Podcast: China's economic head start & a world accelerating into recession

TRANSCRIPT: China's economic head start & a world accelerating into recession

Ian Bremmer:

Hello and welcome to the GZERO World Podcast. This is where you'll find extended versions of my interviews on public television. I'm Ian Bremmer, and on today's episode, we are looking at the state of the global economy in 2023. It's a new year and we're going to keep things in perspective. Global inflation is not going anywhere anytime soon as the specter of a worldwide recession looms large. And yet, for most of us living here on planet Earth, now is the best time to be alive. The alternative's not so fun. Globalization has brought prosperity to billions worldwide and here in the United States, the economy has made it out of the pandemic remarkably well. But will the threat of out of control inflation, an unstable China and a rogue Russia altogether spelled disaster in 2023? That's what I'm discussing with renowned global economist Dambisa Moyo. Let's get to it.

Announcer:

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Ian Bremmer:

Dambisa Moyo, very good to see you. Thanks for joining.

Dambisa Moyo:

My pleasure, delighted to be here.

Ian Bremmer:

So I want to start really big picture because we've had massive tumult in the geopolitical environment over the past months. We've got a war in Europe, we've got whiplash on COVID policy in China. We've got massive inflation. Give me for just a moment to start your big picture view of the global economy as we head into 2023.

Dambisa Moyo:

Well, thank you Ian. Look, my global picture is for this year 2023. We're going to continue to face a number of headwinds, which clearly you've outlined things like the Ukrainian war. I don't think inflation is going anywhere. And of course we have concerns, the perennial concerns about slow and slowing economic growth around the world. I would say structurally or long term, we have a bunch of headwinds that we've been dealing with before the pandemic hit in earnest in 2020. Things like technology and the jobless underclass. Areas around massive growth in the world's population were now over 8 billion people. Issues around inequality, issues around supply as well as climate energy transition issues and debt. So there are ongoing challenges that we were already facing, but I think those things will be accelerated in 2023.

Ian Bremmer:

So you're in the camp of global recession 2023. You think we're going to be in that world?

Dambisa Moyo:

Yes, and look, frankly Ian, I think it's a global recession is an acceleration of already structural problems around growth that really started before the pandemic. So things like technology risks are jobless underclass, demographic shifts. We're now at over 8 billion people on the planet. Issues of inequality, headwinds from climate change and natural resource scarcity, debt burden, all of these things are things that were happening before the pandemic. So in that sense, the pandemic and the war inflation are really an acceleration of the structural slowdown and growth that I think many economists have been talking about before the pandemic hit in earnest.

Ian Bremmer:

Where do they bite the hardest in phase one? Is it developing countries? Do we see financial crises as a consequence? Is it your own UK? Does China have a really tough year again? Wait, what do you think?

Dambisa Moyo:

What a great question because this leads into my second bigger point, which is around de-globalization. Now there hints of this topic that a thread in your 10 risks, but I think to that question, there's no doubt about it that the developed world I think is going to suffer enormous headwinds, not just because of the slowdown of growth in 2023, but the amount of debt continues to be problematic. Issues around inflation are perhaps global, but obviously if you look at some of the forecasts around core inflation globally will continue to be a massive headwind in developed economies as well as developing but really developed economies, I would say continue to suffer from that.

I think that beyond the issue of growth and the decline in growth that's forecasted not just for this year but for outer years, is this question of de-globalization and the fact that the world continues to my mind really bifurcate. I know you've written about G-Zero and we've talked about G-Zero in separate conversations, but I think the real question is are there recalibrations in relationships that will really affect geopolitics? So it's not just about Russia and China and Iran as separate entities. It's about the relationships that are being formed among those states and what that might mean for pricing energy, for borrowing and lending and the foreign exchange and the global markets, but as well as investment lend that corporations, but governments have assumed for certainly multiple decades.

Ian Bremmer:

I want to get into energy of course because of your expertise, but I want to start more macro than that, which is to talk a little bit about the orientation of governments and their economic policies. We are seeing a lot more industrial policy. It's not new to a country like France. It's a little new to a country like the United States. Who's doing it right? Do you think some level of greater industrial policy, given what's happened to social contracts around the world is essential and who's doing it wrong?

