American economist Jeffrey Sachs of Columbia University—cited by The Economist magazine as among the world’s three most influential living economists of the past decade—was among the movers and shakers who attended the recent Asian Development Bank event hosted by the Philippines.
Considered to be the world’s leading expert on economic development and the fight against poverty, Sachs is special adviser to United Nations Secretary General Ban Ki-moon on the Millennium Development Goals, having held the same position under former UN Secretary General Kofi Annan.
Sachs has helped dozens of governments and heads of states from the Americas, Europe, Asia, Africa and the Middle East in crafting economic strategies. He has also advised Pope John Paul II, Poland’s first post-communist government under Prime Minister Tadeusz Mazowiecki and two Soviet presidents—Mikhail Gorbachev and Boris Yeltsin—in the country’s transition to a market economy.
At the sidelines of the ADB meetings, Sachs talked to the Inquirer about the global economy, geopolitical risks, the rise of regionalism and the role of various multilateral institutions, all of which are relevant to the Philippines’ operating environment.
Here are excerpts of the interview:
Q: What worries you most when you look at the world today?
A: I think the world is in a very complicated stage right now. First, the high-income world is in an unusually synchronized crisis. Europe is back in recession; the United States and Japan are stuck in slow growth.
There really is a multispeed world economy. It’s putting a lot of stress on the world because old patterns of trade and growth have to change. Asia, of course, grew on the basis of rapid exports to Europe and the United States. That won’t be possible moving forward. So, Asia has to find alternative ways to grow—much more regional, much more trade with other developing regions like Africa and Latin America, much more domestic-centered strategy.
Second, I’m very worried about the growing environmental instability, the extreme storms, heat waves, more droughts, floods. Not only are these already very costly, but they are just the beginning of what’s coming. We have more and more climate instability building up in the world, and this is a big challenge for countries like the Philippines, which is very vulnerable to these shocks.
Third, the geopolitical scene is changing dramatically. We’re going from an era of US leadership to a multipolar world of very little leadership. Each country or region of the big powers—China, India, the European Union and the United States—is much more looking after themselves. They have their own problems, their own politics and there is no clear global leadership right now to really solve a lot of these very big problems.
On one hand, I think it’s a good thing that the world is becoming multipolar but, on the other hand, we don’t have yet a governance system of good global cooperation that’s really working effectively.
I think the international system has not performed adequately. Although I work closely with the US secretary general, he’s working very hard to make it work. But it’s quite difficult. When the US leads less, no other region steps forward to bear those extra responsibilities. The world is a bit adrift right now.
Q: So what do you think about the emergence of regionalism? The Asean [Association of Southeast Asian Nations], for instance, is moving toward a unified market by 2015.
A: This is good. I think this strengthens regional governance. This is not only a good basis for life within the regions but also a good basis for cooperation across the regions. So, if Asean or Asean plus 3 (the Asean, along with China, South Korea and Japan) develops into a more cohesive economic group, that group … can have more fruitful negotiations and constructive problem-solving.
Q: Are you worried about extremely low interest rates in the United States?
A: Each time we had low interest rates, we ended up with a bubble and a subsequent collapse. I think the (US) Fed [Federal Reserve] has fueled these bubbles since the 1990s. And it’s important that this does not happen again.
We’ve had too many shocks. The global economy is fragile. And I think regulators in each country and region need to monitor the risks of a real estate bubble, to head off, through regulation, over-lending to the real estate sector or (prevent) hot money going to construction of residences and commercial structures. This is something that I would strongly advise caution on because if you look at why Ireland or Spain or Portugal or the US got into such a deep recession, it was because it was preceded by the boom caused by easy money in the real estate sector.
Q: Is that becoming a concern in Asia right now?
A: Certainly. It already became a concern in China, for example, that Shanghai was in a bubble kind of situation because the Chinese government pulled back tight credit that might have gone too far. They eased. It is very hard to manage these situations right now—with the very high liquidity, low interest rates, rapid movement of capital between regions. This was what created instability in the last 15 years.
