:00:00. > :00:19.Welcome to HARDtalk. I'm Stephen Sackur. Economists have spent years
:00:19. > :00:24.bemoaning the long—term stagnation of advanced economies, and drawing
:00:24. > :00:27.unflattering comparisons with the dynamic growth in the Powerhouse in
:00:27. > :00:31.emerging economies. Is it time to change the June? The US economic
:00:31. > :00:36.motor is showing signs of life, motor is showing signs of life, just
:00:36. > :00:40.as nervousness is sweeping financial markets from Jakarta to Brasilia. My
:00:40. > :00:47.guest today is leading American economist and former Obama adviser
:00:47. > :01:24.Peter Blair Henry, welcome to HARDtalk. You have just written a
:01:24. > :01:29.book which catalogues the changes in the world economy.
:01:29. > :01:36.look at the shift in economic power from the US to China, another
:01:36. > :01:40.powerhouse emerging economy. Given what we see right now in the world
:01:40. > :01:45.economy, the obsession with what the US Fed is going to do, and also the
:01:46. > :01:51.real signs of growth in the US economic engine, are you sure you
:01:51. > :01:54.have got it right? I think the number one lesson we learn from the
:01:54. > :01:57.current market is that we are still deeply interconnected. What happens
:01:57. > :02:01.in the US still matters greatly for in the US still matters greatly for
:02:01. > :02:09.what happens in the rest of the world. Emerging economies in
:02:09. > :02:11.particular. This question about when currencies and capital flows will
:02:11. > :02:18.begin. It still looks of US begin. It still looks of US
:02:18. > :02:26.dominance. After all, markets from across the world are hanging on
:02:26. > :02:31.every word. US quantitative easing is beginning to taper off, and it
:02:31. > :02:36.suggests that the US is still the dominant world economy. That is
:02:36. > :02:42.correct. The thing that is important to remember is that we think about
:02:42. > :02:47.emergent economies, and the fact that we have had a turnaround in the
:02:47. > :02:50.last 30 or 40 years doesn't mean that emerging economies have
:02:50. > :02:55.arrived. The important lessons that we need to learn, going both ways.
:02:55. > :03:07.keep in mind that when the IMF tells keep in mind that when the IMF tells
:03:07. > :03:18.us that the economies slow, the economy slows well. Are you sure
:03:18. > :03:21.that notion of yours is credible any more? What we have seen over the
:03:21. > :03:28.that there are economies are India, all
:03:28. > :03:30.that there are economies are significantly slowing. And we now
:03:30. > :03:35.see, with the latest numbers out of the US, that the US economy is
:03:35. > :03:37.significantly strengthening and significantly strengthening and
:03:37. > :03:42.gathering pace in terms of growth. The correlation you are drawing
:03:42. > :03:48.doesn't seem borne out by the facts. Two things to remember. One is that
:03:48. > :03:49.the impact of emerging economies slowing down will have a lagging
:03:49. > :03:53.effect on the rest of the world. effect on the rest of the world.
:03:53. > :03:58.Emerging economies, when their growth slows and consumer demand
:03:58. > :04:00.begins to slow down, it will take a while for that to show up in US
:04:00. > :04:04.export figures. It is important to export figures. It is important to
:04:04. > :04:06.remember that things are picking up in the US, and to some extent Europe
:04:06. > :04:09.as well, but we are still in an age as well, but we are still in an
:04:09. > :04:15.of, I think, diminished of, I think, diminished
:04:15. > :04:21.expectations. We are talking about 1.7% growth in the US. This is a
:04:21. > :04:27.boom. Trend growth in the US is really closer to 3%. 1.7% growth is
:04:27. > :04:31.not fast enough. We need emerging economies to continue to grow to
:04:31. > :04:37.help get the US growing as well. In help get the US growing as well. In
:04:37. > :04:38.your big grand idea of the fundamental turnaround in world
:04:38. > :04:45.economy, maybe you have economy, maybe you have
:04:45. > :04:52.overemphasised the growing strength of nations like Indonesia, Rozelle,
:04:52. > :04:57.maybe India as well. Because right now there is something close to
:04:57. > :05:03.panic in those economies. They are deeply nervous, and they feel much
:05:03. > :05:10.more vulnerable than your theories would suggest they ought to feel.
