Niall Ferguson: India Holds the Keys to Success





[Niall Ferguson is the Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor at Harvard Business School. This interview appeared in the Economic Times.]

You have held the position that the financial crisis has not entirely played itself out. How long more do you think there is to go and why do you think so?

In the sense that there are still significant problems in the US financial system and the European financial system, there are substantial losses in commercial real estate in the US. There are substantial amounts of money that are still, it seems to me, have to be written off by European banks. So, for that reason alone, losses will continue to hit banks throughout 2010. Secondly, an increasingly improvised reconstructive response, of which the Volcker plan is a recent example, will, in fact, undermine confidence in the financial sector. Which is why we saw a sell of stocks immediately after the Obama announcement.

Thirdly, the fiscal consequences of Obama’s response to the crisis are almost certainly going to have costs. If you have a massive explosion of public debt, one consequence is likely to be upward pressure on long-term interest rates, which must act as a drag on the economy....

You said you are more an India bull than a China bull. What are your reasons?

I think, in the short term, there are reasons to be nervous. Chinese-led credit growth spun out of control last year and I think there has to be more tightening to prevent bubbles in the real estate and stock markets....

And one reason that I’m long on India than China is that India has a better institutional basis of development than China does. I think that representative government, rule of law, meaningful private property — these are key to success. They were keys to western success.

China doesn’t have these things. In the end, if you don’t have these things, you are just a planned economy with a market wrapped around that.

Look at what Soviet Union was in the 1930s. If you went there in 1936, you would be very impressed — they were building huge canals, buildings, highways, large cities and what not. But it became clear by the 1970s that the negative externalities of industrialisation were huge and the impact of population control and central planning were negative. And sure enough, Russia fell apart. Now, I’m not saying that it’s going to happen in China any time soon. But if you take a 20-year timeline, China has huge demographic problems. If you look at the environmental costs of their development, it’s huge....

Whereas in India, all that is really needed, and I know this sounds terribly simplistic, is improving primary and secondary education for a majority of people and improving infrastructure. And then let the markets rip. Indians are very entrepreneurial. Everywhere you go, people are selling stuff, even if it is only a pile of spices. I think unlocking the entrepreneurial energy of India will lift a large number of people out of poverty....

The classic newspaper headline in Europe or in the US is “The crisis of capitalism”. Magazines will say ‘The end of free markets’ or ‘Capitalism falls from grace’. That’s the kind of classic media simplification. There isn’t any credible alternative to capitalism out there. Even the Chinese recognise that Capitalism is the most efficient way of organising a modern economy. What is at stake here is not whether or not capitalism has a future. What is at stake is how exactly we should regulate market mechanisms and how big the role of the state should be. I think from that point of view, only a surprisingly little separates diverse positions. Because those who are Keynesians and proponents of large deficit finance stimulus programs aren’t against capitalism, they just accept Keynes’ modification that at times of a severe contraction in demand, the state ought to step in....

My argument about the US, between 2003 and now, has been that while the global economy needed a liberal empire to underwrite economic gaps and to spread a commitment towards economic freedom, the US is unlikely to play that role very well because of three deficits: financial, manpower and attention.

The difference between China and the US couldn’t be starker. The Chinese have a massive financial surplus, not a deficit. They have a massive manpower surplus. And they certainly don’t have an attention deficit. They have a very long-term gameplan and the plan is to use their accumulated surpluses to acquire large amounts of the world’s commodities. Sub-Saharan Africa is part of that strategy, and so is to an extent part of South America....

So, if the world is going to become a Chinese world in the next 25-50 years, I don’t think that is a very promising scenario. I’d rather have American power perpetuate because for all its faults. It is a power that is fundamentally committed to the spread of economic and political freedoms.

And you have not revised this position despite the messy war in Iraq and the engagement in Afghanistan?

...I don’t think my position has changed. I have been critical of President Bush to the extent of arguing that the Republicans should vote for Kerry in 2004. But I think the fundamental objective remains correct. The United States cannot just sit back and pretend that it does not have global responsibilities. It does. And not just for self-interested reasons, but also I think as a principle, it includes transforming failed states into functional states....



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