Speaker 1: Welcome to Copy Time, a podcast series on Markets and
Speaker 1: Economies from D BS Group Research. I'm Tare, chief Economist.
Speaker 1: Welcoming you to our 122nd episode.
Speaker 1: Today we will discuss global macro and development multilateralism. Our
Speaker 1: return guest is Martin Mhn, a non-resident, senior fellow at
Speaker 1: the Atlantic Council's Geo Economic Center. Prior to the Council,
Speaker 1: Martin spent several decades at the International Monetary Fund in
Speaker 1: various senior capacity. And his last position there was director
Speaker 1: for the Department of Strategy Policy and Review Martin Mizen.
Speaker 1: A warm welcome back to COVID time.
Speaker 2: Thank you, Tamo. It's great to be back and congratulations
Speaker 2: on the great run of your show.
Speaker 1: Thank you very much Martin. I think if I'm not mistaken,
Speaker 1: you and I did exactly half the number of episodes
Speaker 1: ago back when it was like in the sixties.
Speaker 2: That's right. Yeah. Although, you know, it doesn't feel that
Speaker 2: long ago and you know, we haven't grown that much older, right?
Speaker 2: It sounds like, oh, back in the sixties.
Speaker 1: No. And in fact, you and I met in person
Speaker 1: just a week ago uh in Washington DC. You're kind
Speaker 1: enough to take me out to lunch. Uh, Martin, let's
Speaker 1: start with that. Some takeaways from the IMF meetings for you.
Speaker 2: Yeah, the IMF meetings. It was a great show as always. Um,
Speaker 2: you know, all the, the tents were erected and, uh,
Speaker 2: the meetings were announced and the words were spoken but
Speaker 2: one could not come away from the meetings, um, with
Speaker 2: the sense of, well, you know, there isn't really much
Speaker 2: that people can agree on and by people, I mean,
Speaker 2: the whole world community, um it's not just the two
Speaker 2: big um countries that are kind of um
Speaker 2: you know, being declared geopolitical, you know, rivals, I mean,
Speaker 2: talking China and Russia, of course, they would have resisted
Speaker 2: a lot of the language on, on the politics, usually
Speaker 2: ahead of a communique.
Speaker 2: Um but also, um you know, within Europe um within
Speaker 2: the development community and the finance community, it's no longer
Speaker 2: the old multilateralism, there's a lot at stake in various ways,
Speaker 2: but it doesn't lead to multilateral outcomes. The real show
Speaker 2: is going on elsewhere, I think now having said that
Speaker 2: um obviously, there was some kind of small steps forward
Speaker 2: on issues where everybody has an interest.
Speaker 2: Um uh First of all, just before the meeting started,
Speaker 2: um the managing director had been reappointed for another five years,
Speaker 2: uh which seemed to be a kind of a solution
Speaker 2: where everybody could agree on because deviating from it would
Speaker 2: have been a big mess. And um she had a
Speaker 2: lot of supporters but it wasn't really unanimous. Um uh
Speaker 2: at least at the beginning, I mean, the, the IMF
Speaker 2: always rallies around um in the board meetings usually. But
Speaker 2: um uh there was also some progress on the quota before.
Speaker 2: Of course, it's been a while already that the US agreed.
Speaker 2: And if you read the communique language, um there's a
Speaker 2: lot of talk about. Well, uh first of all, you know,
Speaker 2: we're going to implement this. So the US um obviously
Speaker 2: in the crosshairs here because they need Congress to act,
Speaker 2: but they were writing, they were supporting that language um
Speaker 2: that the, the, the actual quota gets uh legislated and
Speaker 2: uh uh uh appropriated
Speaker 2: and then paid in. Um There was some talk about
Speaker 2: how to switch between the quota and the arrangements to
Speaker 2: borrow in case quotas get delayed. So that's all like process.
Speaker 2: Um And um uh it's fine that it proceeds
Speaker 2: some other stuff. Um Martin
Speaker 1: before you move on, I just want to ask you
Speaker 1: one question just for the listeners. Um understanding uh explain
Speaker 1: the substance of the quota rearrangement. Does it mean a
Speaker 1: reduction in the voting power of the United States and
Speaker 1: European countries and by extension and increase in the voting
Speaker 1: power of emerging market economies?
Speaker 2: Yeah. No. So that's the problem when you come out
Speaker 2: of the spring meetings. You're still stuck with the technicalities. OK,
Speaker 2: let's step back. Um
Speaker 2: um The quota is the IMF S capital. If you want, right?
Speaker 2: Um It's the paid in share capital uh of each
Speaker 2: member country and it also determines the vote. Um the
Speaker 2: voting power more or less. Um and um
Speaker 2: what was agreed was not a real realignment of quotas
Speaker 2: which is a big demand by especially China also emerging markets.
Speaker 2: They feel underrepresented at the IMF um which they are,
Speaker 2: I mean, factually speaking, you know, the, the IMF always
Speaker 2: was supposed to have votes according to the size of
Speaker 2: its member economies and China is obviously undervalued at the moment.
Speaker 2: Um No, it was instead a commitment by the US
Speaker 2: to increase its share
Speaker 2: uh or it's not, not its share, but it's, it's
Speaker 2: actual capital um which it did to solidify the finances
Speaker 2: of the IMF because a lot of the finances, a
Speaker 2: lot of the lending capacity of the IMF um is
Speaker 2: based on arrangements to borrow if needed from member countries
Speaker 2: and
Speaker 2: to make the IMF more stable, the, the US agreed
Speaker 2: to raise its capital. Now, it only did that because
Speaker 2: it got the uh agreement from everybody else to also
Speaker 2: raise their capital share, but in the same proportion like
Speaker 2: the US. So in other words, the IMF gets more capital, great,
Speaker 2: but there's no realignment of votes not so great as
Speaker 2: some will say. Ok.
Speaker 2: And um it's still an important step um because it,
Speaker 2: it also demonstrates the US commitment to the IMF but
Speaker 2: um it's only kind of half the the issue. And
Speaker 2: it's kind of surprising that some other countries agreed.
Speaker 2: But, you know, there we come to this geopolitical thing
Speaker 2: because it was a good move. And I think
Speaker 2: if China had, for example, said, well, we don't agree
Speaker 2: to this unless we get a bigger vote, they could
Speaker 2: have been presented as someone who blocked an IMF kind
Speaker 2: of a good thing for the fund for their own
Speaker 2: parochial reasons. And why would they do that? Because the
Speaker 2: global South needs a lot of money. So the other
Speaker 2: way around, if the US had done nothing, they could
Speaker 2: have been accused of just ignoring the plight of these countries.
Speaker 2: So everybody had an interest to say, well, look, we
Speaker 2: support more capital for the IMF
Speaker 2: so it can lend more. Um uh But uh that
Speaker 2: was kind of the, the, the lowest common denominator. And
Speaker 2: what I was saying earlier is that now they need
Speaker 2: to implement that the Congress needs to legislate the money,
Speaker 2: other countries obviously too. But it's always the Congress that
Speaker 2: proves the sticking part. That's how it was in 2010.
Speaker 2: It took them six years I think to come around.
Speaker 2: Um And then of course, there's the lowest commitment to
Speaker 2: review
Speaker 2: the um the quota shares and the voting shares of
Speaker 2: the IMF and to find the process forward. Now, uh
Speaker 2: you know, I don't want to kind of bring up
Speaker 2: comparisons to Damocles, but it goes a little bit in
Speaker 2: that direction because there are so many interests interwoven um
Speaker 2: uh into that quota formula they even have um which
Speaker 2: is kind of a guideline. It's not, it's not deterministic
Speaker 2: but
Speaker 2: kind of figuring out the relative kind of standings of
Speaker 2: various European countries within that quota arrangement, finding out the
Speaker 2: relative strength of say, Japan and China,
Speaker 2: um
Speaker 2: figuring out how much vote to really give the developing countries.
Speaker 2: Although economically speaking, they're really, I mean, they're so small still,
Speaker 2: unfortunately that they're not really way out of line. It's
Speaker 2: more a political question. So how much votes should Africa
Speaker 2: have in the IMF it's a big political issue and,
Speaker 2: you know, they just got another board chair, the 25th
Speaker 2: board chair of the IMF goes to Africa.
