Peter Blair Henry - Former Adviser to President Obama HARDtalk

Welcome to HARDtalk. I'm Stephen Sackur. Economists have spent years

bemoaning the long—term stagnation of advanced economies, and drawing

unflattering comparisons with the dynamic growth in the Powerhouse in

emerging economies. Is it time to change the June? The US economic

motor is showing signs of life, motor is showing signs of life, just

as nervousness is sweeping financial markets from Jakarta to Brasilia. My

guest today is leading American economist and former Obama adviser

Peter Blair Henry, welcome to HARDtalk. You have just written a

book which catalogues the changes in the world economy.

look at the shift in economic power from the US to China, another

powerhouse emerging economy. Given what we see right now in the world

economy, the obsession with what the US Fed is going to do, and also the

real signs of growth in the US economic engine, are you sure you

have got it right? I think the number one lesson we learn from the

current market is that we are still deeply interconnected. What happens

in the US still matters greatly for in the US still matters greatly for

what happens in the rest of the world. Emerging economies in

particular. This question about when currencies and capital flows will

begin. It still looks of US begin. It still looks of US

dominance. After all, markets from across the world are hanging on

every word. US quantitative easing is beginning to taper off, and it

suggests that the US is still the dominant world economy. That is

correct. The thing that is important to remember is that we think about

emergent economies, and the fact that we have had a turnaround in the

last 30 or 40 years doesn't mean that emerging economies have

arrived. The important lessons that we need to learn, going both ways.

keep in mind that when the IMF tells keep in mind that when the IMF tells

us that the economies slow, the economy slows well. Are you sure

that notion of yours is credible any more? What we have seen over the

that there are economies are India, all

that there are economies are significantly slowing. And we now

see, with the latest numbers out of the US, that the US economy is

significantly strengthening and significantly strengthening and

gathering pace in terms of growth. The correlation you are drawing

doesn't seem borne out by the facts. Two things to remember. One is that

the impact of emerging economies slowing down will have a lagging

effect on the rest of the world. effect on the rest of the world.

Emerging economies, when their growth slows and consumer demand

begins to slow down, it will take a while for that to show up in US

export figures. It is important to export figures. It is important to

remember that things are picking up in the US, and to some extent Europe

as well, but we are still in an age as well, but we are still in an

of, I think, diminished of, I think, diminished

expectations. We are talking about 1.7% growth in the US. This is a

boom. Trend growth in the US is really closer to 3%. 1.7% growth is

not fast enough. We need emerging economies to continue to grow to

help get the US growing as well. In help get the US growing as well. In

your big grand idea of the fundamental turnaround in world

economy, maybe you have economy, maybe you have

overemphasised the growing strength of nations like Indonesia, Rozelle,

maybe India as well. Because right now there is something close to

panic in those economies. They are deeply nervous, and they feel much

more vulnerable than your theories would suggest they ought to feel.

Here is the key point. Turnaround does not mean these countries have

arrived. It means that if you look at how these countries evolved from

being third prominence. Lessons of this plan,

the fact that we are prominence. Lessons of this plan,

which means a sustained commitment to long—term prosperity, clarity in

We have these lessons that we can learn. Emerging economies are able

to turn themselves around, but they need to continue down that hard

road. Your proposition that in a way, some of these emerging market

economies are showing the rich West how to manage and economy. I want to

come back to that. But before I there I want to tap into your

experience with the Obama Administration. In the first

campaign, which got into the House, in the early days of his

administration, you were pretty involved with Obama. You think he is

doing enough to meet what you say are the obligations of any competent

economic manager to show long—term commitment to fiscal responsibility

much but also to tackle some of the much but also to tackle some of the

most difficult issues, like entitlement spending, and getting

the right balance between tax and spend. I think if you look at the

budget the president proposed, it had a very honest approach to things

like long—term entitlements. Including an opening position that

we have to think about entitlements. Saying we have to think about it is

one thing, but he hasn't actually done anything, has the? We live in a

time where we want to think about economics in terms of figures. There

are a team of people. There is Congress, as well as the President.

What we are seeing right now in that people have with the inability

US, to deliver long—term solutions. Hang

on. Profoundly important statement you have just given me. You are

saying that the US system cannot deliver long—term economic

management the country needs. It is not currently delivering what we

will always have an executive, a two in the constitution agreement. You

will always have an executive, a two house legislative, and partisanship

between the two. If that is not going to change, how is America

going to come to a place where it can deliver what you say it needs?

