September 12, 2012; Interview with Jose Antonio Ocampo

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, before we bring our guest on today, Professor [José Antonio] Ocampo, I want to talk to you about why we have the guests we have. When the euro was starting to come under pressure a couple of years ago, we had Otmar Issing, a man who could be considered one of the fathers of the euro. We have a situation right now where you and I have been actively talking about China. It has been an emerging market that has been dependent on the West. It has really needed our demand and our money to grow its own economy, and the question is, does it shift to supplying its own needs?

David: This is a part of a bigger picture, which is that the developing world has somehow become disconnected from the developed world. Some analysts think that has, in fact, taken place, and we would strongly disagree with it, mainly looking at the theory of liquidity, which says that money is flowing from the industrial and the developed world, and there is a positive impact as that liquidity flows downstream to anyone downstream.

When you look at the movements of progress in the developing world, it really is dependent on the health of the developed world countries and the industrial world. When we take these broad issues, beyond our own reading, and ask who would add value to a conversation like this, who would bring a perspective, I think of Professor José Ocampo. Here is a guy who was nominated, one of three, as the World Bank president to replace Robert Zoellick this summer. He dropped out of the race in April, but he still serves with the United Nations, and teaches economics at Columbia University.

He brings a very interesting perspective, because not only has he taken various posts with the United Nations as Undersecretary General for economic and social affairs, Executive Secretary for the Economic Commission of Latin America and the Caribbean, but also playing a role in the Columbian government as Minister of Finance and Public Credit, and Minister of Agriculture and Rural Development, so there is a good reason why he was posted, and potentially was, the World Bank president. It is a development institution.

Kevin: We have been talking about the World Bank Report to China. China is using this possibly as a model of economic change. We have talked to guests in the past, and you and I have talked about this, that political change has to occur, as well, and I am hoping that you are going to ask that question when you talk to Professor Ocampo.

David: Certainly, and this is where we go beyond the choir of people that we always talk to, always read, even always agree with, to say, “What, really, is the context that we are in?” Is this an issue of decoupling? Could we be wrong? Could we, in fact, see the developing world exceed all expectations, and lead, lead, in a recovery, economically, over the next 5-10 years?

We want to embrace as many different opinions as we can as we look at these issues, and here is a gentleman who, I think, adds tremendous value to the conversation in that regard. He studied at Notre Dame for his undergraduate work, has a Ph.D. in Economics from Yale. Again, a blend of academic pursuits there at Columbia, policy pursuits through the United Nations, and then of course, his boots on the ground experience in policy implementation with the government in Columbia.

And I would note, I think Columbia is one of the great success stories. If you look at the last 5-10 years, not only do we have an underlying support for that in the free trade agreements which the U.S. has signed with both Columbia and Panama in recent years, but there have been policy changes, political reform, as well as economic reform, that over the last 5-10 years has made them one of the leading growth economies in Latin America. Wrapping all that up in one bundle, we welcome Professor Jose Ocampo to the conversation.

Jose Ocampo: We are in the midst of a global slowdown induced by the major industrial countries, particularly Western Europe, in which the developing countries are still growing more rapidly, but they are also slowing down.

David: The support for these trends, the major move forward, the rise of the rest, has taken place in a certain context. We have had now for about 40 years, exponential credit growth in the developed world, and also an unleashing of fiat money, followed by the end of the Bretton Woods agreement, with many benefits in terms of capital flows going to the developing world, or at least this would be one interpretation of events, in keeping with Kindleberger or Minsky, in terms of their ideas of liquidity.

The question I would have is, as we look at this period of slowdown, global slowdown, can we avoid a devolution in this context of constrained capital flows, diminishing foreign direct investment, a contraction of credit, the things that have helped aid the developing world? How do we avoid this devolution?