Speaker 2: So then I have three, which is good, I think,
Speaker 2: but figuring out how to kind of divide the political
Speaker 2: and the economic influence and fit it into a formula.
Speaker 2: If you ask me, they're gonna talk about that for
Speaker 2: ages and not making progress, which means that, you know,
Speaker 2: China will again, probably have to ask itself, do we
Speaker 2: still support this institution in a few years if nothing
Speaker 2: happens or what do we do? So so far they've
Speaker 2: been playing along constructively.
Speaker 2: But um it's, it's heightening the, the tension between what
Speaker 2: the IMF really is and what it's supposed to
Speaker 1: be. Excellent, very, very useful. Thanks Martin.
Speaker 2: Yeah. Um So the quota that, you know, the, the,
Speaker 2: the agreement was some way forward now, they, they commit
Speaker 2: to further process. Um
Speaker 2: uh the common framework uh as always is under debate.
Speaker 2: Um so, you know, low income and developing countries are
Speaker 2: over indebted.
Speaker 2: There has been problems with countries like Zambia that
Speaker 2: needed to restructure its debt and they, you know, took
Speaker 2: them forever to do that in part because China not
Speaker 2: always China but often China was very slow in restructuring.
Speaker 2: Um They've been making progress on that one. The, the
Speaker 2: interesting thing here is that um the IMF came out
Speaker 2: with a policy paper just before the meeting started.
Speaker 2: Um and that's not, that's a very tactical paper and
Speaker 2: very difficult to read. I have to warn our, our
Speaker 2: uh all our, our listeners about um you know, delving
Speaker 2: into that paper, there's a lot of legalese in there,
Speaker 2: but it's, it's really important. The issue here is the
Speaker 2: follow Zambia had to wait for an IMF program for
Speaker 2: three years or so because the creditors could not agree
Speaker 2: on a restructuring
Speaker 2: under the old kind of rules if you want 1020
Speaker 2: years ago when China was not yet a big creditor,
Speaker 2: but there was only the Paris Club. So the the
Speaker 2: advanced industrial economies
Speaker 2: um usually agreement in the Paris Club that they would
Speaker 2: take on this, this debt restructure and let alone agree
Speaker 2: on it yet was already enough for the IMF to say, ok,
Speaker 2: we're going to have a deal one day. So we
Speaker 2: move forward
Speaker 2: with China that didn't work because there was no way
Speaker 2: of gauging whether China really was serious when they said, well,
Speaker 2: you know, we're going to engage and we're gonna talk
Speaker 2: and you know, it, it took a lot of years
Speaker 2: at the beginning, but that was due to in part
Speaker 2: internal issues in China. But
Speaker 2: I think the the international community has come to the
Speaker 2: point where they said, well, China has now done a
Speaker 2: few restructurings. They have participated not smoothly, mind you it's
Speaker 2: still a process with them, but
Speaker 2: there is something going on with China that we can say, ok,
Speaker 2: once they say they engage, we're most likely going to
Speaker 2: get to some point where we have an agreement with
Speaker 2: them and that should be enough for the IMF to
Speaker 2: go forward. And so that's one thing that's the assurances
Speaker 2: policy and there's a little kind of um you know,
Speaker 2: a little kind of tool that can threaten China if
Speaker 2: a country wants to,
Speaker 2: to say, well, if China doesn't engage at all or
Speaker 2: not timely enough, but we've made all efforts to reach out.
Speaker 2: We made good offers to them
Speaker 2: that the IMF can say, well,
Speaker 2: China, too bad, you're not going to get paid um under,
Speaker 2: under our, under our IMF program.
Speaker 2: Um You have to wait until you come to a
Speaker 2: debt agreement. In the meantime, the country gets IMF money
Speaker 2: but you will not get paid from it, we stop
Speaker 2: the payments to the country as soon as they even
Speaker 2: think of repaying you. So, in a way it's, it's
Speaker 2: defaulting on China keeping them in default.
Speaker 2: Um, but the IMF goes ahead and that, that is
Speaker 2: something that used to be just impossible.
Speaker 2: Uh In the, in the eighties, nineties, two thousands, it
Speaker 2: got changed a little bit when Russia did its first
Speaker 2: Ukraine thing in, uh with the, with the Crimea and
Speaker 2: Donbas in 2000. Uh when was it 15 or 14,
Speaker 2: it got changed a little bit um to open the
Speaker 2: door slightly to be able to lend to Ukraine.
Speaker 2: And now it's, it's been even further widened the door.
Speaker 2: It doesn't mention China of course. But the so called
Speaker 2: policy of lending into official arrears is a big step
Speaker 2: for the fund. But still, I would
Speaker 1: see, for example, in the Ukraine context, Ukraine can default
Speaker 1: or not service its debt to Russia but still receive
Speaker 1: an IMF program disperse.
Speaker 2: Yeah, so back then, uh in short, um Russia held
Speaker 2: a 3 billion uh bond that it had uh
Speaker 2: kind of gotten from Ukraine in exchange for money. But
Speaker 2: under a regime in Ukraine, that was still kind of
Speaker 2: um you know, to Russia's liking.
Speaker 2: And the Ukrainians after the change in power and that
Speaker 2: little green men invasion of Crimea said there's no way
Speaker 2: we're going to pay, in fact, to cost us so
Speaker 2: much damage. We're not going to pay.
Speaker 2: And the international community said, well, if um if a
Speaker 2: predator like Russia is no longer relevant for program financing
Speaker 2: in the, in the future, which obviously it wasn't because
Speaker 2: they had become enemies by then.
Speaker 2: Um The IMF can still go ahead while the debt
Speaker 2: is being sorted out provided that the country doesn't repay
Speaker 2: the debt. So in other words, if Ukraine doesn't pay Russia,
Speaker 2: we can move ahead.
Speaker 2: So, um that was the lending into official arrears policy.
Speaker 2: And as I said, it has now been widened a
Speaker 2: little bit further, but it's a very kind of weak
Speaker 2: leverage against China because it's uh you know, tell me
Speaker 2: which country would like to default on China intentionally
Speaker 2: and all the trade links, the financing links, the cross
Speaker 2: default clauses and God knows what. Um so it's very
Speaker 2: unlikely but it's there as a little tool to be used.
Speaker 2: But the real issue is the assurances policy. So that's
Speaker 2: a vote of confidence if you want in China, of,
Speaker 2: of them playing by the rules just very slowly, they
Speaker 2: need to still figure out a lot of the details
Speaker 2: and the internal coordinations very weak. Um So the IMF
Speaker 2: can then faster. So that's I think
Speaker 2: uh you know, a good move. It's a marginal one.
Speaker 2: We'll have to see how it works out uh in
Speaker 2: the future. But that's one of the achievements of the
Speaker 2: board before the meetings. Um
Speaker 2: We also got some news, I think just yesterday, again,
Speaker 2: not related to the meetings directly
Speaker 2: that the African Development Bank seems to have come to
Speaker 2: a point with IMF shareholders that they can use SDRS
Speaker 2: that the fund is issuing,
Speaker 2: um, to finance, to, to raise finance that they can
Speaker 2: only lend to Africa. So again, that sounds not such
Speaker 2: a big thing, but it has the seeds of something bigger,
Speaker 2: um,
Speaker 2: that gets us deep into development finance. So the issue
Speaker 2: is that
Speaker 2: um SDRS are being regarded by central banks as reserve currency, right?
Speaker 2: That's part of the deal of the IMF. Um As
Speaker 2: long as um the fund is using conditionality for its
Speaker 2: programs and is able of addressing countries balance of payments issues.
Speaker 2: The the the claims that central banks have on the
Speaker 2: IMF
Speaker 2: because the IMF is financed by member country contributions way
Speaker 2: back in the bo gold and nowadays currency. So as
Speaker 2: long as that claim is of a very high quality,
Speaker 2: the banks, the central banks can say, oh look, you know,
Speaker 2: it's part of our reserves, ok?
Speaker 2: Because the, the IMF owes them SDRS.
Speaker 2: Now say if the IMF would hand out SDRS to
Speaker 2: institutions that are of not such great quality
Speaker 2: and those institutions would then lend and make losses and
Speaker 2: the IMF would have to at some point record a
Speaker 2: loss on its books on its SDRS that would be
Speaker 2: passed on to the member countries and you cannot have
Speaker 2: losses on central bank reserves, right. It has to be
Speaker 2: absolutely safe, that asset. So that's the link here. That's
Speaker 2: so kind of complicated. Sometimes. The centerpiece here is IMF conditionality.
