Paul Krugman is obviously not afraid of offending people. At the Arab Strategy Forum in Dubai this week, if there were any Russians or Venezuelans in the audience, they would probably have walked out midway through his speech; and Europeans and Chinese would have been sitting very uncomfortably towards the end, when he focused on their gloomy prospects for next year.
America came off lightly as perhaps the best hope for economic growth next year; as, in the circumstances, did the Middle East, trying to get to grips with the plunging oil price.
But after the speech – delivered virtually word-perfect without notes over 30 minutes – you could see why he has been called the “most hated and most admired economist” in the world. He speaks plainly and calls it as he sees it, and – coming from a Nobel Prize winner and thought leader via his columns in The New York Times – that can sometimes ruffle feathers.
Mr Krugman, who is also professor of economics at Princeton University in the United States, is, however, regarded as a friend of the Middle East, largely for the same reason he got the “most hated” handle: his opposition to the American invasions of Afghanistan and Iraq more than a decade ago, a stance which went down badly in some US patriotic circles.
So his views on the oil price decline were keenly awaited. Would he blame Opec and regional governments for policies that contributed to the recent plunge in prices? Would the fall permanently damage regional economies?
The respective answers were: partly, and no.
“The fall in oil is because of the weakness of the global economy driving a weakness in demand for energy; [and] an increase in supply because of shale production in the US,” he said. But it was also because of deliberate policy on the part of Saudi Arabia, which was targeting the US shale industry by maintaining production levels and driving down prices.
As regards the effect of lower prices on the UAE, Mr Krugman was sanguine. “There is no crisis level here over the oil price. It is an oil-dependent region so there will be an effect, but the Emirates is more hedged and more diverse economically than it ever has been. If it was 15 years ago, the fall in oil prices would have been a more negative blow,” he said. “Because Dubai is an entrepôt economy, it will of course be hurt by anything that affects world trade, but it can also benefit from increased economic activity from lower world energy prices.”
Was the fall in oil price the result of a conspiracy between America and Saudi Arabia to damage the Russian economy? “I know these people. They’re not that smart,” he mischievously replied.
But if the UAE and Middle East came off lightly, the rest of the world came in for some classic Krugman gloom.
The western world had failed to reduce aggregate levels of debt since the 2009 financial crisis, and austerity policies had compounded the difficulty by reducing economic growth and reducing the capacity of public and private sectors to cut borrowings. “The debt problem is still there,” he said.
He considered for a moment the concept of “US exceptionalism” – the idea that America is the future dynamo of growth for the global economy – but then virtually dismissed it, because of continuing problems in getting employment back to growth levels.
And US policymakers were on the verge of a great mistake if they were going to increase interest rates next year. “I’ve told the Federal Reserve this, and warned them not to do it. If they do, there’s a chance they will wake a few weeks later and realise they are Japan,” he said.
On Japan, there was only a 50/50 chance that Abenomics would success in ending two lost decades.
He was even more negative on Europe and China. There was a real chance the euro zone would fall into a deflationary spiral, like Japan, a possibility that was causing “quiet terror” in the corridors of power in Brussels and Frankfurt. “Europe will face a moment of truth in 2015. Mario Draghi [president of the European Central Bank] has calmed the waters, but political support for the European project is falling fast,” he said.
“Does anybody believe Chinese data?” he asked as he launched into a pessimistic assessment of that country’s ability to lead global growth. “It has gone from being the locomotive of growth to a big source of worry. It reminds me of Japan in the late 1980s,” he warned, adding that there was a real chance that China would become an “open political crisis” next year.
On Russia, a subject he had recently looked at in-depth, he was at his most excoriating. “We could see a lot of private sector bankruptcies. Nobody knows the figures for sure, including the Russian government, but a lot of oligarchs and sovereign wealth funds there are holding assets outside the country ... Russia is like Venezuela with nukes, and that’s scary.”
After the speech, as he was getting pulled around between TV and press interviews, you could tell by the twinkle in his eye that he knows he had hit home and was pleased about that. “Hated and admired” seemed about right.
fkane@thenational.ae
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