The thought about turnaround really comes into focus. Discipline,

defined not by fiscal austerity, but by pragmatic movement, has a cycle

to it. During the early 1990s, the US looked very disciplined. We

became very complacent. Now we are in a period, in the 2000, where we

stand currently, both the West, the stand currently, both the West, the

north, and the South have to look into the abyss, so to speak, and

changes that need to happen for the changes that need to happen for the

US to get back up to potential. 2.5 —3% growth. For Europe to be able to

say it is structural reform that is key, not fiscal austerity. And the

emerging economies to tackle problems from infrastructure in

Brazil, to the bank of India. Surely, the answer has to be

portrayed as a big thinker, and an portrayed as a big thinker, and an

optimist. According to you, the there is dysfunction at the heart of

beyond the US Congress, and this is presidential system

beyond the US Congress, and this is the point. The —— domestic policy

has hope, if we can get to a has hope, if we can get to a

situation where our policies are clearly articulated and communicated

with leaders in other countries. with leaders in other countries.

There are economies are dependent on what we do as well. And what happens

to their economies in packs us. to their economies in packs us. One

of the things that I think would go a long way towards changing the

dialogue, addressing this issue, the dialogue, addressing this issue, the

lack of trust that emerging lack of trust that emerging

reform. That would go a long wt woul reform. That would go a long way

reform. That would go a long wt woul towards sending a signal to emerging

economies that yes, we are in fact ready to move on recommendations

made by the G20. That is not going to happen tomorrow. But tomorrow,

there might be nervousness getting much worse in the emerging

economies. You have cited Indonesia as one of the emerging powerhouse

economies which you say over recent years has exhibited all of the

economic government's economic government's attitudes, and

all of the natural economic assets to become one of the biggest players

in the 21st century economy. This is what the feet said in an editorial

raising awkward pressures about the raising awkward pressures about the

growth model of an Indonesian growth model of an Indonesian

sustained development. Again, maybe without laying the foundations

Again, I think the critical point Again, I think the critical point

that I emphasised is not that countries have arrived. I

understand, you have made that point. Explain to me why, if you are

shifting, why is it that the Indonesian currency, the Brazilian

currency, have all suffered the most currency, have all suffered the most

is spreading through their is spreading through

economies. We have an unprecedented period of fiscal easing. Maybe the

brakes are going to be turned on. That is huge implications. One thing

that needs to happen, is for that needs to happen, is for

emerging economies, and also emerging economies, and also

advanced economies, to protect themselves from overleveraged, too

much debt. Let's take China. The biggest daddy of them all. A country

fundamental to your analysis. Morgan Stanley have looked at it, and think

that credit now represents 220% that credit now represents 220% of

GDP. Due to that, they are high risk. We may be looking at a very

dangerous bubble in the powerful emerging economies. There is no

question that we are at a critical point. The response of policymakers

to the current environment is going to determine whether we end up in a

positive outcome, Gorey zero outcome. Your book could be out of

date by the end of the month, date by the end of the month,

frankly. You say that we can look forward to a world where there are

positive outcomes all round, but now you are suggesting you are not so

sure. S if we have to have policy choices in the US that recognise

affect us. What we are going to do, affect us. What we are going to do,

in a clear way, number two, deal with this issue of debt. Part of

India has made it a priority to address deficiencies in the

financial system. You really believe financial system. You really believe

that is credible, looking at India, which announced it will spend

billions on food subsidies, you still take seriously his promises of

major reform? You have to try.You have to decide what is credible? I

think the governor will fight the good fight of India. In a way, I

want to get you to be a bit more philosophical. You had a series of

top jobs in US top jobs in US academia as an

economist and you've also advised Obama. It seems to me that the way

you look at the world economy is premised on the assumption that the

values espoused by the, sort of, values espoused by the, sort

so—called Washington consensus, good so—called Washington consensus, good

fiscal responsibility, fiscal responsibility,

privatisation, the regulation, the sorts of policies that the IMF has

advocated since the mid— 80s. You seem to assume that they will

deliver economic success, and the right kind of market economy. Is

that fair? I don't assume it. If we look at the history of former third

World countries, and how the World countries, and how the

markets, the stock markets markets, the stock markets in

particular, now when they implement all those things you mention, what

is really critical, this is why is really critical, this is why the

word pragmatic is so key to the definition of discipline, when the

policies are implemented, from that list, that are critical to removing

bottlenecks to growth, stock markets respond very favourably in these

countries. You have just chosen countries. You have just chosen to

as those stock markets rising is as those stock

proof of successful economic proof of successful economic

management, surely that can't be the case. Look at rising

of wealth. Never mind that the growing gaps between rich and poor,

United States or Britain, but look at the newly successful economies

like China, UC vastly increasing disparities and gaps between rich

and poor. Isn't that something capitalism of your brand simply

market forecasting that these good doesn't address?

market forecasting that these good policies are going to create value

we had a leader named Michael are necessary but not sufficient to

Manley. He was a socialist?Yes, the leading economic planning. We learn

from him that when you attack business, you attack capitalism, and

if you don't harness the power of the market you impoverished people.

