Kal Raustiala 0:11

Good afternoon, everyone. I'm Kal Raustiala, director of the UCLA Burkle Center for International Relations. And I'm very happy to welcome you here, and for some of you, back. This is our last event of the year for our annual lecture in honor of UCLA economics professor Al Harberger and his groundbreaking work on the economics of development. We've done this lecture for many years. Past Harberger lecturers have included Jeff Sachs, Jason Furman, Melinda Gates, Esther Duflo, last year Emmanuel Saez from UC Berkeley, and today, we are really honored to have join us in a few minutes, I'm going to introduce her properly, Dr. Carmen Reinhart, who's the Chief Economist of the World Bank. So as is usual with our Zoom events, we're going to begin with a set of short remarks from Dr. Reinhart. And then I will come on and we will have a brief conversation on screen, followed by questions posed by all of you. So please use the q&a feature on your screen to pose those questions, we'll gather them, and I will pose them to Dr. Reinhart at the end of our session. So with that in mind, let me properly introduce our speaker today. So Carmen Reinhart is the Vice President and Chief Economist of the World Bank Group. She was previously the Minos A. Zombanakis Professor of the International Financial System at the Harvard Kennedy School, taught at many other universities as well. She's ranked among the top economists worldwide based on publications, scholarly citations. She's been listed among Bloomberg Markets Most Influential 50 in Finance and Foreign Policy's Top 100 Global Thinkers. In 2018, she was awarded the King Juan Carlos Prize in Economics, as well as the Adam Smith Award. She's probably best known for her book with Ken Rogoff, entitled "This Time is Different: Eight Centuries of Financial Folly". The book has been translated into over 20 languages and won the Paul Samuelson Award. Carmen Reinhart holds a PhD from Columbia University. So it's my pleasure to have Dr. Reinhart with us. And I'm going to invite her on screen to begin with her remarks.

Carmen Reinhart 2:29

Well, thank you Kal for having me. It's been a real honor to be in this lecture series. You know, Al Harberger, or Alito, as I've known him over the years, has been a major force and inspiration in the realm of development economics, and that's broadly defined. And so to reiterate, it's a great, great pleasure and honor to offer some remarks here. And what I plan to do is speak for about 20-25 minutes on the pandemic itself, the economic impacts of the pandemic, the role of the World Bank during the during the pandemic, and importantly, looking ahead, I'm going to focus on some of the lingering challenges that are going to be faced by many developing countries and emerging markets. And those challenges are very connected, of course, to the work that I've done over the course of the year. As Kal mentioned, with Ken Rogoff, and with Graciela Kaminsky, I've studied crises for many years. So, with that preamble, let me get started. And the first question that people ask me is, so is this time different? And, you know, in March of last year, I wrote a short piece for Project Syndicate, that the title was "This Time Truly Is Different". Let me say that many countries are still deep in the crisis that is being overcome very quickly in the U.S. and in other advanced economies in Europe and worldwide. So one of the very striking striking features of this crisis, as opposed to say the 2008-2009 crisis. The 2008-2009 crisis was more of what I would call a traditional financial crisis. First of all, it was called the global financial crisis, but it really wasn't global. It was a the result of a housing boom, and over-leveraged households and over-leveraged financial institutions in about a dozen advanced economies. Okay, so the emerging markets and the developing countries were, of course, adversely hit in late 2008, early 2009. But their recovery was very swift. They did not have, you know, the bubble problem, they did not have the problem with the financial institutions. And they were fueled importantly, by double-digit growth. In China, very high commodity prices, it's very important because so many developing countries and emerging markets are primary commodity producers. So what we saw, and this is important for setting the stage of where we are today, was convergence, and the advanced economies did worse. They, as a whole, recovered much more sluggishly in the U.S. Let me be clear, what do I mean by recovery? I mean by recovery, basically the same definition that I used with Ken Rogoff in much of our work, which is, how long does it take for a country to recoup or recover to its pre-crisis per capita income? Okay, so let's not confuse rebound with recovery. This is also the title of a piece I did last summer with Vincent Reinhart, my husband. So at the current, in the current environment, advanced economies led by the U.S. and spectacular stimulus, monetary stimulus, fiscal stimulus, financial support that is really unprecedented in peacetime led by all this support, advanced economies are going to have a recovery, in the true sense of the word, meaning recoup your pre-crisis, per capita level of income fairly quickly.