Jose: From the perspective of developing countries, stable capital flows are good, particularly, most forms of foreign bank investment, not all, as I will mention, but the volatile flows, which are the financial flows, have been a source of significant progress, generating booms and busts, very much like in Australia, growth and then busts, have generated problems á la Minsky, as they say in industrial countries.

So it would actually be better, I think, for the industrial countries, and certainly for the developing countries, to limit certain forms of capital mobility, much in the spirit of the original Bretton Woods arrangement of 1944.

David: What are the risks, in your opinion, to economic and political stability, should we step back from free trade, and what we have had, as an advancement of globalization? If we should see that move in the opposite direction, what are the palpable risks, in your opinion?

Jose: Increased trade has broadly been good for the world, but at the same time, it has limited the possibility of some countries encouraging new production activities. This is, of course, particularly important for developing countries, which have lagged behind in the development process. From that perspective, and I guess we can add that it also reduces the possibility of the room to maneuver to undertake active social policies, for example, policies aiming at increasing wages.

For that reason, probably a better balance between global trade and some form of national interventions aimed at facilitating the diversification of economic activity, as well as the active social policies may be good for the global economy.

David: When we look at your opportunity to have served with the World Bank, perhaps you can reflect with us on the approaches to development issues that they have had in the past. Should they take a different tack, in your opinion? Under your leadership, would you have changed the approach?

Jose: Let me clarify that. I work for the United Nations. I was a candidate for World Bank president, but they did not elect me, they elected the current president, an American. In my work for the United Nations, where I worked for around ten years, I always pushed for the idea that I just mentioned, the fact that some form of capital account regulation may be good, but of course, some freedom of foreign direct investment has been positive for developing countries in general, and growing world trade has been an opportunity for many developing countries, but developing countries should also have the opportunities to intervene to improve the diversification of economic activity and to facilitate active social policies.

David: What I like about your Bio is that it combines both academic experience, as well as policy experience, both with the United Nations, and with the government of Columbia, and there are roles that you have played there, Minister of Finance, Public Credit, Minister of Agriculture and Rural Development, which give you a very unique insight into what reforms are necessary for economic and social development.

I am curious. What role does political reform play in the development of a country, from less, to more or less fully developed, in your opinion?

Jose: You mean the politics, or sociopolitical, or economic policy?

David: Really, strictly political reform. Let’s take China as an example. They had reforms that were set in place in 1978 and 1979, and these were more economic than political in nature. Even today, the changes that are suggested by the World Bank 2030 study are primarily economic reforms, and there is not a lot that is representative of change to the political environment. That would be a question. How far can you go, in terms of economic development without seeing complementary political reform?

Jose: Let me say that I am a democrat, so democracy as a value by itself, is part of the fundamental freedoms that people should have, so I am fully for democracy, period. Some people argue that autocracy may be better for economic development at certain stages. I disagree with that. I don’t think there is firm evidence that that is correct. There is also the argument that sometimes democracy generates problems, for instance, uncertainty associated with political processes. Yes, that may be correct, but I think the costs of eliminating democracy are much higher than those asserted.

David: And this is right to the core of the point, because it seems to be missing in one of the most important developing world countries today, China, the second largest economy in the world, so it is hardly even fair to call them a developing country anymore. But there is this idea that the global public sector development institution, the World Bank, discussed at length how they can move forward with economic reform, and yet, in nearly 300 pages, little to nothing is put in there. Again, this is a public sector development institution neglecting one of the things that is, at core, public sector.

Where is the political reform? This may be just for politically sensitive or diplomatic reasons, but corruption, depending on the estimates, in China, varies from 4% of GDP, upward to 17% of GDP. That makes it very difficult to engage economic reform when you have vested interests tied into the body politic. That is just to say, yes, democracy is something that is prized and really, what we would be interested in is, what role you think the rule of law plays in the future development of developing countries?

Jose: The rule of law is an essential ingredient of a democratic regime. It is of value in and of itself. I fully support the idea that democracy and the rule of law should be adopted by all developing countries. I think the rule of law actually is good for economic development in general, so the uncertainty that surrounds the absence of the rule of law is generally disadvantageous for developing countries.

