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<p><em><a name="anchor"></a>Romesh Vaitilingam interviews Anne Krueger for Vox</em></p>
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<p><em>October 2011</em></p>
<p><em>Transcription of a VoxEU audio interview [http://www.voxeu.org/index.php?q=node/7124]</em></p>
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<p><b>Romesh Vaitilingam</b>: &nbsp;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 Professor Anne Krueger from Johns Hopkins University. We met at the Global Economic Symposium in Kiel, Germany in early October 2011, where we spoke about some of the issues around globalisation covered in her forthcoming book, <i>Struggling with Success: Challenges for the International Economy</i>. I began by asking her to lay out some of those challenges.</p>
<p><b>Anne Krueger</b>: &nbsp;OK. One of the ones I pick on is I strongly believe that as we become more interdependent, the need for &ndash; I don't want to say &quot;one mechanism,&quot; but a series of &ndash; stronger supports for multilateralism and for the global institutions is, I think, absolutely vital. I think the failing right now, even in the current crisis is in part the international financial institutions did not have the mechanisms with which they might have done some of the things that could have helped a lot.</p>
<p>Some countries, of course, still have serious need for economic policy reform. I think, particularly the Fund and the World Bank have been terribly important in supporting countries' governments when they have wanted to undertake some reforms, sometimes more successfully than others. I think in terms of dealing with individual countries, the Fund and the Bank have both been pretty good, not perfect but pretty good, in sort of saying, &quot;Hey, here is what your problems are, etc, etc.&quot;</p>
<p>Until this crisis and somebody needs the money, the Fund does not necessarily get listened to. The Bank has more of an option. They can work with the agriculture minister. If he's willing to do something and the rest of the government isn't, both of them have made a big difference. But that's one country, the World Bank, or one country with the Fund. It's not multilateral in the other sense.</p>
<p>Before I get back to that, though, the World Trade Organization, has of course, been huge, because a lot of what's happened with globalisation could not have happened had we not had agreed‑upon rules and understandings as to how the international trading system would work. The WTO has been crucially important as a multilateral organisation creating a multilateral framework even beyond the point where the Bank and the Fund have.</p>
<p>The Fund, of course, has done a lot on the international financial system, although not as much as you might like. But having said that, the other part is that the Fund has been less effective than it could have been and wanted to be in terms of the kinds of issues that are coming up now in many regards.</p>
<p>But certainly global imbalances were a major part of the contributor to the low real interest rates, which in turn certainly accelerated, if they did not fundamentally generate, the housing booms in several countries and so on, which were one of the big factors that when the banks and the financial institutions got in trouble. They were huge in that.</p>
<p>The IMF, under Rodrigo de Rato, did try multilateral consultations. The IMF screamed and its world economic outlook's about global imbalances. Raghu Rajan, the IMF's chief economist, gave a talk at Jackson Hole in 2005 in which he spelled out the risks the world economy was under, and he was almost laughed out of town.</p>
<p>The IMF tried bringing together the five key players to see what could be done. Everybody agreed global imbalances were a problem that should be corrected.</p>
<p>The deficit countries, country, mainly, basically said it was the responsibility of the surplus countries &ndash; and it was, at that time, plural, because of the oil exporters &ndash; to make the adjustment. Of course, the surplus countries said it was the deficit countries' problem. The one thing that should have happened, and the one thing they all agreed should happen, is the one thing that didn't happen, <i>ie</i>, nobody adjusted.</p>
<p>Of course, we've paid a price for that. We should have had a recession probably somewhere in the late part of the last decade anyway, but not anywhere nearly as severe had we had fewer excesses. Those excesses were certainly contributed to greatly by global imbalances if that was not the underlying factor.</p>
<p><b>Romesh</b>: &nbsp;Can we talk about where we are in the crisis now? Perhaps I'd like to start off with the issue of trade, because there's been much which I know you've thought about a lot over your life, that there has been talk that there are the fears of rising protectionism around the world as national responses to the crisis. Do you see that as a real threat? Are we making progress with the multilateral trade agenda?</p>
<p><b>Anne</b>: &nbsp;The simple answer to that part of the question is &quot;no,&quot; we are not making progress, regrettably. The first part is harder, because in fact there were fewer protectionist measures undertaken following the downturn in economic activity than I would have expected. You may recall where Gordon Brown talked about &ldquo;British jobs for British workers&rdquo; and so on and so forth.</p>
<p>There was some of that everywhere. There was &quot;buy American&quot; pressure in the US. There were some countries that imposed a number of measures, and there actually is something called the Global Trade Alert. Simon Evenett runs it. I think you know something about it, too, which has been pretty good at tracking some of that stuff. It's not negligible and it's a source of worry, but I think it did not get to the point where I, at least, would have expected it to. That's the first part of the statement.</p>
<p>There are, I think, several concerns going forward. One concern is actually quite different, because remember, food prices ran up or agricultural prices ran up enormously in 2008 and several exporters cut off supplies. If that continues, what's going to happen is the importers are going to say, &quot;Hey, we got to have food self‑sufficiency.&quot;</p>
<p>And we're going to see increasing protection in the raw material and primary commodity industries, and once that happens, then manufacturers are going to say, &quot;Hey, we have higher prices for our inputs than you do, so we need protection.&quot;</p>
<p>I fear very much that unless we can get the multilateral system back on track, that we're going to see a new round of protectionism, not because directly in the crisis, but because of the rising commodity prices and things associated with that, which says that it's crucial to complete the Doha Round quickly, and get some of these new items on the agenda.</p>
<p><b>Romesh</b>: &nbsp;If perhaps we could turn to finance and the big issue of the moment of sovereign debt. What's your take on where we are with that and how the challenges are going forward.</p>