Carmen Reinhart 8:00

However, this crisis, one of the very things that makes this crisis very different is that it has been an incredibly regressive crisis. It's hit the poorest segments of the population. And it's done so within countries, so the poorest households, the smallest, most vulnerable, financially vulnerable firms within countries have been hit the hardest. And across countries it's been remarkably uneven and unequal. So when you hear the term K-shaped recovery, which is what we're really looking at, it's not a cliche. It's very factual. The World Bank late last year, did in the Poverty and Shared Prosperity report, which I participate in, a study that highlighted that global poverty rose for the first time since the late 1990s. Global poverty rates raised, increased for the first time since the late 1990s. And, unfortunately, the setback to middle and low income countries, and I'll start later with the low income countries, has been much more acute than anything we've seen since the great developing country crisis called the 1980s, which Alito also wrote so much about and contributed to the analysis. So, one thing that sets it apart has been, as I said, the very unequal nature of the crisis. Having said that, however, another factor that sets the pandemic, the COVID pandemic, apart from the global financial crisis, from the crisis of the 1980s in developing countries, is that it was truly global. In the forthcoming World Development Report, we highlight that if you look at per capita income back to 1900....1900, so you're really covering the First World War, the Great Depression, the Second World War... we had not seen a single year like 2020, where more than 90% of the countries, there are almost 200 countries that are covered in the database... you have not seen synchronous output declines of more than 90% in any of those instances, not in two World Wars, not during the Great Depression, and not during the 1980s. So it's a very systemic severe global crisis. And the legacy for emerging markets in developing countries is pretty stark. So I'm not here to actually give a very uplifting talk, but I think it's a fairly realistic one. Many of those developing countries were already frail, even before COVID, okay.

Carmen Reinhart 12:14

I spoke about the big role that China and its double-digit growth rates played during the previous, the famous crisis of 2008-2009. Well, China, notwithstanding the fact that it has done relatively very well, vis-a-vis almost by any metric, by almost any metric relative to the other countries, it's no longer the engine of growth that it was 15 years ago. Its growth rates have mitigated from double-digits to maybe we'll settle around 6%. It's a big, big question mark what the new normal will be. Commodity prices have plummeted in 2015. And so many developing countries, especially the poorest ones, were already, many of them, experiencing significant economic contraction, big buildup in debt, and all the setbacks to development that goes hand in hand with drastically slower growth. In effect, I alluded to earlier, the remark about poverty rates spiking. But even before the COVID pandemic, the inroads to poverty reduction and decline in poverty rates globally had been slowing very markedly. So this is very important because you get hit by a major shock at already a more weakened state. So the role of the World Bank, the role of the IMF. So the initial role, the first line of defense, if you will, of the World Bank and other multilaterals was to quicken lending. So whether you look at the IMF, the World Bank, other regional development bank's lending escalated not only in dollar volume, but the number of countries and also in the speed of disbursement. So, the first line of response, as I said, was to provide liquidity to help countries deal with draconian declines in GDP, and therefore, government revenues have seen, pretty much across the board, collapse since 2020. And that lending was one of the measures, together with domestic or homegrown policies, fiscal policy, monetary policy and financial sector policies, which I will talk about later to deal with the impacts of large scale lock downs and the paralysis in so many sectors simultaneously. So, since then, of course, the activities of the World Bank have been manifold, including involvement in vaccines, and involvement in all kinds of more targeted forms of lending, including supportive social safety nets. Now, what are the challenges, that not withstanding the very large scale responses by international institutions, the very large scale response by many governments, is the fact that developing countries, emerging markets, is an obvious statement, but it's one that's critical in understanding what comes next. They don't have the firepower to do the kind of fiscal stimulus or monetary stimulus on a sustained basis that advanced economies have had. So, as a consequence, if you look at what comes next, well, after that initial wave of lending fairly early on, in the spring of 2020, another multilateral international effort under the umbrella of the G20 also took place. This is the DSSI, the Debt Service Suspension Initiative.