Speaker 2: Um
Speaker 2: And that's why this RST the resilience and sustainability trust
Speaker 2: that the IMF came up with um to lend to
Speaker 2: um poorer countries for climate purposes, um which was heralded,
Speaker 2: you know, all around the world as a major step forward. Well,
Speaker 2: it's actually a fairly small amount. It's big for some
Speaker 2: island countries. Yes. But,
Speaker 2: and the rest of the scheme of things, it's in
Speaker 2: the bigger scheme, it's not so big. And the reason
Speaker 2: is because it's all funded on STR contributions and those
Speaker 2: have to be
Speaker 2: reserves and extra reserves in these trust funds. And the
Speaker 2: conditionality has,
Speaker 2: you have a full fledged IMF program and you get
Speaker 2: some money from the trust fund and it's just complicated.
Speaker 2: It's a big mess bureaucratically and the, the outcome is
Speaker 2: not that great. So the African Development Bank now,
Speaker 2: oh,
Speaker 2: with a bunch of guarantees from the UK and other
Speaker 2: countries to do exactly the same. But it doesn't require
Speaker 2: a full IMF program
Speaker 2: because apparently it has sufficient guarantees from other countries to
Speaker 2: use these SDRS. So that's uh an un bureaucratic way
Speaker 2: of proceeding. And if it gains uh followers, it could
Speaker 2: also apply to others like L A DB and the
Speaker 2: Asia Development Bank and so forth. And that would open
Speaker 2: up new ways of financing. Um within limits, I would
Speaker 2: say still. But
Speaker 2: it, it does away with this um IMF program requirement.
Speaker 2: That kind of is a conflict of interest for the
Speaker 2: IMF really and uh just creates unnecessary bureaucratic hurdles. So,
Speaker 2: uh you know, I've been going on to explain a
Speaker 2: lot of this and I'm, I'm sorry, I hope this
Speaker 2: is interesting for people, but you can see that the
Speaker 2: devil is in the details. First of all, and second,
Speaker 2: all these incremental
Speaker 2: kind of ways of making progress are really because there
Speaker 2: is no other ways forward. There's no big decision on
Speaker 2: the voting shares, there's no big decision on, you know,
Speaker 2: uh raising lots of money for the World Bank and this.
Speaker 2: So everybody is trying to, to tweak the existing system
Speaker 2: so that something comes out of it and they can
Speaker 2: claim it as a success,
Speaker 1: right? Um I think uh I mean, a super helpful Martin.
Speaker 1: Uh but at the same time as you correctly say,
Speaker 1: these are uh on the margin, uh these are not
Speaker 1: uh seismic in terms of global development, finance or meeting
Speaker 1: any of the major lumpy needs of the developing world.
Speaker 1: And going back to the first point in terms of
Speaker 1: the voice and the quota in this international organization, certainly
Speaker 1: that crisis is not being resolved by these incremental changes.
Speaker 1: Martin, I felt that, you know, the April meetings were
Speaker 1: not that different in terms of communication than the October
Speaker 1: 2023 meetings in Marrakesh. Although there was one word that
Speaker 1: was not mentioned at all in those meetings and are
Speaker 1: mentioned a lot these days and including in the three
Speaker 1: meetings is the word overcapacity. So the Americans are, you know,
Speaker 1: looking hard at China's industrial capacity and terming it as
Speaker 1: overcapacity with the risk of exporting deflation.
Speaker 1: Uh What do you think of this argument? And where
Speaker 1: do you think the IMF stands on this?
Speaker 2: Um more than the argument first. Um I think it
Speaker 2: reflects
Speaker 2: um a very different view, a philosophical difference of the,
Speaker 2: the role of the state in China as opposed to
Speaker 2: a lot of parts of the rest of the world.
Speaker 2: Um The the private sector is kind of um an
Speaker 2: interesting entity in uh in China, right? The question is
Speaker 2: whether it ever existed or it has probably existed for
Speaker 2: a while. But then
Speaker 2: in the last couple of years, they have clamped down
Speaker 2: like quite a bit on entrepreneurs because they saw um
Speaker 2: first of all
Speaker 2: growth of inequality in China. But I think more importantly,
Speaker 2: I think the leadership feared that the role of the
Speaker 2: party was being questioned. And so what I saw is
Speaker 2: that there was a lot of clamping down on private
Speaker 2: investment and private entrepreneurship
Speaker 2: um in the uh uh at least in the finance
Speaker 2: sector and to some extent, probably elsewhere, although don't get
Speaker 2: me wrong. I mean, obviously you have companies that are
Speaker 2: fairly independent in in China. But I think uh the
Speaker 2: overall notion that, that these, that these kind of operate
Speaker 2: independently of the party and the state is something that
Speaker 2: China wouldn't probably subscribe to as opposed to um Western
Speaker 2: liberal democracies where, you know,
Speaker 2: you have to have a good reason for the state
Speaker 2: to interfere with your business. So I think China looks
Speaker 2: at its economy and says, well, it's part of the
Speaker 2: state broadly speaking. So what do we do? Um to
Speaker 2: first of all address the big slump that we've been
Speaker 2: facing because of our housing, our problems, our debt, our demographics,
Speaker 2: um we need to avoid um first of all, social
Speaker 2: uncertainty and social upheaval that threatens the rule of the party.
Speaker 2: And b um we need to prepare um especially given
Speaker 2: our demographics for the challenges of the next 1020 years.
Speaker 2: And so they seem to have come to a conclusion
Speaker 2: that
Speaker 2: um they need to find ways to support what they
Speaker 2: see as first of all, key industries and second uh
Speaker 2: key markets. So it's no accident. I think that China
Speaker 2: is doing a lot of business with the global South
Speaker 2: as we call it. Um because that's where the population
Speaker 2: growth sits over the next, you know, 2030 40 years.
Speaker 2: Um And it's no kind of surprise that they're trying
Speaker 2: to boost
Speaker 2: industries that they think would be critical, like, you know,
Speaker 2: green energy um technology A I
Speaker 2: EVs if you want. So
Speaker 2: um what happens is that, I think China which is inward,
Speaker 2: I think, uh you know, to a, to a, to
Speaker 2: a degree that we in the West can't really imagine
Speaker 2: uh a billion people that are very internally consumed with
Speaker 2: their own issues. They don't, I think, look so far
Speaker 2: out and if the Chinese say, well, we need this,
Speaker 2: who's going to stop us and that of course, brings
Speaker 2: them into that conflict with the US. Who as you said,
Speaker 2: things, this is overcapacity, they're manufacturing their way out of
Speaker 2: the crisis, they're being a burden on the rest of
Speaker 2: the world. And um that I think will lead us
Speaker 2: into even greater conflict if um there's a change of
Speaker 2: power in Washington.
Speaker 2: Um but I think it's, it's rooted in this fundamental
Speaker 2: difference of view of what the state is there for
Speaker 2: and the role of subsidies and all that.
Speaker 2: So um I don't think it's gonna go away anytime soon.
Speaker 2: I mean, we hear from uh Secretary of State Lincoln
Speaker 2: being in China and being accused of speaking in two
Speaker 2: tongues about seeking greater um and better relations with China.
Speaker 2: But at the same time, of course, the US is
Speaker 2: preparing economic steps against China.
Speaker 2: Um it's, it's really causing the Europeans big difficulties because
Speaker 2: they rely much more. I think on China as an
Speaker 2: export market than the US and also of course, a
Speaker 2: trade partner on imports. Um and it's, it's adding to
Speaker 2: this sense that I felt during the spring meetings that,
Speaker 2: you know, really the the big powers can kind of
Speaker 2: have started to talk past each other to some sense
Speaker 2: and I don't know how it's going to play out.
Speaker 2: I have to admit, but I don't think there's going
Speaker 2: to be any way the Chinese will stop subsidizing some
Speaker 2: of these companies, Europe and the US will probably try
Speaker 2: to raise tariffs and keep them out in other ways.
