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| The real challenge to global growth is in the financial sector: L Alan Winters | | Interview with Chairman of the Board of Directors, Global Development Network |
| Kanika Datta / New Delhi Jan 20, 2012, 00:14 IST |
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 With economic recovery in the US still shaky and Europe in crisis, global growth faces a new and possibly unprecedented set of challenges. What does this mean for India and China? L Alan Winters, chairman of the board of directors of the Global Development Network, professor of economics in the University of Sussex and a leading specialist on international trade and development, sets out some of the issues in an interview with Kanika Datta. Edited excerpts:
In your 2007 book Dancing with Giants on India and China, you came to the conclusion that, by 2020, despite their extraordinary growth, neither China nor India would make as big a contribution to the world economy as most people supposed and that the US’ contribution to world growth by then would continue to be a little under a third. Would you change your views now?
A little bit. We didn’t foresee quite how stressful the last few years would be for the western economies or the pressures of the next few years so, indeed, I would change it somewhat. But the basic principle that while both India and China are huge in terms of population and are growing very rapidly, certainly measured at international prices, their economies are still not as huge as the US.
You had made those projections on the basis of the US growing pretty steadily and on India and China growing at a slower pace from 2005 onwards. What’s happening now is the reverse.
We mis-predicted the future of the US in the sense of not understanding quite how hard it would be hit by the crisis and it is arguable that the US is going to take quite a long time to recover, so I would certainly scale down the expectations relative to where we were in 2007. As for China and India, I haven’t reworked in great detail the growth projections but the basic idea was that as you get richer, growing does become more difficult.
True, both are still growing but not as fast as before for varying reasons. Obviously, we in India see many challenges and China has its share of problems too. What does it look like from the outside? Let’s start with India.
I wouldn’t claim great expertise in India but there clearly are challenges as far as the labour market is concerned so that people can move and the benefits of growth are spread more evenly. One of the interesting features of the Indian economy is that the manufacturing sector has grown but it’s fairly clear that India is not going to become the manufacturing-exporter in the same sort of way as China. The question, therefore, is: can it leap immediately to the services sector as the engine for growth? I have become slightly more optimistic about that over the last couple of years. But it’s quite uncertain to me whether that is the basis for broad-based growth. It clearly is the basis for growth for selected sectors and possibly selected segments of society.
You talked about institutions and the lack thereof as a constraint for growth in G20 countries. Do you see that as a comparable constraint for India?
I don’t see it as such a big constraint as the labour market, although in some sense the issues in the labour market are institutional — there are bodies that have particular sets of interests. I do hear people talking in terms of challenges for spreading growth more widely as being partly institutional — if one is frank, there are sometimes issues of corruption. Certainly, I am not a fundamentalist about corruption, however. One has to be fairly realistic about what could be achieved but very clearly the sort of levels of income that are generated in countries like, say, Denmark or Canada require a lot of trust between a lot of different parties. If you have a situation in which corruption is very widespread that trust does not grow up, so people put a lot of effort into protecting themselves against things that, in a sense, in a trusting society you don’t have to invest in and at some stage that will become a major issue for India.
Well, China has a huge issue with corruption as well but it hasn’t impinged on growth...
It’s very clearly a problem for China as well but it’s not that you can’t grow in the presence of corruption, it’s just that at some point you won’t be able to grow. In a modern society one trusts so many people implicitly. If I am not in a system in which trust is not automatic, then I am diverting effort from being productive. I think it’s a major issue in China and looking at China, one is seeing a more restive society over the last few years so corruption might become more of an issue than I would have predicted in 2007.
To come back to challenges in China, they are more a function of inflation, wages and their exports markets are being squeezed…Where do you see China going?
China has entered the middle income trap. But where both India and China are now was just inconceivable 25 years ago. No one thought anything like this was possible.
Especially China, when you consider the time frame within which it grew.
True, but even if you crossed China out of the equation, India’s performance from about 1997 onward is absolutely unimaginable as well. And they’re both large economies and societies. So I see them continuing successfully, there will be rough periods over the decades, possibly associated with political failure and unrest. But I do think they are large enough to be a bit concerned about the constraints imposed by the rest of the world and just how rapidly the rest of the world will be prepared to offer markets and share commodities.
The western economies have emotionally traumatic changes to make. I don’t know if they will be economically traumatic but very clearly India, China and some other emerging economies are becoming much more important, which means some of the things western Europe and the US had taken for granted – reasonably cheap energy and so on – will no longer be possible even more rapidly than we had projected.
Going forward, what do you see as the biggest challenges to global growth?
The real challenges are in the financial sector. Every morning we worry about Europe and it is by no means clear whether the US is out of the woods and there is also plenty of reason to worry about the Chinese banking system in a sense that they may have quite enough to bail the banks out, but they have an asset bubble building and their banks are stuffed full of bad debt. The issue of stability of the financial sector, the debt restructuring as far as the West is concerned remain challenges. If you look at the work of Ken Rogoff and Carmen Reinhart, recovery from financial crises is slower than from other recessions.
What do you make of Standard & Poor’s (S&P’s) downgrades in Europe?
I guess in the world that rating agencies inhabit it was predictable and understandable. On the whole, however, I find the role that the rating agencies play fairly unfortunate — and I don’t mean that in the same way as Mr Sarkozy would. The principal of financial stability is that lots and lots of people who have different opinions are taking bets and they sort of smooth out. If you set up a system, however, where S&P says it’s not AAA but AA+, a whole bunch of institutions are obliged to change their asset stocks. You actually are eliminating that risk-sharing on which the whole concept of financial stability rests. So we have got ourselves into an extremely unfortunate situation whereby we have conferred responsibility on these rating agencies which, quite frankly, are not very good at predicting what will happen — these are the people who thought Iceland is fine!
It’s not just that we’ve destroyed the law of large numbers and concentrated things around particular points, we’ve then provided a trigger to those points to a bunch of people who have not proved themselves to be terribly good. So I have argued quite vigorously whether it is possible to devise a way of getting out of this situation. Frankly, I have not worked out a system but I do deeply regret the idea that instead of each bank having to take independent decisions of which they are responsible they depend on the rating agency. You do not want a situation where people have the ability to move billions of dollars of money and then say it was not my fault, the rating agency said it was all right!
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