Tweet This set of questions and answers appears in Capital Magazine in July 2021, translated into Turkish. – There is a second and third wave of coronavirus in many countries while also vaccines are being delivered. How do you see the outlook for the global economy against this backdrop? How has the world economy performed since the beginning of the pandemic? JF: The world economy has performed about as well as could be expected, if one takes as given the pandemic and the inadequate public health response. True, the global recession was very sharp in the 2nd quarter of 2020. Largely due to extraordinary monetary and fiscal expansion in many countries, however, there was a substantial economic bounce-back later in the year. Global growth in 2020 was negative 3.3 per cent,
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This set of questions and answers appears in Capital Magazine in July 2021, translated into Turkish.
– There is a second and third wave of coronavirus in many countries while also vaccines are being delivered. How do you see the outlook for the global economy against this backdrop? How has the world economy performed since the beginning of the pandemic?
JF: The world economy has performed about as well as could be expected, if one takes as given the pandemic and the inadequate public health response. True, the global recession was very sharp in the 2nd quarter of 2020. Largely due to extraordinary monetary and fiscal expansion in many countries, however, there was a substantial economic bounce-back later in the year.
Global growth in 2020 was negative 3.3 per cent, which is very low historically. But the economic outlook is stronger now than one would have thought possible at the start of 2021. The OECD in May raised its global growth forecast for this year to 5.8 percent.
-How do you think different parts of the world will be affected by the recession fuelled by the pandemic? How will the developed and developing countries fare comparing?
JF: In 2020, the pandemic’s health effects were milder in developing countries, with the important exception of South America, compared to advanced countries. This was surprising, but attributable in part to a relatively younger population, to remoteness in the case of many countries, and perhaps to greater recent experience with other epidemics (in East Asia and Africa). In recent months, however, the pandemic has spread more widely in developing countries, most notably in India where the effects are devastating.
It was always likely that the global pandemic would have a more severe economic effect in developing countries, overall, than in rich countries. The US has responded to its recession with huge government relief spending and fiscal stimulus. The US can get away with levels of budget deficit and debt that most countries cannot, due to the “exorbitant privilege” of being able to borrow almost unlimited amounts in dollars, as the dollar remain the world’s leading international currency. As a result of the fiscal and monetary stimulus and a successful vaccination campaign, American growth is currently very strong.
Europe can also borrow in its own currency. But it has lagged behind the US, with respect both to fiscal expansion and vaccination. Indeed, it went back into (mild) recession earlier this year, by the technical definition of two consecutive negative GDP quarters. Some relief may come from the EU’s own recovery fund, “Next Generation EU” and from a better-late-than-never vaccination drive.
Emerging Market and Developing Economies are much more limited in their ability to borrow than Advanced Economies. This is especially true of countries like Turkey that were experiencing serious debt problems even before 2020. So far, international financial markets have been relatively sanguine and have allowed many Emerging Market and Developing Economies (EMDEs} to respond to the pandemic with some increase in spending and deficits, more so than in most past global recessions. This is in large part because the Federal Reserve in March 2020 cut interest rates to zero and flooded the world with liquidity, with other central banks following. But, as EMDE debt continues to rise, one fears that these countries will be in serious trouble when global financial conditions sooner or later turn against them, as happened in 1982, 1997-2001, 2008, and 2014-18.
– On the optimistic side there was a hope for a V shaped recovery beginning from the 2nd half of the 2020. As a veteran economist, what is your own scenario of recovery? If we envision recovery as a destination, how far (at which phase) are we from that point?
JF: The situation differs from country to country. But, as some predicted, the pattern is not quite a V-shape, but more of a “square root sign” or “Nike swoosh,” that is, a free-fall in the second quarter in 2020, followed by a rapid half-way bounce-back in the third quarter of that year and then a gradual completion of the recovery over a few years. In the US, the recovery will be rapid this year, in excess of 6 per cent. We will probably surpass our pre-pandemic GDP peak by the mid-point of 2021 and catch up with our previous trend perhaps by the end of the year.
Globally, the IMF’s prediction of 6 % growth in gross world output in 2021, but slower in the euro area and Japan, sounds about right.
-Which region or country will lead the recovery, and why? What will be the weights of the developed (US, Europe) and the developing countries in the recovery?
JF: The US will lead the recovery, together with China. The successful vaccination program and huge fiscal stimulus should make the US the world’s largest source of growth in 2021 and perhaps 2022. Similarly, China has already been playing a big role in the global expansion, particularly with regard to the demand for commodities, as it also did in 2009-10.