David: Middle income countries still have about 70% of the world’s population living on less than $2 a day.

Going back to the World Bank China Report, China 2030, there was an interesting chart that pointed out that in 1960 there were 101 economies that the bank classified as middle income. By 2008, fast forward, half a century later, 13 had made it into the high income category, and Greece is included in that. You are a development expert. What, in your view, is the way for progress to be made? We have just gone through one of the greatest periods of globalization in world history. Why have so few developing countries gotten over the hurdle and actually entered into the high income category?

Jose: Yes, that is a fundamental question in development economics. I would say that it is the same thing that you have at the national level. The mobility of people across income classes is not an easy job. Very few people make it from the middle class into the upper class. But the opportunities for mobility at the national level are always supported by state policy.

One of the major problems in the international community is that there not such support. The idea of development cooperation has been in the air since the second world war, but the capacity of the international system to support that mobility has been relatively limited. A few countries have made it through, but you can see the constraints that are faced by developing countries in terms of the accumulation of capital, both human and physical capital, the capacity, in particular, to upgrade technologically, and even in some cases you see that the process is not full.

You mentioned the case of Greece. That may be a reflection of the fact that Greece does not have the full ingredients of a developed country, and that is not true of several other countries that sometimes make it to the top for other reasons. For example, many of the countries that make it to the top, in terms of income, it is just because they discover oil. That doesn’t make a country develop.

David: I couldn’t agree more. A past guest on our program, Hernando de Soto, has suggested that property rights and clear title of land held by an individual allows for the leveraging of personal balance sheets and capital investment into businesses, just one benefit of unlocking real estate values. The respect of property rights is rooted in the rule of law, which we discussed earlier. Doesn’t a healthy respect for the rule of law precede that economic unleashing, and arguably, the step from developing to developed world status? How would you introduce that, diplomatically, into the developing world, as a fundamental cornerstone, the respect for the rule of law?

Jose: Let me point out that property rights is only a limited part of the rule of law, and I would furthermore make the point that Mr. de Soto tends to overestimate the contribution that property rights can make to development. The fact that people have some limited property and can use it to improve their standard of living doesn’t allow most poor people to get out of poverty. I think Mr. de Soto has always over-estimated that.

The rule of law is a broader concept, because the rule of law refers not only to this particular issue of property rights, but refers to issues such as the access of the population to social services, the division of power in society, how that is managed so that there is countervailing power placed to avoid autocracy from prevailing. It also reflects, in a democracy, the right to elect people to have freedom of speech, the capacity to be represented directly by certain groups in the power structure. I think all of those are good for development, which is the point I made previously.

David: As the old Greek phrase goes, “There is many a slip between the cup and the lip.” If we look at developing world countries having made great progress in recent decades, there is a growth model that has been in place. Do you feel there is some dependence in the growth model of the last 30-40 years on Western Europe and the U.S., and a need for a new growth model?

Jose: It is very well known that the American economist Mr. Prebisch always thought that the international economic system is a center-periphery system, a system in which some industrial countries, the U.S., Western Europe, and Japan have been at the center of the system, and developing countries are in the periphery. That concept, I think, broadly speaking, is the correct one. Within that system, of course, the opportunities for developing countries to advance through the attraction of foreign direct investment are always positive ingredients that allow the developing countries to sometimes, but not very frequently, reduce the gap in income between industrial and developing countries.

The world has lived, until very recently, under that system, so the major dynamic forces always come from industrial countries, particularly in terms of technological development, or the generation of business cycles. Developing countries are takers, they are absorbers of technology. They are business cycle takers rather than business cycle makers.

Still, I think we have not seen a world in which developing countries are the source of those dynamics. They have grown faster for around 10 years, significantly faster, actually, but we still have to see whether, for example, China, or even less likely, India, become the true agents of the world economy. That role is still for the industrial countries, because we continue to live under a center-periphery system.