Speaker 2: But you know, the Chinese economy is still a big
Speaker 2: juggernaut and um
Speaker 2: uh to some extent, it's helpful, as you yourself said,
Speaker 2: a couple of times also in last week's interview with
Speaker 2: Alexis Crow, which was really good. Um you know,
Speaker 2: is there really a problem if China supports a lot
Speaker 2: of green technology to the world that everybody needs.
Speaker 2: Um one can have different views on that. I think
Speaker 2: that Western countries, the liberal democracies still want to have
Speaker 2: some capacity left to do it themselves because being dependent
Speaker 2: on another country,
Speaker 2: as you know, especially in this time of geopolitical strife
Speaker 2: has been uh risky and the Russians to see from
Speaker 2: the other way around.
Speaker 2: So there is a there is a trend for
Speaker 2: on shoring reshoring and that applies to all kind of
Speaker 2: sectors and I don't see a way out right now,
Speaker 2: but it's a problem as we know and this deflationary
Speaker 2: impasse from China um may be with us, but so
Speaker 2: is probably a somewhat inflationary impulse from the US, given
Speaker 2: what they do on fiscal policy, which probably the Chinese
Speaker 2: will tell them. Well, you know, they bring your house
Speaker 2: in order. First, I could imagine.
Speaker 1: Uh Martin, do you feel that the US Treasury's line
Speaker 1: of argument on overcapacity would be something that the IMF
Speaker 1: would be sort of forced to take up and there
Speaker 1: will be in their articles for consultation with China or elsewhere.
Speaker 1: This issue will become something that the IMF staff adopt.
Speaker 2: You know, the IMF um that falls under IMF surveillance, right?
Speaker 2: Because they are not trade organization, but of course, they
Speaker 2: are responsible for exchange rates and the like
Speaker 2: the IMF surveillance has not been its strongest suit unfortunately,
Speaker 2: in recent years of the last five to be precise
Speaker 2: um because the focus was elsewhere. And um
Speaker 2: if you have a business model where you need the
Speaker 2: big countries to provide funds for lending to small economies
Speaker 2: and poor economies, then you don't want to go up
Speaker 2: against Europe
Speaker 2: biggest contributors. And, you know, I I've been really disappointed
Speaker 2: by the way in general that um that the fund
Speaker 2: has handled surveillance in recent years. It's been surprising that
Speaker 2: they've come back to the spring meetings by talking about
Speaker 2: the global economy almost exclusively in the curtain raiser almost
Speaker 2: without mentioning climate. Um It's not that climate isn't important,
Speaker 2: but they focused not enough on what they were supposed
Speaker 2: to do.
Speaker 2: So whether there's guts in the IMF to take on
Speaker 2: China on this one. We'll see, I think the recent
Speaker 2: staff reports have not been bad but on this particular issue,
Speaker 2: um we'll have to see the, the key report here
Speaker 2: if you ask me is the so called external sector
Speaker 2: report in June or July,
Speaker 2: where they go through global current account imbalances where they
Speaker 2: look at the exchange rate valuation and where they come
Speaker 2: to a a judgment whether um you know, there there
Speaker 2: is some, some, some policies that need to be adjusted.
Speaker 2: Um I would imagine that the pressure from uh from
Speaker 2: uh across uh 19th street from, from the Treasury is
Speaker 2: big on writing something we'll have to see. I mean,
Speaker 2: you know, as an economist, I would say, as someone
Speaker 2: who's grown up in the, in the uh in, in,
Speaker 2: in market economies, I would say, well, of course, China
Speaker 2: is doing something that's patently unfair from a western sense
Speaker 2: of the world, but whether China is listening is a
Speaker 2: different story.
Speaker 2: So I would hope that the IMF is clear on it. They,
Speaker 2: they at least the China reports have been pretty good in,
Speaker 2: in the last few years. But whether the institutions comes
Speaker 2: up with a, with a tough call that gets through
Speaker 2: its board, we'll have to see. Um I think there's
Speaker 2: ample evidence that China is hurting in some areas uh competitors.
Speaker 2: But um you know, that's one part where we'll have
Speaker 2: to see whether the fund is really still powerful enough
Speaker 2: to send unpleasant messages to its members and it has
Speaker 2: to be matched by, by messengers on the US, which
Speaker 2: they've started.
Speaker 1: That's right. So I want to talk a little bit
Speaker 1: about the US. Um But, but I, I'll start by
Speaker 1: referring something on the international front, which is that there
Speaker 1: was this US, Korea Japan trilateral finance dialogue. Uh right
Speaker 1: during the beginning of the meetings and the communique they issued,
Speaker 1: I I thought it was interesting because normally these are
Speaker 1: rather proforma importance of cooper operation, that sort of stuff
Speaker 1: uh that is mentioned. But in this one, there was
Speaker 1: explicit mention of the recent weakness in the yen and
Speaker 1: the one
Speaker 1: uh so clearly, even at the rather so almost like
Speaker 1: diplomatic level, the exchange issue is now coming to the fore.
Speaker 1: So let me reverse it around and say that, you know,
Speaker 1: we could talk about yen and one later but the
Speaker 1: US dollar, I mean, what's your sense of the US
Speaker 1: dollar valuation? Uh And uh
Speaker 1: what do you make of, you know, currencies like Yemen,
Speaker 1: one weakening, sharp Yemen. Are they just Correll of one
Speaker 1: another or it's about us being relatively so much stronger
Speaker 1: than the rest of the world, they can absorb high
Speaker 1: interest rates and maintain a US strong dollar. And it
Speaker 1: is the problem for the rest of the world, not
Speaker 1: a problem for the US.
Speaker 2: Um Well, problems in the rest of the world also
Speaker 2: come around usually because cheaper exchange rates also mean that
Speaker 2: um are not cheaper but but but these kind of
Speaker 2: valuations of the exchange rate means that competitors will become
Speaker 2: more competitive and the US economy will become less competitive.
Speaker 2: So at some point, there's gonna be some further widening
Speaker 2: of the deficit in the US and some complaints about
Speaker 2: how could other countries undercut them. Um Again, this has become,
Speaker 2: this would become a big problem. Um If you think
Speaker 2: about the next administration being from a different party, because then,
Speaker 2: you know, economics doesn't play such a big role. It's
Speaker 2: the numbers and how can they export so much to
Speaker 2: us out of the right.
Speaker 2: Um The, the problem will then be that fiscal policy
Speaker 2: will probably not be tightened. Um It's rarely the case
Speaker 2: under populist governments. We're already talking about new tax cuts
Speaker 2: under the Trump administration possibly or an extension of current
Speaker 2: tax cuts. So, um right now, to be honest, um
Speaker 2: if one, if one is a member of a Liberal
Speaker 2: Democratic state like Japan and Korea, are, they will understand
Speaker 2: that the US right now, especially the Biden administration is
Speaker 2: not going to commit political suicide by kind of talking about,
Speaker 2: you know, tax uh tax rises or expenditure cuts and
Speaker 2: the like.
Speaker 2: So I think everybody needs to, I think, understand that
Speaker 2: right now, um the focus of the Biden administration is
Speaker 2: exclusively on November and you can see that in other
Speaker 2: measures as well when they came up with steel and
Speaker 2: aluminum tariffs on the Monday of the, of the spring meetings,
Speaker 2: a great move to get people all excited about bilateralism.
Speaker 2: But you know, they have elections to win and these
Speaker 2: elections in a way are critical for what's gonna happen,
Speaker 2: not just the next four years, but much longer. What's
Speaker 2: happened to
Speaker 2: geopolitical developments around the world. It's a question, I don't
Speaker 2: want to say war and peace, but it gets, it
Speaker 2: gets increasingly up there if you, if you have someone
Speaker 2: who is reasonable in the White House.
