BRICs and brickbats: doing economics at Goldman Sachs

Jim O'Neill interviewed by Romesh Vaitilingam, 11 December 2009

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<p><em>Romesh Vaitilingam interviews Jim O'Neill for Vox</em></p>
<p><em>September 2009<br />
<p><em>Transcription of an VoxEU audio interview [</em>]</p>
<p><strong>Romesh Vaitilingam</strong>: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam. And today's interview is with Jim O'Neill, who is head of Global Economic Research at Goldman Sachs. We met in London in September 2009. But we spoke about the crisis, the rise of the BRIC economies, a term Jim coined eight or so years ago, and the value of economic research in both the academic and commercial spheres. But I began by asking him how he got to be in his position at Goldman Sachs.</p>
<p><strong>Jim O'Neill</strong>: Goldman Sachs treats economic research really seriously. It's not just some kind of sales or marketing tool for the media. It pays a lot of attention to its economics, so the person that heads it has an obligation to try and have a team and analysis which is up there with the best and can influence the firm's thinking and the firm's plans. Quite how I ever got into this position, I have no idea, because if I go back to my days at university, initially, you know, I treated going to university as a reason to learn about the world and have some fun. And, I was there to be educated as a human being and not really to learn more and, you know, devote my life to economics.</p>
<p>If I were truthful, I only really came into post-grad economics because I didn't want to get a job. I liked the life of being a students and kind of enjoying myself. And it was only really when I got into the weird world of doing a Ph.D. - which by the way I don't think was the most astute piece of research ever done - that I started to really get interested in the topic. It intrigued me, and it still to this day does that - and this is highly relevant about the crisis - I think that economics doesn't really have that many answers. But the issue of economics being a social science, and trying to apply assumptions about logic and human behaviour to dilemmas about our society, and moral and economic questions, is fascinating, as it did fascinate me then. And that's, I guess, one way - that's really how I got into it all. I actually got into the City because I built up so much debt after eight years as being a student, I needed some money. And, it all kind of came from that really.</p>
<p>I suppose, the real sort of edge that brought me to this position a long time ago, is that people - maybe this is due to my personality - saw me as thinking about it in a bit more realistic way, and possibly by the very aspects of what I already said. Even when I was doing my Ph.D., I used to find some of the minutiae of some academics I knew focused on, and its relevance to real world issues as really a bit bizarre.</p>
<p>And from an early stage, my interest was trying to take, or think about the smallest way of thinking about the problems, but to try and apply it in a commercial sense. Some people I knew well in the City back in my early days, 25 years ago, used to actually describe me as a dirty economist, which I - occasionally I used to be flattered by. But - and, I think, what they meant was I used to think about it in a commercial way. And I guess it sort of grew from that really.</p>
<p><strong>Romesh</strong>: You mentioned the crisis. Let's talk about that. What do you pick out as the most striking characteristics of this crisis?</p>
<p><strong>Jim</strong>: On a human scale, I find myself actually describing it recently, as the Facebook crisis. And, it may be because I have selective memory, but of the various financial crises I've been through, when I've been working professionally as a economist - there's been a lot because this is my 28th year - I don't remember one in which the interplay with the media and the general population, all over the world with the economic community that analyze it is as intense as this.</p>
<p>There's not a day goes by where I see some highly emotive comment from some media person or the blogging sites about some aspect to this crisis which isn't really that greatly rooted in a lot of factual evidence. And that's definitely, to me, a unique aspect of this crisis. And maybe, that in itself is a function of it also being the first crisis that quickly hit every part of the world economy. And so, of course, it appears to have negatively impacted everybody, which is - probably explains some of this emotion. But, I would say that's the really truly unique part about it.</p>
<p>I observe many other people offering their own views of what's so unique about it. And, you know, I'm not really sure that I share many of those common views. One of the other few things I've learned in my career is that popular perceptions about anything to do with economic are usually wrong. And I suspect in hindsight, popular perceptions about this crisis might turn out to be that case. So, I actually find myself thinking as we appear to be - appear to be emerging out of it.</p>
<p>But maybe many aspects of this crisis might turn out to be good. For example, China's involvement in the world economy - It might well be that China's next phase of development involves China contributing more to world growth in terms of its own demand, than being this massive exporter. And if we would not had the crisis, there's no way that would have happened as quickly.</p>