Q: What geopolitical risks are you most worried about?
A: There are obviously hotspots like North Korea and Iran, which create tension. I’m referring to the fact that, with the US in relative decline and with the rise of China and other regional powers, this will create uncertainties and, no doubt, tension.
There’s more and more of a scramble for resources right now. Oil is scarce, price is high. There’s a lot of competition between China and the United States and others for Middle Eastern, Central Asian or African resources. If it’s done as commercial competition, it’s okay; if it spills over to geopolitics, it will create a lot of tension.
Q: On China, do you agree that it’s no longer as fearsome as it used to be?
A: That’s right. China has had soaring wage costs in the last couple of years, and that surplus labor from the countryside has really diminished from a flood to a trickle. This means China’s labor market is much tighter.
China has to upgrade its technological focus. This means a lot of labor-intensive activities are flowing to other regions. In general, I think China’s growth is beneficial for the Asian region because things will readjust and there will be job creation in the Philippines responding to either (demand from) the Chinese market or replacing China (as a supplier) in the global market. We are seeing some of these happening now.
Q: While emerging markets tend to be treated as an asset class, some emerging markets seemed to have become “favorites,” like the Philippines, Indonesia and Vietnam. Why are these countries getting the attention only now?
A: It’s good because those three countries weren’t always favorites. Basically I think a part of it is kind of a spillover. Part of it is improved governance because there’s an effort to be part of the region. Part of it is good terms of trade—that certain commodity exports have good international prices. So there are a lot of different factors. But in general, a well-run country in the middle of the fastest-growing region of the world should be able to take advantage of that.
Some export success is vital because every country needs to earn foreign exchange, to import technology, to upgrade and so forth. But fortunately, avoiding this dependency on the US market and avoiding that collapse is a very good thing. But I do think that integrating productions systems, trade and finance in Asia will be very important for the Philippines.
Q: When was the last time that you were here?
A: I’ve been here many times since 1986.
Q: How has the Philippines changed over the years?
A: I came first when Cory Aquino just became President and I came to work with her ministers. Winnie Monsod was head of NEDA [National Economic Development Authority] at that time and the Philippines was a very unstable country and has just begun democracy. The idea of the Philippines as a major destination for FDI and so forth was still in the future. This was a country in a deep crisis, and I went here when President Cory Aquino gave a talk in Boston—I was in Harvard at that time—and it was a talk about crisis on politics and economics. Of course, it’s wonderful to look at the progress over 25 years. Those are old issues, and President (Benigno) Aquino now is making real headway and the new challenge is 21st century challenge.
Q: What did you think of the Asian crisis of 1997?
A: I was a critic of how the IMF [International Monetary Fund] was handling things and I immediately spoke up and said that the IMF approach was not the right approach. It failed to really understand that the crisis was a reversal of capital flows and not (because of) something fundamentally wrong in Asia. So I criticized the IMF for imposing high interest rates and draconian credit restrictions and big budget cuts. I said that’s not the right approach. I think I was vindicated in my criticism.
Q: IMF had been criticized for acting “too little, too late” during the Asian crisis, but has done a lot of reforms to stay relevant. What do you think of its role now?
A: I think they have done a reasonable job in the last couple of years in the European crisis. If the crisis had been left only to Europe itself, without the IMF, it would have been much too political. The IMF brought in some professionalism, some good standards, some technical approach that were quite useful. So I applaud the IMF in its recent role in Europe. I think it has been a stabilizing role.
Q: What do you think will be the future of multilateralism under the World Trade Organization?
A: WTO as an institution is functioning to help govern the trading system. But in terms of the Doha round, of course, it’s been stuck for a decade and I don’t know if it will become unstuck because protectionist pressures and a bit of an antiglobalization sentiment are now pretty widespread. I’m not close enough to the negotiations to make predictions, but I think the problem with these trade rounds is pretty serious and we ought to find solutions. The slowing of the Doha round has led to a lot more regionalism and bilateralism.