Enron, Argentina, Al Qaeda Temper Outlook at Forum

The protesters folded up their placards and drifted away from the barricades Monday as the World Economic Forum concluded the final sessions of its much-publicized five-day talkfest.

Inside the heavily guarded Waldorf-Astoria Hotel, where their anti-globalization adversaries could not be seen, business leaders remained far more preoccupied with an unanticipated triple threat: Enron Corp., Argentina and Al Qaeda.

These very different sources of political and financial uncertainty combined to cast a pall over the forum’s 32nd annual meeting, making participants unusually reluctant to make firm predictions about the economic future.

There was a rough consensus about underlying global and regional trends: The world’s leading economies will remain stubbornly sluggish this year, most of the industrialists and finance ministers here concurred. Economists here generally echoed the latest IMF projections of barely 1% growth in the industrialized world in 2002, a rate essentially unchanged from 2001.

“The short-term outlook depends critically on the United States,” said Stanley Fischer, vice chairman of Citigroup, reflecting an almost universal view. But a bearish Microsoft Corp. Chairman Bill Gates said bluntly

that he didn’t see much more chance of a major upturn this year in the U.S. than he did in Japan.

Henry M. Paulson Jr., chairman of Goldman Sachs, also said he expected continued slow growth in the U.S., and the global economy generally. “In our business, I see a tough year this year,” he said in one of the closing panel sessions Monday.

Fischer, who until recently was deputy director of the International Monetary Fund, forecast a modest “U-shaped recovery” in the U.S., with an upswing late in the year.

But Fischer added that many of his forum colleagues worry that the growth pattern may look more like a W, with continuing volatility driven by security fears and fallout from the Enron collapse.

“There is broad concern that the implications of the unfolding Enron scandal could have a major impact on investor confidence,” Fischer said.

Some corporate analysts said the spectacular disintegration of the Houston-based energy trading company could trigger further bankruptcies, as creditors subject balance sheets to more intense and skeptical scrutiny.

“In a sense, Kmart was a victim of Enron,” said Gail Fosler, chief economist of the Conference Board, a research group funded by major U.S. corporations. Others could follow, she said, despite assets and incomes that would in other times ensure continued investor support.

Argentina’s travails, while not immediately threatening to big industrial economies or major banks, will jeopardize financial flows to other emerging markets, economists and government officials warned.

U.S. Treasury Secretary Paul O’Neill indirectly agreed, making it clear in several panel sessions that his staunch opposition to a new bailout of Argentina stems from a much broader resistance to financial assistance to developing nations.

“Over the last 50 years, hundreds of billions have been spent in the name of economic development, with so many of the countries that have been major recipients still not showing strong evidence of positive change,” O’Neill said.

With presumably deliberate hyperbole, he later disparaged what he said was the waste of “trillions” in aid to developing countries. Argentines and other countries, he said, should not expect American “plumbers and carpenters” to pay for their economic mistakes.

Trade experts said the Argentine crisis also could hamper the quest for further free trade deals in the Western hemisphere and beyond--trade pacts that many here consider essential to revitalizing the world economy.

And Argentina’s own long-term recovery--like that of many developing nations--could depend on the willingness of wealthy nations to dismantle domestic agricultural protectionism.

“Criticisms about how the markets of the north are closed are totally correct,” said Michael Moore, the head of the World Trade Organization, which recently initiated a three-year round of global trade talks.

“It is an injustice that has to be addressed. If it is not addressed in this round, this round will not conclude.”

Japan, which has been mired in something close to recession for nearly a decade, still appears unprepared to cut farm subsides and purge billions in bad loans from its banking system, experts said.

But for the rest of us, it may not matter, suggested Jacob Frenkel, the London-based president of Merrill Lynch International.

“The world economy has already adjusted to the fact that Japan is on the sidelines,” Frenkel said.

Developing nations are expected by the IMF to keep expanding this year at close to 4%.

But that encouraging growth was expected to come largely from India and China, and analysts from both countries said the two giants may begin faltering in 2002. India has been shaken by regional geopolitical tremors, they noted, while China, as a freshly minted member of the World Trade Organization, faces the disruptive challenge of preparing for import competition for the first time.

With the World Trade Center still smoldering just three miles south of the forum site, much of the discussion focused on real or imagined fault lines between Islamic and Western culture and the widening “digital divide” between advanced industrial societies and the world’s poor majority.

But CEOs here also noted with concern their own mounting costs from terrorism, with billions going to unanticipated security measures and expensive new insurance requirements.

Damage from the downturn in air travel, deeper and longer-lasting than many had predicted, is rippling beyond the airline and hotel businesses to hurt many manufacturers and real estate projects, analysts and chief executives said.

“People must create more flexible business models so they can adjust to a more uncertain environment,” said Kenneth I. Chenault, chairman of American Express, which saw its earnings plunge by half in last year’s last quarter, due largely to the drop in business travel.

Conspicuously absent from the gathering were executives from Enron, which had its status as a forum sponsor unceremoniously revoked shortly before the Waldorf--Astoria meeting.

Andersen consulting’s chairman also canceled an appearance.

But Enron was ubiquitously present in conversations on panels and in the hotel’s corridors in the last five days.

“To a large extent, the Enron scandal is to the world of economics what Sept. 11 was to the world of geopolitics,” said Dominique Moisi of France’s Institute of International Relations.

“What is wrong with Enron is not how it fell, but how it rose,” said John Sweeney, president of the AFL-CIO. “Enron economics is not an aberration, it is an ideology.”

Even the Archbishop of Canterbury weighed in. “What is happening to Enron at the present moment is a deep challenge to capitalism,” the Rev. George Carey said.

Unsurprisingly, not all the capitalists here agreed.

Goldman Sachs’ Paulson called Enron “a one-off event” and worried that it would prompt “unnecessary regulation.”

Laura Tyson, dean of the London Business School and a former head of the White House Council of Economic Advisors, also cautioned against reading too much into the collapse.

“We still don’t know enough about the Enron story to draw broader conclusions about transparency and conflict-of-interest regulations and accounting standards,” she said. “I don’t think there is any evidence yet that it is systemic in nature.”

Yet in the short term, analysts and bankers here agreed, the Enron collapse will make funding even tighter for the most vulnerable companies, much as Argentina’s troubles are choking off the flow of loans to the most needy economies.

“The haves will get credit, and the have-nots will not,” said Richard S. Fuld, chairman and chief executive of Lehman Bros.