Growing hope for globalisation ends forum on upbeat note

World Economic Forum: Sustainability of US recovery in the spotlight; Retirement age could rise to 73, warns UK pensions chairman

On one thing most business leaders here at the World Economic Forum in Davos are agreed; the economic recovery is here, it's real, it's robust and it will last at least until the US presidential election in November. The mood is still one of caution and restraint, but the contrast with this time last year could hardly be greater.

With the clouds of war gathering, the atmosphere was then one of deep gloom and despondency, as if the world was about to fall in. Today, the prevailing mood is one of upbeat optimism, among the Americans and British at least, and with the Chinese economic success story there for all to see, there is a sense of vindication - a growing belief that globalisation and trade liberalisation, if correctly pursued, can be made to work as forces for good after all.

Two contrasting themes constantly press themselves on participants. One is quite how sustainable the US recovery really is. The other is why Europe has been so slow to join the party. The US and Asia are pursuing aggressively pro-growth policies, some might say recklessly so, yet Europe seems impotent to respond, apparently content to see its currency appreciate to levels that endanger its still barely perceptible recovery, slow to the point of glacial in pushing through urgently needed structural reform, and fiscally paralysed by the stability and growth pact rules.

While the US and Asia seem charged for growth, the European attitude is one of resignation, even complacency, in the face of the growing economic challenge of the Far East. At one session here, Wolfgang Clement, the German economics minister, characterised the euro's appreciation as more of a problem for America than Europe, as if the Americans might be persuaded to oblige the Europeans by sharply raising interest rates and killing off their own recovery in the process.

Francis Mer, the French finance and industry minister, did at least admit that he pressed for an interest rate cut in meetings last week with the European Central Bank's president, Jean-Claude Trichet, which may be taken as evidence that Europe's leaders haven't entirely abdicated their political responsibilities. Yet it is still by no means certain he'll get one.

Here in Davos, M. Trichet would only stick to previously declared statements that he was concerned about excessive exchange rate movements, and European finance ministers seem more prepared to rely on next month's G7 communiqué to correct the exchange rate problem than do anything about it. Fat chance. The last communiqué only served to confuse and it certainly did nothing to correct the falling dollar, which accelerated in its aftermath.

Both M. Trichet and M. Mer said they believed Europe and the ECB get an unfair press. In fact the degree of change and reform going on in Europe is more significant than it is given credit for. Indeed M. Mer seemed to think the problem more one of presentation and temperament than policy failure. The Europeans need to borrow some of America's penchant for optimism, he suggested. I only wish it were that simple. Not that the American recovery is yet much to boast of. The US mix of extraordinarily lax fiscal and monetary policy is still best characterised as an experiment, and there is no certainty that strong growth, even if it is capable of being sustained beyond the election, will eventually magic away the twin budget and current account deficits in the way the Bush administration hopes for.

But there are no such doubts among the sizeable contingent of American business leaders here. Not everyone is as incurably upbeat as Alston Correll, the chairman of Georgia-Pacific Corporation, one of the world's largest paper and packaging groups, who says the fourth quarter of last year witnessed a watershed change for American business, with the weaker dollar beginning to return the balance of trade to more normal levels. He's hiring again, too. Yet the pro-growth therapy is plainly working at some level and though America's regained optimism may be misplaced, it must beat the European penchant of sitting around waiting for Godot.

Here's an alarming prediction about the socioeconomic consequences of ageing, cited at the World Economic Forum annual meeting in Davos by Adair Turner, the chairman of Britain's Pensions Commission. In order to keep the UK dependency ratio - that is the ratio of working people to the retired and young - at present levels, the legal age of retirement in the UK would have to rise to 73 by the middle of the century.

Alternatively, the problem could be solved through immigration, but the consequences would scarcely be more appealing. According to Mr Turner, Britain's population would need to rise from its present level of about 60 millionto 80 million to achieve the same effect, and as the new immigrants would eventually retire and become dependent, the population would need to continue rising thereafter.

Sadly, this is not a problem confined to Britain. To a greater or lesser degree, most countries from China to the US will suffer much the same phenomenon over the next 50 years as fertility rates decline and life expectancy improves. Both trends derive from rising levels of prosperity, so in many respects they are to be very much welcomed. But because it is the working population that largely supports the non-working element of society, they bring with them the possibility of generational warfare, as the aged becomes an ever-growing burden on the taxpayer.

Fertility rates have halved over the past 30 years and today there is virtually no developed country that is replacing its workforce from procreation. As the phenomenon spreads to developing countries, the worldwide supply of labour will begin to shrink. Demographers expect this to start happening 15 years hence. In developed countries, the trend is already well established.

So even if it were thought socially acceptable to plug the gap in the labour force with growing numbers of immigrants, Britain would face intense international competition in attempting to attract them.

There are other ways of addressing the issue, by for instance co-opting more women into the workforce. In Japan, where the proportion of working women is still low, this might solve the problem, and even in Britain, it would considerably reduce it. However, levels of procreation would quite likely be further depressed by forcing more women into the workforce, so in the long term it might worsen the position.

The age at which people enter the workforce could also be reduced, though in Britain this would be incompatible with the Government's goal of having half of all school leavers go on to higher education. As can readily be seen, longevity is fast becoming one of the biggest public policy challenges of the modern age, and it has been a major topic of debate among participants here at Davos. Ageing is also a huge challenge for business, which will face growing labour shortages, mounting pension costs, and quite possibly a severe excess in certain forms of industrial capacity as levels of established product consumption decline.

As things stand, Britain is better placed than most to withstand the pressures on the public finances caused by the ageing phenomenon, but only because state pension provision is so derisory. In any case, with British private pension provision in a crisis, the elderly will be forced in growing numbers to resort to social security to supplement state pensions, so the affordability of our system may not be as robust as it seems.

If left unaddressed, Britain and other developed countries will face serious consequences down the line. Or as Donald Johnston, secretary general of the Organisation for Economic Co-operation and Development, puts it: "The time has come when confronting these issues is no longer just a challenge but an imperative".

Yet so politically charged are all the obvious remedies that the Pension Commission's interim report, due to be published next September, will be confined to analysing the nature of the problem, leaving any policy recommendations for after the next general election.

Even so, it is not hard to see what conclusions Mr Turner must eventually draw. By general agreement among international experts here at the World Economic Forum, the so-called "three pillars" approach, which places obligations on the state, the individual and the employer to save into a flexible funded pension, looks the most fruitful.

To most voters it would look like an additional tax, which at a time of already rising taxation isn't going to be at all easy to sell to the country. This is more especially the case as during the period of transition from pay-as-you-go pension arrangements to a funded system, the taxpayer essentially has to pay twice - once for existing state pension obligations and then all over again for his own future pension. No wonder the politicians keep ducking the issue.