With no end to the global economic crisis in sight even after seven years, World Bank’s Washington-based Chief Economist Kaushik Basu says it should be called the Long Depression. In an exclusive e-mail interview, he answers Puja Mehra & TCA Sharad Raghavan on the new debate in the west on capitalism, the state of the global economy, especially China, and the advice he gave to Prime Minister Narendra Modi on the Indian economy.
Delivering the C.D. Deshmukh lecture, you had predicted that there would be two difficult years ahead for Europe: when the repayments come up at the end of 2014 and the beginning of 2015. It turned out the way you had anticipated. Is more bad news coming?
My forecast of two difficult years has turned out to be true – this is one of those rare cases where you wish you got the forecast wrong. What I had not anticipated but is turning out to be the case is that the difficulties are persisting beyond the two years. With sovereign debt still high, growth low and unemployment high, the end of Eurozone's problem is not yet in sight. We at the World Bank had in June forecast a growth of 1.5% for 2015 for the Euro Area. But with the recent turbulence in China and given the strong trade links between China and Germany, the forecast will, I think, have to be revised downwards.
Do the developments in China, especially the devaluation, confirm that the world is now without an economic engine, stabiliser and a punching bag? What does the state of the Chinese economy imply for the world?
China has a difficult stretch ahead since it has to perform the balancing act of curtailing its large overall debt without slowing down the real economy too much – that’s a fine line. Fortunately, the US economy, which grew at an impressive 3.7% in the second quarter of 2015, and now has unemployment down at 5.1%, is acting as a bit of an engine for the world. But the world economy today is too enormous to run on a single engine. It needs other drivers. Interestingly, the country that looks best placed to provide the second engine for the world economy is India.
French economist Thomas Piketty has swept the discourse on capitalism. Your thoughts on this new debate in the west and also what it means for the discourse in India...
Piketty’s excellent book is a reminder to all of us that something is amiss in the way the world economy is trundling along. Conservatives argue that the bulk of human inequality is a consequence of individual choice, and that by hard work and effort the poor can make it. Nothing is further from the truth. The bulk of human inequality occurs at birth. There are millions of babies born into such abysmal poverty that they don't stand a chance of making it in life no matter how hard they work. This is one of the great injustices in the modern world. The extent of inequality that prevails in the world is unacceptable. It is important at all levels – governments, international organisations and individuals – to recognize this. I feel good that for the first time the World Bank has elevated the idea of sharing and inequality mitigation into one of its mission goals. It is important to realise that being very poor robs people of voice. Extreme inequality is not just bad in itself but it is an assault on democracy.
An argument also is that it isn’t enough to give people access to capitalism and provide them with a safety net: the underlying system has to be reconfigured. Earlier, if a company C.E.O. dumped defined-benefits pension, you knew who to complain to. Today, it may be an unseen private equity fund.
The fundamental problem in the world is the total wage bill as a fraction of GDP is declining. In other words, with the advance of technology and automation, labor as a factor of production is becoming steadily less important. The big challenge of our time is to think of innovative ways in which we can bolster the incomes of labourers. If we fail to do this, this seemingly purely economic problem will no doubt spill over into political instability. This is indeed a root cause of some of the political turmoil around the world that we see today.
You have always held that economic growth doesn’t automatically alleviate poverty. What would your advice be to those who believe that it does?
It is clearly in the self-interest of those who do well by the status quo to say growth is enough and that the poor should just wait for the benefits to trickle down. That's clever advice for guarding your own pocket. Fortunately, there are prominent voices, including from some very rich people, who have done well by the system but are honest enough to point out that there is something wrong with a system that leaves so many people out in the cold. We need direct government interventions in favour of the poor to make amends for this.
As the Chief Economic Advisor in the Manmohan Singh-led UPA Government, you had described your job as of a meta-advisor. Any policy advice for Prime Minister Modi…
I would tell the Prime Minister – and in fact I did tell him, during a very good meeting I had with him on the Indian economy – that India is on the cusp of a major take-off and we must not miss this opportunity. It is possible for India to vastly step up its exports, be a hub of global education, and take major strides in the manufacturing sector. But for all this a combination of policies is needed, ranging from exchange rate management to micro-level stimuli. India has a lot of expertise and very good minds. Government must reach out to them. Determination and passion are important but not enough to drive a complex machinery like the modern economy. They need to be backed up with data, analysis and strategic thinking. Take, for instance, even a simple phenomenon like a sharp rise in the price of onions. This cannot be ended by sending out baton-wielding police. We need research to understand its source and then device policies which will entail a mixture of microeconomic and macroeconomic interventions. Alongside such economic policies, I must also stress, India is a diverse society and we have to strive for greater inclusiveness so that all individuals, irrespective of their caste, race and religion, feel a part of society. This will then bring out the best in the people and help nurture the nation’s development. Individual creativity is the biggest driver of growth.
In a lecture delivered in Chennai in 2007, you had argued that the first spurt of 9 per cent growth in 1975, the first year of the Emergency, was not a one-year burst. The initial breakaway from stagnation was born of the sharp rise in savings and investments largely owing to nationalisation of banks in 1969 by Ms. Indira Gandhi. Two subsequent “magical transformations” became the seeds for 10 per cent growth. These were the increased rate of savings around 2002 and the emergence of a new corporate culture. You had said that you first heard of the growing global respect for Indian companies from Lee Kuan Yew in Singapore. How is that road to 10 per cent growth looking now?
Very difficult. But this has little to do with India. The global economy is going through a difficult phase. The global growth slowdown we have seen since 2008 maybe less deep than the Great Depression, but it is turning out to be more protracted than the Great Depression was. We are now in the seventh year of this crisis and the end is not in sight. Maybe we should call this the Long Depression. Having said this, it has to be pointed out that India is one of the brightest spots in this firmament. It is expected that India will top the world’s growth rates table of major economies this year. This has not happened before. It is possible for India today to consolidate its position in a way that it never could before. A 10% growth seems unlikely, but a sustained 8% per annum growth is possible. And that will transform the nation in twenty years, with per capita income breeching the $10,000 mark.
Will Chinese devaluation of Yuan impact US Fed’s decision on rate hike?
The problem is not just the Yuan but with so many central banks currently injecting liquidity, a US rate hike may not be as effective. For one, it is unlikely to achieve the increase in interest rates across the US economy that would have occurred in a less globalized world. Easy money and low interest rates in other industrialized nations will partially dampen increases in interest rates in the US. The main thing that will happen as a result of a Fed rate hike is the dollar will get strengthened. This is the big dilemma the Fed faces and, for this reason, I hope the Fed will wait a bit more hiking rates. A US slowdown will be bad news not just for the US but for the world.
The world managed a coordinated fiscal stimulus in 2009 and 2010. Can we expect a coordinated monetary action?
I sincerely hope so. We live in too globalized a world for disparate monetary policies to be effective. With the Eurozone and Japan injecting liquidity, the US getting ready to hike rates, and China, India and Brazil pursuing their own diverse policies, each country is ending up less effective in achieving its goals than would have been the case if there was greater policy coordination. There is little surprise that Japan has slipped back into negative growth despite its quantitative easing. When it comes to monetary policy we cannot pretend to be living in walled territories. There is a need for international institutions that can help coordinate monetary policy across economies, at least the major ones.