:05:11. > :05:14.Here is the key point. Turnaround does not mean these countries have
:05:14. > :05:17.arrived. It means that if you look at how these countries evolved from
:05:17. > :05:21.being third prominence. Lessons of this plan,
:05:21. > :05:37.the fact that we are prominence. Lessons of this plan,
:05:37. > :05:37.which means a sustained commitment to long—term prosperity, clarity in
:05:37. > :06:02.We have these lessons that we can learn. Emerging economies are able
:06:02. > :06:07.to turn themselves around, but they need to continue down that hard
:06:07. > :06:10.road. Your proposition that in a way, some of these emerging market
:06:10. > :06:12.economies are showing the rich West how to manage and economy. I want to
:06:12. > :06:17.come back to that. But before I there I want to tap into your
:06:17. > :06:22.experience with the Obama Administration. In the first
:06:22. > :06:27.campaign, which got into the House, in the early days of his
:06:27. > :06:32.administration, you were pretty involved with Obama. You think he is
:06:32. > :06:40.doing enough to meet what you say are the obligations of any competent
:06:40. > :06:42.economic manager to show long—term commitment to fiscal responsibility
:06:42. > :06:48.much but also to tackle some of the much but also to tackle some of the
:06:49. > :06:52.most difficult issues, like entitlement spending, and getting
:06:52. > :07:01.the right balance between tax and spend. I think if you look at the
:07:01. > :07:04.budget the president proposed, it had a very honest approach to things
:07:04. > :07:13.like long—term entitlements. Including an opening position that
:07:13. > :07:16.we have to think about entitlements. Saying we have to think about it is
:07:16. > :07:24.one thing, but he hasn't actually done anything, has the? We live in a
:07:24. > :07:28.time where we want to think about economics in terms of figures. There
:07:28. > :07:30.are a team of people. There is Congress, as well as the President.
:07:30. > :07:32.What we are seeing right now in that people have with the inability
:07:32. > :07:49.US, to deliver long—term solutions. Hang
:07:49. > :07:54.on. Profoundly important statement you have just given me. You are
:07:55. > :07:59.saying that the US system cannot deliver long—term economic
:07:59. > :08:00.management the country needs. It is not currently delivering what we
:08:00. > :08:10.will always have an executive, a two in the constitution agreement. You
:08:10. > :08:13.will always have an executive, a two house legislative, and partisanship
:08:13. > :08:16.between the two. If that is not going to change, how is America
:08:16. > :08:21.going to come to a place where it can deliver what you say it needs?
:08:21. > :08:32.The thought about turnaround really comes into focus. Discipline,
:08:32. > :08:38.defined not by fiscal austerity, but by pragmatic movement, has a cycle
:08:38. > :08:45.to it. During the early 1990s, the US looked very disciplined. We
:08:45. > :08:53.became very complacent. Now we are in a period, in the 2000, where we
:08:53. > :08:59.stand currently, both the West, the stand currently, both the West, the
:08:59. > :09:05.north, and the South have to look into the abyss, so to speak, and
:09:06. > :09:11.changes that need to happen for the changes that need to happen for the
:09:11. > :09:17.US to get back up to potential. 2.5 —3% growth. For Europe to be able to
:09:17. > :09:23.say it is structural reform that is key, not fiscal austerity. And the
:09:23. > :09:35.emerging economies to tackle problems from infrastructure in
:09:35. > :09:37.Brazil, to the bank of India. Surely, the answer has to be
:09:37. > :09:45.portrayed as a big thinker, and an portrayed as a big thinker, and an
:09:45. > :10:01.optimist. According to you, the there is dysfunction at the heart of
:10:01. > :10:19.beyond the US Congress, and this is presidential system
:10:19. > :10:28.beyond the US Congress, and this is the point. The —— domestic policy
:10:28. > :10:35.has hope, if we can get to a has hope, if we can get to a
:10:35. > :10:37.situation where our policies are clearly articulated and communicated
:10:37. > :10:41.with leaders in other countries. with leaders in other countries.