Dambisa Moyo:

So just to show my colors off the bat, I'm generally not a big bureaucracy government interventionist person. I do believe in free markets. I do also have the reasonable numbness to recognize that we need effective governments that are delivering on public goods, but also creating a regulatory environment that creates investment and innovation, but at the same time make sure that we don't have market collapses and challenges that can stem from corruption. Having said that, I'm just going to correct you. I think the United States has had forms of, if you can call it industrial policy, maybe they weren't packaged in that way, but the efforts around the buildup of Silicon Valley, which Margaret O'Mara has written about very effectively. But beyond that, the development of the infrastructure in the United States to me, all has hallmarks of a very deliberate industrialized policy.

But to answer your question, yes, I think there are massive gaps in areas that are necessary drivers of economic success and economic growth that are lacking right now in Western societies generically, but also in the United States specifically. Clearer energy policy areas about of infrastructure. I mean obviously we've seen an infrastructure bill in the last several months from President Biden, but why are we playing catch up? These sorts of real drivers in terms of capital labor and productivity are just traditional drivers of growth. And I think the industrial policy is necessary. Some form of a 21st century industrial policy is necessary and I think is very urgency warranted in the west.

Ian Bremmer:

So when you look at who is making structural and strategic investments to build out their own economic sectors, their own human capital, where do you think that's being done most effectively among the major economies, the G20 economies in the world right now?

Dambisa Moyo:

Well, I'm afraid for our druthers, really, it continues to be, at least on paper, very much something that's led by China. They have a very clear policy in terms of their innovation. They recognize technology is going to dominate a lot of not just networks and consumerism, but also public policy. The disruption in public policy of education and healthcare is really going to be largely driven by technology and they're leaning into that very explicitly. I mean, they're not shy about it. China also is very much a leader in infrastructure, again, not news. For several years now, they've talked about Belt and Road and a very deliberate and systemic approach to rolling out infrastructure. But more recently they've been very aggressively talking about their energy policy. I mean, these are key areas where I would argue that the West, again generally, but specifically the United States, has not really had a clear articulation of what the plan is.

And perhaps more than that, dare I say, is that I feel we seem to backfooted. In some respects, the financial crisis was a surprise to us. In some respects, the COVID pandemic was a surprise to us. And not only did we not anticipate these things, but we didn't seem to have a plan that would at least be implemented off the shelf. So it's those type of things that are quite worrying. Now, I'm not here to discount the West or the United States. I think that the very nature of how democracy and market capitalism works means that there's an opportunity for a reset and to drive these things. But I'm afraid at this moment it seems there's a much clearer articulation of these necessary government industrial policies as you call them, coming out of China and perhaps some other rogue states.

Ian Bremmer:

Now, the Americans today, in both response to COVID and response to China's technology policies, infrastructure policies, energy policy, first of all, it's very easy for Americans to say this is all China's fault and to build a strategic competition policy against them. But there is a level of, I want to use this word, everyone uses it, decoupling, which is occurring. And some of that is thoughtful and strategic. Some of it is not. Tell me what you think about the decoupling conversation in the global economy to the extent that it's being driven by the US, to the extent that it's being driven by other countries. Where do you come out?

Dambisa Moyo:

Look, I think superficially, there's no doubt about it. If you look at something like trade for example, you think about the peak trade, I believe is around 2006, 2007. And since then we've seen more regionalization, more balkanization around the world so that we can definitely pick out trends that would point to greater decoupling that's occurring. I would argue, however that would be far too simplistic, an understanding of the interplay and interlinkages certainly between the United States and China, whether it's around things like the pharmaceutical industry, which people are now becoming much more recognizing much more clearly that there is an interplay there. We know about the trade deficit versus capital account issues between China and the United States. Very deep linkages there. I'm not dismissing the fact that there is a fever pitch in respect to competition in military technology and economic aspects, but I think it would be naive for us to not recognize that we are very strange bedfellows.

The United States continues to borrow from China. I was just looking at China's dollar reserves around 3 trillion dollars. And as you know, China continues to be one of the top one or two biggest foreign lenders to the United States government. I think the big however here is that it would be silly for us to not recognize the bigger decoupling and re-coupling aspects of what's going on around the world. And this is what I think is really important about where we go, not just this year, but in years to come. There's no doubt about it that China as the largest foreign direct investor and trading partner across the emerging markets is reconstituting relationships in trade, in terms of capital.