Carmen Reinhart 17:35

The idea is a simple one, basically stop repaying creditors, bilateral official creditors, temporarily, and direct what would have been debt repayment to other emergency needs. The DSSI initiative was fast. It was timely. But unfortunately, when I look back, it fell very short of expectations in what it delivered, largely because private sector creditors did not participate. So, in any country that was indebted to bilateral official creditors, but also was indebted to the private sector, be it banks or bonds, those debt payments have continued. So, to make a long story short, I noted that initial conditions were already much weaker before COVID. And now they have taken a severe turn for the worse if you look at the 73, or depending whether you include Angola, 74 low income countries that are eligible for the DSSI initiative. And by the way, the DSSI initiative ends this December, December of this year. More than half of them at the moment are already either in debt distress, or ranked or, you know, depending on the risk, at a high probability of getting into debt distress over the near term. So we've had a wave, if you will, of sovereign debt servicing problems. Big challenge ahead! Big challenge ahead because a lot of the work that I've done, including a lot of the work that I've done with Christoph Trebesch, in which I've written a number of studies with him, unfortunately, debt crises don't get resolved quickly. On average, it takes, if you look at the 200 year average, it's even longer, but if you look at the post war, on average, it takes about eight years for debt forgiveness for debt reduction, to actually be robust enough, big enough, deep enough, to actually bring those countries out of their debt overhang, and they can start growing again. And at the crux of the debt restructuring dilemma, which we're in the midst of right now, is the fact that, understandably, creditors don't want to take losses. Creditors don't want haircuts. And so quite often, what you see is a number of piecemeal debt restructurings that don't offer sufficient debt relief, or that are very partial, they only cover certain types of debt. But the bottom line is the debt overhang lingers. And with it, countries still face a very limited scope for real recovery, or for being able to borrow to finance that recovery. So when I said I wasn't going to be upbeat, I am being quite realistic. I think, not withstanding the latest G20 efforts late last year, of setting up what is known as the common framework for resolving the cases of countries, soveriegns, that apply to the common framework for debt relief. Notwithstanding those efforts, I think we're in for a protracted period in which many low income countries, and a number of middle income countries that are not yet part of the common framework, are going to be facing a very difficult environment, not unlike the 1980s debt crisis.

Carmen Reinhart 22:59

Let me throw an important statistic for your consideration, just what I mean by severe and protracted. The debt crisis of the 1980s really started as early as 1981, but really gained global attention in 1982, when in August, Mexico defaulted. By 1990, okay, almost a decade later, about....almost...not quite 60% of developing and emerging markets still had per capita incomes that were below the income that they had before that crisis. Let us hope that we do not repeat that because countries developing and emerging market countries are facing a lot of financing needs, not just to restore social services, education, and try to recoup from the severe damage of COVID-19 but also to become green, meaning to move towards a new infrastructure that allows for a green recovery, a recovery characterized by, you know, the recognition that we really can't delay. We can't slow the clock on climate change, and let me say climate change disproportionately also affects many low income countries especially those that are prone to typhoons, hurricanes, and so on with a lot rising sea level and so on. So you have many challenges. You have the challenges of the recovery from a very deep crisis, you have the challenges that I alluded to with the delay in debt restructuring, and you have the climate challenges that we really can't afford to delay. I'll throw in as my final point one other challenge that is making the recovery for many developing countries and emerging markets a very uncertain a recovery, which is financial fragility. Just as governments have been hit hard, their budgets, their balance sheets, their debts have gone up significantly. During the COVID pandemic, many households impacted by job losses, and many small firms impacted by lockdowns, and in some cases outright closures, are also much more frail. So in effect, the next World Development Report is focused on the legacy of COVID and how to how to overcome the financial fragility. That financial fragility, I call it the quieter crisis, because, you know, in an environment in which we're hit by dramatic rise in deaths and the human toll of the pandemic, and the major output collapse, is the quieter financial crisis has been mitigated by policies apart from the monetary stimulus, apart from the fiscal stimulus, financial sector stimulus has also been very, very important.

