Transcription
Gita, welcome to Money Talks.
Hi, Mike. It's a pleasure to be on your show.
So, you spent a while at the IMF. You were there as chief economist and then you were there as first deputy managing director. It's a bit of a mouthful. Um, tell me a bit about those jobs. It was obviously a very interesting period the last seven years. You've had uh the pandemic. You've had a number of uh serious issues for low-income countries immediately after the pandemic. There's the war in Ukraine. There's bailouts in various parts of the world. What was the job like?
So, as you said, uh Mike, these were very interesting years. The world was getting hit with one shock after another. I joined the IMF in 2019 in January of 2019. That gave me about a year to get my hands into the job and understand the job well. And then there was one big shock after another. So the pandemic in 2019, then you had Russia's invasion into Ukraine, inflation, interest rates being increased everywhere, now geopolitics and geoeconomic fragmentation that continues. So these were turbulent times but in a sense it was probably the best of time to be uh at the IMF during these turbulent times because the experience I gained, the what I learned through working through all these different crises with member countries with the fantastic people at the fund is something I truly treasure.
If you look at the sort of barrage of shocks over the last six or seven years in particular from US trade policy, US interest rates, global interest rates generally, um the pandemic and the inflation that followed and the sort of commodity price shocks from uh the invasion of Ukraine that would in any other circumstance have led to a lot more emerging market crises than you would actually see. Now that's been as you say huge amount of progress made in in governing on the fiscal policy side, investor reliability, uh borrowing in the currency mix that you choose. Do you worry about the sustainability of that in a world where shall we say that the US seems substantially less interested as an administration, the current administration in promoting these sort of norms around the world in a in a world where you do see a little bit of sort of fraying around the international order? Is the ability to support and encourage those sort of reforms diminished in general? Not just for the IMF, but do you think there'll be less progress in the future?
I would say that emerging market policy has matured to a point where it is somewhat less reliant on whether the US is advocating for it or not. Now that said, I I what I do worry about is the one crisis we haven't had these last six years, which is a financial crisis uh in any major economy. That has been the good news and that's what we describe as resilience in the world economy. But the question is what happens uh if there were for instance financial market turbulence in the US. Right now financial markets are very sanguine. The stock market is booming. The spreads at which uh corporations can borrow are absolutely squeezed and thin. Um, it looks perfect. Uh, if that were to change and you had a a big financial event, then that the consequences of that for emerging markets could play out very differently than what we saw over the last six years. So that's a risk that I would hope more people worry about about than currently exists especially when you see the pricing in markets. Um, but it that's I think the the consequences of that for the world are going to be uh could be much bigger.
Also, it it could it could play out very differently from previous crises because this is the first time where we have non-bank financial institutions playing a much bigger role in corporate lending in access to finance more broadly. And so we've not had a crisis a financial crisis that's involved non-bank financial institutions in a big way. And that's uh what I worry about some more. We spend a lot of time at The Economist trying to sort of dig into this stuff. And you must find the same things as an economist that it's just much more difficult to monitor what's going on, right? The sort of retreat from public markets, especially in credit. You have a lot of private credit now. You have a lot of things going on. So, you have examples of companies that sort of blow up and it's very, very difficult to establish quickly what the lending relationships going on are, what the sort of other financial exposures are. That does seem a lot more difficult.
The other thing that has changed significantly and I think you can see this in a lot of IMF output is you've got these sort of jubilant financial markets especially in the US. You also have enormous government spending impulse especially in the US, right? You have deficits at sort of six and a half, 7% of GDP, absolutely enormous numbers given where unemployment is, given where you would guess we were in the in the business cycle. How concerned should we be about that?
This is a a problem I would say for many countries in the world right now where there is a disconnect between the level of spending that is expected from government uh and the level of revenue that governments collect and what you've seen is while revenue to GDP has stayed relatively flat over the last 25 years, government spending to GDP has continuously increased and it is very hard for policies to stay temporary and targeted. This is something that at the IMF we tell countries, okay, during the pandemic on a temporary basis, you can increase spending. Very difficult to roll it back. So I think there is uh there is a structural problem here in addition to of course the fact that in advanced economies um spending that's going to be that's going to be associated with aging, you know, on health, on retirement, all of that is just on an unsustainable uh trajectory. So it is a it is a major problem. You know, debt to GDP for the world is forecasted to reach about over 100% of GDP by uh 2030, which is five years from now. I I worry about this and while in the past I think advanced economies could get away with uh no, maybe we don't need to worry, we can just keep borrowing, it's our debt and your problem. I don't think that that's the case anymore. You're seeing more and more advanced economies. You see that in France. You see that in the UK most starkly where this is a day-to-day issue that you the countries are grappling with.
We were talking a bit about the UK on the way into the studio and uh what you were talking about there got me thinking about, you know, it's the understanding in the UK, for example, now that you have an energy price cap, right, which you you know that you don't face the the full market cost of the energy that you consume. That's now a sort of political understanding in the UK which definitely wasn't the case before and it's just built up. It's just one of the additional things for the developed countries that find themselves in this position. What's the answer? Obviously, it will be slightly different country by country, but you know, does most of the lifting have to come from increases in tax? Does it have to come from big reductions in spending? As you say, very difficult with an aging population? Does it come from growth? Where is, you know, doing the heavy lifting here? Where has to do the heavy lifting?
For rich nations? Uh uh, you if you really want to fix the problem, the truth is you have to address entitlement spending, otherwise you're talking about tax increases that are going to be extremely large and we haven't, you know, the consequences of that for the economy obviously, um, a matter too. I'm not saying that there are no there's no scope for increasing some kinds of taxes and there is certainly scope for better enforcement and collection of taxes, uh, but entitlement spending, taking care of that is going to be very important. And with aging, there's plenty of evidence that we are aging and having longer lives, but also as actually healthier lives. So life expectancy has gone up by about four and a half years over the last, you know, few decades and the they have actually been healthy increases in terms of four and a half years. So the right thing to do would be to raise the retirement age. Uh, but as we were also talking as we walked over here is that uh in France, we may see now a pause at least in terms of of the increase in the retirement age to 64. So this is very difficult. I think I think governments around the world will have to find a way to bring a society around to dealing with, you know, squarely addressing the uh, the imbalance that exists on their budgets and the debt that keeps growing. It's it's not possible that you can't if you have to live with retirement age not increasing to 64. I mean, that's is a difficult place to be.
Gita, thank you very much for joining us on Money Talks.
Thank you, Mike.
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