<p><strong>Romesh</strong>: Well, perhaps we could talk about the different impact of the crisis on different parts of the world, because your focus is very much global. How do you see it in terms of how the US has been affected, how Europe has been affected, how Asia, how Africa? I mean, some countries have suffered worse than most, I think. Some regions have suffered more than most.</p>
<p><strong>Jim</strong>: Yeah. Yeah. And actually, as of yet, there's been a surprising aspect in some ways of who has suffered more than others. The mood about this of course, part because of the information process being so strong, the mood changes dramatically. But, right after Lehman - and here, by the way, I think there's a difference between the two-year anniversary and the one-year anniversary. But, the Lehman bust was a bit of a game changer because that resulted in global trade having this severe shock.</p>
<p>And when that happened, many people thought that the big exporting countries of the world, especially China, would be in for huge problems. That's reflected by a collapse of the stock markets. But, one year on, in fact, China looks as though it could still average more than eight percent growth this year. And India, another huge emerging market country, looks like it might get close to six - double its much ridiculed Hindu rate of growth. At the same time where the UK and the US are experiencing declines that I certainly never thought would happen while I was still professionally, or even when I would still be alive.</p>
<p>And so, when I go into the real economics of it, you know, the real lasting impressions sort of fall. And, it's accelerating the shift away from the so-called industrialized countries to the big emerging giants. But, you know, that's really to me, right now, the most interesting aspect of all of this.</p>
<p><strong>Romesh</strong>: Well, let us talk about those because, I mean, the term &quot;BRICs&quot; is one that you coined, I think, eight years ago.</p>
<p><strong>Jim</strong>: Yeah.</p>
<p><strong>Romesh</strong>: Can you explain? What is a BRIC?</p>
<p><strong>Jim</strong>: What is a BRIC? For the past five years now, I have described a BRIC as a country from the emerging world that is already three percent of GDP, of which China is the only one, or has a realistic chance of becoming three percent of global GDP or thereabouts in the next couple of decades. And it goes back to the whole reason why I thought of the coincidences of those countries and the name, as being central to the modern integrated global economy. And so, that's the easiest way of me explaining how I think of a BRIC.</p>
<p>And in that context, it's often misunderstood by many media commenters. I don't think of them as being traditional emerging market countries as such. I think of them as being complex integral part of the modern global economy, that certainly, for many multi-national companies, they couldn't function unless they were doing things in these places. Which, you know, you couldn't say for many more traditional emerging market countries.</p>
<p><strong>Romesh</strong>: So, the bricks are Brazil, Russia, India, China - those the ones. And you only picked them because of their potential contribution to global output.</p>
<p><strong>Jim</strong>: Yeah.</p>
<p><strong>Romesh</strong>: What is it about them that's made them such success stories, or such potential success stories in terms of their growth?</p>
<p><strong>Jim</strong>: I mean, the only common thing, and this is of course where many people, both amusingly, and with still some validity, you know, write critical things about the brick concept. The main commonality of them is that they have a lot of people. You've, obviously, China at 1.3 billion, and Russia at 140 million. And so, outside the US, these are the biggest-population countries in the world, give or take, and Indonesia.</p>
<p>And so that is the biggest common factor. And as the most basic economic theory demonstrates, in terms of long-term solo-growth type models, if you take the size of a labor force and improve its productivity, that's what delivers economic growth. So, in terms of economies that could become the biggest, those with the biggest populations have the easiest chance.</p>
<p>And linking it back to the concepts, and what's so unique, really, about these four, is that if they allow globalization or other aspects of communication and development to really help their populations, it's pretty easy for them to become big. And really, that's what it's all about. And I think, in different ways, each of the four have done that over the eight years since I first dreamed up this phrase.</p>
<p><strong>Romesh</strong>: So are there going to be future BRICs? Are there going to be other countries that we can look at? Are there countries, like you mentioned, Indonesia, that can make this kind of contribution and have this success?</p>
<p><strong>Jim</strong>: There is a couple that have the potential to say that maybe, if you could rewrite the clock, maybe it should have been BRIIC or BRIMC. And the two that I naturally think of in that regard would be Indonesia and Mexico, because they have a lot of people. Interestingly, and it's only very recently, that there are one or two signs that Indonesia is starting to adopt more reform and develop a bit more independence about its style of growth. But, even for them--and certainly, Mexico has had a bad crisis--it's not obvious to me that they could be anything like these four.</p>