Carmen Reinhart 26:55

This has taken the form of the private sector equivalent, if you will, of the DSSI. Banks have given, households have given, firms pretty much, not in every single country, but in the majority of forbearance periods. So we still have a major challenge in which we don't know when those financial forbearance policies come to an end, how many of those households will be, or firms, will not be illiquid, they might be insolvent. So here is what I'm getting at concretely, is that this did not start as a financial crisis. But the severity of the crisis, and the fact that it's lingered for so long, especially in developing and emerging markets, poses a new challenge, which is the morphing of what was a health crisis into a financial crisis. So let me stop here. I've been very grim in laying out the problems. And hopefully we can discuss more what some of the solutions beyond what has been done today in terms of lending because financing needs are very large, pretty much across across the globe. And so let me stop here and let's have a conversation.

Kal Raustiala 28:40

That was a terrific overview. And yes, a little grim, but appropriately it seems. So you brought up solutions at the very end of your comments. And maybe we can start with that. One thing I heard, many people saw in the news in the last couple of days, was this announcement out of the G7 about what I think they're calling "Build Back Better World", which is a riff on President Biden's "Build Back Better" program and basically a giant infrastructure program that maybe is a rival or mimics what China has done with the Belt and Road initiative. And so I'm just curious how you see these infrastructure initiatives either let's say Belt and Road or this new one, as part of a solution to some of the problems you raise. These are not COVID specific, but they address some long standing issues. So is this a good thing? And what do we hope to see out of it?

Carmen Reinhart 29:35

Well, certainly, you know, I mentioned the need for a green recovery. And so infrastructure is part, very much an integral part of the shift. You know, we need to retool for that green recovery. The problem, Kal, is of course, one of resources. Right?That, you know, those new infrastructure projects are also in the countries that are already either insolvent or quickly approaching insolvency, or even in the ones that are not quickly approaching a bit are afraid they're competing with the need for our social safety nets. The setbacks have been many, in education. There are a number of issues also that, social issues, that need to be addressed in terms of safety nets. COVID has been, you know, the term the "perfect storm" is often overused, but it's certainly been that because one of the things I did not mention is the COVID pandemic, and we haven't talked touched on the issue of inflation. But the COVID pandemic is also leading to reflationairy pressures. Now in the U.S., okay, so we go from two to four. Okay. All right. Inflation, unfortunately, especially in many developing countries, has taken the form of huge food increases in food prices. This is very regressive, because food accounts for the largest share that, the poorer the country, the larger the share of food, the poorer the household, the larger their share of food. So that, of its own merits, the infrastructure is both desirable and needed to transition to green. But the question again, boils down to, how much will this be transferable from the wealthier economies to the poor economies? That, as I said, for a long list of reasons, are facing very difficult financing conditions and a lot of competing needs. That's a real challenge. But, you know, this goes back to the importance of quickening the clock on debt restructure, because, you know, dealing with the debt overhang, in many of these poor countries, enables them to free up resources, you know, debt servicing is soaking up. It's not, you know, 3% of revenue. In some cases, it's 15. And in some cases, it's 50% of revenues. So you're really talking about the importance of, if they go hand in hand, if you will. And ditto for private sector, debt overhang. One of the solutions that we put forth in the World Development Report is restructure private debts as quickly as possible because the last thing countries need are banking sectors, banks that can't lend. You need the the new lending for the infrastructure, you need the new lending for recovery.