The closest to changing the system is the possibility that China would emerge as an alternative pole of the world economy, but it is still a bit far from that position, particularly because it is not yet a major source of technology the way the U.S. or Western Europe or Japan are sources of technological innovation.

David: When you look at the changes over the last 25 years, the migration in emphasis from the G2 to the G3, G7, G8, now the G20, with an institution like the World Bank, there are a many as 77 countries with opinions on what should and should not be done. This has led some analysts to conclude that we have effectively moved to a G-zero world, devoid of leadership and fractured by too many divergent interests and opinions. How do you see this greater, if you want to call it, democratization, in global leadership, and how do you define leadership in this period?

Jose: That is a fantastic question, and your observation that maybe we are under G-zero is a wise one. We have seen in the last few years some cases of leadership, but they don’t necessarily last for too long. For example, it is quite clear that after the collapse of Lehman Brothers, the actions of the major industrial country central banks in industrial countries have always played a role in helping to avoid the catastrophe. Then the G20, particularly in its London meeting in April 2009, made a major push toward the recovery of the global economy. But it didn’t last. We have seen that movement from a G4 or G5, let’s say, to a G20, or as you pointed out, maybe to a G-zero.

Another area is that we have seen inadequate action. The most important long-term issue that the world is facing is climate change. It is an issue in which there has been no action yet. Even the signing of the Kyoto Protocol, which was the major advance in this area, ran into difficulties. Almost no country met the commitments in the Kyoto Protocol, and the United States did not even join the protocol. In the negotiations that have been going on in recent years, there has been no real advance. We are still waiting to see whether the international community will reach an agreement on this critical issue.

David: Drawing on your experience with ag policy, and what you did as Ministry of Agriculture in Columbia, let’s talk about the recent food price volatility. Primary staples have risen a minimum of 15.5%. In the case of soybeans, just in the last year, there is a 52% increase. What are the impacts you see in the developing world from these sharp shifts in price?

Jose: I think there are several issues that we have to separate. The strict volatility is a problem by itself, and the most important reason for that is that the poor of the world spend a large proportion of their income on food staples. As much as 50% or more of their income goes for food, so when there is a sharp increase in food prices, many people in the world see their livelihoods threatened significantly, so reducing the volatility of food prices would be good.

The second issue is the source of volatility. I think the basic reason is the lack of adequate stabilization mechanisms. In the past we were much more successful in doing that than currently because we had much stronger state interventions trying to regulate agricultural markets, and there has been a claim by many that the intervention of finance in the purchase of derivative contracts in commodity markets has been an additional source of volatility, which is probably correct.

Beyond that, I think the long-term issues of agricultural prices have, I think, two dimensions. The first one is to recognize that, yes, there has been a significant medium-term increase in agricultural prices, but people forget that the 1980s and 1990s were terrible for agricultural producers. Prices collapsed, on average, by around 40%, if you compare the levels of the late 1990s with the levels of the 1970s, so there has been a recovery of prices, viewed from that perspective, rather than a price boom, by itself.

Second, the long-term solution to these problems is more agricultural research, more technology, in other words. There have been, in the past, major advances in agricultural technology, and a green revolution in the developing world, the 1960-1970 period being the most important one, but there are many others that are still going on, for example, through the spread of biotechnology.

But there are many, many problems, still, in the world. For example, the research on tropical agriculture has always been minimal relative to the research in temperate zone agriculture, which is the agriculture of industrial countries. The north-south, central-periphery division, plays again here, because there has been really in adequate research for the tropics in terms of agriculture.

David: So with a recovery, not necessarily a price boom, but with a recovery back to levels that we saw prior to the 1980s and 1990s, one of the things that we have had as an adjustment, and it has been a cultural adjustment – we had the food riots of 2007 and 2008, we had the Arab Spring last year. We see a number of underdeveloped countries that are quickly and dramatically affected by food inflation.

