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hello I'm Jeff Brown for knowledge at
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Wharton today we're with Maro guen
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professor of International Management
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for Wharton and thank you very much for
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joining us thank you for want to talk
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about the state of the economy the state
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of the world uh for
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2013 and I'd like to talk about the
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Emerging Markets we often think that
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this is where the future is this is
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where the great growth potential is at
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the same time if you're an investor uh
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you you see a lot of volatility and you
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know that there are a lot of ups and
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downs in these countries what is the
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state of the emerging markets today well
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it's not as good as uh we would like it
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to be uh here in the United States or in
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Europe or in Japan in the parts of the
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world that are not growing that much and
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let me explain I think most people would
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like the emerging economies right now to
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become the locomotives of the global
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economy but um uh in recent uh months
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over the last year or so emerging
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economies have also begun to slow down a
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little bit they're still growing China
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is growing at 6 7% India is growing
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maybe 5% uh but Brazil is uh you know
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barely growing it's growing at less than
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1% um so uh you know this uh slowdown in
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the emerging e actually comes at a at a
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bad point in time uh because we would
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like them to uh to be a little bit more
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Dynamic than what they are right now and
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is this a result of what's happened in
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the rest of the world spilling over to
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them or do they have their own factors
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that are causing this well uh it's the
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answer is yes to both uh so um the
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emerging economies of course export uh
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their manufactured products uh and some
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of their energy or other Commodities uh
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to Europe or to the United States
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so if growth here or in Europe is not as
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strong then of course these economies
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suffer uh but then secondly they also
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have problems of their own Brazil has uh
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encountered a number of bottlenecks in
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its economic development in its growth
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over the last uh three or four years
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interest rates were too high because
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they were trying to keep inflation down
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but that meant that then local
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businesses didn't have enough credit at
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the at an appropriate price to uh to
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invest and to create jobs and to grow uh
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India also is famous for many bottle in
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infrastructure in the legal system um
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and so on so U one economy emerging
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economy after another what we see is
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that both because of uh domestic reasons
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and um global reasons International
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reasons uh you know they're starting to
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grow less rapidly than they used to and
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China you know which was such a
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Powerhouse there for for for a while
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what what is what is going on in China
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it seems to be slowing down well in
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China we've had uh a leadership
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transition that is still going on uh in
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terms of filling uh in the uh the
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various positions in in the government
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so there's some uncertainty regarding
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that then of course we have the uh the
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problem with their exports to uh Europe
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in particular right now and a little bit
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also to the United States even though
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the US economy is growing faster than
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European economies which are not growing
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at all except for uh Germany and a
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couple of others um and uh then thirdly
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of course uh China has the problem of uh
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uh you know transformation right now uh
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it is an economy that has being uh you
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know investing a lot in infrastructure
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it has been uh growing uh in terms of
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exports uh but it is an economy that now
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needs to switch to uh the creation and
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the growth of a domestic consumption
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Market uh so again I mean these uh
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Transformations these transition phases
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are are difficult and I think China is
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now uh essentially wrestling with uh
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with those issues now how does this
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affect the developed countries I mean
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does this does do this make them more
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competitive or is this hurting them why
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should we care other than they our
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fellow uh fellow citizens of the world
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well the emerging economies are a very
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important part of the global economy
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they're nearly half of global
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output uh and uh also you know 40% at
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least 40% of the uh Global Market for
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consumer goods um so if things don't go
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well in the emerging economies uh that
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affects everyone not just them uh you
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know 20 years ago the emerging economy
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is where at most 15 or 20% of the global
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economy the bulk of economic activity in
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the world uh and the bulk of consumption
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was in Europe the United States and
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Japan but that's no longer the case so
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now we cannot really afford uh emerging
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economies not to uh play their role in
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the global economy which is to grow
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quickly right uh these are the uh the
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economies the up and cominging economies
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they supposed to grow quickly they're
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not growing as quickly uh as they once
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did and that's a problem and now you've
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mentioned the major ones China India
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Brazil what about some of the other
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countries the other Asian countries that
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that were once known as real comerce
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what's happening with them well we have
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uh uh in the emerging world we have uh
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new countries that have now become hot
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and attractive for investment and uh
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they're growing quickly uh I would
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mention for example in La America
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there's two of them Colombia and Peru uh
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clearly doing really well especially
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compared to 10 or 15 or 20 years ago
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uh if you go to Africa there's also two
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or three economies that are doing better
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than in the past uh even though there
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are many problems of course that
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continue to uh limit uh growth uh in in