Kal Raustiala 33:34

I want to come back to the debt issue because it's so interesting and significant. But I'm curious, just to clarify, you mentioned how it's a very uneven, I think you said K-shaped recovery that you anticipate. You know, here in California, for example, I think our own UCLA Anderson forecast is quite bullish. And I imagine that's true of many parts of the United States. Can you distill down what is it about this country or other advanced industrial democracies or just wealthy countries in general, that allow them to recover more quickly from something like the shock of the pandemic? What is it that specifically that enables that?

Carmen Reinhart 34:16

Resource. Look, this is a critical question that you asked and it is behind, importantly, the K-shaped recovery. What if some of the poor countries can do stimulus packages in the double-digits? What if they could have monetary policy stay very accommodative for a long time. Now, for the first time in history, we've seen many emerging markets in developing countries being able to, during the height of the pandemic, ease monetary policy, lower interest rates, enable ample liquidity conditions that facilitate being able to grow your way out of...You know, you need the resources. Many emerging markets right now, you take Brazil, a country where you're still looking at more than 2,000 deaths a day from COVID, has started to tighten monetary policy. Are they crazy? Absolutely not. They're walking a fine line. An inflation spike in a developing country where there is a history of inflation can quickly unravel, not into 4% or 6%, into double-digits and even worse, and this is not being melodramatic. So the critical driver of the ability of the advanced economies to recover quickly, has been the ability to do more on the monetary front, on the fiscal front. And on the financial stability front, emerging markets do not have the luxury of having the Federal Reserve. And in effect, one big concern is if indeed, you know, my colleague at Harvard, Larry Summers, has been highlighting, you know, overheating issues in the U.S. Well, any overheating issue in the U.S., meaning rising long-term interest rates, even if the Fed doesn't change policy is pretty poisonous, or countries that are debtors and borrow in dollars. So, the disparity of resources, the disparity of wealth that predated COVID, also, you have to list that at the very top of why the recovery for the U.S. and for the advanced economy is so much more rapid and vigorous. And of course, emerging markets and developing countries cover a very broad heterogeneous group of countries. And you see that within the emerging markets in developing countries, the countries that were in better shape at the outset that had more fiscal space to do more, that had a more stable history of inflation. Their central banks can do more. And so those disparities, which have been made worse by the pandemic, I think are a big driver of that K-shape.

Kal Raustiala 37:56

So it sounds like you see the pandemic as accentuating these inequalities that were already present and severe in many cases?

Carmen Reinhart 38:04

Indeed. Look, you know, Kal, I don't want to be overly grim. But it's pretty devastating to see a spike in poverty rates. Because it's asymmetric, right, it takes a long time to wind it down, but it can come back pretty quickly. When I say that this crisis has been very regressive, it is very much, you know, both within countries and across countries. If you look at within the U.S., you know, those households that did not have the safety net of their own savings as well, not withstanding the very large fiscal transfers, are faring a lot worse. And so the inequalities that were already present have been widened significantly. And, you know, one of the big, big winners of globalization in the last three decades had been very much, if you look, even those that did not favor globalization as, you know, trade and finance and so on. One of the big positives was always well, it's helped convergence. Well, we're seeing a setback to that convergence at the moment.

Kal Raustiala 39:58

That's really helpful. Let me ask about debt because you spoke about it quite a bit. Obviously, it's a big part of what the bank does and your interest. And so I'm not an economist, but a political scientist, so, you know, maybe a naive question about the politics of it. One of the things you mentioned in passing was, you know, the recurrence of debt crises, which I'm aware of in my own lifetime. And I know they go way back, you mentioned 200 years plus of data about it. So given the recurrence and the difficulties with debt service that you mentioned, really crushing many, many governments, many societies, why do these debt crises keep happening? And what is it about our system of debt, sovereign debt, let's say, that needs fixing? What can we, this is a very broad question, I recognize, for you.