:10:41. > :10:44.There are economies are dependent on what we do as well. And what happens
:10:44. > :10:51.to their economies in packs us. to their economies in packs us. One
:10:51. > :10:52.of the things that I think would go a long way towards changing the
:10:52. > :10:57.dialogue, addressing this issue, the dialogue, addressing this issue, the
:10:57. > :11:01.lack of trust that emerging lack of trust that emerging
:11:01. > :11:06.reform. That would go a long wt woul reform. That would go a long way
:11:06. > :11:09.reform. That would go a long wt woul towards sending a signal to emerging
:11:09. > :11:18.economies that yes, we are in fact ready to move on recommendations
:11:19. > :11:23.made by the G20. That is not going to happen tomorrow. But tomorrow,
:11:23. > :11:27.there might be nervousness getting much worse in the emerging
:11:27. > :11:30.economies. You have cited Indonesia as one of the emerging powerhouse
:11:31. > :11:33.economies which you say over recent years has exhibited all of the
:11:33. > :11:37.economic government's economic government's attitudes, and
:11:37. > :11:43.all of the natural economic assets to become one of the biggest players
:11:43. > :11:49.in the 21st century economy. This is what the feet said in an editorial
:11:49. > :11:51.raising awkward pressures about the raising awkward pressures about the
:11:51. > :11:53.growth model of an Indonesian growth model of an Indonesian
:11:53. > :12:02.sustained development. Again, maybe without laying the foundations
:12:02. > :12:08.Again, I think the critical point Again, I think the critical point
:12:08. > :12:15.that I emphasised is not that countries have arrived. I
:12:15. > :12:17.understand, you have made that point. Explain to me why, if you are
:12:17. > :12:20.shifting, why is it that the Indonesian currency, the Brazilian
:12:20. > :12:28.currency, have all suffered the most currency, have all suffered the most
:12:28. > :12:39.is spreading through their is spreading through
:12:39. > :12:42.economies. We have an unprecedented period of fiscal easing. Maybe the
:12:42. > :12:46.brakes are going to be turned on. That is huge implications. One thing
:12:46. > :12:50.that needs to happen, is for that needs to happen, is for
:12:50. > :12:53.emerging economies, and also emerging economies, and also
:12:54. > :12:58.advanced economies, to protect themselves from overleveraged, too
:12:58. > :13:03.much debt. Let's take China. The biggest daddy of them all. A country
:13:03. > :13:09.fundamental to your analysis. Morgan Stanley have looked at it, and think
:13:09. > :13:20.that credit now represents 220% that credit now represents 220% of
:13:20. > :13:24.GDP. Due to that, they are high risk. We may be looking at a very
:13:24. > :13:28.dangerous bubble in the powerful emerging economies. There is no
:13:28. > :13:32.question that we are at a critical point. The response of policymakers
:13:33. > :13:37.to the current environment is going to determine whether we end up in a
:13:37. > :13:43.positive outcome, Gorey zero outcome. Your book could be out of
:13:43. > :13:47.date by the end of the month, date by the end of the month,
:13:47. > :13:50.frankly. You say that we can look forward to a world where there are
:13:50. > :14:06.positive outcomes all round, but now you are suggesting you are not so
:14:06. > :14:13.sure. S if we have to have policy choices in the US that recognise
:14:13. > :14:19.affect us. What we are going to do, affect us. What we are going to do,
:14:19. > :14:21.in a clear way, number two, deal with this issue of debt. Part of
:14:21. > :14:33.India has made it a priority to address deficiencies in the
:14:33. > :14:41.financial system. You really believe financial system. You really believe
:14:41. > :14:44.that is credible, looking at India, which announced it will spend
:14:44. > :14:48.billions on food subsidies, you still take seriously his promises of
:14:48. > :14:53.major reform? You have to try.You have to decide what is credible? I
:14:53. > :14:59.think the governor will fight the good fight of India. In a way, I
:14:59. > :15:02.want to get you to be a bit more philosophical. You had a series of
:15:02. > :15:06.top jobs in US top jobs in US academia as an
:15:06. > :15:10.economist and you've also advised Obama. It seems to me that the way
:15:10. > :15:13.you look at the world economy is premised on the assumption that the
:15:13. > :15:17.values espoused by the, sort of, values espoused by the, sort
:15:17. > :15:22.so—called Washington consensus, good so—called Washington consensus, good
:15:22. > :15:26.fiscal responsibility, fiscal responsibility,
:15:26. > :15:30.privatisation, the regulation, the sorts of policies that the IMF has
:15:30. > :15:34.advocated since the mid— 80s. You seem to assume that they will
:15:34. > :15:41.deliver economic success, and the right kind of market economy. Is
:15:41. > :15:45.that fair? I don't assume it. If we look at the history of former third
:15:45. > :15:47.World countries, and how the World countries, and how the
:15:48. > :15:51.markets, the stock markets markets, the stock markets in
:15:52. > :15:54.particular, now when they implement all those things you mention, what
:15:54. > :15:58.is really critical, this is why is really critical, this is why the
:15:58. > :16:01.word pragmatic is so key to the definition of discipline, when the
:16:01. > :16:05.policies are implemented, from that list, that are critical to removing
:16:06. > :16:08.bottlenecks to growth, stock markets respond very favourably in these
:16:08. > :16:12.countries. You have just chosen countries. You have just chosen to
:16:12. > :16:14.as those stock markets rising is as those stock
:16:14. > :16:17.proof of successful economic proof of successful economic
:16:17. > :16:19.management, surely that can't be the case. Look at rising
:16:20. > :16:32.of wealth. Never mind that the growing gaps between rich and poor,
:16:32. > :16:36.United States or Britain, but look at the newly successful economies
:16:36. > :16:41.like China, UC vastly increasing disparities and gaps between rich
:16:41. > :16:41.and poor. Isn't that something capitalism of your brand simply
:16:41. > :16:49.market forecasting that these good doesn't address?
