The Global Crisis: Sadly, there is no magic wand for us to fix it

`The most likely thing that will happen to the world economy will be a series of patches to the system'

FOR ONE week each year the Swiss ski resort of Davos becomes the centre of the world economy. Just about everyone who will help to shape the direction of the economy assembles in Davos for the World Economic Forum.

This year there is Al Gore, Robert Rubin and Larry Summers from the US administration. There is Gordon Brown, naturally, and his counterparts from most of the other big developed nations. Gerhard Schroder, the new German Chancellor, came up at the weekend. From the world outside the rich countries' club came Nelson Mandela, who received a standing ovation, and Mohamad Mahathir, who assailed the speculators - and was rather less warmly greeted.

But this is not just a politicians' show: it is the place where business leaders meet them. Name a prominent business leader - Bill Gates, perhaps, or Jurgen Schrempp of DaimlerChrysler - and they too are up here. This the place where the people who make the tough decisions about employment and investment meet the people who set the rules under which they do so.

So what, this year, are these people saying about the state of the world economy? Are they confident, even arrogant, or worried and frightened, or are they more puzzled and maybe angry? They are all of those.

We talk about the global market place - the multinationals operate in scores of different countries; and the new technologies allow instant transfer of information from one part of the globe to another. But the different bits of the world are experiencing utterly different economic conditions. These different experiences naturally colour people's perceptions. If your country, your business, or maybe just your own personal finances are doing well you feel quite different than if they are doing badly.

The greatest contrast within the developed world is between the US and Japan. Japan is struggling to escape the worst recession since the Second World War. That drags down the entire region, for Japan, the world's second largest economy, even in recession still produces two-thirds of East Asia's output. The US, by contrast, is still enjoying the longest boom since the Second World War. The economy is now in its eighth year of strong growth but far from flagging seems to be putting on a new spurt. In the last three months of last year growth was running at an annual rate of more than 5 per cent.

You might imagine this would make the Americans pretty cocky. There is certainly a bit of that but it is tempered by the knowledge that the result of this differential growth has been a growing imbalance between the two countries.

Booming America sucks in imports; flat Japan buys less and less from other countries. American external debts are now so large that despite the enormous assets of US multinationals around the world, the US now has a deficit on its interest and dividend account as well as the much larger one on physical trade. It is having to borrow to pay the interest on its previous debts.

America is running a very large trade deficit with other countries. This cannot go on. As Al Gore told the Davos forum, the US could not be "the importer at only resort" to the rest of the world.

This message was emphasised by Robert Rubin, the US treasury secretary, who used the word "crisis" to describe the state of the world economy. He argued that while part of the trade imbalance between the US on the one hand and Europe and Japan on the other was the result of their different positions in the economic cycle, it was also that the US had a more open attitude to accepting imports from other countries than did Europe or Japan.

A threat of a trade war? No, absolutely not. There are currently efforts being made to get a new world trade agreement going, one that will extend trade liberalisation from trade in goods to other aspects of global trade such as trade in services and the growth of foreign investment. The US supports this. But expect it to be a tougher, rougher negotiator.

Besides, from a world perspective it is not safe to rely on one country to keep the show going. Suppose the US stock market cracks, an oft-spoken fear here in Davos. US consumers will surely cut their spending. If they do that, imports will fall.

Within Europe the response has been pretty muted. Continental European politicians have been so absorbed by the introduction of the euro that the fact that their own consumers remain cautious has been pushed to one side. And of course Britain, outside euroland, is not going to get much growth this year, even if things turn out rather better than the growth of 0.5 to 1 per cent now expected.

Heiner Flassbeck, Oskar Lafontaine's deputy in Germany, made the point that the world was dealing with a new problem, one of which none of the policy-makers had any experience: the problem of deflation. People do not know how to operate in a world of falling prices.

If the United States falters, Japan does not recover and Europe fails to grow faster the countries that will be hardest hit will be those of the developing world. Some parts of East Asia - Korea and Thailand for example - seem to be making reasonable recoveries from the catastrophe of the past year. But others have yet to see much growth.

Meanwhile, the crisis in Brazil threatens a knock-on effect on the whole of Latin America. As so often happens, those least able to withstand a fall in income are those most likely to be hurt.

Other problems - Russia, the Middle East, the former Yugoslavia - rumble on and in terms of global security may, heaven forbid, present even greater threats to world stability than these economic pressures. But viewed in economic terms the key threat is the imbalance between the United States and the rest of the world. The world cannot fly on one wing.

So what is to be done? Perhaps the most telling comment came from Robert Rubin, who said several times that there was "no magic wand" to fix world economic problems. Mr Rubin was the senior partner of Goldman Sachs, the New York investment banking partnership, and as he reminded us, had spent 26 years on Wall Street before joining the administration.

He argued that the market economy, for all its flaws, had delivered a great increase in wealth for much of the globe. It needed to be controlled, for unfettered markets could not cope with all the challenges the world faced. They had also to be supported by social policies designed to reduce inequalities both within countries and between them.

But he was pretty sceptical of some of the plans around. For example, the idea of target zones for currencies, favoured by the French, or our Chancellor's idea of an early warning system for global financial problems. His years on Wall Street suggested it could not be done. Not only could you never see problems coming; if you tried to spot them you might create other problems.

Whether that is right, it is surely true the world has to try to find a way of fine-tuning the market economy. Many people remain profoundly suspicious of the process of globalisation and given the excesses of financial markets it is not hard to see why. The triumphalism of a couple of years ago has been replaced by questioning and concern.

The most likely thing that will happen to the world economy over the next few years will be a series of patches to the present system. But the greatest difficulty will not be correcting the errors of the past but learning how to run the market economy in a world where prices are just as likely to go down as up. There has been no period of sustained price stability for a century.

Is the world economy in bad shape? That depends where you look. But the one thing common in the regions that are up and those that are down, those that are rich and those that are poor, is that the great 20th-century inflation is over.