Davos explainer: What is the 'new reality' faced by the world?

CNN News, By Paul Armstrong, January 25, 2011

There was anger around the world over major banks in the U.S. and UK receiving
billions in taxpayer-funded bailouts after several financial institutions were caught
out in the 2008 housing market collapse

STORY HIGHLIGHTS

• Klaus Schwab: New reality means post-digitalization and post-globalization
• Politicians, business leaders say a new approach is required to achieve greater prosperity for all
• WEF's Global Risks report: World's economy could not withstand any further shocks

Davos, Switzerland (CNN) -- The global economic crisis exposed fault lines in our capitalist system with such ferocity that even the most optimistic of analysts struggled to predict when -- or even whether -- a full recovery was possible.

Chastened by this experience, politicians and business leaders concede that the world has changed and a new approach is required to achieve greater prosperity for all. Organizers of the 2011 World Economic Forum at Davos, Switzerland, say this year's theme, "Shared Norms for the New Reality," reflects this thinking.

The world goes global

WEF founder Klaus Schwab explained that this new reality means understanding the impact of globalization and the Internet. "We are now living in a completely digitalized world and a completely globalized world, so we have to find some new mechanisms and values to deal with this post-digitalized and post-globalized world," he told CNN's Richard Quest.

He stressed the same problems of unemployment and inflation exist but "we deal with those problems in a completely new context.

Klaus Schwab: World leaders need to inspire recovery

"For example, you have the shift in the geopolitical and geoeconomic center from north to south, WikiLeaks, I could go on and on."

Volatility and uncertainty

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Nestlé CEO and WEF co-chair Paul Bulke explained the post-crisis reality will require a complete re-think of our priorities and value systems to address the current volatility and uncertainty in the world.

Official website: World Economic Forum

"In the short term we must manage the debt crisis, we can't continue living beyond our means," he said in an interview posted on the WEF website. "We have to organize ourselves in response to new challenges and refresh our regulations, especially in the developed world.

"But over-regulation is not a good option. You cannot regulate honesty for example. I'm a true believer in a principled approach to business, rather than an excessively rule-based system which will only asphyxiate initiative and growth.

"The wiser choice is to agree to share norms for our new reality based on strong and explicit global principles -- the very ingredients needed to fuel development."

The future for the banking sector

The banking sector in particular has been a lightning rod for public criticism, after a number of major banks in the United States and Britain received billions of dollars in taxpayer-funded rescue packages at the height of the crisis. Many had been caught out after the collapse of the housing market on both sides of the Atlantic, which exposed a culture of high-risk lending without proper risk management in place.

Some analysts ventured that lucrative bonuses have encouraged bankers to take greater risks for short-term gains.

But Bulke also pointed to the progress made by the private sector in the development of emerging economies, which has in return reduced rates of absolute poverty. "The private sector run in a principled way based on strong values and with a long-term perspective is a fundamental force for positive development in society," he said.

In its 2011 Annual Global Risks Report, the WEF warned the world's economy could not withstand any further shocks to the system and identified 37 main threats to its future stability, from crippling government debt and cyber security, to unsustainable pressure on resources and food security.

Among the most serious economic risks is the ongoing fiscal crisis in the euro zone -- sparked by countries borrowing and spending beyond their means -- which has spread from Greece to Ireland and Portugal in the past year.

What Ireland's bailout means

This prompted other euro zone partners to pump in billions of dollars in bailout packages, as investors worry about governments' ability to repay their debts. Governments have reacted with severe austerity measures which have in turn brought thousands onto the streets to protest.

Food prices hit record high

Meanwhile, the United Nations Food and Agricultural Organisation warned that world food prices hit a record high in December, prompting riots in a number of poorer countries, from Mozambique to Algeria. Analysts believe a combination of causes, from environmental factors such as major droughts and wildfires, to a surge in the world's population, have hit global crop prices.

The report also notes that while globalization has reduced impediments to trade, improved international connections and sustained growth for a generation, it has also increased divisions within countries.

Internet-enabled mass protests

But the current generation of ordinary people have been able to voice their discontent like never before, thanks largely to the proliferation of the Internet and social media. Whether it is in Greece, Iran or Tunisia, like-minded people have been able to share information and then mobilize swiftly.

"We are having to confront so many risks at the same time," said Schwab.

In order to meet these challenges decision-makers will have to "overcome the behavioral biases towards immediate, short-term solutions and switch to longer term thinking," according to Howard Kunreuther, Co-Director of the Wharton Risk Management and Decision Processes Center.

In short, future development in the 21st century will have to be more inclusive and collaborative in order to reduce the divisions that threaten food security and increase tensions over trade imbalances.

A framework for inclusive growth

According to the WEF, the key to navigating this new reality "will be the shared norms that not only transcend differences across generations, stakeholder groups and geographies in a multi-polar world, but also enable inclusive growth.

"These norms must be truly shared and integrated into a holistic, interdisciplinary and multidimensional framework. For governments as well as multinational corporations, shared norms provide the compass by which leaders give and receive direction, define benchmarks for acceptable and unacceptable behaviors, and ensure inclusive rather than exclusive outcomes."

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