<p><strong>Romesh</strong>: Jim, can you describe a bit more, in a down-to-earth way, what it really means to the people of these countries to see these growth rates? What do you see? I mean, you've been visiting these countries for many years. What do you see in terms of people's lives?</p>
<p><strong>Jim</strong>: Again, it differs in the various countries. And let me emphasize, I'm not in each of them every month, so I'm sometimes embarrassed that people give me this status as being some kind of detailed expert about the four of them. I'm anything but. I'd actually never been to any of them, other than China, before I dreamed up this phrase.</p>
<p><strong>Romesh</strong>: [laughs]</p>
<p><strong>Jim</strong>: That's changed. I'm in them frequently.</p>
<p>What I would say, as a common thing for the world as a whole from it--and this is what really is amongst the things that sustains me in my job here--I feel as though these countries are at the forefront of living through a transformation of the world. I sometimes think it must be a bit like living in California during the Californian gold rush, where you can observe people's lives and the world being transformed.</p>
<p>I go to all these places. Just take, as an example, Delhi, which is a place I don't know well and I've not been to that much. But when I go back, the last time I went back, you see the evidence of a subway being built. And at the time I was there before, people said there's no way, because of typical Indian problems, that it would happen that quickly. But it's up and running, and it's smooth and it works. You have highways being built between downtown Delhi and satellite cities that are transforming the place.</p>
<p>And the big story from it, and it's something as simple and basic as this. A lot of people in the West, especially, don't get it. It's academics and general people.</p>
<p>I think this thing is taking hundreds of millions of people out of poverty. And as we've written in one of our relatively more recent controversial papers on this stuff, about a year ago, we think, correctly measured, global inequality is declining, because this globalization process for the BRIC countries is taking hundreds of millions of them out of poverty. And that certainly wasn't happening for many decades before. And of course, in those countries, people feel it, which is why they feel good about it.</p>
<p><strong>Romesh</strong>: What about the configuration of the world economy, generally, in terms of where the power lies? This is already causing a shift, probably increased by the crisis, as you mentioned, and it's going to down the road. How do you see that playing out?</p>
<p><strong>Jim</strong>: I think it's exciting. But, of course, it's very challenging. It's challenging for everybody. And for people of our generation that have grown up in a world, let's call it a post-World War II order, it's an enormous challenge because it suggests a world completely differently.</p>
<p>The issue of the degree of American dominance over not just our economies but our military security and our cultural way of life, it raises enormous issues about that. And with it, because that's been a pretty prosperous life for many people from the West, there's an element of fear about, well, is this a world we don't want to go down and we don't want to explore? And so it's extremely challenging, and it's fraught with it a lot of difficult issues.</p>
<p>At the same time, there are all sorts of exciting things. And it's going to really, I think, especially the next decade or two, require really imaginative policymakers, with quite open minds, on a global basis. Otherwise there could be nasty things that happen, as you get conflict from it. It's exciting, but also quite complicated.</p>
<p><strong>Romesh</strong>: Let's talk a little bit more about policy challenges, perhaps start off with some of the more immediate ones, what your view is on how governments around the world and international bodies around the world have reacted to the crisis in terms of monetary policymaking and fiscal stimuluses, and the whole trade issue, which has become particularly worrying, I think, in terms of rising protectionism.</p>
<p><strong>Jim</strong>: I would say, on the good side, the advent of the G-20, in some ways, is sort of recognition of the growth of the BRICs and the other big emerging world. It's the first time we've had any of these global fora where, effectively, these guys are sitting at the table as equal partners as the developed countries.</p>
<p><strong>Romesh</strong>: So the crisis has forced the move from the G-7 to the G-20.</p>
<p><strong>Jim</strong>: Yes, I would say the crisis has forced that. And that's a fantastic thing because, if I go back right to what I first wrote about in 2001, it was blatantly obvious that you couldn't solve the world issues of our time without something like that. So that, in itself, is a fantastic development.</p>
<p>And I think, with it, and here I think both George Bush and Obama both deserve congratulations for taking leadership on it, have actually orchestrated the biggest collective economic stimulus that any of us can ever observe through history. Which, of course, is probably why, despite everybody's fears of a year ago, this is why it's not going to be like the second great global depression, because we've had this huge stimulus. And I think, without the G-20 idea, it wouldn't have happened.</p>