The stock market lost 90% of its value under him, then it became very

expensive to invest, expensive to invest, capitol

depreciated. That proves that Michael Manley's style of socialism

doesn't work and doesn't deliver prosperity. I would turn to you and

say that the financial meltdown of 2007/ and the way the markets

responded, and the way the markets build themselves up in 2000 before

the tech bubble burst, these are great examples to show that your

form of liberal capitalism is deeply flawed and dysfunctional —— 2008.

The key thing is to separate the cycle from the trend. Economic

capitalists will always have cycles. If you look at the long—term trend

for the last three or five years, millions of people have been lifted

out of poverty with higher living standards around the world. The

important thing to learn from these turnarounds in the emerging world is

how do we avoid the kind of access that you just mentioned, and

certainly there's too much leveraged. Frankly we have not fully

Markets, to realise that your notion to look at

Markets, to realise that your notion that you can judge whether an

the state of its stock market the state of

transparently can't be right. Recent transparently can't be right. Recent

US history tells you transparently can't be right. Recent

right. we look at the stock market in times

of great change, it can be a useful forecaster as to whether the changes

austerity, 56 cases of countries an example, in countries,

austerity, 56 cases of countries trying to implement fiscal austerity

saw moderate inflation. The stock market fell in value by 30%, but

inflation was very high. Think of Brazil, in the early 1990s, 25

episodes the stock market responded positively. The lesson there, fiscal

austerity is only appropriate in high inflation circumstances

populate the lesson in the current environment, in Europe, where it

inflation is very high, fiscal austerity may be a cure worse than

the ailment. What's needed in the case of Europe is more structural

easier. This goes to your about how easier. This goes to your about how

you create prosperity beyond the stock market, when the stock market

goes up in value it makes it easier for firms to invest, but it is too

hard to fire workers and nobody is going to do that. Earlier you talked

about the IMF, in your career you have spent a lot of time looking at

how the multinational financial institutions worked with developing

economies trying to improve economies trying to improve

governance and their levels of prosperity, another fundamental

problem is that when emerging problem is that when emerging

nations look at the IMF and the World Bank, they look at the

leadership and it does not represent them. If they are to be lectured

about how to run their economies in future, surely that has to change.

Absolutely. We finally have a point of agreement! The third point I

mentioned, the third lesson, mentioned, the third lesson,

there's a lot of talk about fiscal there's a lot of talk about fiscal

debt visits around the world, in many ways the most important deficit

is the global trust deficit. And the IMF is not representative of the

emerging economies, that throws in emerging economies, that throws in a

release at this point. How can you expect countries to continue to

given voice internationally? For changes at home when they are not

given voice internationally? For example, 21.5% at the bricks, and

hardly any votes on the World Bank and the IMF board 's.

approved by the G20 ministers and central bank governors and finance

ministers in 2010, but ministers in 2010, but the US

Congress is currently holding the IMF forum. It comes to the

dysfunctionality of the US system, you advise Obama on this very

issue, he appointed you to look at issue, he appointed you to look at

the way the financial institutions, international institutions, were

working. If you told him what you just told me, he has done very

little to deliver on little to deliver on it. The

reform. In fact, the 64 million... reform. In fact, the 64 million...

$64 billion increase in the US quote that needs to happen for IMF reform

to go through, the president has said the emergency fund that was set

aside a few years ago for aside a few years ago for IMF

funding should be used towards that end. But the Republicans in Congress

have tried to tie that to the sequestered abate. That's a great

example of missing the point —— sequester debate. $64 billion to

promote a little prosperity, we promote a little prosperity, we are

holding up over a political battle. A final thought on this issue of how

to deliver better economic to deliver

management, economic management that management, economic management that

works for the interests of people around the world. And it's a point

that unites the West, and indeed the emerging economies. It seems to me,

there isn't just a problem with the there isn't just a problem with the

distribution of prosperity and wealth, there's also a question of

what kind of growth we have in the future, thinking particularly of the

environment and tackling issues like climate change. Again there is no

clear indication from your view of climate change. Again there is no

how liberal capitalism should work that there can be a way of shifting

priorities towards a greener growth. How do we deliver that?

Critical issue, growth. How do we deliver that?

economies and our systems in such a we didn't make earlier on. But the

economies and our systems in such a way that they are more efficient,

the short and medium term, there the short and medium term, there

will be a greater abundance of zero sum path, then there's a chance

of sustainability and inequality. of sustainability and inequality.

If, if, if. What are the chances of those ifs coming off? I think that

their leaders are going to urge to their leaders are going to urge to

help us. Are you suggesting that your old boss, Barack Obama, and the

other leaders of the world 's most powerful economies are not up to the

job? They are working at it, I'm optimistic. That doesn't mean you've

answered my question, are they up to the job? I think the president is up

to the job. Peter Henry, we have to end there. Thank you very much for

being on HARDtalk. Thank