India is one of the most vulnerable nations in the world to the long-term impact of climate change due to its geographical location, according to Adair Turner, chairman of Institute for New Economic Thinking.
Turner, however, said the technologies are becoming available to achieve the transition to a low-carbon economy at an either nil or very low cost.
On the Indian economy, the former chair of U.K.’s Financial Services Authority said the country was performing relatively well compared to other emerging market nations but a slow pace of job creation remains a cause of concern.
Some aspects are working well but job creation worries me the most about India.Adair Turner, Chairman, Institute for New Economic Thinking
Turner said the global economy was going through abnormal times and the world economy could face serious consequences if the conflict between the U.S. and its trading partners escalates further. In an interview with BloombergQuint, Turner speaks on a range of topics from climate change, monetary policy goals and flaws in capitalism.
Watch the full interview here:
Here are the edited excerpts from the interview:
We are talking at a time the Donald Trump administration has increased tariffs and many nations are responding with retaliatory action. Is this trade conflict likely to escalate? What kind of ramifications does that have on the global economy?
The chances are that it won’t keep on escalating. Certainly, I hope not. To answer your second question, if it went all the way; if every move by the Americans was matched by another country, and matched by the Americans again, then there is a danger that it could have a serious effect on the global economy, which already found it difficult to recover from the crisis in 2008.
Now, I think the crucial thing is for the rest of the world to reciprocate. You have to answer a tariff but in a measured fashion which never ‘ups’ the game. So, you respond a little bit less than where they started the aggression with. And, one should always operate within the WTO (World Trade Organisation) rules to make sure there’s a rule-driven structure.
If that occurs, Trump and his advisers will realise that there are serious consequences to the American economy and to his own political base. We have seen this interesting spat about Harley Davidson. It is perfectly reasonably that faced with European tariffs, they are saying we’d have to move manufacturing out of the U.S. to have a viable business selling in Europe and elsewhere. That may begin to affect some of the more sensible minds around President Trump. I certainly hope we don’t have continuous escalation. If we do, it will be very bad. How the rest of the world plays it, has significant ability to try and calm it down.
If the world’s largest economy doesn’t play it by the rules of the WTO, what message does it send out to the world? Is the credibility of the multilateral institutions such as the WTO at stake?
Ultimately, if the U.S. chooses to be a rogue state and doesn’t follow rules, the rest of the world must stick to them. We can combine together and put joint tariffs on the U.S. if we want. President Trump has taken the U.S. out of a crucial institution—the Paris Climate Agreement. On trade, he is not formally going outside the WTO but he is, in many ways, acting outside its spirit. So, there is a strong streak of unilateralism in the Trump administration and it is completely overt. President Trump is absolutely clear—he doesn’t believe in multilateralism. He believes in doing bilateral deals. He thinks he is a great deal maker. The rest of the world has to be sensible and if necessary we have to stick together and not rely entirely on America. We need to have a way of running the world effectively even if America, at a federal level, is at the moment, acting bizarrely.
Despite these measures by Trump, you believe that the U.S. trade deficit is going to widen. Why? What is your reading of the U.S. economy right now?
The fundamental reason why the U.S. trade deficit is likely to widen this year is because the U.S. is running enormous fiscal deficits. The global economy is being kept going at the moment by large fiscal deficits in both the U.S. and China. Two of the largest economies of the world have switched to large fiscal deficits. The U.S. has introduced major tax reductions and major ballooning of the fiscal deficit. Some say it could go to 5 percent of the GDP by 2020. When you run a large fiscal deficit and you stimulate domestic demand, it is almost certain that it will widen your balance of payment deficits and this is the fundamental point that President Trump doesn’t seem to understand.
The fundamental determinants of the balance of payments surplus isn’t the current accounts, it’s in savings, investments and budget deficit. It’s not tariffs that determine it. The reason why Germany has a huge current account surplus is because it has a high rate of savings relative to its investment rate. The reason why the U.S. has a current account deficit is because it has less savings than it invests. I wish someone could get these elements of mathematics through to those around President Trump.
Leaders across the world are getting protectionist in their rhetoric. It seems to be politically prudent to play to the gallery and talk up domestic economy and protect local concerns. Is that an indictment of globalisation not having worked?
It is an indictment of the simplistic faith in globalisation, which many members of business and economic elite believed in the 1990s and the 2000s. From the top of the Davos mountain, the world looked pretty damn good, but it wasn’t pretty damn good for a lot of people who were losing out, either due to free trade flows, immigration or volatile capital flows.
The creed of globalisation is free trade, capital and migration. It is all great. But it isn’t great for everybody. There are losers in that. We have to get the benefits of globalisation while managing that and compensating losers and sometimes opening up things slowly rather than rapidly. I think the high confidence in globalisation, in all its aspects, was lost. We are seeing a backlash against that.
We are talking at a time Indian banks are facing a serious bad loan crisis and a perception that billionaire defaulters are getting away. There is a serious trust deficit among the common man on the street. If I don’t pay my mortgage or credit card dues, someone comes after me. But that’s not true of the billionaire defaulter. At least, that’s the feeling among the people. You are on record saying “there is something wrong with capitalism”. Does this resonate with your view?