Carmen Reinhart 40:49

Well, I am so happy you asked it because that is, "This Time Is Different". In my work with Ken, the term "this time is different" is....

Kal Raustiala 41:01

with Ken Rogoff...

Carmen Reinhart 41:02

You know, four most expensive words in history, it's during the boom when things go well. Everyone wants to lend and everyone feels they can borrow. And to put the current debt problems in context, we had the crisis of the 1980s, which first was resolved by the Brady Plan, you know, the debt restructuring and write-offs for the middle income countries. And then later, the HIPC Initiative, the highly indebted poorest country initiative that wrote off, just simply wrote down significant amounts of debt. So how do we end up becoming indebted again? Well, a new entrant to the lending arena, a major entrant has been China. And so, pick a year...2004. A country had had its debts written off, so they were lean and mean. They look pretty attractive from a balance sheet. At that time, you know, commodity prices were booming. So there's this optimism that those commodity prices are going to continue to boom. And governments, especially in governments that had been out of, unable to borrow, can borrow again. And so they're all too willing to borrow again. And lenders are all too willing to lend. In effect, one of the byproducts of our low-for-long policy, I'm referring now to U.S. interest rates, has been the search for yield, which is time immemorial. It goes back to when London was the financial center and the first Latin American debt crisis of the late 1820s. If interest rates in the U.S., government bonds are low, well, you seek alternatives. Part of those alternatives were the U.S. equity markets, but also emerging markets that were offering bonds with coupon rates that were twice as high and sometimes even more than that. As high as, the U.S., the private sector is willing to lend. But the idea that behind it, is always "this time is going to be different", it's not going to end like last time. But invariably, commodity prices go up, and then they go down. Now they've gone up again, and they'll go down again. And the debt that you accumulated in good periods comes back to haunt you. So the seeds of a new debt crisis are sown in the good times. And the reason why also in the book, we highlight that we're really not optimistic that those debt cycles are going to be done for, it may be done for in some countries that graduate out of it, is very much human nature. It's, you know, the over-optimism that characterizes the periods where things are going well because that's when households take on more, debt firms take on more debts, and governments take on more debt. I'm not anticipating that things will not always go so well. That's my nutshell.

Kal Raustiala 44:59

Great, great. I'm going to use that as a pivot to some of the questions we have from the audience. Because, first of all, there's a lot of great questions. One is specifically about commodity prices. So I'm going to start with that. So the question is, won't the post-pandemic boom in the developed economies lead to a recovery in world commodity prices? You already suggested this is happening, as we already see in lumber, wheat, copper ore, etc? If so, will that substantially alleviate the problems of the poorer countries?

Carmen Reinhart 45:27

It's an excellent question, it is indeed. It will alleviate. So, the pandemic hasn't pivoted to the outright, almost across the board debt crisis of the 1980s in developing countries and emerging markets, because we have not had all three shoes drop at the same time. And I'll come to that. And the three shoes are capital flows, north to south capital flows, commodity prices, and international interest rates. So last year, you know, at the height of the spring, the panic of 2020, what we saw, we didn't see an exit in capital flows from emerging markets, we saw a stampede. You know, in six weeks, in the spring, we had a major reversal in capital flows. And remember, oil prices were trading in single digits, and commodity prices exceptionally depressed. But the third shoe didn't drop, quite the contrary. You know, the big decline in interest rates, the big global liquidity created by not just the Fed, but the major central banks, eased conditions and avoided the trifecta of the early 1980s, in which, when the U.S. was facing 14% inflation, in late 79, Paul Volcker, then Fed Chairman, took as his job to reduce inflation and jacked interest rates to their highest levels in the post-war. And that triple whammy, because commodity prices, oil prices, and commodities had, you know, plummeted, U.S. interest rates had spiked and capital flows quickly exited. That was, you know, the three shoes had dropped. This time, we had the commodities, we had the capital flow reversal, we didn't have the interest rates. Now we're moving more to a scenario where U.S interest rates may be rising. But because of the very vigorous growth in the U.S., in China, and in other advanced economies, commodity prices have also been recovering. So that will buy breathing space, especially for those countries that were not yet in that high vulnerability category. Let me say this, it will help all the commodity producers, but the most help will be to those that weren't already borderline crisis, because it will provide a boost. But the toll is cumulative, meaning they already had the high debts they already had, you know, the huge financing needs because of the large output declines. So yes, commodities are already helping, but it's also not the mild scenario of 15 years ago, where you had high commodity prices, low interest rates, and high capital flows. Now we're really facing challenges with both the capital flows and with the interest rates, although the commodity is a welcome reprieve.

