U.S. President Donald Trump, right, and Xi Jinping, China’s president. (Photographer: Qilai Shen/Bloomberg)

Davos 2019: Geopolitical Tensions Could Be ‘Catastrophic’ In The Medium Term, Says Adam Tooze

Structural issues like U.S.-China trade tensions and climate change could trigger a catastrophe which could in turn affect growth of emerging countries like India and China, according to Adam Tooze.

“There is reason for profound pessimism which we have to adjust to a distinct possibility of a catastrophic outcome due to these structural issues,” Tooze, Professor of History at Columbia University, told BloombergQuint on the sidelines of World Economic Forum in Davos, Switzerland. “This from the point of view of the rising nations is particularly tragic as their set (stability) in national terms will coincide with darkening horizons for humanity as a whole.”

The 2008 crisis depended critically on weaknesses in the cardio-vascular system of modern economy in the banking sector. Since then, we have had a heart transplant and a pacemaker. There is every reason to think the banking system has been neutralised as a source of crisis.
Adam Tooze, Professor of History at Columbia University

Tooze said 2008 global crisis was “one in a century heart-attack” and doesn't expect it to repeat amid the global economic slowdown.

Watch the full interview here:

Here’s the edited transcript:

Some might argue that we are still seeing tail effect of the global financial crisis. Would you say that we are witnessing it now?

By way of intermediary link. For instance, Fed’s monetary policy, we are still in the process of normalisation into our way back to interest rates level that Fed policy makers are comfortable with because it gives them some downward leeway. In here, we are still living, essentially the question of deflation of long after-effects of banking crisis right down to the present day. Europe is the case where you can see the direct continuity.

In China, it is a question of debt bubble of how Beijing is going to manage a soft landing in the wake of sustained 10-year credit fuelled growth phase which is different from the first 15-20 years of post-reform Chinese growth. It is much more dependent on credit. Behind much of the pessimistic thinking about the world is the productivity slowdown. We have seen something similar in China where $3 billion of extra credit is generating less growth. So, that is the question which is preoccupying people and do feel like a long after-burn and scarring effect of 2008 crisis.

Do you believe that the solutions today are even tougher to come by that just monetary policy ain’t going to do it?

It is much respect for the central banks as they were working outside the boxes. This was a radical policy. Fundamentally, monetary policy is relatively a similar business. State is artifact of laws. You can take money out of circulation and put it back in circulation and expand liquidity. That is the power the fiat money has. That is the easy bet. The question of de-carbonising the economy or preparing the labour force for manufacturing an industrial revolution, preparing the white-collar labour force for the impact of AI, dealing with the fundamental question of supply chain that impacts the environment and society. This stuff is much harder to address. It requires politics. It requires not just technical insight of what made the monetary policy a wonk fest. Everyone couldn’t understand the magic. It is difficult decision of what kind of cause we drive, what kind of energy infrastructure we use. It gets geo-political. You have to figure out the flows and what they are going to flow through. Ultimately, it is on the back of everyone’s mind. Chinese- American relationship controls the flows of South China sea. This is where it gets hard on ground and that is the phase of policy making that we are in. One could wish for simplification of the banking crisis. It is not clear how to conduct energy policy, industry policy at a time when we need it. If we believe the science, we have one generation before the impact of climate change. That is the problem for which we don’t have necessary tools.

What are the implications of not being able to bring solution to the table?

There could be some fix, like some gadget, bitcoin, blockchain. These are gadget solution and if it did exist it will be great. If we can find something like that, then it will turn the problem of decarbonisation into a problem solvable like a monetary problem. It is wishing the problem not to be what it appears to be which is trackable, deeply embedded by it. We were talking about the land reform in India. It is that kind of problem. Everyone knows there is not a gadget to fix it but it is about entire social and political system. It is power and hard sets. That is what we are struggling with. It requires the intervention of politics and we are hardly in good space in that regard.

What do you make of the politics of this time and whether they can deliver at all?

The combination is inward looking move and the nationalist move. But it is combined with aspirational and self-assertions on the global stage. The nationalism needs the global stage to affirm itself. What it lacks is notion of cooperation and idea of common interest which would allow the national interest to reconcile with each other and negotiate it. Not the absolute assertion of national interest but a process of give and take which will have to come in terms of fundamental differences. All of the structures of the cold war don’t exist anymore. That is a big problem for us right now. You have to recognise your opponent. That kind of interaction is not there anymore. That we have to build up again with real urgency.

How does one decipher what should be 3-4 top solutions of leadership?