:16:49. > :16:52.market forecasting that these good policies are going to create value
:16:52. > :17:05.we had a leader named Michael are necessary but not sufficient to
:17:05. > :17:06.Manley. He was a socialist?Yes, the leading economic planning. We learn
:17:06. > :17:15.from him that when you attack business, you attack capitalism, and
:17:15. > :17:18.if you don't harness the power of the market you impoverished people.
:17:18. > :17:21.The stock market lost 90% of its value under him, then it became very
:17:21. > :17:30.expensive to invest, expensive to invest, capitol
:17:30. > :17:34.depreciated. That proves that Michael Manley's style of socialism
:17:34. > :17:39.doesn't work and doesn't deliver prosperity. I would turn to you and
:17:39. > :17:42.say that the financial meltdown of 2007/ and the way the markets
:17:42. > :17:46.responded, and the way the markets build themselves up in 2000 before
:17:46. > :17:51.the tech bubble burst, these are great examples to show that your
:17:51. > :17:56.form of liberal capitalism is deeply flawed and dysfunctional —— 2008.
:17:56. > :18:04.The key thing is to separate the cycle from the trend. Economic
:18:04. > :18:08.capitalists will always have cycles. If you look at the long—term trend
:18:08. > :18:11.for the last three or five years, millions of people have been lifted
:18:11. > :18:15.out of poverty with higher living standards around the world. The
:18:15. > :18:18.important thing to learn from these turnarounds in the emerging world is
:18:19. > :18:22.how do we avoid the kind of access that you just mentioned, and
:18:22. > :18:29.certainly there's too much leveraged. Frankly we have not fully
:18:30. > :18:37.Markets, to realise that your notion to look at
:18:37. > :18:41.Markets, to realise that your notion that you can judge whether an
:18:41. > :18:43.the state of its stock market the state of
:18:43. > :18:45.transparently can't be right. Recent transparently can't be right. Recent
:18:45. > :18:46.US history tells you transparently can't be right. Recent
:18:47. > :19:00.right. we look at the stock market in times
:19:00. > :19:02.of great change, it can be a useful forecaster as to whether the changes
:19:02. > :19:19.austerity, 56 cases of countries an example, in countries,
:19:19. > :19:21.austerity, 56 cases of countries trying to implement fiscal austerity
:19:21. > :19:26.saw moderate inflation. The stock market fell in value by 30%, but
:19:26. > :19:31.inflation was very high. Think of Brazil, in the early 1990s, 25
:19:31. > :19:36.episodes the stock market responded positively. The lesson there, fiscal
:19:36. > :19:39.austerity is only appropriate in high inflation circumstances
:19:39. > :19:45.populate the lesson in the current environment, in Europe, where it
:19:45. > :19:49.inflation is very high, fiscal austerity may be a cure worse than
:19:49. > :19:54.the ailment. What's needed in the case of Europe is more structural
:19:54. > :20:00.easier. This goes to your about how easier. This goes to your about how
:20:00. > :20:03.you create prosperity beyond the stock market, when the stock market
:20:03. > :20:07.goes up in value it makes it easier for firms to invest, but it is too
:20:07. > :20:12.hard to fire workers and nobody is going to do that. Earlier you talked
:20:12. > :20:17.about the IMF, in your career you have spent a lot of time looking at
:20:17. > :20:18.how the multinational financial institutions worked with developing
:20:18. > :20:24.economies trying to improve economies trying to improve
:20:24. > :20:26.governance and their levels of prosperity, another fundamental
:20:26. > :20:29.problem is that when emerging problem is that when emerging
:20:29. > :20:33.nations look at the IMF and the World Bank, they look at the
:20:33. > :20:37.leadership and it does not represent them. If they are to be lectured
:20:37. > :20:41.about how to run their economies in future, surely that has to change.
