Washington is starting to look like Delhi: Niall Ferguson
Chaitanya Kalbag, Rishi Joshi and Manu Kaushik March 29, 2011An erudite scholar, an acclaimed author and the William Ziegler Professor of Business Administration at the Harvard Business School, British historian Niall Ferguson wears several hats at the same time. At the India Today conclave, Ferguson spoke on "American Decline: Myth and Reality" and asserted that US faces grave challenges, particularly from the spreading fiscal crisis. American politicians must ring in far reaching reforms if the country is to retain its preeminent status on the global stage, he says. On the sidelines of the conclave, BT's Chaitanya Kalbag, Rishi Joshi and Manu Kaushik caught up with Ferguson for a free-wheeling interview. Edited excerpts:
On whether the US is in decline
I think there are two issues which are quite separate. One is the rise of the east and the south and that is a good thing. And so any relative decline, if it just means India or China is growing rapidly is not something Americans should complain. The prosperity of China or the prosperity of India represents opportunities for the United States. But the issue that is more concerning is that the US has internal problems that it is not grappling with well and these are impacting America's long-term prospects. I think the biggest is probably the fiscal crisis because the cost of entitlements like social security and medicare is already greater than the cost of the entire military establishment. Until I see signs that the American politicians are serious about the reform of medicare, social security and the tax system, I will be pessimistic.
On the problems with the US and Indian democracies
Washington was starting to look a lot like Delhi but to some degree Delhi is also starting to look like Washington. And that convergence tells you what is going wrong in the US more than what is going right in India. The problem of corruption in American politics is one that has to be addressed more openly. The reality is that the financial crisis exposed the dangerous levels of overlap between the financial institutions and political institutions to the point of near absurdity. It appeared as if the treasury department has become a subsidiary of Goldman Sachs. I think there is a similarity there with India.
I think the other critical similarity is that political vested interests in both systems stand in the way of structural reform. When you a have a conversation with an Indian politician the strong impression you get is that good ideas for reform exist but the execution is hampered by vested interests within the bureaucracy. Now that in the same way reminds me of the US. So I would say that there is a kind of convergence there which may be inherent in large democracies.
On why the US is the leader in innovation
Many people doing innovation in the US are not American born but they come to the US because Harvard, Stanford are still the ideal locations in terms of clusters of talent there. If you want to take a really cutting edge idea from the laboratory into the market, the US is still the best place. India should be doing better because it has elite educational institutions that are among the world's best. But they just don't seem to doing quite as much in terms of commercial spin-offs as their American counterparts. The Chinese want to do this and they are furiously trying to create clusters around their top universities on the American model. They are very shameless about copying what's good.
On the state of the global economy
I think it's really way too early to declare victory over the crisis because the US housing market is still in the doldrums. If you look at unemployment the official figure is understating it. And inflation is also edging up in ways the official data doesn't capture. The trouble is that people base their judgements of the US economy based on the US equities market, not realizing on that S&P 500 is doing well not because the US economy is recovering but because there is sustained growth in Asia, there is sustained growth in Brazil and so on.
If you actually look at the companies focused on the US consumer it is still pretty fragile. I don't see consumer expectations and consumer mood in any way strongly positive. And on top of that there are the shocks that we witnessed in the last few weeks. Oil must end up higher because you have taken a whole lot of capacity offline. I think you have got potential for major trouble in the Middle East and North Africa and then you got this fiscal problem that American politicians just can't seem to deal with. I don't see the outlook as being super positive.
On the Japan crisis
The trouble is that Japan isn't that well set up to deal with this problem. It is not a society which has a lot of unskilled labour. Japan is going to struggle with the reconstruction work with the work force that it has.
I actually think the bigger question is about Japanese government bonds and the additional borrowing that would clearly be needed. When you get to the point of reconstruction work my sense is they will need to attract capital into that reconstruction process. It is going to push up Japanese rates. Think of the German unification as an analogy. The German unification did not involve a natural disaster, it just involved the collapse of the Berlin wall. The West Germans suddenly had the cost of East Germans to handle and the effect was to push up German rates quite substantially. And I think it seems a likely story in Japan for the second half of this year.
On the importance of India to the US
I'll give you an anecdotal piece of evidence. Some of the New York hedge funds that have traditionally been focused in the US have drawn the obvious conclusion from the crisis that they have to be more global in their approach. It is very interesting how often I hear those people talking about India because they find it much easier to operate in India than in China. There was a great deal of interest in Indian real estate as an asset class in the hedge fund community last year. So, I think smart Americans get it about this country but they are still in a minority.
On China's role in the global credit crisis
Without Chinese savings recycled into the American economy through currency intervention and reserve accumulation the real estate bubble would not have inflated as much as it did. If there had been no Chinese reserve accumulation and Chinese had let the remnimbi appreciate there would have been higher long term rates in the US way earlier, which would have cooled down real estate. So I think China supplied the fuel for the fire. If you look at the Chinese reserve accumulation it amounts to 50 percent of China's GDP. The Chinese reserve accumulation kept interest rates 150-200 points lower than they would have otherwise been in the period from 2003 to 2007.
Watch video of his speech at the India Today Conclave