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Dambisa Moyo on macro risk and economic innovation

Octavian Report: What are the macro issues in the economy today that have you most worried?

Dambisa Moyo: I think you can classify them into two groups. There are what I call tactical, short-term risks, of which geopolitics has obviously come from further down into the number-one spot — at least to my mind. And then obviously within that is what happens this year in terms of the path of interest rates and what that might mean for the economy in the United States and more generally the global economy.

Then there are a whole host of what I call longer-term, or structural macroeconomic issues that have not gone away. Everything from policy questions around technology and the jobless underclass to issues around income inequality to the continually burgeoning global population to concerns about productivity declines.

Of course, one of the biggest ones is the sheer amount of debt that the global economy is burdened with right now, and what implication that might have for longer-term economic growth.

OR: What do you think, particularly with the last two, are the big implications for growth?

Moyo: All the evidence has been that debt actually does provide an overhang to economic growth prospects. I think that we don’t know exactly how we’re going to get out of it. In places where we’re seeing more improvements in economies, there’s a prospect of interest rates rising. This could contribute to a global slowdown and recession.

So I think there are a lot of questions around what that global debt looks like. There are many other ways to get out of it. You hope that you can grow out of the debt, but at the same time, they’re having lots of debates about default and issues around inflating the debt away.

I think in particular, of all the countries, the U.S. is the one that everyone is really focused on because it has an enormous amount of debt and the dollar is a reserve currency. Particularly since large countries like China are the largest foreign lenders to the United States. I think those questions are still very much in the minds of investors but also public policymakers.

One comment in terms of productivity. Obviously there are lots of surprises around productivity, given the fact that you would have thought that an increase in technology on the scale we have seen over the last decade or so would actually have improved productivity. And it did. But the question now is: what exactly is happening? Are the full effects of the benefits of technology in terms of productivity now fully embedded? This is one of the questions that continues to pervade public policy, specifically because productivity is the biggest contributor to economic growth after labor and capital.

OR: From a historical perspective, to what extent have longer-term American and European economic policies contributed to these issues?

Moyo: I think there are a lot of assumptions made in the past that were not necessarily borne out. I think that there was a lack of understanding of exactly how the global economy ebbs and flows and evolves over time.

I’ll give you a specific example. When I was doing my Ph.D. at Oxford, we never, ever talked about income inequality. The assumption in economics was that what you needed to focus on was economic growth. A country that was growing would, essentially passively, solve the problem of income inequality.

Now income inequality is, I would say, a top-three agenda item for public policymakers and politicians, and a lot of that has been because we’ve seen that social mobility has declined. I think it’s halved in the United States over the last 20 years. So there are real questions around assumptions that have been made about income inequality and how to resolve it.

But that’s also true for things like globalization more generally. I think one of the most interesting comments that has been made recently around globalization has come from Alibaba’s Jack Ma. He — I think rightly — pointed out that it’s not globalization per se that’s been a problem. It’s that the U.S. has benefited incredibly, earning a lot of money and creating a lot of jobs on the back of globalization. But unfortunately those returns, in terms of the money that was generated, have largely been deployed to fight wars and underwrite public goods globally as opposed to investing in America’s heartland and infrastructure.

OR: You mentioned before that geopolitics constitutes a cluster of risk in macroeconomic issues. To what extent do you think that the problem you just outlined is fueling that geopolitical threat?

Moyo:  I think that there’s a fundamental problem, which is that the tools of politics and the tools of economics that we relied upon in the 20th century are essentially impotent in the 21st century.

We know that the tools of monetary policy — cutting interest rates and quantitative easing, plus this idea of fiscal policy — worked to solve economic booms and busts throughout the 20th century. Unfortunately, while it may have some short-term benefits, we have not seen what the long-term consequences of this strategy might be.

So in that regard, our tools, economically, are impotent. In terms of geopolitics, the environment in which there was diplomacy and bilateral and even multilateral engagement through multinational institutions has also come under fire. We now have many other non-state agents that are determining public policy, whether it’s philanthropists and other very wealthy individuals or non-state actors who pursuing interests not in line with what the United States or other leading economies want.

