Jim O'Neill is the former chairman of Goldman Sachs Asset Management and former UK treasury minister, notable global economist and chair of UK think tank Chatham House. He coined the acronym BRICS 20-year-ago to represent the emergence and probable rise of economies of Brazil, Russia, India and China. He predicted that by the mid-2030s, the combined GDP of these four countries would be as large as that of the G6 (the G7 minus Canada). In a special interaction with Business Today’s Aabha Bakaya, Jim discussed the US exit from Afghanistan and the resulting impact on global governance. He also spoke about Biden's ambitious plans, China's emergence on the world stage, and what this means for shifting global power dynamics? Here are the edited excerpts.
AB: Jim, what is going to be the ongoing role of the US economy, and with it, or indeed separately, the role of the US dollar in the world economy and its financial system? The US has maintained such a massive influence throughout the past 50 years, despite the rise of other economies. Now that we’ve seen this massive event, Biden’s withdrawal from Afghanistan, his ambitious stimulus programme, how do you see things changing?
Jim: Dangerous to give too much lasting importance to the role of the Afghanistan mess to the US and the dollar. Based on history, (one) could easily have said the same after Vietnam, Iraq, Libya, and so on. And none of them fancied the role of the dollar in particular, and it is peculiar, given the rise of other economies and the relative decline of the US economy. I would caution viewers about that. Certain long term comparisons are to be made with the demise of pound sterling -- the pound played a role in global finance long after the declining of the UK economy -- so, at some point in the future, the dollar will cease to be as important as it is. And at that point, historians will look back and say it was obvious. And it will probably depend on the ongoing performance of the US economy and the performance of not only the Chinese and EU economy especially, but how policymakers want their financial models to develop. My career has spanned the 50-year-history of Bretton Woods and the reason why the dollar continues to have so much influence is that no one else wants to provide that role. And until that changes, the dollar is going to have that not so economically justified role hanging over global finance, relevant to many places including India.
AB: Dollar’s potential has been used as a tool for pursuing diplomatic and security objectives. The Trump administration’s use of secondary sanctions against countries that did business with Iran was a perfect example of this. If current or future US leaders choose to use the dollar’s dominance in a similar fashion -- perhaps against countries doing business with a hostile Afghanistan -- that could have a significant bearing on the currency’s future. What are the implications post the withdrawal from Afghanistan? Could it be different this time?
Jim: My suspicion is, the US probably thought, if we continue to use the dollar, and US financial system, in a more aggressive way against what they perceive as hostile states -- and countries that engage with them against our wishes -- that’s undoubtedly more powerful and definitely less expensive for the US than these endless ground wars. So I suspect that’s part of the process. It will be important to see some evidence of that if countries do end up supporting the Taliban in Afghanistan in a way that America chooses to not desire. And as I said, it’s particularly true in China, as well as post-Merkel Germany… relevant to see how Chinese and Europeans want to see the RMB financial system and Europeans want to see Euro. Who knows, maybe in 30 years time, the same question will be relevant to India and the rupee.
AB: In a recent article, you mentioned that it is better not to underestimate the US but that Biden has taken huge risks with the US fiscal position. What’s the potential downside of a failed stimulus? And is that the biggest risk… a tighter fiscal policy… especially if inflation returns? What are the implications for the global economy?
Jim: I’m going to give you a contradictory answer. I think it’s too early to judge. Throughout my career, it’s been tempting to write the US off… 20 years ago, with 9/11, how easy it would have been, and it was a mistake, same after 2008. It’s dangerous because the US has proved to be remarkably adaptable and flexible to many things that happen. That said, Biden has taken over against the background of an already weak fiscal position, and taken extraordinary fiscal risks. Two big risks that’ll accelerate the US decline. One is what economists would call the no-multiplier effect… where it does not raise investment and where trend growth remains just above 2%... which will be seen as a meaningless fiscal stimulus next few years. And certainly… if it unleashes a sustained pick-up in inflation… it will mean the end of the Fed reserve board’s policy going back to 2007 and going back to the early days of my career in the 1980s... the Fed would then have to think differently and that would be a huge constraint for anything to do with consumers in the US and also corporate borrowers who have a lot of leverage. Will have to watch closely next 12-18 months to see what the evidence is.
AB: From BRICS, it’s really been India and China. If China becomes as large as the US, the question arises… What does China want or what will it perhaps evolve to want, on the global scene? Will it want to truly influence the global financial system and crucially, contribute more responsibly towards it? How do you see Chinese policy evolving? Is it headed in that direction and if not – why not? What’s holding them back?
Jim: Peculiar part of my answer to you -- historically for me, predicting the next five years and beyond for China, I always found relatively straightforward answers despite the uncertainty of these things. Because, I found clarity about Chinese policy, unlike other international commentators, and I never feared the direction China was going on would be different from the ongoing 5 yearly estimates would indicate. Now I see two dilemmas. The apparent crackdown Xi is continuing to make is linked to this desire for more equality… (it) raises risks about further disincentivising parts of domestic economic growth. It discourages risk-taking by private individuals about being penalised savagely by the government and also the consumers.
So it raises risks to Chinese growth at a time when the labour force has definitely peaked. So the dynamics for growth in China is not as good as in the past. Secondly, not clear to me whether the Chinese have a truly developed chance on how they want to engage with the rest of the world.
You can see it with the one-belt-one-road initiative, which in many ways has been huge a disappointment. It is noticeable the complete lack of dialogue and involvement of India. If China can’t truly engage in a constructive way with important neighbours in the region, it shows how difficult it is to be a bigger accepted global player the same way the US has been for the last 50 years. China will have to figure all these things out. It’s difficult for China to find a stable relationship with the rest of the world. Got to change how they engage.
AB: Biden towards China – how detrimental can it be for the world economy, for the US, to turn its attention from the Middle East to China in an antagonising manner rather than taking a constructive approach? Instead of focusing on domestic concerns and using economic and even military threats? Economic collaboration has led to peace for over 40 years… but the complaints against China are growing -- from technology theft, policy on Hong Kong, Wuhan and coronavirus. Is this looking like a potboiler? We saw a pause in the trade talks during the worst of the pandemic, what do we expect to see next?
JIM: (We) Will see further problems between the two countries. It won’t be that stable either. The US will have to change. Aspects of the US stance are rather naive. (It) seems to be based on the idea that they want China to become a democracy and shows the lack of understanding about various aspects of China’s history and crucially the implicit support the Chinese government has from its population.
Even though it’s different, the US should be a bit more bruised about the experience of trying to impose the US-style democracy on many smaller places and it hasn’t worked in those. So that’s a mistake in approach. There are obviously many important values the US leads and represents like human rights and laws on trade and China has to find a way of behaving more consistently with what many of us are used to. Or introduce a gentler way of why they do what they do because for many of us it’s hard to understand. Because of China’s importance, the US can’t afford to persist on a permanently antagonistic stance. It will hurt us and the rest of the world. China has been the most marginally important economic force in the world for the past 20 years and if (you) disrupt it to the point of chaos, it will be bad for everybody.
AB: Finally, let’s talk about India. What’s working in our favour is the huge influx of foreign capital at the moment, but what are India’s growth prospects over the next 20 years?
Jim: India is poised, with favourable demographics, in the next 15 years to be 3rd largest economy in the world, overtaking Japan. Whether that happens or not depends on what Indian policies are. Without this, it will continue to be influenced as it has been by global events and will experience much more erratic cycles of growth vulnerable to global forces. Still conceivable that India could grow close to double digits in the next 15-20 years.
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