The turnaround was near complete. A year back the annual World Economic Forum meeting at Davos of political, social and business leaders was overcome with gloom. This year, most participants were complacent, if not upbeat.

Last year's gloom was directly related to America's seemingly unsustainable current account and budgetary deficits that were widening because of a consumption splurge induced by the wealth bonanza that a speculative housing boom was delivering. To finance those deficits the US was relying on inflows of the large foreign exchange surpluses accumulating in countries like China and India, who seemed to be growing wary of their excessive dollar exposure. A dollar crash and the end of the American bubble seemed a real possibility. If that did transpire a global slow down and even recession could be the outcome. Last year's gloom was attributable to the fact that with the US unwilling to make the adjustments needed to correct its twin deficits and the rest of the world reluctant to take on the burdens of adjustment an engineered 'soft-landing' seemed an unlikely possibility.

Fortunately, the expected crash has not yet come, providing more time to work out a solution. But the dominant mood in Davos this year was to underplay the problem. Those like Stephen Roach, the Chief Economist of Morgan Stanley, who refused to argue that the problem had gone away, were dismissed as perennial pessimists who never learn. The lesson from the past year, it was argued, was that while imbalances exist, they are not of the crisis-producing kind. The unusual ''equilibrium'' in the global economy was sustainable, even though it possibly needs correction. In the end the battle was won by those like Laura Tyson, Dean of the London Business School, who in noncommittal fashion predicted that there ''was a good chance of another goldilocks year'' – neither too hot nor too cold, so that the world can muddle through with a reasonable rate of growth and no calamity.

The perception of the temporal optimists was sought to be strengthened by reference to the currently popular choices as global winners: India and China. These two countries are seen as the source of the solution in two rather divergent ways. To start with, buoyancy in India and China are expected to provide the demand to spur global growth and substitute for the US consumption splurge when it registers a much needed decline. Recently released data establishes China as the fourth largest economy in the world, which the Chinese vice premier Zeng Peiyan promises will keep growing. "Over the next five years, China's development will bring more opportunities to the rest of the world," Zeng reportedly said. "The total import of commodities alone is expected to exceed $4 trillion."

This view was advanced forcefully by Jim O'Neill, the chief economist of Goldman Sachs. Citing estimates which showed that a third of total global domestic demand over the past five years originated in the BRIC group of countries (Brazil, Russia, India and China), he argued that these countries would be able to cover any reduction in consumption spending in the US. He is quoted as having optimistically held that the world is today in a position to ''cope with a US slowdown better than at any time over the past decade.". In particular, growth based on higher technology is expected to create more big spenders in these economies who would generate the jobs in the US and Europe to neutralise the effects of the offshoring boom on developed country employment.

The second way, in which China and India, especially the former, are seen as being able to contribute to global adjustment is through the appreciation of their undervalued currencies. Such adjustment would reduce the bilateral trade surplus that China has with the US by making its exports more expensive and cheapening imports from the US. In fact, the US chose to campaign for such a process of adjustment. According to reports, when speaking at a panel session, the US undersecretary of the Treasury for International Affairs, Tim Adams, held that a big question for the IMF was "what do you do with countries that are attempting to thwart balance of payments adjustments"

As of now the managing director of the International Monetary Fund, Rodrigo Rato, seems unwilling to fall in line and serve as a tool for the international economic designs of the US. "There is a trade-off between our role as confidential adviser in our surveillance work and our role as transparent judge ... I think that trade-off is well balanced," he reportedly argued. But this was not because he, and presumably his organisation were not in agreement on the need for appreciation of the Chinese yuan. It was because he felt that the Chinese were complying. Noting that the IMF had been among the first to publicly advocate a move away from a fixed peg, he expressed satisfaction that China was moving in that direction: "We like what they did this summer, but they have to let it work."

In sum, the complacence generated by the unrealized forecast from Davos 2005 that global imbalances are likely to lead to a growth slow down is being used to locate the source of the global imbalances problem outside the US and transfer the burden of adjustment to the rest of the world. Those who were calling for immediate action, including from the US, were in a minority. Stephen Roach reportedly raised a note of caution about ''a dangerous degree of complacency,'' since ''out of complacency comes the surprise that does most damage to global markets and economies.'' But there were few takers.

Having set aside the threat of a global recession, the focus shifted to the seemingly never ending potential of new technology to deliver profits. According to official Forum figures, among the more than 2,340 participants from 89 countries, were 735 who were chairmen, chief executives or chief financial officers of their companies. Betting on technology to raise profits either through innovation or by reducing costs through offshoring, they exuded a confidence that strengthened the overall air of complacency. Such confidence also came from the belief that better performance in EU countries and Japan and sustained buoyancy in China and India would spur global demand which they could exploit with facilities located at home and abroad. To legitimise the forecast link between technology and profit, much was made of the benefits that can flow from science to the rest of the world, as for example by reducing the world's oil dependency.

There seem to be others who are interested in a technology focus. Beleaguered by a never-ending war in Iraq that cannot be won, and days after the Davos meet came to end, President Bush took up the baton in his State of the Union address. Pointing to the threat from new competitors like China and India and dangers of dependence on imports from ''unstable'' parts of the world, he pledged to spend $50 billion on research aimed at strengthening US competitiveness. Among his stated priorities is research into alternative energy, aimed at dealing with the problem that: ''America is addicted to oil, which is often imported from unstable parts of the world.'' His target is to replace 75 per cent of Middle East oil imports by 2025.

The $50 billion pledge would help double federal spending on research in the sciences and harness US talent and creativity by the training of 70,000 new science and mathematics teachers. According to one estimate, the full cost of the competitiveness initiatives would be $136 billion over 10 years, of which the remaining $86 billion would come from the cost of an additional proposal to make permanent the tax credits for private sector research and development. Bush manages to achieve his tax cut objectives even while pursuing technological superiority of the kind that the world leaders endorsed at Davos.

Were there no problems and dangers discussed at Davos then? There were: terrorism, an oil-price spike, natural disasters and a bird-flu pandemic among them. Interestingly, in keeping with its effort to focus on areas that are not in its remit, the World Economic Forum spent much energy discussing the last of these. Holding the view that the avian flu has the potential to develop into a global pandemic as devastating as the Black Death of the 14th century, a report released at Davos argued that: "An outbreak of H5NI [avian flu] human to human transmission could have devastating impacts globally across all social and economic sectors, disrupting efficient processes, severely degrading response capabilities and exacerbating the effects of known weaknesses in different systems." While this is no doubt an important global problems, it also serves to deflect attention from the main problems that should concern a Davos-style meet.

Where does India stand in all this? Indian delegates at Davos seem to have been driven by two, perhaps even conflicting, objectives. The first was to play down the image that India was a haven for cheap labour waiting to be exploited by offshoring initiatives. The idea was to declare that the country was emerging as a technological leader with a global manufacturing presence. According to the Financial Times, London, business delegates from India were arguing that the country was not simply an offshore back-office and software service centre but an emerging manufacturing power.

The second was to declare that India was a better investment destination than China, which does not have a monopoly over manufacturing. Rather, India was presented as developing technology-related manufacturing in which it could establish an advantage over China, with its focus on cheap mass production. "If you want to make Barbie dolls, don't come to India," Anand Mahindra, vice-chairman of Mahindra & Mahindra reportedly declared. Many also read a not to veiled reference to China in one of the hoardings advertising India's attractiveness: "India, the preferred democracy for global investors." As Jeremy Warner of The Independent put it: ''If that's not a side swipe at China, I don't know what is.''

Everybody at Davos seemed to have fingers to point and a clear direction in mind.

February 4, 2006.