You will be very much aware, again, very publicly and explicitly stated by the Chinese, they are now doing deals with Russia and other countries using RMB. They are very clearly trying to replace, I would argue the US dollar is a reserve currency. They're making these moves not in secret. It's very public. So to your question about decoupling and recoupling, I think with the US it's going to be much harder to extract ourselves, not withstanding some of the corporate thinking about coming back to the United States because of supply chain issues, et cetera. I think it's going to be much harder because we are linked in trade, we are linked in FX, et cetera. But I do think the bigger story for me is this restructuring of the world order that China's very much ahead of in some sense, not just with broader emerging markets, but also with our key strategic sometimes of your enemies.

Ian Bremmer:

So China is the most important trading partner for almost all of the developing countries around the world. That's true, and that's a relatively recent phenomenon. At the same time, strategically, China has massive problems with India right now. That's a country that's much more aligned with the United States and the Western through the Quad and also more broadly. China has all sorts of backlash that comes strategically from other countries around the world, in part because of that major investment and because not all those investments are followed through on very effectively. I think of what just happened in Sri Lanka, that country fell apart. Everyone thought China was going to buy it. China said, "That's way too expensive, bad money after good. We don't want to be a part of that." So I mean, do you actually believe that there is the formation of a China led or China integrated economic block of emerging markets, of developing economies that is in process? Or is that way too simplistic?

Dambisa Moyo:

No, I mean you don't have to believe me. Look at what the evidence is saying. And even on the case of India, let me push back and you say that they're firmly or certainly leaning West with the Quad, that may be the case. But let me pick out two specific areas in which India has not really fallen in line. One is with COP26, 27, they didn't come rushing to sign-

Ian Bremmer:

The climate deal.

Dambisa Moyo:

The climate areas, they've been kicking and screaming. And then more recently they haven't been come out gangbusters to criticize Russia and Ukraine. So I think maybe it's comforting for us to think that India is on side and you will have better visibility than I, in what conversations are happening. But I think it would be presumptuous and I think quite dangerous for just to us to assume where they are on site.

Ian Bremmer:

Dambisa, I wasn't suggesting that India's becoming an ally of the US rather I was suggesting that India has deep and abiding strategic challenges with China, which it sees as its principle competitor and in many ways adversary. So it's more about that. It's the question of if we are talking about the emergence of a China led block of developing countries where a lot of developing countries either see China as an adversary or increasingly see China as the problem, see China as a wealthier country that's driving the rules and the developing countries aren't so happy about it. I wonder if you actually see a relatively, not necessarily smooth, but an accelerating path towards a China-led global block of developing countries, which seem to be what you were suggesting is coming.

Dambisa Moyo:

And I do, and I suppose my lenses colored by the fact that I'm an economist. So people ultimately across the emerging world where 90% of the world's population lives are worried about continuing economic progress and improvements in livelihoods. And at this point of the game and I'm short handing. I think there's a sense that they need a constructive story of investment and a story of growth. And if you look at the IMF World Bank numbers for projected growth, they're still above 3% in China as forecast. And yeah, maybe they're down, but there's capital that's coming from China. Yes, you're right, it might be a bit more erratic. This Sri Lanka cases is a case in point and I think there'll be others given where bonds are trading, et cetera.

But I think fundamentally, if you are looking for a growth story and if you're looking for investment, which many developing countries are, the China story is still quite attractive. And I'm afraid to say that because we did have a good number of decades where democracy and market capitalism were the story that the West was selling and unfortunately were on the other side of the mountain and we didn't deliver. People like myself who are very pro-globalization and felt there were a lot of gains to be had. I think there were gains, but I think the narrative has been usurped by a sense that actually they were not shared and somehow globalization didn't work, which I disagree with, but I think that's the narrative that we're up against and that's why China has an apprehend.

Ian Bremmer:

One other question on the big global trends, which is at a time when interest rates are going higher, when emerging markets are heavily indebted and don't have the fiscal space to put money into their middle classes the way they had, I mean these were countries that were hugely pro-globalization and now are also turning more inward for lots of different reasons. Are we on the precipice of an emerging market crisis? Do you believe that capital is suddenly going to flee from a lot of these destinations that just seem too risky?

Dambisa Moyo:

I've tended to take that view, but as you can see, we haven't had a crash. So I think my worry has been baited, if I could put it that way. And there are some caveats. Many of these countries do have dollar debt, the emerging market countries as you say. But the good news is that it's nowhere near the degrees of dollar debt that we would've seen during the Brady situations or previous periods. And I think so in that respect, that's quite curved.

