices, especially with today’s demand crisis.
Sources: EIA, Thomson Reuters, The Economist.

4. depreciateditscurrencyto a meager 76 rubles/USD.9
Withoil barrelssellingbeyondthe threshold
of USD 100 and a persistent demand for Russian energy in Europe, the Eastern European power
couldcoverup forthe damagesof its diplomaticstrifewiththe US.Needlesstosay,the recentturn
of eventshas posedthe exact opposite scenario,andRussiais now sinkingwitha growth of -3.8%
by the end of 2015.10
Today, Russia is negotiating its political redemption with the US – and, hopefully its economic
recovery – from a positionof weakness. Atthe weekendinDavos,US Secretaryof State John Kerry
proclaimed in his speech that “with effort and with bona fide, [and] legitimate intent to solve the
problemonbothsides,itispossible inthesenextmonthsto (...) gettoa place where sanctionscan
be appropriately (...) removed.”Thiswouldinvolve atotal ceasefire ineasternUkraine, the prompt
withdrawal of heavy weapons from the region and the full retreat of the Russian military in the
longer term, as per the Minsk agreement.11
However, the sentiment from the other side of the
bargaining table is rather pessimistic and discordant – not to mention that Russian President
VladimirPutinandPremierDmitri Medvedev wereabsentfromthe forumforthe thirdconsecutive
year. Notsurprisingly,sourcesfromthe Kremlinclaim “Russiahasnocommonagendawiththe West
aimed at the development of bilateral economic ties.”12
NewHope: The Ventureof Technology
Despite the volatile international
condition, one of the most inspiring
topics in the conference at Davos was
the future political and economic
impacts of technological development,
referred to as the Fourth Industrial
Revolution. This evolutionary process
covers areas from telecommunications
and connectivity to robotics,
nanotechnology and artificial
intelligence. For hundreds of years,
humanity has resorted to curiosity and
intuition to bring upon innovation,
whetherto improve thatwhich already
existedortomaterialize thatwhichhadneverbeenconceived. Thiscycle hasperpetuatedoverand
over again, and every time some revolution comes to an end a bigger one is set in motion. Yet,
within an atmosphere of infinite change, the purpose for technology has always prevailed: to
improve people’s quality of life.
9 BloombergBusiness, USDRUBExchange Rate. <http://www.bloomberg.com/quote/USDRUB:CUR>
10 Trading Economics, “Russia GDPAnnual GrowthRate.” <http://www.tradingeconomics.com/russia/gdp-growth-
annual>
11 Goenka, Himanshu, “Davos 2016:Russia Seeks InternalReforms To Offset Sanctions AndFall InOil Prices,”
InternationalBusiness Times, January22, 2016. <http://www.ibtimes.com/davos-2016-russia-seeks-internal-reforms-
offset-sanctions-fall-oil-prices-2275982>
12 “Kremlin topbrassbailson Davos,” Russian Times, January20, 2016. <https://www.rt.com/business/329522-davos-
kremlin-russia-delegation/>
Professor Klaus Schwab, founder and president of the World Economic
Forum. (Photo: EPA)

5. Each past industrial revolution has changed society from the single individual to the entire world
population. Followingahistorical recapof the previous’revolutionsfundamental impacts,Founder
and Chairman of the World Economic Forum Klaus Schwab introduced the Fourth Industrial
Revolutionasthe amalgamationof biological andphysical technologies. ProfessorSchwabclaimed
that the development of Informational Technology has created “new products and services that
increase the efficiency and pleasure of our personal lives.”13
Thus, the Third Industrial Revolution
can be perceivedasthe beginning of mass consumption of and demandfor productsand services,
a phenomenon that was catalyzed by the emergence of the Internet.
“In the future,”continuedSchwab, “technological innovationwill alsoleadtoasupply-side miracle,
with long-term gains in efficiency and productivity.” This brings to mind the fact that the global
growthand stabilityinthe longrundependnot only onpurelyeconomicvariables,butrathermore
on factors exogenous to the discipline. These can be categorized as investment in physical and
humancapital, for instance,scientificresearch andeducation.Suchfactorsreconcile bothefficient
production and equitable distribution of the resources of the economy. Only with these will any
individual be able to return more than he or she takes from the economy, while still preserving
enough to improve his or her quality of life.
Nevertheless, the democratization of technologyremains an unfulfilled task, because technology,
whichisunifyingpeoplefromone side,isalsobroadeningthe gapbetweenthemandothergroups.
The complexity of technology is growing at a faster rate and to further frontiers than its outreach
and accessibility to the general population. While some groups will yearn colossal profits on the
incoming technological revolution, others will suffer the consequences of such reallocation of
income.Thus, thinkinginafuture fullof uncertainty, ProfessorSchwab claimsthat“there hasnever
beenatime of greaterpromiseorgreaterperil.”Thisisthejudgement callthatwill decidethe future
of humanity.
13 Schwab, Klaus, “The Fourth Industrial Revolution,” Foreign Affairs, December 12, 2015.
<https://www.foreignaffairs.com/articles/2015-12-12/fourth-industrial-revolution>