Interview Part 1
Global Economic Outlook 2011
Opportunities and Risks

1. What is the status of the global economic recovery?

2010 was a year of uneven global recovery. The good news is that the global trade has recovered, and will likely continue to do so. The bad news is that the real estate, consumer credit and sovereign debt problems in the world's largest economies are yet to be solved. About 22 countries, including several EU-member states, requested IMF's help in 2010. As expected, technically, the recession has ended in the US and we saw a modest GDP growth, however, in my opinion, real economic recovery is measured along with a growth of employment. The good news is that the rate of unemployment has slowed down significantly, but it will take a long to recover to the pre-crisis levels. My concern is that this growth was fueled mainly by government debt spending, bailouts, banking accounting manipulations and massive money printing. The price of such recovery will have to be paid in the coming years with interest putting more pressure on higher taxes and inflation, thus reducing the budget for socioeconomic development and real economic growth

Economies that have high Debt-to-GDP ratio with high budget, trade and investment deficits will continue to struggle and will suffer even more if they do not reform soon. The list of economies includes the US, UK, Spain, Italy, Portugal, Ireland, Greece, Iceland, Latvia and others. On the other hand, China, India, Australia, Brazil, and the GCC weathered the storm much better than the US and Europe.

The question for 2011 is how resilient is the recovery? In general, I believe it is positive, but not without geopolitical and domestic policy risks. There are more default and currency risks in US and Europe and more asset bubbles and inflation risks in emerging economies.

In general, I see the world economy growing 1 to 2 % from about USD 62 Trillion in 2010 to USD 64 Trillion in 2011. However, the distribution of that growth will be uneven; the emerging economies, which represent about 30% of the global GDP, will contribute about 70% of that growth. Oil exporting countries, China, India and most of Asian countries are set to experience strong domestic demand in 2011, driven by private consumption and infrastructure spending. I'm more optimistic about eastern economies and less about the West. 

2. Why have some countries recovered faster than others?

There are several factors, but the most important is that countries that have strong pre-crisis macroeconomic metrics, rich natural resources and export-based industries have stronger recovery prospects. Strong budgets allow the government to stimulate the economy with less debt burden. Exports play a significant role in supporting a stable interest rate and exchange rates, thus renewing investors' confidence and recovery.

The main difference in the speed of recovery between Argentina in post-2001 and Thailand in post-1997 crises is the exports. Fiscal discipline is necessary, but not sufficient without export-driven economic growth. Too much debt can result in prolonged stagnation similar to the Japanese lost-decade of 1990s. With inflation risk on the rise, we could see more socioeconomic troubles and political unrest in economies with thin middle class. 2011-2012 will be challenging for many policy makers.

3. What is your economic outlook for China and India?

2011 will be a year of continued growth. China continues to lead the global market in outsourced manufacturing, while India leads in outsourced services and both are working hard on closing the innovation gap with the US and Europe. China will soon surpass the US as the world leading manufacturer after surpassing Japan as the world's second largest economy. The pool of low-cost English speaking and educated talent has proven and will continue to prove as the most valuable asset of India. It is also a valuable asset for global businesses and investors. There is still long way to go to become on par with the US standards of living, but I'm positive about their future. Chinese and Indian expats in the US, EU and GCC are effective socioeconomic ambassadors promoting the interests of their countries. The rise of the middle class will help lift more people from the poverty layer.

As for the economic risks, inflation, currency wars, and geopolitical conflicts are the risks to watch. The most important policy issue is not to get distracted by conflicts with neighboring countries and instead focus on domestic economic development and global competitiveness. Higher energy costs and food inflation can be very challenging to China, India and other emerging economies.

4. What are the risks for the global economic recovery?

The US economy is the number one risk for the global economy. Since it is the world's largest economy and investment fund, any setback in its recovery will affect the rest of the world.  The current recovery is linked to a host of challenges, including a fragile state of the banks, poor public finances, the impact of fiscal tightening on growth, wrong tax policies and the negative consequences of policy-making driven by populist domestic agendas, such as the voting blocs protecting social security and certain lobbies enacting policies on the expense of the rest of the population.

EU debt crisis has not been resolved yet. I would also watch for wrong monetary policies leading to currency wars and political unrest in weaker economies due to rising inflation.

Other risks include geopolitical events such as a US or Israeli war with Iran that could damage oil production facilities in GCC countries, thus limiting the global oil supply and raising energy prices. A significant hike in energy prices could send the US and the world into a deep recession. War with North Korea could also hurt the Asian economies significantly.

While these risks can be mitigated, one can never rule them out. When one tries to forecast the future, one cannot underestimate the impact of policy decisions. With this disclaimer in mind, all key decisions and trends remain the same and with the absence of any major negative event, the outcome is as follows: US, UK, and Europe will continue to go through a period of a correction and at some point these countries will have to go through austerity and/or  higher taxation.

Risks are not limited to the West. Excessive capital inflows plus domestic inflation pressures are already creating policy challenges across some emerging economies. Inflation could lead to unrests in many countries, but it would be felt the most in emerging countries. China and Asia will have to act to prevent the emerging financial bubbles. Overheating investments, prices and fears will test policy makers in each country. My view is that mistakes will be made, but the global economy will overcome these challenges and the recovery will continue in the short term.

