Davos Mid-Year

I am just back from the World Economic Forum mid-year meeting, held after a two-year hiatus due to the pandemic. As always it was an Impressionist painting, a bit left to the imagination given uncertainty in politics and economics. Here are a few of the takeaways from the week:

1. Ukraine/Russia—We heard from Ukrainian President Zelensky who addressed a packed room in the Congress Center. His major message was to business leaders, a plea to get out of Russia, which is brutalizing his country. He told stories of Ukrainian heroes sacrificing themselves to stop the Russian advance. He also related the unimaginable loss of life in the Eastern Ukraine, the barbaric actions of Russian soldiers binding the hands of suspects then shooting them in the head. He asked for a Marshall Plan for rebuilding his country. I also ran into Bill Browder, a money manager with deep experience in Russia, who told us that only 35 of the top 150 oligarchs in Russia have been sanctioned, with 115 to go. “We need to totally contain Russia via an economic embargo; stop importing Russian oil and gas into Europe.” A U.S. Senator said that we should not give Russia any sense that we would not reciprocate in a like-for-like manner on either chemical or theater nuclear weapons. Finally, failure to open ports, such as Odessa, to Ukrainian grain exports is tantamount to a declaration of war on food security. For every two percent increase in hunger, there will be a one percent increase in emigration, largely from the Middle East and Africa to Europe.
2. Cyber Warfare—The Russian attacks on the Colonial Pipeline and Solar Winds are indicative of what is possible. There have not been attacks in the U.S. since the invasion of Ukraine, but we have to protect energy, finance and energy assets. Last year, Russia attacked 14,000 Google accounts. We must take multiple steps to harden our tech infrastructure, starting with modernizing our legacy technology and instituting multi-factor authentication that goes beyond username. Part of the Russian approach is Verified Violent Event Theory, which is denial of war crimes in Ukraine. YouTube is still running in Ukraine and Russia as a source of independent news. Best quote of the conference in this panel from the inventor of the Rubik’s Cube, Mr. Ernő Rubik, who said: “If you are curious, you will find the puzzles around you, if you are determined you will solve them."
3. Poland: The New Hero Country—I heard from the Prime Minister of Poland who told us that his country has absorbed three million plus Ukrainians into private residences. Putin has turned off gas supply from Russia to Poland; now Poland is relying on Norway for gas. Poland has established a special counterintelligence unit that is preventing Russian attacks on our electrical system. Putin is trying to create a rift between Poles and immigrants from Ukraine through an aggressive disinformation campaign on social media. He urged the West to stand strong; “Putin is counting on the fatigue of public opinion in the West because he has more time than democracies.” Note that the acceptance of Ukrainian immigrants stands in sharp contrast to Poland’s prior policy on Syrian immigrants who were not allowed to remain in the country. The Polish president wants to offer Ukraine candidate status for the European Union. “Ukraine has a right to be part of the West.” 
4. China—The Covid lockdown and the continuing geopolitical scrum with the U.S. have prompted companies to move production closer to home markets and out of China. Foreign investment has tumbled as a result. Brazil-China bilateral trade is booming, with agricultural products coming to China and industrial products going to Brazil. There is real opportunity in drug development; a stunning 70% of new food patents are coming from China. There is a more balanced economic model in China today, with regulation of the tech giants (Alibaba), but the high housing cost and elevated debt levels post-Covid causing more of a mass class divide. 
5. Global Growth—The U.S. is likely to have a soft landing, not a recession. There is plenty of cash around. But the nominal demand in the U.S. in the last year went up 12%; inflation is the necessary result of excessive Federal Reserve easing of rates and too much fiscal stimulus, so the Fed will have to jack up interest rates significantly to stop the price hikes. Real wage growth in the U.S. in the bottom quartile of income went up during the pandemic. But now we are in a period of negative real wage growth due to inflation. Energy and food prices put Europe at a major competitive disadvantage. The source of this inflation is not rising wages, it is bottlenecks in supply chain and supply shocks including people leaving the work force and the Ukraine invasion.