In the developed world before the crisis of 2008, we allowed debt to grow to an unreasonable level. The challenge is when you allow debt to reach that level, you need to bail out your banks, or else it’s a complete disaster. It is very important that whenever you bail out a bank you do impose some hurt on managers, equity holders and some of the debt holders. Otherwise, you create a moral hazard problem for the future and a sense of unfairness. When you have created too big a problem in the banking system, there is a very careful balance of doing intelligent loan forbearance or restructuring. That’s the best way to get the maximum value as a lender and not letting people get away scot-free. Otherwise, you have turned capitalism into a one-way bet for the rich, i.e., when things go up, they make a ton of money, when things go down, they default. That will destroy the moral case for capitalism.
Monetary policy theorists, central bankers, economists believe that the global economy is getting back to normal after the 2008 crisis. There are others like the former U.S. Treasury Secretary Larry Summers who believe we are in a phase of what he famously called “secular stagnation”. Where do you stand?
I am broadly with Larry on this. The developed economies are now getting back to reasonable growth and inflation is not yet up to the 2-percent target. And that is despite the most enormous monetary policy stimulus. Interest rates have remained close to zero for 10 years, which is now added by a large fiscal stimulus as well in the U.S. What’s interesting is that if 10 years ago, I had forecast that by 2018 there’d be 10 years of close to zero percent interest rates, and the U.S. would be running a fiscal deficit 4 or 5 percent of GDP, what would be the rate of growth of inflation? People would have said it’d be out of control and inflation would be going through the roof.
So, the fact we are only getting mediocre growth and inflation not being in line with the target despite this huge policy stimulus tells us something has changed in the global economy. It is a combination of a large debt overhang, which means we need low interest rates to make that sustainable and a changing structure of the labour market. An extraordinary feature of the American labour market over the past few years is strong job creation but very little wage growth. The scenario is exactly the same in the U.K. We need to understand why. All of these factors make me sympathetic to Larry Summers’ idea that something fundamental has changed.
The worry is if we were to now get a turn down in the global economy produced by the tariff war, what would we do? Because our interest rates are already close to zero. I think we should not assume we are back to normality, we are still in abnormal times.
Larry Summers also believes that avoidance of inflation was a useful policy objective for central banks before 2008. After the crisis, he believed central banks needed to be focusing equally on maintaining growth and creating jobs. Since you agree with Larry, what would you tell an emerging market central bank governor. What would you tell Governor Urijit Patel to do?
Emerging market central bankers are different. The crucial thing in the developed world is to have a symmetric approach to inflation. To believe hitting 1 percent below your inflation target of 2 percent is as bad as hitting 3 percent. In the emerging markets, it is always more complicated. You have worries about feed through from the exchange rate potential, you are seeing a real danger of that in Turkey, at the moment. In India, you have the food price inflation issue that you don’t see elsewhere.
Broadly, in emerging markets, you have to make sure that inflation does not go up to really high levels. But there is a big difference between running an emerging market with an inflation rate of 4-6 percent and allowing it to go to 10 or 15 percent. The trouble then is businesses start focusing on how to manage through inflation instead of fundamentals. How to get their prices ahead of their input costs and that in itself leads to an inflation spiral. So I do believe it is a good idea for the RBI to have a broad inflation target at the sort of level that it does at the moment.
I want to talk you about India. We liberalised in 1991. In 2014, we brought in a government with a different political ideology. Do you believe the direction of India’s growth story?
The Indian economy is doing relatively well. The huge challenge for India is job creation. When you see China, it has 500-600 million working age workforce of which 110 million is in manufacturing and so on. But for India, the formal manufacturing sector is 30 million and shrinking. The great IT back office, that’s about 3 million. What are the rest of the people doing?
We know from the labour market figures that the last few years have been fairly good growth but very little employment in the formal sector. As I look at the Indian economy I think that is the big challenge. India has not gone through a mass wave of industrialisation and manufacturing. Exports were a classic route to prosperity for Japan, China and Korea. India has a somewhat different model. Some aspects are working well but job creation worries me the most about India.
India is one of the most unequal societies in the world. How do you ensure equitable distribution of opportunities? If education, private enterprise and affirmative action cannot level the field, what can?
That’s a very good challenge. Clearly, the affirmative action is a very complicated concept in India with its caste system. Now you have this extraordinary process where people who are not from the lower castes demanding affirmative action for them. The point for affirmative action is that it can’t be for everybody, otherwise it’s completely meaningless. Some of it has worked to a degree, but it has limits. The private sector will create some jobs but not all. I think this challenge of inequality is a very major one and it’s going to get worse with automation.
I could well see Indian formal employment shrinking with entrepreneurs adapting best practice technology to run their businesses with a smaller number of people. There is a danger of rising inequality across the world. What we have to do is some overt re-distribution —people talk about universal basic incomes. We certainly have to educate people and keep looking for opportunities where you can create large numbers of jobs. In 50 years, there are going to be very few jobs in manufacturing because robots are going to do a lot.
We are a developing nation. There is always a debate on the cost of growth versus protecting the environment. Is that an either or question anymore?
It’s not an either or question anymore. The fall in the prices of renewables, wind or solar, are getting cheaper than coal. If you look at the debate in India, more coal or more renewables, which I am engaged in through the Energy Transition Commission in India, renewables are going to win on an economic basis even if you weren’t involved with the climate. Having said that, for India environment issue is incredibly important. I’ve just come from Delhi and the air quality is not the best in the world. It is harmful to health and that needs to be cleaned up.
India is one of the most vulnerable nations in the world to the long-term impact of climate change, with melting Himalayan glaciers, the Ganges facing flood and then drought. The north west Europe is a livable place even if the climate warms by 3 degrees centigrade. I don’t think India is remotely livable if that occurs. The good news is that there are technologies available to make that transition to a low-carbon economy at a low cost.