The Davos Disconnect; For a great number of major industrial nations the share of economic rewards going to labor stands at a historic low. This is not sustainable.

Byline: Stephen Roach (Roach is chief economist at Morgan Stanley.)

This year's World Economic Forum was the most optimistic in years. Four years of booming global growth and surging financial markets put the attendees in a giddy mood. The Davos consensus was convinced that more of the same lies ahead in 2007. The optimism is understandable. After years of agonizing over the implications of terrorism, geopolitical instability, higher oil prices and ever-mounting global imbalances, the world economy never even flinched. This resilience stands in sharp contrast with the vulnerability that many, including yours truly, have long feared.

The Davos consensus was heartened by the equally euphoric state of financial markets. Particularly encouraging was the froth in what traditionally have been some of the riskiest of assets--emerging market debt and high-yield corporate credit. Sharply reduced volatility in major equity, bond and currency markets was the icing on the cake. Just as the markets were betting on a riskless world, those gathered at this year's World Economic Forum were prepared to do the same.

Yet beneath the surface, there was an undercurrent of concern. Even the optimists admitted that many problems were festering--especially rising income inequalities, unfunded retirement obligations of aging developed nations, America's chronic saving shortfall and increasingly contentious trade frictions. Therein lies the contradiction of Davos: in the end, a baseline forecast of a riskless world dismisses any complications that might arise from social, political and economic tensions.

I suspect the resolution of this contradiction is likely to take the form of an important power shift in the global economy--a realignment that could add a good deal more risk into the equation than is the case at present.

The reason: the pendulum of economic power is at unsustainable extremes in the developed world. For a broad collection of major industrial economies--the United States, the euro zone, Japan, Canada and the U.K.--the share of economic rewards going to labor stands at a historic low of less than 54 percent of national income--down from 56 percent in 2001. Meanwhile, the share going to corporate profits stands at a record high of nearly 16 percent--a striking increase from the 10 percent reading five years ago.

This divergence is not sustainable. The angst of workers in the developed world has become a major source of tension. Yet with labor unions on the decline and with workers from China, India and the former Soviet ...