We are working in a very different world, and I think that the models of economics and politics of the 20th century need to be upgraded to reflect the network effects and some of the other challenges that the economy has been dealing with.

OR: Other than an update of these models, what else is needed to mitigate these risks?

Moyo: It’s funny. A great deal of my interest now is around the inadequacy and challenges that the democratic system is dealing with. I would say that a lot of the economic challenges that we’re facing today are a manifestation of flaws and weaknesses in the political system.

I’m not saying we should jettison democracy at all. I think it is the best system, but I think it’s also due for an upgrade. And in that respect in particular, one of the greatest problems that we need to address in politics and ultimately also in business and in economics is short-termism.

I think the fact that public policymakers and politicians come up with policies that are designed to cater to and court voters in the short term but may have longer-term consequences that are dangerous or deleterious for an economy is very much at the root of the problem.

All the problems that I mentioned to you earlier — demographics, income inequality, productivity, debt, technology — are long-term, intergenerational problems. And yet we have elections in the United States every two years. There’s clearly a mismatch between the political system being very short-term and these intergenerational, longer-term challenges.

So if I had to pick one thing, I would really do a reboot of how public policy and politics are done in a democratic state.

OR: Do you buy the argument that, with respect to these issues, there is something to be said in favor of the Chinese model? What’s your take on China’s rise under Xi Jinping?

Moyo: I think in many respects it’s too soon to tell, even for China. They’ve clearly done some amazing things — things that economists and historians will tell you have never been accomplished in any country anywhere in the world. They’ve been able to move hundreds of millions of people out of poverty in just a few decades. That deserves respect already.

But I think it’s too soon to say, “Oh, this is the model of the future.” They continue to have significant issues in terms of environment, in terms of poverty; their political system is still evolving. I think that one of the challenges that these types of discussion have is that they view economics and politics as being static. And what I was saying earlier about democracy applies to any type of system, because I think you have to assume that these systems are very dynamic and constantly changing.

Do I believe that China will continue to grow under Xi Jinping and be successful? Yes, I do. Do I think it’s going to be linear? No, I do not. I think there will be lots of volatility. We have concerns in the marketplace around leverage in the system, and we talked already about some of the demographic issues that they’re dealing with. I think that these are all really well-known and accepted challenges, and that tells me that it requires a lot of savvy and nous to move in the right direction. But I’m also very optimistic. They’re very focused. I’ve spent time in China, and I think that they are not swayed by a lot of the political machinations and political interests that democratic societies are.

OR: You’ve outlined a number of big challenges and big steps meant to address these issues. Do you see national and international institutions as still having enough legitimacy to undertake these big strategic projects?

Moyo: I’m very much for innovation. So I think that the institutions that will have relevance and legitimacy are the ones that are innovating. Because the world is changing, and as I said, the dynamics around who we engage with politically and how we solve economic challenges is changing. A lot of that is due to exogenous factors — things that public policy may not have a priori a lot of influence on.

Do I think they have legitimacy? I think they can have legitimacy if they recognize that a lot of the models and the assumptions that we’ve made in the past may no longer hold. And I think they themselves as institutions need to evolve. They need to shift their focus or their agenda — and certainly the manner in which they execute.

So I am optimistic, fundamentally. But think about business. Some companies will survive and others will not, and I think it’s really about you constantly evolving and forcing yourself, as an institution, to evolve and change as systems change.

OR: Do you think that the current U.S. administration has the capacity to at least embark on this process?

Moyo: I think it’s a bit too soon to call it one way or another. There are some good people who are in the administration. Of course, it’s quite disconcerting to hear some of the remarks and commentary that comes out. And to be honest, I try to separate what is just a style difference and to really focus on the content. In that respect, we’ve had a tax debate. I want to see what’s going to happen in infrastructure. We’ve had the healthcare agenda. I’m much more interested in public policy than I am in superficial language. I think the jury’s still out.

Let’s see what happens. The economy is growing, and we are seeing employment numbers that are solid. Obviously, we haven’t addressed participation rates, and I do think that some of the language coming out of the administration is very disturbing as it undermines the U.S.’s global agenda. But overall, I’m pretty optimistic that America and Americans will make sure that the country is set on the right course.