Speaker 2: Um So, um I mean, there's gonna be some talk,
Speaker 2: they'll think about how to respond on uh monetary policy
Speaker 2: in these countries, I'm sure,
Speaker 2: but it's going to play out to the disadvantage eventually
Speaker 2: of the US, if there's some export competition that's heating
Speaker 2: up and then, you know, it plays in the hands
Speaker 2: of those who want more terrorists but that, that's a
Speaker 2: bit down the road, I think for the moment, uh
Speaker 2: I think the countries will have no choice but to
Speaker 2: keep up with it. Um The fed is, I think
Speaker 2: in my view, right? Not to um play politics. So
Speaker 2: they need to focus on their mandate, which means they
Speaker 2: may not cut uh anytime soon, who knows how long
Speaker 2: it's going to take
Speaker 2: and other countries will have to accommodate it. I mean,
Speaker 2: it's not their fault obviously, but um you know, if, if,
Speaker 2: if Japan and Korea feel that
Speaker 2: um, the inflation targets are being threatened, well, they need
Speaker 2: to raise rates and it's going to be unfortunate. But, um,
Speaker 2: let's talk again in a year from time when, um,
Speaker 2: there's another, but there's the same administration still and then
Speaker 2: kind of getting really worried about fiscal trends which are
Speaker 2: clearly on a, on a path in the US that
Speaker 2: can go on much until after the uh once the
Speaker 2: elections are over.
Speaker 1: Right? I mean, I never thought that I would see
Speaker 1: trillion dollar interest payment on the US fiscal accounts in
Speaker 1: 2023 2024. But that's where we are at. Martin. You
Speaker 1: spent a number of years covering Japan. I had the
Speaker 1: pleasure of working with you in Japan. So I will
Speaker 1: sort of, you know, end the Asian discussion with a
Speaker 1: little more discourse on Japan. Uh It's, it's a pretty
Speaker 1: remarkable situation where, you know, we had decades of deflationary
Speaker 1: dynamic and unconventional monetary policy
Speaker 1: and now we have the makings of inflation beginning to
Speaker 1: become an issue. Uh but more importantly, that extremely weak
Speaker 1: yen at any sort of reasonable measure, one would say
Speaker 1: it's substantially undervalued.
Speaker 1: What, what do you think of, you know, Boj and Governor,
Speaker 1: h I mean, does it make sense for them to
Speaker 1: uh you know, be fairly aggressive on monetary policy? Because
Speaker 1: you and I remember uh 23 years ago Japan tried
Speaker 1: to normalize monetary policy and it ended up being in recession.
Speaker 2: Yeah.
Speaker 2: So again, I said, you know, if, if they feel
Speaker 2: that inflation is getting a bit out of control then
Speaker 2: they need to do something. But to some extent it
Speaker 2: may be helpful for Japan. I don't know exactly the
Speaker 2: latest CP I readings. But, um, there's a, there's a
Speaker 2: reason they've gone off their zero interest rate policy, maybe
Speaker 2: they can absorb a little bit of that. Um, they've become,
Speaker 2: you know, almost like a post aging country now. It,
Speaker 2: it seems like they've gone through the worst of the
Speaker 2: aging process. And now, um,
Speaker 2: I think there were some good pieces on Bloomberg the
Speaker 2: other day. Um, Bloomberg says, well, you know, the demographics
Speaker 2: are much worse now, in some other countries, Europe, Japan
Speaker 2: is actually not stabilizing, but it's not so bad anymore.
Speaker 2: So they're over to become.
Speaker 2: And, um, they've been surprising everybody I think with their
Speaker 2: resilience and their inventiveness and that exchange rate will have,
Speaker 2: will help their companies, um, for a while. But, um,
Speaker 2: clearly there is a manpower constraint and, uh, you know,
Speaker 2: when once that kind of begins to bite too much
Speaker 2: into wages and competitiveness, I think BOJ will need to act.
Speaker 2: So maybe it's becoming a bit more like, um normal country.
Speaker 2: But again, um, once the elections are over in the
Speaker 2: US and everything goes, um, as many people around the
Speaker 2: globe hope then there should be some, I would expect
Speaker 2: some correction on fiscal policy after that because you know,
Speaker 2: there's some very good economists in that administration and they
Speaker 2: know the trends just as much as we do. So
Speaker 2: I think these countries will give the USA little bit
Speaker 2: of the benefit of the doubt for a couple of
Speaker 2: months
Speaker 2: and then we'll see um if nothing happens, then next
Speaker 2: year will be the the time for much more serious
Speaker 2: discussions about
Speaker 2: global imbalances again. So
Speaker 1: Martin, in your view, consolidation in the fiscal side in
Speaker 1: the United States would lead to some degree of curtailing
Speaker 1: of demand, uh, which then ought to play into a
Speaker 1: weakening of the US dollar. And that should give some
Speaker 1: degree of breathing room for the Japan and the careers
Speaker 1: of the
Speaker 2: world.
Speaker 2: Yeah, I think so. I mean, once the fed starts
Speaker 2: is able to start easing rates, I think then things
Speaker 2: should adjust a bit. I mean, a lot of what
Speaker 2: we're seeing now is being driven by, by fears about
Speaker 2: the unsustainable US fiscal position. Right. So 10 year yields
Speaker 2: are moving very fast again. Um, they hit last year's
Speaker 2: level and there's fear that there's going to be more so,
Speaker 2: you know, people, some, some, some capital is kind of
Speaker 2: coming into the yes and going like, great, we're going
Speaker 2: to use these rates. Um, others are more fearful. But I,
Speaker 2: I think there's a lot of it driven by uncertainty
Speaker 2: right now and I think that things will come down
Speaker 2: once we're back into some quieter um, waters hopefully.
Speaker 2: Um, and also assuming that there's no financial accident in between. Right?
Speaker 2: And obviously the faster things change, the more risk there
Speaker 2: is that something goes up somewhere,
Speaker 1: right? I was plotting the GDP numbers that came out
Speaker 1: yesterday for the United States. And of course, along with
Speaker 1: the growth data and the national account data, you get
Speaker 1: all those different consumption expenditure deflator
Speaker 1: the first quarter, consumer expenditure deflator and the core consumer
Speaker 1: expenditure deflate did not look good. Martin uh used the
Speaker 1: chart is sort of alarming that from mid 22 onward,
Speaker 1: you see this inflation going all the way to the
Speaker 1: end of 2023 and then there's a really unpleasant bumper
Speaker 1: for the first quarter of 2024.
Speaker 1: Um So what if that baseline scenario which I think
Speaker 1: both you and I would like to see pan out
Speaker 1: which is some softening of demand, some softening of the
Speaker 1: inflation and then some rate cuts. Uh What if we
Speaker 1: don't get that? And we have all of 2024 without
Speaker 1: any rate cuts in the US? Are we then looking
Speaker 1: at some serious risk of emerging market crisis?
Speaker 2: Well, yeah, well, that's a different story. We haven't talked
Speaker 2: about it. Yeah. Um um because we were focusing, I
Speaker 2: guess in Japan and Korea. But yeah, and I mean,
Speaker 2: there's also a possibility the fed may raise again at
Speaker 2: some point. Although, and you've talked about that with um
Speaker 2: with your, with your counterparts, I think the last couple
Speaker 2: of times um there are some factors that
Speaker 2: may suggest that well, the long term or medium term
Speaker 2: downward glide path for inflation is still there like, you know,
Speaker 2: housing and the like, but I'm not a market analyst.
Speaker 2: So um you know, much more about that than I do.
Speaker 2: But yeah, there's a lot of uncertainty now, emerging markets
Speaker 2: um
Speaker 2: have come through COVID rather well with all the market
Speaker 2: generations and
Speaker 2: supply cuts and inflation uh supply chain uh problems and,
Speaker 2: and uh inflation, many have been quite alert on the
Speaker 2: monetary policy front tightened early, were able to, to loosen
Speaker 2: up again, couldn't totally um
Speaker 2: uh avoid a peak in inflation, of course, but I
Speaker 2: think we're able to manage it in a very responsible
Speaker 2: way and kept stability and kept capital flows in check.
Speaker 2: So very good economic management. And I would expect that,
Speaker 2: you know, some of the large countries especially um
Speaker 2: in Asia that they will continue to do very well.
Speaker 2: They've just grown also so big and, and, and have
Speaker 2: gotten so good at managing their economies that um
Speaker 2: barring some major shock somewhere else in the financial world,
Speaker 2: they should I think relatively well, but there's a big
Speaker 2: bunch of emerging markets um elsewhere that um may also
Speaker 2: have been jumping on the fiscal bandwagon and you may
Speaker 2: not see it yet, but coming you know, coming into
Speaker 2: next year may require a lot more financing, may have to, to,
Speaker 2: uh you know, roll over that
Speaker 2: and um may not have done this all in the
Speaker 2: local currencies and even if so maybe hit by some
Speaker 2: interest shocks because of, you know, what, what the US
Speaker 2: is doing. So, yeah, the potential is there. Um I
Speaker 2: wouldn't be surprised. Um
Speaker 2: I've been very worried before COVID when I was still
Speaker 2: at the fund about emerging markets and I've been proven
Speaker 2: wrong to some extent. Um So I wouldn't kind of
Speaker 2: buy wolf necessarily on emerging markets as a whole. I've
Speaker 2: learned my lesson there. But um
Speaker 2: for some countries, it's gonna get more and more difficult.