6. Food Shortage—In the last major food shortage in 2007-2011, there were 48 moments of political instability, most notably the Arab Spring. The food shortage will be far worse than fifteen years ago. It will be the “Hungry Season” with major impact on the upward economic mobility in Africa and Asia, as 1.7 billion people will face food insecurity this year. We know where the food supply will be short; it is time for aggressive humanitarian aid and food supply from wealthy countries. Africa is a great place to increase agricultural production in the long run, with 60% of the arable land not in cultivation. Now, African yields are 1.5 tons per hectare compared to 7 for Europe and 10 for the U.S. Africa lacks trade links to key markets; foreign direct investment in African agriculture will not happen without reform of trade regulation and trade certainty. Agricultural subsidies to producers in the EU and U.S. should be repurposed to carbon capture and regenerative agriculture. The key to food is Accessibility, Availability, Affordability. Ukraine supplies 80% of the grain to Africa and Egypt. Meanwhile on the sustainability front, food production accounts for one-third of carbon production and it is projected that we will need 50% more food by 2050 and demand for protein will rise by 70% as Africa and Asia eat more meat. Regenerative agriculture is a big trend; Unilever is funding 100 farmers in Iowa (moving up to 750 farmers this year) who use cover crops when not planting soybeans, enabling less use of machinery and fertilizer. Unilever then buys all of the soybean output for Hellmann’s Mayonnaise. 
7. Blue Carbon—There are blue carbon ecosystems in South Asia, Latin America in the mangrove forests at the edge of the ocean. Mangroves store four times the amount of carbon as the terrestrial forest. The mangrove forests of the world are disappearing, with 30% of the total lost in the past 50 years, often for aqua-culture farms. There are now mangrove credits trading at financial institutions such as Rabobank. Several nations in Latin America, including Ecuador, Panama, Colombia and Costa Rica have set aside 30% of their coastal areas as protected blue carbon generators. There is now planting of one billion corals in the sea around Colombia. This provides income for local communities, who learn that they can take more value from sustainable areas. 
8. Demographics—The sharp contrast between growth in Africa and shrinkage in population in Europe is best depicted by Nigeria versus Italy. Nigeria is projected to increase its population five-fold by 2100, from 200 million to 1 billion people, becoming the third largest country in the world. Meanwhile the 40–65-year-old age group in Italy is 40% larger than the 0–25-year-old group. 
9. Financial Systems Are Balkanizing—There are 3 billion people not online and 1.7 billion people not in the financial system. Nationalism is an increasing problem in data security. The key issues are availability and resilience against attack. Financial inclusion goes hand in hand with digital inclusion. Microsoft has developed cyber incident tracers to check attacks on financial and healthcare systems.
10. Energy Situation—There is no big pick up in oil exploration despite prices that could rise as high as $175 a barrel because there is the problem of terminal value (what is the value of a well in 20 years?). There will be extended life of brownfields where you get oil out by pumping in CO2. We know how to capture CO2 and to use hydrogen in energy supply but will need subsidies for a decade to make the jump. Natural gas is underappreciated; it is a destination fuel, not a transition product. The transition to green energy is inflationary but the fastest way to cut carbon is to develop hydrogen, do carbon capture and recognize that the world needs more energy with a lower carbon footprint. I met an entrepreneur who is doing next generation nuclear energy with a reactor that costs half as much as the traditional, using MOX (mixed oxide) as the fuel source (this is spent uranium, thereby eliminating the nuclear waste issue). He said that the momentum is strong in global financial markets for energy generation ideas that solve the climate crisis. 

I left Davos inspired by the bravery of the Ukrainians and Poles, more convinced than ever about the global rift between democracy and autocracy, and cautious about our business given the recessionary winds. I would have attended more sessions, but I had to go back to the U.S. for my daughter’s graduation from business school. I would not have missed that for the world.   

Richard Edelman is CEO.