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Cheap oil forcing adjustments, economic benefits will take time

Kaushik Basu

WASHINGTON -- Low commodity prices are good for the global economy, but the transition to them has created turbulence, Kaushik Basu, the World Bank's chief economist, told The Nikkei.

     Edited excerpts from the interview follow.

Q: Are the financial markets headed for stability?

A: I do expect the markets to be stable but there are some risks.

     The markets were reacting to the fact that there have been some slowdowns in the global economy ... [and to] lower commodity prices.

     Low commodity prices -- critical inputs like oil -- are good for the economy.... [But] the benefit from the low oil prices will come with a lag. What you get in the short run is the turbulence of that, and that is what you are feeling.

     The U.S. economy is suffering because it had invested a lot in the energy sector, and it is going through this transition phase where suddenly you've invested in a sector which has become unprofitable .... We are forecasting that [the] oil price this year is going to be, on average, $37. Once it settles down at roughly $37 per barrel, the U.S. economy could begin to pick up by the end of the year.

Q: Concern over China's economic slowdown persists.

A: For the Chinese economy, our ... forecast is [for] ... an orderly slowdown ... which is a good scenario. The risk in the case of China is that even during this orderly slowdown there is always some political turmoil.

     People get a bit restless. You can begin to inject liquidity. [Last year,] that was one way to keep them calm, to keep the stock market buoyant. That was overdone. When the correction took place, there was a huge amount of suffering.

     What China has to do is reconcile to the fact that a slow slowdown is a good thing. Even if growth goes to 6% -- in today's world 6% growth is handsome growth, especially for a country like China which has grown by 10% for 30 years. It's done extremely well.

Q: Is capital control an issue in China? 

A: At times you have to prevent capital from leaving the country. So you bring in controls. But there is one risk that has to be kept in mind. In India in 1991, it was very difficult to take your foreign [currency] out of the country. India had very little foreign exchange and it had put restrictions. But one side effect was that no one brought their foreign [currency] into India because they knew once you take it in, you can't take it out. So, actually, preventing foreign [currency] from leaving the country made the problem of foreign exchange worse in India.

     Every time you are thinking of a capital control, you have to think ... Will that slow down the flow of foreign money coming into the country? These are the problems that China will have to contend with.

Q: How do yougrade the Federal Reserve's interest rate hike?

A: I think what the Federal Reserve has done is exactly right.... The only thing that will be a mistake is what was earlier being anticipated -- four moves this year. You cannot do that; it has to go slower.

     My advice to the Fed would be [to] hold it where it is, and make it clear that we will, again, hold it for quite some time, if the need arises to hold it over there, and then to a slow increase.... What Janet Yellen indicated is just right.

     But there is another thing to be kept in mind. We live in a very globalized world, with some central banks trying to inject liquidity -- the Bank of Japan, Riksbank, Suisse National Bank and even the ECB injecting liquidity in different ways.... In the olden days, when the Japanese economy was the Japanese economy, with little bits of flow in and out, you could follow the policy you wanted.... But now we see that there is a need for a bit of a policy coordination.

     One reason why the U.S. is less effective when raising and Japan is less effective when lowering is precisely because you are counteracting each other's moves. At the level of, maybe, G-20, there needs to be better coordination of monetary policy in today's globalized world.

Q: Are you concerned about slow growth in advanced economies?

A: Thanks to changing technology, the labor market is becoming a common pool in the world. Very cheap labor, sitting in poor African countries, Latin America, South Asia ... now, thanks to technology ... can get into the global labor market.

     Rich countries that are able to use this labor are outcompeting rich countries that are not using this labor well enough. So the United States is outcompeting Japan because the United States is taking advantage of this better.

     At the end of the 15th century, one particular technology [that] opened up the global markets ... was long-distance shipping, which first started with the Portuguese. Countries that could not take advantage actually lost out, in relative terms and in absolute terms. 

     Something similar has happened because of technological change. I feel for rich countries like Japan, like Germany, like France -- it is like the late 15th century, and new technology has become available. If you don't take advantage of that, you will suffer on growth.

     If Japan ... complements its monetary policy with ... big structural changes which allow Japan to take advantage of this new resource ... I feel Japan can get back to 3% growth ... easily.

Interviewed by Takeshi Kawanami, Nikkei staff writer

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