Speaker 2: I don't want to mention any names but um look at,
Speaker 2: look at fiscal paths in in emerging markets and then
Speaker 2: you'll then you'll see where maybe there are some problem
Speaker 2: candidates and we're not even talking about the Argentina of
Speaker 2: this world. Yeah.
Speaker 1: Uh Martin, I have no problems mentioning names but even
Speaker 1: beyond the emerging market space. And going back to our
Speaker 1: early discussion on Japan and Korea, particularly Korea, I mean,
Speaker 1: you know, huge housing overhang, lots of debt issue, lots
Speaker 1: of short term, short duration risk. Uh and if rates
Speaker 1: do remain where they are in the US for the
Speaker 1: rest of the year, I do wonder if that makes
Speaker 1: life difficult for our former IMF colleague who's now heading
Speaker 1: the Bank of Korea
Speaker 1: Uh So, um, but you're right. Uh, we probably would
Speaker 1: have been convinced if two years ago somebody told us
Speaker 1: rates would be where they are now for a prolonged period,
Speaker 1: we would have predicted major rippling crisis in various parts
Speaker 1: of em. And DM. And so far the absorption capacity
Speaker 1: of the global economy has been pretty impressive.
Speaker 2: Yeah. No, it's been interesting. Right. The big blow up, uh,
Speaker 2: from this tightening episode that the FED went through after
Speaker 2: missing it first
Speaker 2: uh was in, in the US itself, the regional banks
Speaker 2: and then credit, of course. Right. So that was really interesting.
Speaker 2: It didn't have any effects beyond that too much. Um
Speaker 2: So hopefully we don't see it now,
Speaker 2: but the usual um rule is, I guess if something
Speaker 2: really unexpected happens and it happens fast, like
Speaker 2: a change in the red outlook in the US to,
Speaker 2: to the upside that could trigger some
Speaker 2: more upheaval. I mean, again, you talked about private equity,
Speaker 2: I think before there's a lot of uncertainty there in
Speaker 2: the non-bank financial sector. Um the GFSR, the, the global
Speaker 2: financial stability report of the IMF looked into it, but
Speaker 2: overall the the assessment was pretty sanguine and also when
Speaker 2: you talk to people elsewhere, I mean, there is nobody
Speaker 2: who kind of rings the alarm bells big time.
Speaker 2: But um we've been too long in this business time.
Speaker 2: All right, we know that something
Speaker 2: can happen very quickly and then everybody says, why didn't
Speaker 2: you see it before? Yeah.
Speaker 1: I mean, if only somebody were to go back to
Speaker 1: the 2006 US article for report
Speaker 1: it's pretty sanguine, you know. And then one year later
Speaker 1: I
Speaker 2: think I already moved off the team back then.
Speaker 1: I was not pointing any fingers. Martin, I think there's
Speaker 1: a different Martin who was involved there.
Speaker 2: No, actually, I mean, but, but it's interesting you bring
Speaker 2: this up because, um, I would like to see this
Speaker 2: more from the fun look. I mean, back in,
Speaker 2: uh, I think it was 06 or 07
Speaker 2: and I had actually moved off the team, but I
Speaker 2: did cover the housing market when it was still kind of, ok,
Speaker 2: it was running up. Um, but, but the IMF at
Speaker 2: some point called the US recession
Speaker 2: and uh the, the team did it very deliberately. Um,
Speaker 2: and they were kind of right. I think it wasn't
Speaker 2: the 2007 report, I believe they called the US recession,
Speaker 2: you know, and they had to run against some, you know,
Speaker 2: resistance uh internally and externally. Well, what they didn't see
Speaker 2: coming was a global financial crisis but they did, they
Speaker 2: did see the, the, the, the, the situation change in
Speaker 2: the US and
Speaker 2: I would wish the, the fund in general had more
Speaker 2: guts of calling out countries on this. It's just too
Speaker 2: important and, you know, they can be wrong, of course. But, um,
Speaker 2: they, they need to do their job, they need to
Speaker 2: be led to do their job. And so, um, you know,
Speaker 2: if there is a shift or now a bit more
Speaker 2: awareness and focus on surveillance at the IMF if the
Speaker 2: spring meetings may give you some hope. I mean, the
Speaker 2: US fiscal deficit was obvious they can move around that,
Speaker 2: but there's also other issues that need to be addressed
Speaker 2: and if there's a move back toward greater surveillance emphasis,
Speaker 2: that would be all the better for the global economy.
Speaker 1: Yeah, absolutely.
Speaker 1: Uh So in terms of surveillance, uh Martin, uh when
Speaker 1: you and I met in Morocco during the annual meetings
Speaker 1: last year, uh there was a lot of chat, there
Speaker 1: was a high profile report on the cost of geo
Speaker 1: economic fragmentation. So earlier in the conversation, you've already touched
Speaker 1: upon that issue that
Speaker 1: in the name of security resilience of supply chain, some
Speaker 1: degree of uring offshoring is inevitable. Uh Now, through this meetings,
Speaker 1: we also saw the am continue to produce research underscoring this.
Speaker 1: Uh And I think I saw a speech by GTA
Speaker 1: Goinna given in November where she basically pointed out that
Speaker 1: all we're doing is lengthening the global supply chain. We're
Speaker 1: not necessarily creating a more resilient system. We're just saying
Speaker 1: I'm not going to import from China and then China
Speaker 1: goes and invest in Mexico and then I end up
Speaker 1: importing from Mexico. Does it really make us more resilient?
Speaker 1: So I want to hear your take on this whole
Speaker 1: geo economic fragmentation thesis.
Speaker 2: So, um if you impose constraints on the system, I
Speaker 2: think by default, it's gonna be less efficient than um otherwise, right.
Speaker 2: So that's the basic optimization theory now.
Speaker 2: Has the world found a good way to kind of
Speaker 2: work around some of these restrictions? It's actually quite amazing.
Speaker 2: Um For example, after the Iran Israel conflict escalated and,
Speaker 2: and the uh the Yemenite militias started shooting at the
Speaker 2: Gulf of the Strait of Hormuz and the whole Gulf,
Speaker 2: how seamlessly things seem to have been rerouted.
Speaker 2: Um Just like during COVID, I mean, it took some time, obviously,
Speaker 2: but um all of a sudden, you know, things kept
Speaker 2: flowing again. Uh you bottlenecks were at rest
Speaker 2: uh restrictions on, on certain Chinese imports, you know, can
Speaker 2: be overcome. So it seems like there is there is
Speaker 2: this um
Speaker 2: ability of, of uh the global trade network to absorb
Speaker 2: quite a number of shocks.
Speaker 2: No.
Speaker 2: Um perhaps that is because we haven't really seen either
Speaker 2: side engaging in a full blown trade war yet. And
Speaker 2: I say yet because as you know, one of the
Speaker 2: candidates here in the US has said that there's going
Speaker 2: to be big tariffs on everything from China uh from,
Speaker 2: you know, baby diapers to high end chips.
Speaker 2: And what that will do if China retaliates, I don't.
Speaker 2: But clearly this the specter of more constraints on the
Speaker 2: global economy is hanging over us. That's why these elections
Speaker 2: are also so important.
Speaker 2: Um And um
Speaker 2: how long the system can work around all these constraints
Speaker 2: remains to be seen. Now, China is very proactive. Um
Speaker 2: as you and I discussed, I threw over lunch too bad.
Speaker 2: We didn't record it back then. But um uh you
Speaker 2: were quite amazed by the amount of investment, for example
Speaker 2: of China in Mexico. Um Of course, in Vietnam, in
Speaker 2: all of Asia, there's a lot of Chinese companies that
Speaker 2: are setting up shop there. Um because that way they
Speaker 2: can work around some of the constraints.