– In one of your articles you say, “Contrary to widespread belief, post-war Democratic US presidents have been significantly better for the American economy than Republicans have”. So what will President Biden term will mean for the US economy and politics when compared to the Trump era? How do you evaluate criticisms against his “American Rescue Plan Act” that claim President Biden is trying to bring “welfare state” to the US.
JF: In the 16 complete US presidential terms that followed World War II, from Harry Truman through Barack Obama, annual GDP growth averaged 4.3% under Democratic presidents, versus 2.5% under Republicans. Trump’s presidency pulled down the Republican score further. (All five of the last five US recessions started with a Repubican in the White House. And 9 of the last 10 recessions.)
An even more startling fact emerges from a review of the last 10 times when an incumbent from one party handed over the White House to a president from the other party. In five of these transitions, a Democrat was succeeded by a Republican; each time the growth rate went down from one term to the next. In five of the transitions, a Republican was succeeded by a Democrat; each time the growth rate went up. No exceptions. It is still early in Joe Biden’s term in office; but so far he seems likely to extend the pattern.
In most of these presidential terms, it is hard to explain what precisely the leader did that could have brought about this result. A president’s power to determine the path of the economy is limited. But in the comparison of Biden to Trump, the difference in the quality of decision-making seems clear. This President runs a more orderly administration, processes information in a more open way, and makes decisions more rationally. Hence the successful vaccination campaign and the wave of economic legislation that was successfully passed during Biden’s first hundred days, whereas his predecessor’s main achievements were ceaseless tweets and falsehoods. In that lighit it is not surprising that Americans’ economic health and physical health are improving.
Furthermore, the Administration’s spending is mostly well-targeted. The $1.9 trillion American Rescue Act brought relief to those who need it. Next, the proposed American Jobs Act — $2.3 trillion in spending over ten years – will invest in infrastructure. Biden proposes to partly fund these programs by raising taxes on corporations and wealthy individuals. The overall effect will be to grow the size of the economic pie while also making sure that everybody gets a piece.
Regarding claims from his opponents that Biden is trying to bring socialism to the country, they say that whenever a Democrat is in the White House. They appear not to know the meaning of the word socialism (which is defined as public ownership of the means of production). As to a social welfare state, the extent of the US safety net remains far below that of Europe or many other countries of comparable means.
-There has been a long-going debate over whether China is surpassing the United States as an economic and financial power. What are your thoughts on that? Will the COVID-19 alter China’s position in balance of power in the world economy?
JF: China’s GDP is now above the US, if the two are compared using “Purchasing Power Parity” exchange rates. But it is still well behind if one uses actual market exchange rates, which seems to me the relevant ones for assessing economic power. As to financial power, various measures of the ranking of international currencies show China’s yuan not only well behind the US dollar, but also behind the euro, Japanese yen, and British pound. It still has quite aways to go.
Regardless, there is room for more than one super-power in the world.
-Biden seems to continue Trump’s tough stance on China, North Korea and Russia. How do you evaluate Biden’s international economic policy when compared to his predecessor? What will be the major differences?
JF: Unlike his predecessor, Biden is an internationalist, believes in keeping his word and the word of the United States, and has the ability to process information and make rational decisions that is necessary for a successful leader. The world will run more smoothly with him in the White House, compared to the highly erratic President Trump.
Unfortunately, though we are stepping back from the previous trend of an escalating trade war, Biden has not rushed to undo the steel tariffs and many other trade barriers that he inherited. So far, he has not put as high priority on free trade as did most of his pre-Trump predecessors.
-Which countries are you most concerned with right now when you look at the nature of their responses to the pandemic?
JF: Most countries have, at some stage of the pandemic or another, made some major mis-steps in their response. Few, even among rich countries, had adequate public health regimes in place to begin with. Many countries made the problem worse by down-playing the potential seriousness of the coronavirus and hence impeding social distancing, masking, testing, or vaccination. Leaders either failed to appreciate scientific expertise or put their own political images ahead of their citizens’ welfare, or both. Some obvious examples include former US President Donald Trump, Brazilian President Jair Bolsonaro, Mexican President Andrés Manuel López Obrador, Russian President Vladimir Putin, U.K. Prime Minister Boris Johnson, Indian President Narendra Modi, and recently deceased Tanzanian President John Mugufuli.
Some who did a poor job of managing the health crisis in 2020 are doing better this year (US, UK) and vice versa (India, Germany). It is very difficult to generalize, but autocratic and populist politicians tend to follow worse policies, such as suppressing coronavirus testing, than democratic governments with strong independent institutions.
What will be the disadvantages of countries that have not given enough stimulus to the markets such as Turkey in terms of recovery?