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Africa um in the Middle East well we
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have U turkey which is uh doing pretty
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well uh but then right next to it we
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have Egypt uh which in the wake of the
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Arab Spring um has actually uh gone
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through a period of enormous difficulty
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from an economic and financial point of
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view for for a variety of reasons and
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then uh in Asia well we have Pakistan
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which is actually doing pretty well it
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is growing about the same at the same
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Pace as as India and this is a very
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large country as well uh and in South
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East Asia uh we have now Indonesia uh
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doing relatively well and Malaysia uh
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which seems to have finally recovered
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from the difficulties uh from 10 years
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ago or so uh but we still have other
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economies like Thailand uh we have other
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economies in the region that are not uh
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doing as well and uh so it's a mixed uh
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bag it's a mixed picture some countries
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are doing better than we were expecting
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them to to do and others are not
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performing as well but on balance I
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would say that we're worse off in terms
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of uh
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emerging um uh you know growth in in in
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the emerging economies than we were two
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years ago or three years ago now is
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there anything that the International
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Community could be doing to make this
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situation better uh wealthy Western
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countries or major agencies the world
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World Bank uh organizations like that
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well we have uh way too many question
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marks in the global economy right now uh
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I mean just to give you a short list we
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have the uh the Euro crisis in Europe uh
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it seems as if uh now is the month of
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January it seems as if over the last
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couple of months uh the problem has
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stabilized a little bit but that doesn't
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mean things are going okay in Europe in
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fact we have a recession going on so
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there's the the the double dip recession
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the second dip in this recession has
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been declared as of six weeks ago um so
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we have these very big problems in
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Europe and let's not forget that Europe
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is still 25% of the global market right
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uh and we have the continuing fiscal
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crisis in the United States uh which is
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I think for the most part self-inflicted
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at this point uh and uh we have of
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course Japan which doesn't seem to be
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able to find its way out of its own 20y
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year uh quasi recession right although
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the new prime minister seems to be um
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very adamant that he wants to change
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things let's see what let's see what
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happens um so those are the bigger
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problems but if you shift the level of
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analysis a little bit and you think
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about the global economic and financial
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infrastructure what we have right now is
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very little collaboration among
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governments in terms of what should be
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done in fact what we have is governments
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trying to uh you know take advantage of
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one another we have all of these um
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currency manipulations going on China
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has been for a long time accused of
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being a currency manipulator but they're
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not alone over the last year or so Japan
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has all also try to um you know reduce
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the value of the Yen so as to remain
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export competitive so has Switzerland
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right and so has the United States in
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the United States we have printed a lot
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of money and that has put downward
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pressure on the dollar and uh that has
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made uh possible a Revival um of US
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manufactured exports um so everybody is
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you know trying to look after their own
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interests uh we I see very little
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collaboration among key governments
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around the world and I think this this
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is also something that adds to the
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uncertainty out there now if there were
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to be more collaboration who who's the
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who's the where's the likely uh country
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or organization to lead that well I
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think uh you know there are three or
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four maybe five countries in the world
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that really matter right now that have a
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something to say about a possible way
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out from this uh you know big um Global
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uh slowdown that we you know happen to
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be are uh trapped into uh certainly the
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United States certainly China right
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those are the two biggest economies and
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they are very important from a financial
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point of view for for very different
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reasons uh then we have Germany uh which
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in my view should perhaps be the
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representative from Europe right as
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opposed to having the European Union uh
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as such Germany is the world's fourth
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largest economy and it is the second
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most important export power and then of
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course you have Japan and possibly the
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UK right but that's about it I mean I
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don't think U countries such as Mexico
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or Brazil or Argentina or Colombia or
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Indonesia or turkey should be sitting at
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the table trying to make decisions
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because then the table gets too big we
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have too many people uh negotiating uh
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so what I think we need is four or five
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key countries sitting at the table and
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helping us overcome all of the you know
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complexities that uh we're facing right
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now in the global economy now we also
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hear about fiscal imbalances and you can
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explain a little what that means and why
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that's a problem well we have all sorts
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of balances in the world I mean you
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mentioned fiscal which is uh government
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spending more money than uh what they uh
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take into us in the form of Revenue
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taxes for the most part uh we also have
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other kinds of imbalances Financial
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imbalances we have trade imbalances and
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so on so forth but focusing on the
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fiscal imbalances the problem of course
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is that U as you know investors no
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longer believe that some governments in
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the world can uh you know pay them back
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and so what we've seen is uh interest