I am reminded of the recent release of corn and rice from the Chinese reserves in order to contain food inflation. Let’s look at that in the context of the developing world. You have, again, both an advantage in your analysis, of having experiences as an agricultural minister, but also in your roles at the U.N., I think you have the ability to see the political and the geopolitical knock-on effects of food inflation. Do we have more political volatility ahead of us because of this factor?

Jose: Certainly, and let me say that I think this is a very important issue currently. I think the world has to come to realize that it has to adapt to the management of this problem in a serious way, which means, I think, more support for research in agriculture, more intervention in markets, for instance, greater buffer stocks to try to smooth prices. And I think, finally, when the conditions are difficult, there has to be income support for the poor so that they are able to buy the agricultural goods, or even subsidies for consumption.

David: Professor Ocampo, thank you so much for joining us, and hopefully, we can call upon you to add to our conversation again in the future.

Jose: Yes, that would be my pleasure. Thank you very much.

Kevin: David, I think it is an interesting concept to think of this center and periphery type of mindset. The center, so far, has been the industrial world, and let’s face it, it was the free market that created the industrial world. The developing world is the periphery, they have benefited. But using China as an example, China is going to have to figure out how to get to the center before they solve the problem.

David: This is exactly our point, that you have a prevailing trend in place, and that trend has been set by the industrial world. We are the makers, the rest of the world are the takers, and to some degree, we like to see healthy competition come into that, where the takers progress, and in fact, have the potential to someday exceed or excel beyond just takers and moving to that status of makers.

But this is the main point. You have financial flows which have enabled great growth in the developing world, and those same financial flows and foreign direct investment are more limited today than they have been over the last 10-30 years. With those limited financial flows, it means that there really is a change in the tone, tenor and direction, the success variables, if you will, in the developing world.

We think China has its own problems. And certainly, as you are looking through Latin America, if you are looking through Africa, if you are looking to India, they are in the same position of vulnerability, and this goes back to our conversation with Harold James about contraction, globalization, and the potential for political volatility. This was underscored in our conversation today with Professor Ocampo, as we looked at one more variable, not just globalization and a contraction in that trend, but political volatility on the other side of an increase in the value of food, something so basic, and yet, for many people living on less than $2 a day, so very, very important.

Kevin: I think it is ironic, and it was an interesting insight. This is a man who is very much into upper level management. He works for the U.N., and that says enough, he feels like global climate change is one of the big issues. But really, whether you think global climate change is a big issue or not, I think the main point that you are making, and he was making, is that maybe the G20, maybe the U.N., maybe the World Bank, this upper level management, doesn’t really have the power that they thought they had, because even with climate change, there was really no teeth in it. You brought up that we may be in a G-zero world. He lit up when he heard that, because even though he is part of these organizations, he is seeing that they don’t seem to have teeth.

David: We need clear leadership. We need confident leadership. We need leadership that is reflective of a philosophy that works, and it is all of the above that we are missing, it is lacking, and I think everyone is aware of it. Everyone is longing for it, everyone is hoping for it, but it is not there. It is not there.

In the transition toward democratization, it is almost as if we have expanded, expanded, expanded, and now, like the rubber band that has reached its outer limits, things are contracting again, and we are moving back toward, “Who is going to call the shots?”

Who is going to lead with clarity on the issues of our day, whether it is global poverty and development issues, like they head up with the World Bank, or just basic issues? How is our economy going to grow? What is going to stimulate a business-owner to take a greater risk and improve his lot in life by growing his franchise? How do we get that done? We need someone, or a group of people, and frankly, I don’t know that they are here yet.

I think, as we look forward, and this is perhaps a philosophical reflection, going back to our interview when we talked about The Fourth Turning, we haven’t gone far enough through this crisis to see or to recognize the leadership to remake the world of tomorrow.

By | 2012-09-14T12:10:12+00:00 September 14th, 2012|Transcripts|