And then also there's the other point, which is that because of the financial crisis, the ability for contagion and broader risk that emanates from the traditional emerging market crisis has been mitigated because of regulatory restrictions on banks and certainly traditional lenders. So in that respect, again, we might not see the spread of a crisis as we've seen in previous times, but no doubt about it, the slow growth story coupled with debt and inflation is not a great picture. Not just in the developing world, but also the developed world.

Ian Bremmer:

Now before we close, I want to spend a little bit of time on global energy. Again, something that you spend a lot of time focusing on. Maybe start with this incredible trip since we were talking about China of Xi Jinping to Saudi Arabia. Certainly, seems like the Chinese have a much better relationship in Riyadh than the United States does these days. How do you think about the shift of power between global energy consumers and global energy producers? Are they breaking up? Are they fragmenting? Where are the tectonics in the supply and demand equation globally?

Dambisa Moyo:

So Ian, can I just maybe separate your question into two parts? Let me start by the global snapshot of what we're dealing with and then I'll talk to you more specifically about what I think are risks emanating from these shifts. From a snapshot point of view, we are globally consuming about 100 million barrels of oil every day, 100 million. That is an enormous amount to fill. And we've seen this, and this is why the energy price has been so volatile, but also extremely high because we have both, by the way, WTI and Brent. And that's largely because we have underinvested. I'm saying we, in the West have tended to underinvest in not just exploration, but also with refining. And these are more details than people might need, but there's also a broader understanding that we need an energy transition. I've never met anybody who disputes that, but maybe my friend group is narrow.

And as part of that we've seen ESG movement and the flow of capital. I think JP Morgan had estimated about something really quite enormous. I think it was 50 trillion worth of capital shifting out of traditional sectors moving more into this ESG space. So that backdrop plus a 50 billion tons of CO2 emissions from climate, all these risks that we are very familiar with have led to I would say a much more negative view around the energy sector, which is reflected in shift of investors. Energy about a decade ago was about 25, 27% of the S&P, went down to 2% in recent years. So there've been some massive shift as we have signaled both in public policy but also in investment terms that people do not like-

Ian Bremmer:

Your point here is that we know that we need to transition to post carbon. There's been a massive amount of capital that's shifted out of traditional fossil fuels that is long term to be welcomed, but in the near term has led to significant underinvestment in the fossil fossil fuels that we continue to need and demand every day around the world. Is that my read of what you're saying?

Dambisa Moyo:

But most importantly, that creates a risk for us living in the west because clearly now we hadn't anticipated that there'd be a war that would create these shocks and that put us slightly offside. We know we had the energy price, but we didn't have the immediate ability to fill in this gap. So that's one thing. But as a practical matter, which is the second piece of this, China and Saudi Arabia, but others, GCC, Venezuela, Iran have been forming agreements, again very publicly so in which they are, I would argue structurally changing the way the energy system works, at least making that a very concerted effort.

So investment not just in buying energy from Russia, which we've talked about. I know you're very familiar with, they're buying these energy sources at discount. But more than that, they are replacing, I would argue, and this is a risk for the West, they're replacing the refinement, a lot of the second order aspects of the energy sector by investing in some of these other states and taking away what I would say is the traditionally been a petrol dollar system and moving it more, at least in their minds, into yuan petrol renminbi type of structure.

That to me has real blowback implications for how we price energy, but also ultimately how we think about energy. And it's particularly worrying because as I mentioned earlier, we don't have an energy policy that is to me joined up with the need for an energy transition, but also the real politic of the current situation, which is, as I said, we need to consume 100 million barrels. And unfortunately the combination of Russia, Iran and Venezuela is about 40% of the energy that's produced in the world. And as we know, we're not exactly friends with any of them.

Ian Bremmer:

Well, Venezuela is a tiny piece of that. Because I mean, their economy has completely collapsed, so they can't really produce anymore.

Dambisa Moyo:

But looking forward in terms of resource, Venezuela is a critical player in the future, and so we might not be buying from them, but there are other people who, the China's and other parts in the world who would have no problem buying from them.

Ian Bremmer:

So I take it mean the United States, of course has become a leading producer of fossil fuels in the world and in relatively short order in the past decade. Do you think that is to be... you haven't mentioned that in the context of a global environment that's changed. I'm wondering why not?