Speaker 2: Um
Speaker 2: And um you know, I I think this is good
Speaker 2: because it also means that um in a sense, the
Speaker 2: the the globalization increases, more countries have a stake in
Speaker 2: free investment and trade, right? Because in the end, it
Speaker 2: provides jobs in Mexico or elsewhere for people, even if
Speaker 2: they work for a Chinese company. Um the Chinese are
Speaker 2: also actively getting into Europe. Um President Xi is, is
Speaker 2: visiting Hungary of all places where they got
Speaker 2: um uh approval to open up big. Uh I think
Speaker 2: it's a uh some it company, I have to look
Speaker 2: it up again. Uh It's a huge green field investment
Speaker 2: um into the European Union and some other countries also.
Speaker 2: So um China itself is preparing for it. Um The
Speaker 2: US is trying to get together alliances on its part
Speaker 2: to work around this. Everybody's grambling for minerals and metals
Speaker 2: and all this. So
Speaker 2: I think we're still at a point where it's in
Speaker 2: everybody's interest to keep things going. Um, I don't see
Speaker 2: any big confrontation yet. If the Biden administration can continue,
Speaker 2: I think it's going to continue that way. But,
Speaker 2: um, if political relations deteriorate, then we may be into
Speaker 2: more of a full blown trade war and then, um,
Speaker 2: I don't know whether the world will separate into
Speaker 2: different camps or whether the middle is strong enough to
Speaker 2: tell the big guys. Well, you know, sorry, but we cannot,
Speaker 2: we cannot decide between of you. You have to continue
Speaker 2: to work with, with us and we have to continue
Speaker 2: to work with both of you. I don't know, it's
Speaker 2: an interesting situation, but I don't see that um
Speaker 2: uh fragmentation uh is necessarily continuing in a way that
Speaker 2: allows all actors to adjust smoothly,
Speaker 2: it can blow up and it can blow up for
Speaker 2: other reasons. It can also become much more difficult if,
Speaker 2: if Russia has big wins in Ukraine and the whole
Speaker 2: European situation is different and Europe starts kind of uh
Speaker 2: turning on itself and, and tearing itself apart and in
Speaker 2: how to respond,
Speaker 2: it's very difficult to say, but there's a lot of
Speaker 2: uncertainties out there. And I wouldn't be so sanguine about
Speaker 2: the future of globalization so far about the future of
Speaker 2: fragmentation so far. It's been OK,
Speaker 2: we could live with it, but it doesn't mean that
Speaker 2: it's going to continue that way. Right.
Speaker 1: Since we just touched on Europe, Martin, let's just jump
Speaker 1: over there. Uh, your thoughts on Europe? I mean, we've
Speaker 1: seen the US sort of, you know, really have a
Speaker 1: turbocharge public sector driven economic recovery and even though yesterday's
Speaker 1: GDP numbers were slightly below expectations, still pretty strong numbers
Speaker 1: from there, China, we all know it has problems and
Speaker 1: it's trying to work through that. So, where is, you know,
Speaker 1: Europe in the middle of all this?
Speaker 2: Well, um
Speaker 2: Europe is, is, is a pretty, pretty sad state right now.
Speaker 2: I mean, politically, economically, I think they're turning the corner slowly.
Speaker 2: Um again, the fund was very sanguine on their kind
Speaker 2: of recovery. Um There's room for rate cuts perhaps at
Speaker 2: some point with inflation coming down. But um
Speaker 2: it's,
Speaker 2: it's, it's the shape of
Speaker 2: in the European relations that kind of gives uh reason
Speaker 2: to be concerned and it's going to carry through to
Speaker 2: economics at some point. Um The, the Germans are kind
Speaker 2: of caught in their coalition disputes and they're not really ready,
Speaker 2: I think for big action. Um the problem with Europe
Speaker 2: is that it cannot really compete the way it is
Speaker 2: set up right now with the big guys.
Speaker 2: And in order to get there, they need reforms inside
Speaker 2: the European Union. Everybody is talking about, you know,
Speaker 2: the, the, the the banking and the common banking union
Speaker 2: capital markets and all that. Um I think it's, it
Speaker 2: needs more than that um
Speaker 2: it needs a willingness to not always push your national
Speaker 2: champions when it comes to all sorts of European projects.
Speaker 2: Think about European defense.
Speaker 2: Oh man, it's so difficult to kind of come to
Speaker 2: some common understanding because underneath every initiative
Speaker 2: is always a fight about so which parts of my
Speaker 2: domestic industry will benefit from. So it's also a mindset.
Speaker 2: It's Europe doesn't really have a European mindset yet. It's
Speaker 2: still uh
Speaker 2: uh a number of countries that
Speaker 2: have kind of given up some of the sovereignty, but
Speaker 2: they're still very sovereign. I mean, you don't have to
Speaker 2: be in Hungary necessarily to see that. Right. There are
Speaker 2: some states that are much more extreme on this one
Speaker 2: than others. But as long as Germany and France can
Speaker 2: agree on things which they seem to have difficulties doing
Speaker 2: at the moment because they are both pushing their um
Speaker 2: domestic interests first in the name of European
Speaker 2: uh action. Uh You will not see much action. So
Speaker 2: it doesn't, it doesn't, it's not just the mechanics of
Speaker 2: a common market, it's also the, the heart and soul
Speaker 2: of a common market.
Speaker 2: And, um,
Speaker 2: you know, having lived in the US now for more
Speaker 2: than a, almost 30 years now, actually, no, more than 30.
Speaker 2: Um Yeah. Yeah. No, it's been more than 30. Um
Speaker 2: everywhere you go in the US, you have a familiar
Speaker 2: feel in the cities you go and you could say, well,
Speaker 2: you know, it's always the same chain stores and stuff
Speaker 2: and all this. Ok, fine. I I grant that II
Speaker 2: I would love to be a little bit less for that,
Speaker 2: but the economy is always functioning in the same principles,
Speaker 2: you know what you get also as an investor. Yes,
Speaker 2: there's difference between state regulations here or there.
Speaker 2: You know, companies wanna wanna settle in Delaware still. But
Speaker 2: uh it's, it feels like a common market although people
Speaker 2: sometimes have um different dialects in Europe. Um it still doesn't,
Speaker 2: if you go there, there's a lot that has been achieved.
Speaker 2: No question. And uh it's been visionary in the last,
Speaker 2: you know, 50 60 70 80 years,
Speaker 2: but it's not there yet. And I'm, I wonder whether
Speaker 2: it will ever get there or whether it's going to
Speaker 2: be eaten
Speaker 2: uh alive by Russia and China and the US who
Speaker 2: all have their interests. I mean, just today, there was
Speaker 2: a big article in the German newspaper about how the,
Speaker 2: the A FD that, that Russia, the Russia file party,
Speaker 2: autocratic file party in Germany has been influenced by the
Speaker 2: Kremlin and by Chinese state security.
Speaker 2: And you know, these guys are supposed to get a
Speaker 2: big share of the next parliamentary elections. So Europe is
Speaker 2: not only
Speaker 2: kind of still stuck in its partial sovereignty, it's also
Speaker 2: subject to all these foreign interests coming in because they
Speaker 2: are not kind of grappling with how to respond in
Speaker 2: a determined way. I mean, just imagine the Russians use
Speaker 2: an outfit for the voice of Europe to get their
Speaker 2: propaganda into, into Europe.
Speaker 2: And the, the, the US and Europe have nothing comparable.
Speaker 2: There used to be a voice of America that got
Speaker 2: the voice across and help people kind of see through
Speaker 2: communism in the old days. Right now, the shoe is
Speaker 2: on the other foot, but it's the influence against democracy
Speaker 2: that's kind of gaining
Speaker 2: and there's still no response to that. Um So
Speaker 2: I don't see how, how Europe gets to this point
Speaker 2: where they agree to be um a strong economy that
Speaker 2: can really compete with China and the US.
Speaker 2: And so as long as that's not happening, they're gonna
Speaker 2: at some point be
Speaker 2: either demographically outflanked or simply become less and less meaningful
Speaker 2: and then trade will shift away from them because they
Speaker 2: don't have as much to offer anymore
Speaker 2: to, to the rest of the world as they,
Speaker 1: right. Um Europe lacks a European mindset. I'm going to
Speaker 1: use that code Martin, that was very good. Um It
Speaker 1: evokes I think, you know, exactly what it needs to
Speaker 1: sort of underscore. Um Finally, Martin, I mean, you and
Speaker 1: I are both ex IMF staff, we would like to
Speaker 1: see this institution, you know, maintain its relevance and leverage.