<p>So that's kind of the really good part. The tough part is what do you do for an encore? And now it gets trickier, because the G-20, as an institution as such, is too many. It's not actually 20. I think it's possibly even 26 countries. And it's not conceivable to persist with that on an ongoing basis. So we somehow need to make it smaller but more representative of the world, including some of these emerging giants. And that, in itself, is a big challenge.</p>
<p>You mentioned trade. The great threat to the world economy, beyond this crisis, and to the BRIC economies, is if we do move more protectionist. And we have to find the belief from everybody that we all do win from international trade still, which this crisis has threatened.</p>
<p>But in addition, I think--and this is maybe a controversial view but it's what I believe--we have to find something better than the WTO. Because the WTO, like the IMF and the World Bank and all these other things, are remnants of the old order. And I don't quite know how we're going to do it. But we need to find some system of making it easier and less cumbersome to reach international trade agreements, which these countries say is as equal as those of others. It's not going to be easy.</p>
<p><strong>Romesh</strong>: What's your perspective on the discussion of financial regulation?</p>
<p><strong>Jim</strong>: Not surprisingly, it's highly emotional, and it varies through time. And there is this quite remarkable focus on things like compensation of people in the financial sector, which is obviously an important issue, but I would like to think policymakers must really believe there's more serious issues that are more important to sustainable improvement of people's lives than focus on that.</p>
<p>But again, linked to this sort of thing I said earlier about the Facebook aspect of this crisis, the kind of intensity of the daily news flow about all these things, that's, I think, what's bred this incredible focus about compensation. And that's unhealthy. As has often been the case with past crises that I've observed as I've worked, policymakers frequently rush to implement something because they think that's what they need to do, and with it, they usually end up doing something to solve the last crisis instead of thinking about the next crisis.</p>
<p>If you look at the burst of the so-called TMT bubble, technology bubble, in '01, many people think that Sarbanes-Oxley, which is this congressional policy that was agreed to influence corporate governance, came on the back of some of the big notable busts of that, which arguably contributed in some ways to aspects of this crisis. And so policymakers shouldn't rush. They should just think really carefully about what to do to have a better structure of financial governance going forward.</p>
<p>All that being said, coincidentally, I think some of the earliest things said a year ago, and at the G-20 Summit in London, had the ingredients of what I would regard as sensible, which is: our industry needs to be less pro-cyclical. And by, I think, somehow instigating either self rule or, if we're not strong enough to do that, forced rule by governments to vary the usage of our capital through the cycle. I think that is the ingredient of a sensible response going forward, to stop our industry being so hyper-cyclical.</p>
<p>As I said earlier, I've been in it a long time, and the number of times I've heard, on the up cycle, people in our industry say, &quot;This time it's different.&quot; And of course, it never is. The nature of the thing that goes wrong is always different. The last one was particularly horrific. But when you're in the up cycle, it's so easy for bankers to think that that's the case, and they probably need to have some external constraint put on them to stop them thinking that kind of way, because that ends up what causes the damage.</p>
<p><strong>Romesh</strong>: Let's talk a little bit about research. I'd be interested to get a feel for how you guys at Goldman Sachs go about doing the kind of economic research that you do.</p>
<p><strong>Jim</strong>: In some ways, and this goes right back to my beliefs when I came into the City, based on the experience I'd had myself as a post-grad student and an observer of the world, and certainly, under my leadership, this is what I try to impose on our department. We need to be both really commercially as useful as possible to our clients, which is our own traders and salespeople and all our external clients, whilst--and this is really difficult, a lot of the time--at the same time as that, being as independently creative with the economic research we do.</p>
<p>And so, in some ways, which, of course, is impossible for us to do, is to be up there with the best of academic economic research--which, by definition, we can't, because we don't have the same time and, in many cases, probably not the same ability--but to make sure it has some commercial applicability.</p>
<p>Which might not sound that different from many others, but I think it is something that's a bit more unique about us than many of our competitors in the private sector, because we do a lot of more in-depth research papers that, in many cases, some observers think, &quot;Well, where does that have its commercial applicability?&quot;</p>
<p>Some of the early BRICs research, for example, people said, &quot;Well, why are Goldman doing it?&quot; I've had it said to me: &quot;Why are you spending time on this kind of stuff?&quot; And of course, people would not dream of saying that now. And I think that's what helps give us an edge, and actually helps give Goldman Sachs an edge, in a number of ways.</p>