5. Do you still foresee another global economic crisis to follow the 2008-2009 crisis?

Unfortunately, the answer is yes. It might not be in the short term, but macroeconomic indicators and trends show that we are heading in that direction. All things remaining the same, we could see another crisis within the next five years or so. I'm especially concerned about the US and the EU. Debt-laden countries such as Greece, UK and Ireland and Latvia started to suffer, other countries could follow soon. A crisis in Spain would constitute a greater challenge for EU policy makers because the Spanish economy makes up 12% of euro-area GDP, which is close to double of Greece, Ireland and Portugal combined. In addition to debt and inflation problems, the EU still has challenges with aging and lower population growth. The ongoing costs of supporting an aging population and the law of diminishing returns will cause more burdens on the EU.

There is a real risk that the US economy could enter another crisis driven by the cost of the bailout and the misallocated stimulus funds, the continued deficit spending and the much less publicized social security, public pensions, Medicaid and Medicare debts that place the real uncalculated Debt-to-GDP ratio at about 700% as opposed to the official debt number of about 90%, and that is not counting the individual states' debt. The impact of the upcoming increase in direct and indirect taxes to fund wrong economic policies will result in reduced disposable income and consumer spending; add to that the existing large consumer debt, the burden of aging baby boomers and increased welfare spending. All of these issues pose a real risk for another economic and currency crisis.

6. Seems that the US government cannot fight the current economic crisis. Is that correct?

The US government alone cannot get us out of this crisis. It appears to me that the current policy makers are suffering from the gambler's syndrome. They keep spending more money hoping that they will eventually win. More debt spending is a receipt for bankruptcy. Real economic growth comes from government and private sector investments, not from massive debt spending followed by tax increases or currency devaluation. The problem is that current GDP recovery numbers are driven primarily by government debt-funded spending rather than by private sector productivity improvements and exports.

The other problem is that Government spending is more than 40% of US GDP. When  government spending slows down (and it will slow down) to try to balance the budget and avoid a currency crisis, the private sector and the economy will be impacted significantly. Unfortunately, what hits the US economy will impact the world and we could experience another global crisis.

With all policies remaining the same, there are two possible scenarios: either another sharp correction (crisis) in the next five years with quick recovery or a prolonged stagnation period similar to Japan's lost decade.

Countries that have high Debt-to-GDP ratios and follow the same US economic policies will be hurt the most. This includes Japan and some EU countries in particular Italy, Spain, Portugal, Greece, Ireland, Latvia and some other countries. In Latin America, Mexico and Central America are more vulnerable due to their strong dependency on the US economy. Add to that the long-term negative demographic trend. Over the next 50 years, the US labor force is projected to grow at a slower rate. As a result, there are concerns about the future growth of the U.S. economy. Despite the aging of the baby-boomers, the U.S. labor force is in a better position than most countries in Europe and East Asia. Japan, for example, is projected to see a 6% drop in its labor force by 2020.

7. This looks very bad for the US economy. Is there a way out of the crisis?

It is not all bad news, on the upside, the factors that are in favor of the US economy include the private sector innovations that brings export revenues, attracting foreign investments to undervalued assets, and the lack of governance and transparency in emerging markets makes US a safer investment destination.

One main reason the US has been able to prevent the currency and the economy from collapsing, despite the latest wars, huge debt and massive currency printing, is because the dollar is the de-facto standard for international trade and reserve currency.

Despite recent proposals to establish an alternative international currency by the IMF and World Bank, and despite the support for the proposal by China, Brazil, and Russia, not many politicians have the will to push harder for an alternative international currency. The US is running on the goodwill of the previous decades. Once the dollar is replaced with a basket of international currencies, the US economy could crash, especially if the government does not stop its debt spending or fails to go back to healthy production-based growth and investments.

What scares me the most is the unpublicized rising level of stress and distrust in the relationship between US and other countries. If China decides not to invest in US treasury debt or if the GCC countries demand another currency to pay for their oil, or if more politicians push for the implementation of an alternative international currency, we could see the collapse of the US dollar and experience a larger economic crisis similar to that of Argentina in 2000-2001.

Luckily, globalization had all us invested in each other, therefore it is unlikely that we will see any drastic decisions that could result in a global economic disaster. Any push and pull will be done gradually and hopefully diplomatically. Therefore, in the short term there is less risk of another crisis, but the US leadership should not forget that global competition is growing. Manufacturing, services, knowledge and innovation leadership gap is diminishing. In the long term, the dollar will eventually be replaced as the international trade and reserve currency. We should not push our luck.

If the US does not fix the national economic problems in the short term, we will all face a bigger crisis in the mid and longer terms. I know this sounds gloomy, but I do not agree with the prophets of doom who are predicting the socioeconomic collapse of the United States. Make no mistake, the US will recover. The road to recovery is rocky with potential setbacks, and we have to pay for our mistakes like everyone else.

8.  What is the new economic growth model for the next decade?

Innovation in products, services, value chains and business models is the only sustainable growth strategy. New knowledge and business networks will shape the new global economy. Entrepreneurs should shift their thinking from "How can I make successful products to sell to my clients?" to "How can I create products and services that can compete globally?". Your local products and services now have to compete with products from China, India, US and Europe. They all compete on price and quality. Politicians should shift their thinking from "How can I balance the budget?" to "How can I attract top global talents, businesses and investments to compete in a global economy?".

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