JF: The US is able to finance huge deficits, without exhausting the enthusiasm of global investors for holding US securities. The reason is that the dollar is still the dominant international currency. Other countries do not enjoy this “exorbitant privilege.” There are sharp limits to how much they can borrow, especially when borrowing in terms of their own currency. Emerging market countries need to run strong budgets during periods when the economic and financial conditions are favorable (e.g, 2010-13) if they are to have the “fiscal space” to respond to bad shocks like the global pandemic of 2020-21. A country like Turkey is now caught in an impossible conflict between the critical spending needs of the pandemic and the exhausted patience of international creditors.
-Do you think that the pandemic will accelerate the anti-globalization trend? If so, what will be its possible effects on the global economy, esp. for the emerging markets?
JF: Since the 2008 global financial crisis, trade has no longer been increasing as a share of the world economy. Probably the gains from lengthening supply chains had reached their limits by the time that the Global Financial Crisis hit. Over the last year, the pandemic has of course put a big dent in trade and other indicators of international integration – especially travel. As countries emerge from pandemic and recession, trade and travel will bounce back. There may be a long-term dampening effect on globalization in certain sectors such as travel (conferences by internet have demonstrated less need for in-person business meetings, for example). There will be an understandable desire to reduce dependence on international supply chains, particularly in the sensitive case of medical equipment.
But it is hard to predict what will be the effect on globalization in general. International trade increases the availability, not just of consumer goods, but of medical supplies and renewable energy equipment. Princeton historian Harold James argues that past traumas, such as European famine in the 1840s have been followed by widespread national reforms, including liberalization of trade barriers. A particularly strong example was the 1929-1945 period of Depression, protectionism, and World War. It was followed by 75 years of peace and prosperity, under a multilateral rules-based system that included steady trade liberalization. One can only hope that this pattern might repeat in the aftermath of the current pandemic.
-Geographically, where do you expect the world economic growth to come from in 2021 and onwards? Which region will spearhead economic and social progress and why?
JF: The successful vaccination program and huge fiscal stimulus should make the US a big source of growth in 2021 and 2022. Similarly, China has been playing a big role in the global expansion, particularly with regard to the demand for commodities, as it also did in 2009-10.
The US government mismanaged the Covid-19 problem in 2020. But in 2021 it is doing far better with the vaccination phase (though it should be doing more to get vaccines to people in developing countries). Meanwhile, US fiscal policy has been very expansionary, and fully accommodated by monetary policy. The result we are seeing is rapid growth in the American economy, some of which will spill over to the rest of the world via rising US imports.
-What are the biggest risks and challenges for the world economy in 2021 and onwards?
JF: The most urgent challenge is to get all countries vaccinated. The single most pressing risk is that the speed of vaccination will be too slow and will lose the race with the myriad mutations of the virus, one of which might turn out to be more powerful than the vaccines.
More generally, I see a crisis in the quality of political leadership in many major countries, which made the pandemic much worse than it had to be and which could hamper the ability to respond to whatever uncertain developments lie ahead.
Perhaps I should confine my answer to economics. Whenever easy money leads to high asset prices, as is currently the case, there is the danger that a future correction will crash asset markets.
-What are your projections for FED’s interest rate policies for the rest of 2021? And how will it affect the Turkish economy and other emerging markets?
JF: The Fed will continue to keep the short-term policy interest rate near zero throughout 2021 and very likely 2022 as well. (Fed officials have even indicated they expect to stay at current levels in 2023.) But that will not necessarily keep US medium-term and long-term interest rates from rising in response to a strong economic recovery. At some point we could see a repeat of the “taper tantrum” of May 2013 where, in anticipation of the future end of US monetary easing, medium-term interest rates rose and global investors responded by pulling out of emerging markets. At it happened, the Fed did not start raising the short-term rate until 2 ½ years later (Dec. 2015). But after that, further increases continued for three years, and in 2018 hit vulnerable countries like Turkey particularly hard.
The unprecedented easing by the Fed in 2020 boosted EM asset prices. But at some point it will begin to taper down its current $120 billion per month in securities purchases and withdraw the open-ended renunciation of interest rate hikes. An eventual replay of 2013-2018 is likely, which would especially hit EM countries that have already incurred excessive debt.
-Finally what is your current view of the Turkish economy? What are the most important problems of Turkish economy right now? And what are your urgent recommendations for Turkey to overcome its current economic crisis?
JF: As often, Turkey has an excessive inflation rate and an excessive current deficit. It seems to me that they originated in excessively easy monetary and fiscal policy. It would help if the government could signal that it recognizes the importance of keeping Turkish assets attractive to international investors. But the time for discipline was several years ago. It is hard to make recommendations for how to tackle these problems in the midst of an awful pandemic and financial crisis.