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rates on on bonds government bonds go
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through the roof uh for those countries
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that uh uh have lost the trust of uh
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investors now at the other side of the
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uh the equation we have other countries
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that uh can pretty much borrow at zero
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interest rates right that includes early
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Germany uh but also Switzerland and uh
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at least up until now pretty much also
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the United States so these are countries
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that still are perceived as being solid
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and being capable of uh uh you know
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returning the money that they're asking
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investors to to give them now in the US
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again I mentioned earlier that most of
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the fiscal problem is self-inflicted um
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because the upcoming battle now in the
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month of February will be uh the debt
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ceiling and of course this is an
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artificial thing right and I'm sure
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there's going to be quite a bit of
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political uh fighting about it uh but
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you know the global economy and
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investors know that the US is a uh is at
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least so far is a government that can
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pay its debt right and like other
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governments around the world which
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cannot right now it it seems sometimes
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like the US can get away with murder you
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know I remember I think it was about 18
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months ago when we lost our credit
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rating our top rating and everybody said
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this will be a catastrophe and interest
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rates are lower now well and that was a
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signal I think that was a signal to the
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politicians in in Washington DC that
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they shouldn't do anything crazy because
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although the US continues to be the
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largest economy and it is the most
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important Financial power in the world
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uh its uh strength is not Unlimited
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right uh but the US has one big
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Advantage as we all know which is that
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the dollar continues to be the the most
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important Reserve currency like 70 about
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70% of all allocated um reserves in the
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world are in in in dollar denominated
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assets now this gives the US uh quite a
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bit of uh you know leeway uh a lot of
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breathing room uh with which to uh to
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play because once again there is a big
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appetite uh for us denominated uh uh
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dollars and the US can therefore uh you
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know play you know a different role in
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the global economy than other economies
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that don't have that that kind of a
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privilege and it looks like investors
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around the world simply don't believe
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the US will ever default on its debt is
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that that what these numbers tell us
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well uh I would never say that we'll
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never ever default because obviously you
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know what is the time Horizon here is it
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uh 20 years or is it 50 or 100 or 200
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years if history is of any guide uh well
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I would definitely bet my pension right
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now in saying that the US will default
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within the next 500 years right now I
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don't think it will default within the
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next five years or 10 years or 15 years
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not in the foreseeable future right uh
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but a lot of it depends also on what
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happens to China and whether China makes
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uh takes more steps in the direction of
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playing an active role in global finance
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and of course a very important um
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element in all of this will be the Yan
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what happens to the Chinese currency is
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the Chinese currency going to become at
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some point in the near future another
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Reserve currency and and then once it
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becomes a reserve currency of course I
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think the prediction is that it will
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probably become an important Reserve
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currency I don't think it will displace
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the dollar but it will become an
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important Reserve currency maybe at the
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same level as the Euro you know 15 20%
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of all currency reserves in the world
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but we're still at least five seven 10
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years away from that in the meantime the
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US continues to you know be the most
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important economy in the world from the
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financial point of
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and will continue to be or to have the
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the the most important Reserve currency
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so let's just finish with a sort of a
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projection for 2013 do you think that at
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the end of this year conditions will
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look much different from the way they
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are now either Better or Worse well uh
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12 months down the road uh I think um uh
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if we go region by region I think things
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will look much much better here in the
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United States unless of course something
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really weird happens in Washington DC
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over the next two or three months
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regarding all of these fiscal
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negotiations ations uh Europe I think uh
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is not going to be seeing the end uh the
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light of the end of the tunnel yet uh at
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the end of this year 2013 why well
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because they uh seem set on a uh an
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array of austerity measures and these
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austerity measures May at some point be
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effective but it's not going to be
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anytime soon you know if that's the way
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they want to uh overcome their problems
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it's going to take a while right and of
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course unemployment in the meantime will
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be very very high uh then I think the
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big question mark is where we started
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this conversation it's with the emerging
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economies will um uh the two that um
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worry me the most India and Brazil
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because of their size and because of
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some of the problems that they're
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encountering will they manage to reverse
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the decline in their growth rates uh I
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think this is a very urgent question
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especially in the case of Brazil uh uh
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so uh I think emerging economies uh
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hopefully more likely than not they will
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be better off at the end of this year
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but certainly not Europe and um
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hopefully the US will be better off yeah
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well we'll come back in a year and see
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how it turned out thank you very much
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thank you for inviting
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[Music]
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me
