Wise people tend to measure words and carefully address every aspect of the topic they are discussing, avoiding oversimplification and rushed conclusions. Having served as the Chief Economist at the IMF and Chief Macroeconomist in Obama’s Council of Economic Advisors, Professor Maurice Obstfeld makes no exception to this principle.
Two months after the end of his experience at the International Monetary Fund, Prof. Obstfeld joined us at WES2019 to share his reflections on what lessons current and future macroeconomists should learn from the financial crisis. Prof. Obstfeld, who is now back at UC Berkeley after five years in Washington, warned our audience about the importance of a sound financial system for macroeconomic outcomes, something that had been neglected in pre-crisis literature.
Focusing on the political economy of the post-crisis period, he also acknowledged the widespread resentment in advanced economies. Stemming from wage stagnation, firm dislocation and de-industrialisation that led to a loser-winner divide, discontent now finds expression in nationalist movements.
“The challenge for economists is now to find the best policies in the face of past and future structural transformation and, perhaps more crucially, to sell these to the public and politicians,” Prof. Obstfeld said, adding that while scientific rigour is necessary, it is no longer sufficient for economists, who also need to be as near to earth as politicians.
After the speech, we had the pleasure to converse with him on a variety of topics, touching upon his experience at the IMF and linking it to recent events that made the headlines around the world.
Starting from IMF’s recent reports on the impact of trade tensions on global growth, Prof. Obstfeld stressed that “it is a big problem that the US is withdrawing from its global leadership role, particularly in a time when there are so many multilateral challenges, not just those of a purely economic nature.”
At the same time, he believes that recent weak data on China’s GDP “hurt their bargaining position as they are less able to withstand trade measures by the US,” while also noting that China is taking a more conciliatory tone in their communication with the US.
When asked about Greece, he supported the decision by the IMF not to join the third bailout programme to the country, a measure that was, however, discussed before his appointment at the IMF in late 2015. “It will be challenging for Greece to move forward without further debt relief,” predicted Obstfeld, especially considering the weak outlook for economic growth in the country.
“Up until fairly recently Europe was growing quite quickly and that helped Greece,” Prof. Obstelf argued, suggesting that Europe’s recent slowdown might create a much more difficult environment for the country. He also warned that any reversion of earlier reforms by the Greek government would also make life more difficult in terms of fiscal sustainability.
When prompted to comment on the role of China within the IMF, Prof. Obstfeld praised the work done by the Washington-based institution, which has been wise in bringing and keeping China at the table. “The next Quota Review should certainly adjust the voting shares to reflect the growth of emerging markets generally,” he emphasised.
The US opposition to this quota increase is “short-sighted”, especially considering the need for adequate resources in the face of new challenges after the loan extended by the IMF to Argentina. Indeed, further risk could come from Venezuela. “If the country, as we might hope, has a peaceful transition to a more democratic government, they will definitely need an IMF programme and it would be at least as a large as Argentina”, he foresaw.