The former U.S. treasury secretary on the competition with China and why he puts the chances of a recession at 70 percent.
At a recent International Monetary Fund and World Bank meeting, F.P.'s Ravi Agrawal sat down with Lawrence Summers (full bio here), a former Chief Economist of the World Bank, Secretary of the Treasury, and 27th president of Harvard University. Summers retains his Harvard University status as former president emeritus and Charles W. Eliot University Professor. He also regularly writes opinion columns for The Washington Post.
The two discussed the global economic outlook but also spent time examining the state of Russia's economy, the dollar's strength, accusations of U.S. protectionism, and the economic impacts of U.S.-China competition. My summary of the conversation appears below, with some comments of my own.
To frame the meeting, see FP's Larry Summers: It's Dangerous When Everyone Is a China Hawk:
Policymakers from around the globe traveled to Washington this week for the annual spring convening of the International Monetary Fund (IMF) and the World Bank. The backdrop to the meeting was stark: The IMF warned of an "anemic outlook" for the global economy amid rising interest rates, stubborn inflation, and Russia's war in Ukraine. It projects global growth could slow to just 2.8 percent this year.
Economic outlook - global action against inflation needed?
At the IMF/World Bank spring meeting in Washington, the atmosphere was subdued as concerns about the global economy loomed large. Despite a generally optimistic outlook, former Federal Reserve Chair Janet Yellen and current U.S. Treasury Secretary, expressed doubts about the US ability to achieve a "soft landing" amidst high-interest rates and a difficult Chinese economy. Fragmentation in energy and food markets and heavy global debt were also cited as major challenges that could impact other programs.
Summers urged action on inflation, geopolitics, and other factors affecting commodities, warning that the consequences of inaction could be dire. The larger share of the burden may fall on debt service and imposed austerity, with potential political backlash, and we were too late to contain inflation and may now need to take larger measures. Despite the magnitude of the challenges, the proposed solutions are relatively small compared to the suffering being experienced. With the risk of defaults on the rise, there is growing concern about the need for austerity measures and the potential for political backlash. Ultimately, there is a sense that the world may have been too late to contain inflation and now must take bigger and more aggressive actions to address it, including measures related to real estate.
Summers contends that while U.S. Treasury Secretary Janet Yellen expressed optimism about the future economic outlook, she acknowledged that there was a need for more action to address inflation and other geopolitical factors affecting commodity markets. With the risk of defaults on the rise, there is growing concern about the need for austerity measures and the potential for political backlash. Ultimately, there is a sense that the world may have been too late to contain inflation and now must take bigger and more aggressive actions to address it.
Russia's economy also a factor
Russia's GDP suffered a significant decline in 2022, but the exact extent of the economic contraction remains uncertain. Experts predict that the pain could be even greater than the International Monetary Fund's projections. The Ruble has been hit hard, with President Biden's sanctions seemingly taking a toll on the country's economy. However, the efficacy of sanctions is often determined by their global scope, and it is clear that the current "coalition" of countries is far from ideal. With only half the world's population and GDP represented by countries that are at best neutral towards the sanctions, it may be challenging to achieve the desired impact. Furthermore, the effects of the sanctions pale in comparison to the suffering experienced by the Ukrainian people, who are caught in the middle of the conflict. It is challenging to target the powerful. People who can't get their medicine are not in the ruling elite, and those in the ruling elite can often weather the storm. However, there is some good news: Europe and Japan are among the countries joining the United States in imposing sanctions. Despite the challenges, the global economic integration that makes sanctions difficult may also offer opportunities for effective collective action.
The dollar's surprising strength
According to some experts, those seeking alternatives to the USD may be misguided. Despite its occasional fluctuations, the USD remains one of the most predictable currencies, largely thanks to the strong rule of law in the United States. While some may look to the Chinese RMB as a potential alternative, the country's capital controls currently serve to prop up the currency, casting doubts on its long-term viability.
However, many countries that are not closely aligned with the U.S. may view China as a more amenable partner, particularly when it comes to securing infrastructure investments. As Summers noted, “They will tell you, we will talk to China, and we will get an airport. We speak to the U.S., and we get a lecture. We need to up our game in financial diplomacy." To address this challenge, some argue that the US must do more to engage in financial diplomacy and build stronger relationships with countries outside its traditional sphere of influence.