Dambisa Moyo:

Well, I think there's no doubt about it. We know the story about the US becoming energy independent, et cetera, the investments in shale and in renewables that is ongoing. And I'm not at all disputing that there hasn't been progress in that space. But clearly I don't feel that there's a joined up discussion around these trade-offs certainly not publicly, the energy transition plus the emergent needs here and now, but also what is going to be required to get to that new equilibrium. I know for a fact because I serve in an energy board, but I've also spent a lot of time with public policy makers that these conversations are happening, but they don't feel like they're an adjoined up succinct way in which we could see a massive industrial policy, if you can call it that, a massive leaning in to drive energy policy.

Ian Bremmer:

One of the things that we've talked about is the fact that in Europe, the input costs are so much structurally higher than they are in the United States. This is energy import, it's not energy export. And especially with what's been happening in the Russia war, implications of that are de-industrialization. They're the ones that are really getting hit, not the Americans, not the Chinese, not the Gulf states. It's actually Europe. On the back end of Brexit, which is increasingly unpopular in the UK, it feels like everything that could be going wrong for Europe and the UK economically is right now, push me back.

Dambisa Moyo:

Look, it's a hard proposition to go against. You don't have to just look at the last three to five years. You can take a broader aperture, widen your aperture to the last several decades. And again, from an investment perspective, you have to figure out where you're going to put this marginal dollar to generate some return above the cost of capital. And I would say Europe has consistently failed to deliver returns above cost of capital that is appealing. And right now we're in a situation not only where the growth trajectory is seen as declining, but the structural aspects that drive growth, things like innovation, I would argue in many aspects are being strangled by regulation. Issues around immigration are very fraught in Europe, and unlike the United States where immigration is a backbone of society, immigration has tended to be a hot button issue in Europe in a very unconstructive way that is coming to a head.

If you sit here and ask me, what are the key areas that are going to dominate the future world, I would say things like energy transition, areas such as technology, again, not just networks and consumerism, but about disrupting public policy. Things like public goods, like education and healthcare. I mean, where is Europe in this story? I mean, I think there are a lot of things that have traditionally been appealing. They've got a rule of law, they've got good language, good time zone, but those things are not enough in a world where technology provides an impetus or a catalyst for reducing the cost of these things.

So it seems to me that Europe needs more than just an industrial bandaid solution, which again, because of the political infrastructure, it's always appealing to find short-term solutions. Let's do more handouts, let's do more redistribution, but that is not going to solve the structure problem, that and the need for economic growth over the long term. We need to have something much more focused around capital allocation and also reduction of risk mitigation. This focus of risk mitigation instead of an investment is particularly problematic. There's lots of controls, lots of rules, lots of aspects that create that stranglehold the bureaucracy, but actually that is not driving the innovation and investment that's going to be needed.

Ian Bremmer:

So Dambisa, before we close other side of that argument, tell me the one thing you think right now that the West is getting the most right.

Dambisa Moyo:

Quite frankly, I think it is about some unity among the Western countries, and I hesitate to say that because I worry at this moment that there still could be a peel off from Western countries. I mean, clearly they've shown themselves through NATO, G7 that resurgence that there is this stalwart or a very committed view to the aspects of freedom and aspects of market capitalism or some form of capitalism. My worry though is that as time passes and a war continues and economic challenges are not addressed in a structural fundamental way, and they continue to have these band-aid half-hearted efforts, I worry that you start to see other countries peel off among the ally group.

And we've already started to see some of these phishers, France versus the US, and President Macron was very clear and subsequently the British government have also come out worried about the subsidy package from the IRA in the US for example. And I worry that those phishers could very quickly or schisms could widen very quickly if there's not real delivery or outcomes that people can point to in the near future.

Ian Bremmer:

Dambisa Moyo, thanks so much.

Dambisa Moyo:

Thank you, Ian.

Announcer:

That's it for today's edition of the GZERO World Podcast. Like what you've heard, come check us out at gzeromedia.com and sign up for our newsletter signal.

Announcer:

The GZERO World Podcast is brought to you by our founding sponsor First Republic. First Republic, a private bank and wealth management company. Places clients' needs first by providing responsive, relevant, and customized solutions. Visit firstrepublic.com to learn more. As the world industrialized, nature suffered. Conservation has been dominated by Western voices, but in Africa, home to 30% of the world's biodiversity, African conservationists blaze a new path forward. On Africa Forward, a podcast supported by African Wildlife Foundation and produced by FP Studios hear about green infrastructure, Africa's tremendous biodiversity and how African led conservation may save endangered species and the planet. Listen to season two of Africa Forward wherever you get your podcasts.