Speaker 1: Uh But, you know,
Speaker 1: having these conversations with you and, and hearing sort of,
Speaker 1: you know, lack of progress in these important issues like
Speaker 1: quota uh and, and not much you know, progress in
Speaker 1: the common framework either. Uh Do you worry that independent of,
Speaker 1: you know, who's president today or next year that the
Speaker 1: relevance and leverage of this institution has sort of eroded?
Speaker 1: And what would you like to see for that to
Speaker 1: be restored?
Speaker 2: Uh Well, uh for the last one, it takes all
Speaker 2: members that are determined to um
Speaker 2: shape the institutions and the way um that they were
Speaker 2: supposed to, to be.
Speaker 2: Um
Speaker 2: that is not the case right now because um
Speaker 2: um
Speaker 2: I think the the the key issue here is that
Speaker 2: um there's a lot of um
Speaker 2: stuff going on elsewhere like in the climate discussions, right?
Speaker 2: The
Speaker 2: the the the the the industrialized countries are um being blamed,
Speaker 2: you know, rightly, in many respects for
Speaker 2: um getting the global climate to where it is right now.
Speaker 2: Um this is
Speaker 2: can be measured where the, the co two emissions came
Speaker 2: from
Speaker 2: and the global South wants compensation, wants help in meeting
Speaker 2: the challenges and
Speaker 2: uh they want money
Speaker 2: now, is this money all going to be used for
Speaker 2: climate projects and raising, you know, dams everywhere where there's
Speaker 2: a flood or
Speaker 2: I'm not sure. But the point is um there's this
Speaker 2: huge debate about um helping
Speaker 2: developing countries that have not contributed to the climate crisis
Speaker 2: in adapting
Speaker 2: preparing.
Speaker 2: So that's that and there's also the pressures on um
Speaker 2: governments to finance their own climate transition. Talk about electrification
Speaker 2: of the grid and all this.
Speaker 2: Um
Speaker 2: there is the need to um uh influence the politics
Speaker 2: of partners in developing countries that are geopolitically important
Speaker 2: and more and more and more of these kind of
Speaker 2: tasks that fall on advanced economies and they don't have
Speaker 2: the money for it.
Speaker 2: Yeah, because the budgets are, as we discussed, you know,
Speaker 2: they are already pretty stretched and a lot of that
Speaker 2: has to do with aging and social
Speaker 2: um uh transfers that relate to health and pension spending.
Speaker 2: So, where's money? Where's money left? Well, look at it,
Speaker 2: the IMF has a trillion lending capacity, a trillion dollars.
Speaker 2: Um The World Bank needs more and well, with the
Speaker 2: World Bank, we need to leverage um private money, right?
Speaker 2: So the the World Bank lends and then private sector
Speaker 2: comes in and fills the rest. So I don't think
Speaker 2: that leveraging is going so well, quite frankly. Um it's
Speaker 2: uh it's not from billions to trillions, it's from billions
Speaker 2: to a few more billions at best.
Speaker 2: Um but the IMF still has a trillion and for
Speaker 2: someone who comes from the developing work and to get
Speaker 2: into the, to the IMF to lead it, it's almost like,
Speaker 2: you know, a kid in a candy store all of
Speaker 2: a sudden we have all that money and um people
Speaker 2: are frustrated that they can't use it to the, to
Speaker 2: the fullest. So
Speaker 2: um
Speaker 2: the, the thing that's been going on for the last
Speaker 2: five years has been a steady expansion of trying to
Speaker 2: get more finance to developing countries from the IMF
Speaker 2: what's not so much kind of evolved in line with
Speaker 2: it has been
Speaker 2: um
Speaker 2: the conditionality and the debt restructuring that's needed to make
Speaker 2: these programs work.
Speaker 2: And that's where the biggest risk is for the institution
Speaker 2: in my view. Um You don't even have to talk
Speaker 2: about Argentina, which is, you know, are they ever going
Speaker 2: to get out of that 40 billion hole? We'll have
Speaker 2: to see. But um other countries also get a lot
Speaker 2: of money and, and the problem is also that developing
Speaker 2: countries get most of their money these days from multilateral institutions.
Speaker 2: So they keep on lending, which is good.
Speaker 2: They may not get so much in terms of reforms always,
Speaker 2: which is not good. And you know, the way things
Speaker 2: are going in five years, 10 years, there's a risk
Speaker 2: that countries can't repay their money to the multilateral institutions
Speaker 2: if things go badly
Speaker 2: and then there's going to be again, calls for um
Speaker 2: multilateral debt forgiveness and you know, another jubilee campaign and
Speaker 2: this and that and I have sympathy for that, but
Speaker 2: it should not have happened or it should not happen
Speaker 2: that way if, if countries want to transfer money to
Speaker 2: the developing country, well, it has to be grants,
Speaker 2: some countries do it, but there's just not more money around.
Speaker 2: So they're using the institutions right now as a substitute
Speaker 2: and it's going to blow up in the face of
Speaker 2: these institutions. And it's never been good, you know, to
Speaker 2: see that happen the last time
Speaker 2: um the IMF went through a huge restructuring in the 2006.
Speaker 2: Um lots of people left, it was written off and
Speaker 2: then the global financial crisis came and all of a sudden,
Speaker 2: it didn't even have the wherewithal to address all these
Speaker 2: issues overnight.
Speaker 2: So it would hurt to see the institutions go down
Speaker 2: that way again. And for that, we need responsible kind
Speaker 2: of leadership, the the the IMF and World Bank, I
Speaker 2: think need to be integrated
Speaker 2: better in a way how uh
Speaker 2: advanced economies help
Speaker 2: uh developing countries, there needs to be more than just
Speaker 2: monetary incentives. Um
Speaker 2: I
Speaker 2: the Atlantic Council that kind of goes into that a
Speaker 2: little bit. I think countries need to be convinced to
Speaker 2: do the reforms, right? And the populations need to see
Speaker 2: that it's not just the West also showing up with
Speaker 2: money like the Chinese do. Um There needs to be
Speaker 2: a real attempt at reform which can be difficult, but
Speaker 2: I think there's more incentives that the West can offer
Speaker 2: than just money to help countries do it.
Speaker 2: And if it's done in a smart way, the institutions
Speaker 2: could be really helpful. So I think that the West
Speaker 2: needs to make sure the institutions function, they need to
Speaker 2: be doing their jobs, right? Um They should be careful
Speaker 2: to dilute control at the moment. I don't believe the
Speaker 2: interests of China in getting more votes at the IMF
Speaker 2: are so benign.
Speaker 2: So there needs to be some kind of broader concept
Speaker 2: of how to use the institutions and you have, you
Speaker 2: need to have the leadership to do it
Speaker 2: um to really make them useful from a geopolitical perspective. Otherwise,
Speaker 2: you know, we have a multilateral institution that's just been
Speaker 2: used as a piggy bank
Speaker 2: and eventually it will have to be refinanced and that's
Speaker 2: going to be awkward.
Speaker 2: Um So let's be careful how to, how to use them,
Speaker 2: let's use them. Right.
Speaker 1: Right. I think the warning is very well taken. Martin.
Speaker 1: I I share your uh concerns. Uh We've done quite
Speaker 1: the trip of the world. Mart. I say, you know,
Speaker 1: thank you very much for your time and insights.
Speaker 2: Thanks for having me time. So whenever we meet again,
Speaker 2: if we meet again, we say the last one we
Speaker 2: did in our 100 twenties.
Speaker 1: Yes, but we're not going to wait till 100 and
Speaker 1: 80 for the next month. We'll do it much before that.
Speaker 1: Uh
Speaker 2: Thank you for having
Speaker 1: me. Great to have you Martin and thanks to our
Speaker 1: listeners as well. Copy Time was produced by Ken Delbridge
Speaker 1: at Spy studios, Violet Le and Daisy. She provided additional assistance.
Speaker 1: It is for information only and does not represent any
Speaker 1: trade recommendations or what
Speaker 1: 122 episodes of copy time are available on youtube and
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Speaker 1: As for our research publications, webinars and live streams, you
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Speaker 1: a great day.