Global economy could turn Japanese

Nobel prize winning economist sits down with Travis Pantin for a discussion on the global and UAE economy.

Paul Krugman, the 2008 Nobel laureate in economics, is in Abu Dhabi to deliver a keynote speech at the Megatrends conference today. Dr Krugman, who is a professor of economics and international affairs at Princeton University and a popular columnist for The New York Times, sat down yesterday for a discussion on the global and UAE economy with Travis Pantin. Q: What's your outlook for the global economy this year?

A: I'm really worried about the global crisis. I think "Great Depression 2.0" has faded as a possibility, but the lost decade, the "Japanification" of the whole world, is something that is very much on my mind. That we will have this really prolonged period when the economy is not plunging, but just stagnating at a low level. But the absolute plunge, the 20 per cent fall in GDP, is not going to happen, whereas a few months ago it looked like it might.

Q: You have written on the creation of business clusters and the ways in which economic hubs develop. What do you think about the UAE's attempt to turn itself into such an international hub? A: The theory says it can be done, that you can provide a big push and create something that ends up being self-sustaining. But historically, it's very uneven, most of the world's great hubs were created by accident. [In the case of] the great financial hubs, obviously nobody decided to make New York or London the centre of world finance. Silicon valley is there because a couple of guys named Hewlett and Packard started something in a garage. But there are others. The North Carolina Research Triangle was a deliberate creation. So it's not something that is wrong in terms of economic theory.

Now logistics, without knowing anything about the details, I like it because it's not something that anyone else is trying to do. Everybody wants to be an IT centre, everybody wants to be a biotechnology centre. To give a weird analogy. The fastest-growing metropolitan area in the US is Atlanta. And if you do economic geography, you always want to ask: "This metropolitan area, what does it do for a living? What is the source of its competitive advantage?" And as far as I can tell, in Atlanta, it really is logistics. It really is the airport and the stuff that's clustered around that. And it's really about being a logistics centre. And the airport. That's public policy.

Dubai may not see its vision as becoming the Atlanta of the Middle East, but actually that's a possible goal. Abu Dhabi has outlined a plan to use its oil wealth to diversify its economy away from petrochemicals over the long term. What do you think of this plan? Historically, it's been very difficult for resource-based economies to diversify. People talk almost without explanation about the "resource curse". There has been this tendency for economies large in resources to be stunted in their growth in other dimensions. Resources have probably got a run still. One of the things that has been little remarked during the economic slump, but that has been striking, is how well resource prices and oil in particular have held up. Here we are, the world still deeply depressed, still declining, although more slowly, and [oil is still] over US$60 a barrel. So that says the resource money is going to continue for quite a while.

Q: How will emerging market economies be affected after the crisis passes? A: We might actually see some revival of more traditional capital flows to emerging markets. Since the late 1990s we've had this situation where many of the emerging market nations have been capital exporters, because they've been building up these huge precautionary reserves. Those funds have been flowing uphill, especially to the US because the perception was that the US is safe, and emerging markets are dangerous places. It turned out that the US is not safe, and the emerging markets - not all of them, certainly not emerging Europe, which is a disaster area just like South East Asia 10 years ago - although they haven't decoupled, they have actually handled the crisis at least as well as the advanced countries have. So we might see in the future that there will be a fair amount of money flowing to the BRICs [Brazil, Russia, India and China], and some of the smaller emerging markets. But maybe take the "R" out of BRICs, because the whole eastern European, former-Soviet area is a really bad scene. But Brazil doesn't look like a bad place to invest these days.

Q: What is your outlook for the future of sovereign wealth funds (SWF) globally? Will they rise or fall in economic importance after the global crisis passes? A: People got all riled up about SWFs. I never did. I think it's a greatly exaggerated issue. It sort of faded from prominence as we've had more serious things to worry about. There may come issues, there will be cases where there are companies that are perceived as strategic and there will be concern over having a foreign government owning them or owning a large stake in them. That will continue. But more broadly, aside from those cases, I think a medium-sized country, or a small country, sovereign wealth fund ? is no more of an issue than a large private investor. China is a little bit of a special case. But even so, so long as [it is not investing in] a defence contractor or possibly an oil company that's engaged in a lot of strategic stuff in dubious areas of the world, I don't think it's going to be an issue.