:20:42. > :20:45.Absolutely. We finally have a point of agreement! The third point I
:20:45. > :20:49.mentioned, the third lesson, mentioned, the third lesson,
:20:49. > :20:53.there's a lot of talk about fiscal there's a lot of talk about fiscal
:20:53. > :20:57.debt visits around the world, in many ways the most important deficit
:20:57. > :21:01.is the global trust deficit. And the IMF is not representative of the
:21:01. > :21:05.emerging economies, that throws in emerging economies, that throws in a
:21:05. > :21:08.release at this point. How can you expect countries to continue to
:21:08. > :21:16.given voice internationally? For changes at home when they are not
:21:16. > :21:19.given voice internationally? For example, 21.5% at the bricks, and
:21:19. > :21:27.hardly any votes on the World Bank and the IMF board 's.
:21:27. > :21:28.approved by the G20 ministers and central bank governors and finance
:21:28. > :21:32.ministers in 2010, but ministers in 2010, but the US
:21:32. > :21:35.Congress is currently holding the IMF forum. It comes to the
:21:36. > :21:37.dysfunctionality of the US system, you advise Obama on this very
:21:37. > :21:41.issue, he appointed you to look at issue, he appointed you to look at
:21:41. > :21:45.the way the financial institutions, international institutions, were
:21:45. > :21:47.working. If you told him what you just told me, he has done very
:21:47. > :21:50.little to deliver on little to deliver on it. The
:21:50. > :21:58.reform. In fact, the 64 million... reform. In fact, the 64 million...
:21:58. > :22:02.$64 billion increase in the US quote that needs to happen for IMF reform
:22:02. > :22:05.to go through, the president has said the emergency fund that was set
:22:05. > :22:08.aside a few years ago for aside a few years ago for IMF
:22:08. > :22:15.funding should be used towards that end. But the Republicans in Congress
:22:15. > :22:20.have tried to tie that to the sequestered abate. That's a great
:22:20. > :22:24.example of missing the point —— sequester debate. $64 billion to
:22:24. > :22:28.promote a little prosperity, we promote a little prosperity, we are
:22:28. > :22:31.holding up over a political battle. A final thought on this issue of how
:22:31. > :22:33.to deliver better economic to deliver
:22:33. > :22:36.management, economic management that management, economic management that
:22:36. > :22:41.works for the interests of people around the world. And it's a point
:22:41. > :22:42.that unites the West, and indeed the emerging economies. It seems to me,
:22:42. > :22:46.there isn't just a problem with the there isn't just a problem with the
:22:46. > :22:50.distribution of prosperity and wealth, there's also a question of
:22:50. > :22:55.what kind of growth we have in the future, thinking particularly of the
:22:55. > :22:57.environment and tackling issues like climate change. Again there is no
:22:57. > :22:59.clear indication from your view of climate change. Again there is no
:22:59. > :23:03.how liberal capitalism should work that there can be a way of shifting
:23:03. > :23:09.priorities towards a greener growth. How do we deliver that?
:23:09. > :23:19.Critical issue, growth. How do we deliver that?
:23:19. > :23:27.economies and our systems in such a we didn't make earlier on. But the
:23:27. > :23:29.economies and our systems in such a way that they are more efficient,
:23:29. > :23:33.the short and medium term, there the short and medium term, there
:23:33. > :23:45.will be a greater abundance of zero sum path, then there's a chance
:23:45. > :23:52.of sustainability and inequality. of sustainability and inequality.
:23:52. > :23:55.If, if, if. What are the chances of those ifs coming off? I think that
:23:55. > :23:59.their leaders are going to urge to their leaders are going to urge to
:23:59. > :24:04.help us. Are you suggesting that your old boss, Barack Obama, and the
:24:04. > :24:09.other leaders of the world 's most powerful economies are not up to the
:24:09. > :24:13.job? They are working at it, I'm optimistic. That doesn't mean you've
:24:13. > :24:18.answered my question, are they up to the job? I think the president is up
:24:18. > :24:23.to the job. Peter Henry, we have to end there. Thank you very much for
:24:23. > :24:24.being on HARDtalk. Thank