Below is an verbatim transcript of the interview.
Spence: If you start with major economies, I think you are going to see a successful middle income transition and sustained growth at about 7 percent plus in China. This is systemically important because it is now a big market and helps support growth in most of the rest of the developing world. India has had a bit of a lull and it is probably going to accelerate now.
Obviously, it depends on the election coming up and the policies adapted by whatever government comes in. However, I think there is a huge amount of talent and capacity. There is determination to solve some of the problems that may be getting in the way and there is a reasonably healthy, not perfect, but healthy global environment to be relatively supportive. So, none of these are sure things but that looks pretty good.
Mexico is doing very well. I expect some acceleration in Brazil as they at the margin fix up some issues that caused consternation amongst the people. There are problems in certain places. Turkey is obviously having a difficult time politically at the moment. So, there are ups and downs but on the whole I expect this to be a pretty good year, an upward trend year.
In America, I would call it a partial recovery driven by private sector, structural shifts in the economy, rising exports, de-leveraging. We have got some challenges. We have got no agreement on how to deal with the fiscal situation in the government. So, we could get grid lock or dysfunctional choices or other bouts of craziness with respect to the debt ceiling and so on. So, there are a few clouds on the horizon. We are certainly not at full potential. We are under investing in America on the public sector side, in infrastructure and the effectiveness of some parts of the educational system. So, we have got ways to go and it will take some more time but it is improving.
In Europe, it is a difficult situation where it is very hard for me at least to convince myself that we won't have few more years. I don't know exactly how many of rather low growth. Southern European countries are not competitive at the moment. They have diverged badly when the eurozone came into effect.
It is a very difficult structure with the eurozone and big divergences in productivity in relation to income, some countries like Germany have an under valued exchange rate and other ones have an overvalued exchange rate.
I hoping the normalisation of the monetary policy in the US over time will actually cause the dollar to elevate a little bit which won't necessarily be good for America but if the euro declines it will help a lot in restoring growth. There is a pretty general interest in having Europe, which is: if you take it as a unit, a pretty big economy, about the same size as the US it will make a healthy comeback at some point.
Q: First about EMs specifically about China. There is considerable concern about what this year is going to mean and I think almost everyone will agree with you that they will manage to do better than 7 percent growth but the volatility and the sharp swings in China are what's worrying everybody. Then you have got the Plenum reforms that are set to sort of kick-in and it is a long haul for China, those are important changes that are going to take place. How China consumes drives a large part of the global economy, it drives commodity prices and all of that. Can you give us some more insight on how volatile you think this adjustment is going to be for China? Especially for instance last year we saw several pops in short term money markets because the Chinese government and the central bank were trying very hard to control liquidity flows in the China's banking system.
A: I think you will see some volatility. Here is what I think they are going to do, they have an enormous balance sheet. They could use investment as a lever to sort of accelerate growth pretty much anytime they want. The problem with that and they know this, if they use investment and push it in a low return territory it is just going back to the old growth model which had kind of run its course. So, they are not going to do that. They are going to restructure the financial system to both liberalize and to regulate. It is sort of two conflicting forces. So, the shadow banking system has to be regulated and that process is not complete. So, that is a certainly a source of volatility. Shadow banking means outside the main sort of state owned banking system. So, I expect some volatility. You will also see volatility in the markets because markets are very jittery about whether this is all going to happen or not and that doesn't necessarily reflect the underlying economic difficulties. It is just the mood of the market.
Q: In fact, today we got a below 50 PMI number for China. Even as we speak that is causing a bit of a flutter in Asia and emerging markets. Of course that will seep into how Wall-Street reacts later in the day, this is exactly what we are talking about, the volatility that China creates in the global markets.
Spence: What I am trying to say is there is some real sort of underlying kind of risk with respect to implementation and then on top of it there is a bunch of volatility that doesn't have much to do with what is going on. It is just reacting to the latest signal. The honest truth in my view is that growth might slowdown a little bit this year in China.
It will cause very big nervousness in markets but actually it is a good sign. If China cranked all the levers down, ran growth up to 8 percent. That is the time to get nervous because it would be the wrong growth model.
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Here's how Nobel laureate Michael Spence sees EMs in 2014
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