<p>And what I've learned more and more in my role as the leader of the department, I believe, ultimately, that Goldman Sachs exists to make the world a better place. And by that, I mean a better place for all its six billion people. And if we're going to have a good economics research department, we've got to do economics research which might have a lot of longevity beyond what our traders want to know, what's going to happen to next week's money-supply numbers.</p>
<p>And so that's sort of the governance I try to give to all the people that work here, help them think about how they do their research. And everything afterwards, in one way or the other, sort of, hopefully, flows from that, really.</p>
<p><strong>Romesh</strong>: Tell me a little bit about what your perceptions are of academic economic research, how you use it, how you interact with people in that world, what, perhaps, the differences are between the kind of work that they do and the kind of work that you do.</p>
<p><strong>Jim</strong>: Because of what I said about what I aim for us to be, I like to make sure we can stay in touch with as many of the top academic economists as we realistically can given the time constraints and have very good dialog with as many of them as we can, because that's where so much brilliant thinking in the economics space, as in any other space of research, comes from. So I'm very eager for us to do that.</p>
<p>And at times, I have thought, but it's never yet turned out to be practical, maybe we should directly link ourselves with some academic establishments around the world on a permanent basis. But it's just very hard, for a number of obvious reasons, to do. And it's really important that we do that. And with it, I see some, let's call it enlightened self-interest for that, because our own credibility gets enhanced by being associated with top academic thinkers.</p>
<p>The flip side of that is, through those relationships, it reminds me of some of the occasional darker days of when I was a student. A lot of academics don't actually follow that closely high-frequency developments about the world economy, or many of the countries that they're researching on. Which is amusing.</p>
<p><strong>Jim</strong>: Because this is where we end up sort of clashing because, despite what I said earlier, we have to have a commercial outlet for our research, so it has to be very applicable to what's going on. All academics aren't the same, but in many cases, a lot of them just don't know what's going on because they don't follow the data intensely enough.</p>
<p>And so I guess, in that sense, I'm very aware that there isn't the intensity of current timeliness about a lot of academic research, which is something we don't have the luxury of. And that can be a source of considerable frustration.</p>
<p><strong>Romesh</strong>: Perhaps we can close by talking about economics, broadly defined to encompass the academic world and the business world, and how it's done in this crisis. I tend to think of this as the Queen's question. When she opened a new building at LSE last year, she asked one of the professors there, &quot;Why did no one see it coming?&quot; And as you're probably aware, this spilled out into a whole media story about &quot;Even the Queen wants to know the answer now.&quot; [laughs]</p>
<p><strong>Jim</strong>: Now, it's interesting you ask because I was invited to be part of the group that ended up giving a formal response to that. They had about 30-ish people in a room, and you can imagine the kind of egos that went with it. And I think most of us managed to say about two things, but like all the others, I was itching to say plenty more.</p>
<p>One of them I was trying to say is that from my own perspective, I think this crisis is great for the economics profession. And I have been struck, for much of my professional life, is just how many economists, first of all, think they are smarter than everybody else, which is invariably not true. And secondly, with that, they actually behave as though it's a science, and they actually really think they know, definitely, where economies and societies are going in the future. And of course, this is nonsense.</p>
<p>And I've always believed that, partly maybe I sometimes think it's because, in the days when I was doing my PhD, you had to put a punch card into your econometric programs. And most days, other than not, the supercomputer had failed overnight, so I thought, &quot;This damn stuff is useless.&quot;</p>
<p><strong>Jim</strong>: But more seriously, I think it should have been a great leveler and a great reality check for many economists. And I think part of the problem of our so-called profession, the past 20-odd years--and computing made it easier for people to go down the wrong path--is people have believed it too much. It's a social science, and it's not like a true science. And I think this crisis has made that blatantly obvious. [laughs] And those people studying economics today and in the future that don't realize that are going to have a tough time, I think.</p>
<p><strong>Romesh</strong>: Great. Let's leave it at that. Jim O'Neill, thanks very much.</p>
<p><strong>Jim</strong>: You're welcome.</p>

Topics:  Development Global crisis

Tags:  global crisis, BRICs

Head of Global Economics, Commodities and Strategy Research, Goldman Sachs


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