World Bank reform
As per the National Library of Medicine:
The World Bank is accustomed to criticism, and few organizations have generated as much outcry since the second world war. However, most analysts accept that the bank has successfully conducted a campaign to improve its image over the past decade.
Indeed, during my meetings with health workers outside the bank, I was surprised that it attracted far less criticism than I had expected. Nonetheless, reservations remain about the bank's approach.
Common Criticisms of the World Bank:
- Creating a climate where high levels of lending are deemed to be good
- Advocating DALY (disability-adjusted life years) as a health measure
- Disregard for the environment and indigenous populations
- Evaluating health projects by looking at economic outcome measures
- Insufficient evaluation of projects
- Lack of sustainability of projects
- Poor evidence base for policies
- Promoting private healthcare
- Forcing countries to adopt structural adjustments for their economies
- User charges
Summary points: Despite its recent change in image, the World Bank still has staunch critics.
Summers pointed out that the World Bank's unpopular strategies, such as structural adjustment, user charges, and DALYs (disability-adjusted life years) have faced criticism for years. These issues, and the bank's underuse of health outcomes, pose significant obstacles to the broader acceptance of its policies. Summers believes that introducing evidence into policy-making and ensuring the sustainability of projects are crucial issues that need to be addressed for a better future.
West can use the $300B in frozen Russian funds in the West to rebuild Ukraine. It's the expedient thing, and it's morally sound. It's not a new idea. Iraq funds were used to reconstruct the destruction they wrought in Kuwait. Similar approaches were used after WWII with Germany and Japan. Global assets were deployed to repair the damage they caused. It may even deter future aggression, another virtue. The war will end. However, a phased approach may be necessary given Ukraine's limited capacity to absorb large amounts of funding. Nonetheless, such a move could deter future aggression while helping Ukraine regain its feet. The time to act is now. Legal scholar Laurence Tribe has also backed the idea, claiming it is both legal and the right thing to do. For a counterargument to Tribe’s (and others) position, see Giving Russian Assets to Ukraine— Freezing Is Not Seizing.
US industrial Policy/Protectionism
“We are thinking about resilience. Many of our imports are vital components of our exports.”
“There is an intuitive economic appeal to protectionism.”
Summers is sounding the alarm on the United States' protectionist approach, labeling it as self-defeating and harmful to innovation and job creation. He warns that such policies may even foster corruption. While he acknowledges the need to prioritize national security concerns, he stresses the importance of maintaining resilience in key technologies like semiconductors, regardless of political considerations. Summers is also critical of limiting imports, such as in the case of infant formula, urging for a more measured approach to industrial policy.
The recent pandemic has exposed the fragility of global supply chains, with the dependence on a single supplier for a component leading to disruptions in production. He recommends developing multiple suppliers, building inventory, and investing in in-house manufacturing capabilities to mitigate such risks. Protecting the steel industry makes little economic sense as the sector employs merely 60,000 workers, only a fraction of the six million who rely on steel. Raising steel prices could have far-reaching negative consequences for the broader economy
US and China competition
There is a mood to decouple and look to India. As tensions rise between China and other nations, everyone wants to take a hardline stance. But the more hawkish the rhetoric, the more China responds in kind. Adopting a policy of reassurance without affection and respect without partnership is not sustainable. We need to adopt a more balanced approach to avoid an escalating spiral of conflict. However, dovish voices advocating for cooperation and diplomacy are drowned out by the louder, more aggressive voices. China's military spending only adds to the difficulty of finding a way forward. “China made it hard not to be a hawk.”
Some miscellaneous points: AI moving from bespoke Machine Learning applications and point solutions to generic solutions; some are helpful, some are a bid unknown - as is their economic impact. Most enterprises still lack a data architecture to support AI, and big plans for “digital transformation” to address it are facing resistance. Higher investment demand for resilience, reshoring, and green energy for the whole world put pressure on deficit spending.
But this is a tough time to speculate what all this means for the enterprise.The long era of practically zero-cost for capital is over, so investment in technology, with its promising upside but uncertain outcomes, could be attenuated buy the bean-counters. Add to that turmoil in a general election, and the rosy projections of trillions of dollars of value added from AI and other advances may be just a dream now.
In closing, it should be acknowledged that Summers’ history is not without controversy. He resigned as Harvard's president in the wake of a no-confidence vote by Harvard faculty, financial conflict of interest questions, and a notorious speech which raised questions on his views about under-represented groups in academia. Nonetheless, his views on macro-economic issues are worth consideration.