Optimistically, one can say that history does show this kind of nationalism can be disarmed. Here, the most western Europe could be the pre-eminent arena which took place at a huge cost. This was a lesson which was learned in a painful way. The reference in which history makes me uncomfortable is it underestimates what we are doing. Emergence of China and India is simply the biggest drama in modern history. The population giants of 1.3 billion and 1.4 billion people realising national aspirations which was so longer pressed by westerners. Now, it is explosively demonstrated. Not just the demand but capacity to generate growth. By doing so, it changes the balance of power. No western idea of order has ever had to deal with the world including those kinds of Protean forces. To have India on loop as well as China at same time, both of them trying to make dominant forces in modernisation of the world. Such large chunks of humanity involved in that process, we need to be modest in thinking about how much history can teach us about where we go from here in relation to that problem. I don’t think ancient history help us going back to mythic history of deep past. My sense is we have to focus on specific issues that we can align around.

Climate change is the most obvious one. We need complex multi-natural deal, to divert India crucially, for making legitimate demand for electrification depended on dirtiest fuel source which is cheap and available but disastrous. Those are the source of problems. Then the question is how we compensate India, work around that problem. How do we divert Chinese-Pakistani investment into huge coal mine? China is taking constructive steps to de-carbonise. America is a bystanders in this. It is no longer the source of the problem or solution. We contributed in past, but we are not dynamic element in carbon equation. So, think of that as a problem model going forward. There is no model for that negotiation. We try to figure out the resurgent India needs to not go down to coal road and some how employee Chinese and Chinese technologies. That is the kind of deal we have to make.

We are not sure the countries have the ability to think and focus on any of these issues. They are so busy narrowing their own worlds back home.

For competence, we look to Beijing. Has the national government solidly set that as a mandate doing its thing which is fighting for its political life. In Russia, it is extraordinary state of affairs whereas the western European countries are in political disarray.

U.S. is experiencing crisis which is very deep. This is phenomenal of Donald Trump. It goes back to generation of Republican politics of American political spectrum in 1970s. it is crisis waiting to happen. There were two shutdown crisis in the middle of recovery of GFC. We are seeing that American economy can shape and sustain the kind of nonsense. But it has a considerable impact and even worse than private contractors. You don’t have guarantee of getting paid. It is a shocking situation. The military are not receiving salaries. It is failed state kind of symptoms. I am not saying that America is at that point. At this point, you will have to say we are looking for Democrats to do any kind of coherence. It is two party system. So, there is no competence going forward.

What happens if there is no solution found?

I am not pessimistic about prospect of repeat in 2008. I do not except repeat of 2008. 2008 was a one-in-a-century heart attack and it has weakened the cardiovascular system of the banking sector. We have got a heart transplant and a pacemaker. There is every reason to think the banking system neutralised as a source of the crisis. That takes off the table is the prospect of cardiac arrest in west. What it doesn’t take off the table is a prospect of a slowdown. We can have a nasty recession in the U.S. driven by corporate debt. The familiar story of huge quantity of debt is hovering on edge of subprime and junk-rated bonds. I don’t think it is a scenario of a catastrophe immediately. In the medium term, we are talking about structural issues of West-East relations, American-Chinese relations. There is reason for profound pessimism. I think we have to adjust to possibility of catastrophic outcome which on point of view of the rising nations is tragic because their set national terms will coincide with the darkening of humanity as a whole.

What do you see in India from outside?

It is a complex society. We treat it as an entity. You have functioning federal government. It is a powerhouse nation state. It is so much to understand and there is so much complexity. If you take the aggregate GDP, then it is fast growing economy. It is an extraordinary dynamism.

In the other set of numbers, it is equality and persistence of poverty. So, you have another reality of back to basics of issues like land reform, land ownership, infrastructure, electricity and mass education. You see whether India is really capable of providing core education to entire population and ensure that it is covered by boys and girls to same extent. Beyond the passing exam, children are actually learning skills, are they literate? The figures are daunting. Everyone in the West stares in disbelief. The figures of Indian Railway recruiting scheme which advertise thousands of jobs and tens and millions of applicants apply. This is extraordinarily unmanageable reality. The number of applicants for that jobs is size of several small European countries put together. That is a reality which is daunting.

With a right-wing conservative government in power when it comes to beliefs, are the centrist policies enough for India looking at in terms of almost insurmountable challenges for past eight decades since independence?

There is nasty place where two things intersect which is conservative culture politics intrude free speech on academic campuses leads to extraordinary claims about history of science as it is culturally nationalist re-reading of India’s enormously complex cultural history and the source of its own vitality. The extraordinarily brilliance of Indian mathematicians and scientists should not be woven in a ludicrous way in nationalist exceptionalism. It is beneath India’s dignity. It does need to make those kinds of claims. The consequence of that is not the issue of only political correctness, but this has functional effects. If you undermine the independence of your university system, undermine what rationality of economic policy then this will have effect on performance and dampen in the long run the potential of economic growth and for India to develop from research and technological change which it is so evidently capable of. In a global view, the question for humanity like climate change, we need India’s contribution. We can’t afford to have talents of billion-plus people shunted in that way. This is a great lesson which Chinese are demonstrating. How a country at that level of income can make the investment in technology, science, math totally transforming the global picture. There may be issues of quality. In the long run, mobilisation of human talent is important.