Comment: Politicians keep heads in the clouds

The trouble with holding a meeting of world leaders in a ski resort is that it somehow detaches them from the problems back home. Maybe that is why they come to the World Economic Forum at Davos, for rare is the country that has not sent a clutch of political and economic leaders to the meeting - Britain's include Douglas Hurd, Peter Lilley and Robin Leigh- Pemberton. But the altitude gives a curiously detached tone to the discussions.

Take the exchange rate mechanism. It continues the messy series of realignments that started in September and will doubtless continue for another few months. (It is evident from private discussions here that the French industrialists are desperate for a franc devaluation to get interest rates down). On Friday, two top central bankers, Robin Leigh-Pemberton, Governor of the Bank of England, and Helmut Schieber, board member of the Bundesbank, agreed that the only satisfactory way to make the ERM work was to have smaller and more frequent changes in parities.

Intellectually, it is hard to quarrel with that, but what would that have meant for the punt? Should it have been devalued by 10 per cent in September, for that seemed about right then? Should it now have been devalued by a further 5 per cent as pressure built up? What does this 'small and frequent' policy mean for the French franc: a 3 per cent devaluation last September, and another 5 per cent now? The franc was probably about right in September but since then it has in effect had an 8 per cent revaluation. What does it mean for the mark? A 3 per cent revaluation now to help to curb inflation followed by a 7 per cent devaluation in November when the depth of the German recession becomes even more evident and industrialists plead for mercy? The 'small but frequent' policy may be intellectually attractive but it would be extraordinarily difficult to manage.

THREE BIG ISSUES

Problems of the ERM are, to borrow from Harold Macmillan, a little local difficulty. The gap between what earnest politicians say and what happens in the real world is equally great. There are really three big economic issues dominating the world at the moment. Will growth recover in the next two to three years? Will the world split into three big trading blocs, America, Europe and the Far East? What will happen to the two new entrants into the market economy, Russia and China?

On growth, although the formal theme of Davos is 'rallying all the forces for global recovery', some of the most thoughtful comments have come not from politicians but from an industrialist and an academic.

The industrialist was Akio Morita, chairman of Sony. He explained 'why I am not hoping for global recovery'. He did not want a return to the extravagances of the 1980s but wanted countries to rebuild their industrial heritage. Many factories had to make new and better products and sell them in open markets.

The academic was Fred Bergsten, director of the Institute for International Economics in Washington. He argued that the Group of Seven was dead in the sense of the policy co-ordination of the Plaza and Louvre accords. There was no leadership from the politicians. What was needed was: a new G7 agreement; a Japanese economic stimulus; the yen going up by 20 per cent; fiscal tightening in Germany and a fall in German interest rates; and a US initiative for a new Gatt round to do the unfinished business of the Uruguay round.

Put these two together - a move back to basics by industry and sensible economic and exchange rate policies - and there is a plan for a slow but steady economic recovery. But it did not come from the politicians.

The second issue - will the world split into trade blocs? - turns in part on the answer to the first. What clearly cannot continue is Japan running a surplus of dollars 150bn a year. Much will depend on the attitude of the Clinton administration and the world response to it.

CONCESSIONS ON TRADE

Lester Thurow, author and dean of the Sloan School of Management at MIT, argued that some element of protection was inevitable in the US because the economic policies of the Clinton administration would show benefits only in the long term and President Bill Clinton had to get re-elected in four years. So there would be concessions to pressure groups on trade. This is probably right and it points to much greater regionalism in international trade. The issue is whether the Gatt system can continue to develop alongside a move to managed trade between three big regional blocs. No one knows the answer.

Answers are easier to the third question: what will be the economic impact of Russia and China? Viktor Chernomyrdin, the new Russian Prime Minister, was anxious to explain that the country would not move back to the old centrally planned economy. While he stressed no turning back to planning, such sketchy details as he gave of the new Russian economic plan (price subsidies, credit allocation, and direct measures to boost industrial production) suggested that Russia will go at least halfway back to its old system. Maybe that is what is needed, considering the present chaos, but do not expect Russia to be a big force in the world economy for a decade.

The important force will be China. Unlike Russia, China is represented in Davos at a relatively junior level: the aim is to listen and learn, not to convince business leaders that they should invest. But the reality of China's progress is evident: the world's fastest-growing economy for the past 10 years. How an economically powerful China will fit into the world system is hardly being discussed. Even to talk of the G7 is a little absurd when China is second only to the US in economic size. The business leaders here know that: the politicians have yet to come down from Thomas Mann's magic mountain.