If China cannot go back to work, firms will need support: Helene Rey

Professor Helene Rey of London Business School
Businesses affected by the coronavirus outbreak must be saved till the threat gets over, says Helene Rey, who teaches at London Business School. Rey, who is in Mumbai to deliver Exim Bank’s commencement day annual lecture, told Anup Roy that India needs to undertake structural reforms before it can hope for proper monetary policy transmission. Edited excerpts:

How do you see the coronavirus outbreak impacting the world economy?

First, we thought the virus could probably be contained, and except for human lives in China, the consequences for the global economy would be not very serious. But now, it looks like that’s not the case. We have seen cases in Europe, in the US and of course in the Middle East. So, it looks like this is going to be more long lasting. The problem now is that it’s more like a supply shock, as well as a demand shock. From the supply side, it can be pretty serious because of integration of the global value chains with China. In case of India, too, there are a lot of intermediate inputs from China, in particular, in electronics, textiles, and pharmaceuticals. If China cannot go back to work, that’s going to be an issue for a lot of companies and they would need some support. If the hit is big enough, it can have a macro effect on demand. That is where there is a need for central banks and fiscal authorities to help people who will be most affected.

What kind of fiscal and monetary support is needed?

In particular, medium-sized enterprises and those that are exposed to the global supply chain can run out of liquidity, and so in very short run, they can go bankrupt unless they get some targeted help. Also, you could be helping liquidity support in the form of loans, or very cheap loans.

Could this virus outbreak work against the idea of globalisation? Do you think that companies and economies would want to distribute their production lines?

Well, I think there are lots of things in the recent past that suggest that globalisation is being pulled back. I guess where it really started getting pulled back was by the ‘America First’ policy. Already, there are trade linkages coming under attack due to growing nationalism. The virus is just another kind of layer that is adding to that equation. There’s the techn­ological war between the US and China. It’s also about not being dependent on key critical infrastructure, such as 5G. It is going to be a very long struggle as countries try to develop their own technology. I don’t see this trend as a good thing. The lack of multilateral organisations and multilateral trade cannot be good.

But is it inevitable?

Well, as we’ve seen in history, there are waves of globalisation, and then there is a pull back, and again a globalisation wave. Globalisation in the 19th century and in the beginning of the 20th century was fairly big by the standards of that time. The UK was trading a lot. Then, there were wars, or depression dragging down trades. And after the war, people started saying we want cooperation, we don’t want walls, and we want to have rules that apply to everyone. So, we have multilateral exchange. And this has worked quite well, for a while. And now, we see this trend of nationalistic policies. And it’s very worrying.

India’s growth is slowing. What needs to be done to arrest this slowdown?

I have studied a lot of credit booms and financial crises around the world in emerging markets, and in the US and Europe. What I have found is that after a credit boom, there are non-performing asset problems. India had also witnessed a credit boom earlier. And if you don’t clean up these balance sheets quickly, then this is a drag on growth, because that’s what’s going to decrease credit growth. That’s going to decrease investment. And obviously, there are lots of issues with the supply side. India needs to fix the education system, labour market and supply side policies need to be addressed. If you don’t get the supply side working, it’s very hard also for monetary policy to really help. You cannot stimulate demand if the supply side is very rigid.

Is the US dollar losing its dominance?

At this juncture, it’s hard to see a dominant challenger. However, we do see the trend that the relative size of the US is going down in the world economy. And we do see the rise of China and India. So, we do see some shifting in geopolitical power. If a country is relatively smaller, it cannot provide liquidity the world economy needs in a credible way. The relative size of the US is declining. At some point, there will be a switch. But the alternative could be a multipolar system. The euro is the second-most major currency but there is no integrated bond market. But that may change. China is still a bit underdeveloped financially. At some point, digital currencies issued by central banks, not the private currencies like Bitcoin or Libra, can take over because these will have credibility of a fiscal authority. That would make global settlements and payments potentially much more efficient.

How do you see the world changing when oil dominance ends? It seems this is just a few decades away.

But you need to produce the electricity first. I hope the oil dominance will end, for the sake of this planet. But there are also lots of coal-fired plants, particularly in Asia. And some of them are very young. 

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