<p><b>Anne</b>: &nbsp;Right, well, the first part, I should just say, of course, in the book I've got a couple chapters on that, as you might expect. The international economy does not have a mechanism for resolution of sovereign debt crises, and there are sovereigns who cannot pay on occasion. When you say &quot;cannot pay,&quot; of course, that's an interesting concept, but there are times when debt is truly unsustainable. When that happens, until something is done about it, the economy that cannot support that level of debt payment is going to be having its real output declining. It's going to be in big trouble.</p>
<p>Meanwhile, the rest of the world is going to feel that in a number of ways, including, of course, it's a longer time before the creditors get paid, and the more time goes, the less their claims are worth. In my judgement, you need some kind of a bankruptcy mechanism, the same as one has for private-sector activities, for circumstances when debt is truly unsustainable to preserve the assets, so that they can go to the appropriate parties and to enable the economy of the country that's under siege to restart more quickly rather than more slowly.</p>
<p>I see it as an urgent need for the international economy and one that I think, I hope, will come around sooner rather than waiting for another several instances where there's a country that's a victim to the inability to resolve issues quickly.</p>
<p><b>Romesh</b>: &nbsp;Could we focus specifically on the challenge that we're facing this very week, this very day, of Greece? What do you see, the prospects?</p>
<p><b>Anne</b>: &nbsp;Well, the first thing to be seen is, and I thought a year or more ago, and I think most economists did, the Greek debt was unsustainable. And having said that, then the next question is, well, why do we wait this long? Clearly, the Greeks have to reform economic activity. Clearly they have to change a lot of things. Clearly they've strangled their own economy in a number of ways. On top of that, they had fiscal excesses that they couldn't afford. There were clearly corrections that were needed, but having on top of that on a year and a half where you just sort of don't recognise the inevitable has led to an even more extreme situation. It's made it more difficult, and if there's going to be more spillover when it finally does completely fall apart, which seems to be happening as we speak.</p>
<p><b>Romesh</b>: &nbsp;Where do you think the euro is likely to be in five years' time? Do you have a sort of image of how that's going to play out?</p>
<p><b>Anne</b>: &nbsp;Well, no, I don't, because it's political. There have been, as you know, political crises in the past in Europe. Normally, when there's been such a crisis, it has been a conflict of what the economics said you should do and what the politics said you should do. The politics has always won out. The will to stay together has been strong enough so that in the final instance, the issue has been resolved in ways that enabled the European integration design to keep going. What worries me this time is this may mean an occasion in which when things get bad enough, and they may be close now, things will begin to unravel so fast that there won't be time for countries to react quickly when there are 17, each of whom has to agree.</p>
<p>I see the real danger coming not from a total absence of European will, but an inability of Europe to come to grips quickly enough with the issue to get ahead of, rather than behind, the speed of events.</p>
<p><b>Romesh</b>: &nbsp;The other big area where politics is big is the US debt issue. What are your reflections on that?</p>
<p><b>Anne</b>: &nbsp;In the Greek case, they truly cannot pay their debt. I mean, it is truly unsustainable, and it's going to get worse if they don't do anything about it. So that's... The US is at the other extreme. Of course, the US can pay. That's not even an issue. Nobody even thought it was an issue. And even the debt ceiling issue is kind of a red herring. I certainly did not think that Congress would let that deadline go by, and I certainly thought that even if they did, the Treasury would find some way to fund some payments that were not debt, that they might delay a few days or something until it got going.</p>
<p>On the other hand, the way it was handled made the payment of the debt a political football, which it should not have been. It was actually shocking to me to hear some of these statements by what I thought were responsible politicians who, in turn, had voted for the very expenditures that they were then voting not to finance once they had voted to finance them.</p>
<p>In the US case, I think it is very much political. I think the vast majority in the middle of the American people were appalled by the spectre of their Congress. Congress's approval rating is at the lowest in history. My guess and expectation is that in the 2012 election, some of these issues will be sorted out. My guess is that after that, we'll see what I'll call <i>more responsible behaviour</i>.</p>
<p>Surely, the US has to make some adjustments. The US has negative demographic trends. Not as much as some other countries, but it does have them. The US has burgeoning health expenditures coming up. Some corrections will have to be made, but there is some time to make them. In that sense, the US isn't in trouble.</p>
<p>It would be much better if right now there was a medium‑term plan to get the fiscal deficit under control much more quickly, but that's not the same as saying that the US is going to have any trouble sustaining its debt.</p>
<p><b>Romesh</b>: &nbsp;You call your book <i>Struggling with Success</i>. The word &quot;success,&quot; as you said to me earlier, implies that the global economy has been a success.</p>
<p><b>Anne</b>: &nbsp;Yes.</p>
<p><b>Romesh</b>: &nbsp;But we're facing struggles now. I guess my final question is: are you optimistic or pessimistic about the next ten years as we come out of this crisis?</p>
<p><b>Anne</b>: &nbsp;Well, this is a balance sheet crisis. A balance sheet crisis means that people are more indebted than they'd like to be, and they've got to work off some of that. That may make for a difference. I guess, by the end of the ten years, I can get reasonably optimistic, provided that sensible measures are taken in the US with regard to its fiscal problems coming up, and provided that the European Community somehow gets through its immediate troubles. I think the next couple of years are probably not going to be too great, but going beyond that I still think that we've learned how to do so many of these things that we'll get back on track. Some of the measures that will have been taken or have already been taken will mean that if we ever do face another downturn, that at least these kinds of problems won't be as severe as they were, but we'll find as economic growth continues, the structure continues. We'll find some other problems.</p>
<p><b>Romesh</b>: &nbsp;Anne Krueger, thanks so much.&nbsp;</p>