Morocco

Interview with Professor Catherine Lubochinsky: “For economists, there is little mileage in questioning globalisation!”

le 21 October 2019


Mrs Catherine Lubochinsky*, Professor of Economics at the University of Paris II Panthéon-Assas and a member of the Circle of Economists, was kind enough, on the occasion of the 19th meeting of the Circle of Economists held in early July in Aix-en-Provence, to outline her analysis of the current global situation.

And for her, like many others participating in these meetings, the relationship between growth and confidence is inseparable!

La Nouvelle Tribune: Mrs Catherine Lubochinsky, weak global growth affects emerging countries in particular.

In your opinion, what are the factors that guarantee their independence?

 

Mrs Lubochinsky: Emerging countries’ economic growth dependency vis-à-vis that of Western countries will differ from one country to another.

The least dependent countries are those that have been able to generate domestic demand and thereby reduce their external dependency.

Any slack in Western countries’ investment in emerging countries is being taken up by the large number of Chinese investment projects under the Belt and Road Initiative (the Silk Roads).

But can these investments, which satisfy China’s goals when it comes to internationalisation, be considered by emerging countries in Africa or Asia as priority investments? That’s far from certain!

What is clear, however, is that these investments are responsible for these countries’ rising debt, particularly their foreign debt.

If global economic growth were to remain weak, will that not exacerbate poverty in these countries?

Admittedly, a low-growth environment, given the current demographic dynamics, does not alleviate poverty. But it has also been shown that when economic growth in Western countries is strong, inequality also rises (see Piketty).

There are three aspects to the issue of poverty: the first is linked to the creation of wealth, a prerequisite for poverty reduction, the second relates to the distribution of income i.e. the distribution of wages in relation to profits and the third is related to economic policies of income redistribution.

So, the loss of economic growth is not the only cause of worsening poverty, although it certainly contributes.

Why do you think economic growth is so sluggish? Is it due to a loss of confidence, as some seem to claim?

The loss of confidence can certainly influence economic activity and restrain it because, by its very nature, investing is about having belief in the future.

But this is partly due to the failure of Western economic policies in the wake of the great financial crisis of 2008.

The counter-cyclical measures of fiscal policy have resulted in rising public debt which has reached 30-40% of GDP, on average, for Western countries, leaving governments with little room for manoeuvre.

The 19th Rencontres Économiques in Aix-en-Provence this year focused on ‘how to restore confidence’, since a lack of confidence is clearly detrimental to economic growth.

Will a country like Morocco, which has spent the past 20 years deregulating and restructuring, be held back if globalisation were called into question? What do you think are the risks it incurs?

There is little mileage to be had from questioning globalisation, at least as far as economists are concerned. It is clear that Sino-US trade tensions and Brexit are weighing down on European growth.

On the other hand, there is a genuine realisation that globalisation creates winners as well as losers.

Which is why social and tax competition policies are simply less and less accepted.

The trade barriers that are reappearing, except those imposed by the United States, are aimed at re-establishing a level playing field.

As far as currency liberalisation is concerned, even the IMF has revised its stance for emerging countries.

These countries need to maintain a degree of control over capital movements which is why they are being advised against implementing full liberalisation of their balance of payments’ financial account until they have a genuinely floating exchange rate; foreign exchange reserves, given the size of the world’s foreign exchange market, are often insufficient to maintain more or less fixed parity.

What do you think of the balanced budget requirements imposed on developing countries, and the resulting austerity policy? Don’t you think that this thwarts their progress?

In theory, there is no economic justification to maintaining a balanced budget.

A government, with an infinite time horizon and with the effect of fiscal multipliers, is not a household. It is worth remembering that even a household can relax its budget constraints by borrowing to buy a car or property.

On the other hand, a government that has defaulted on its debt, or receives international financial assistance as a last resort, is compelled by its creditors, which expect to be repaid, to adopt a so-called austerity policy.

The real debate is about the type of fiscal policy that low-growth countries which don’t require financial assistance should adopt.

In other words, how can they boost economic growth while remaining solvent?

Budgetary policy must be counter-cyclical. Indeed, budget deficits must be treated as something that is normal during a recession or slowdown. And, conversely, in times of growth, deficit reduction is a priority.

But the available room for manoeuvre will depend on the debt-to-GDP ratio of the government in question at that moment in the economic cycle – strong or sluggish growth phase – as well as, to a large extent, the latter’s access to funding.

When interest rates are low, shouldn’t governments take advantage by borrowing at lower cost?

Debt, irrespective of whether it is private and public, is essential for economic growth, without being the only prerequisite.

The most recent financial crisis was again a debt crisis and it is clear that the issue of public debt sustainability, in particular, needs to be addressed.

It’s complicated because there is no magic number, for example, for a debt-to-GDP ratio: Japan’s public debt exceeds 250% of its GDP while at the time of the Greek crisis, that country’s ratio stood at 130%.

Creditors need to feel confident, which assumes that a nation’s accounts have not been falsified (as was the case with Greece), that debt-financed government spending is in fact investment expenditure in a country’s future (education, infrastructure, climate adaptation etc.) and that there is a degree of legal and institutional stability.

The other important factor is the extent to which a country is economically dependent on the rest of the world. A country’s external financing might potentially compromise its stability since capital outflows could be enormous and result in a balance of payments crisis or a banking and financial crisis.

For those countries that do not have a credibility problem, they should certainly take advantage when interest rates are low by taking on debt, ON CONDITION that they invest in socially and economically effective projects.

But for those countries that are highly dependent on external factors such as foreign debt or overseas investors, they must ensure debt sustainability.

What is your answer to the question, “How can confidence be restored?”, asked in Aix by the Circle of Economists, of which you are a member?

Confidence needs to be restored urgently because, without confidence, there will not be sufficient growth!

The current lack of confidence can be seen in the loss of confidence in traditional political parties and a resurgence in extremism.

The first step to restoring confidence is to improve governance at the governmental and corporate levels.

In my opinion, we need to reduce inequality and, above all, invest massively in education as well as protecting the victims caused by technology’s dehumanising effect.

 

Interview conducted by Afifa Dassouli

* Catherine Lubochinsky is Professor at the University of Paris 2, a member of the Circle of Economists and a member of The Laboratory of Excellence for Financial Regulation. She is also a member of the ACPR’s Scientific Consultative Committee, a member of UniCredit & Universities Foundation’s Scientific Committee (Milan) and a member of CITECO’s Scientific Council.

In addition to her academic career and many publications, Catherine Lubochinsky has held several posts within financial institutions. She is currently a director of LCH Paris.