Kal Raustiala 49:21

Great. So the next question relates to some of the interactions between rich and poor that you just discussed, but kind of in the other direction. So how will the slow and challenging recovery of emerging markets in poorer countries affect the recovery in advanced economies?

Carmen Reinhart 49:37

That is also an excellent question. So I think the impacts will be greater than they were in the 1980s. In the 1980s, developing countries accounted for a much smaller share of global GDP. Now this time around, emerging markets are more than half of world GDP. However, an important chunk of that is China, which, the net effect of that, for global growth is a negative one. How will that transmit to the advanced economies? It'll mean slower growth for advanced economy exports. And it also means that more financial institutions that are exposed to emerging markets, and this time, the new group is bondholders, will be facing much greater risks in terms of debt, the need for debt write-offs, you know, possible defaults. It's not as concentrated it as it was in the 1980s. In the 1980s, you can almost pick a handful of U.S. banks that had big balance sheet problems because their debtors defaulted on them. So the effects are negative. But let me say that a huge mitigating factor is China. That is on a different cycle from many of the developing and emerging markets that we have been discussing here. Another risk that it poses for the advanced economies is the idea that many, or a few small countries, can have a financial crisis and not impact global capital markets. But you get a big emerging market having a major crisis, and that sets the stage for the kind of contagion, international contagion effects. Again, advanced economies withstood very well the Mexican crisis of 1994-95 and the Asia crisis of 97-98. But by the time that the Russian crisis rolled out, in 98, it hit the financial markets, and generated quite a bit of turbulence leading up to the Fed intervening to lower interest rates and calm markets, even in between their meeting cycle. So those are the kinds of risks that I would highlight. There are, of course, others.

Kal Raustiala 53:14

About China, just a follow up to that. So you mentioned the significance of China. I think it's obvious to everyone here how important China is in so many ways, economically and politically. One of the striking things right now is that it's become one of the few areas of bipartisan agreement in Washington is the challenge from China and needing to be more forward leaning about it. One example being even what we saw on the G7, what we started our conversation with, some attempt to politically and economically counter Belt and Road. There's many other dimensions to that. And so my question is, do you find the rising tensions between China and the United States to be troubling from a macroeconomic point of view? Is that going to, given the massive size of China, is that going to degrade some of the factors you just talked about?

Carmen Reinhart 54:03

It is a thorn on the side of globalization, okay. You know, globalization, if you look at it historically, it also has very long cycles. Globalization during the era of the gold standard, late 1800s, it peaks before World War I and then globalization recedes because of the two World Wars and the Depression, then it comes back. And it's been on a downtrend. Globalization has been on a downtrend since the last global financial crisis. And first it was the global financial crisis. And it was the recognition that even wealthy economies like Greece and Spain, and Ireland had difficulty borrowing. So, you know, trade took a big hit. You know, the crisis in the decade before the global financial crisis, trade growth was on average about 6% a year export growth, then half, and then came in Brexit and then came in the U.S. trade, you know, U.S.-China trade war. So, these tensions are, and obviously export oriented economies are, if you will, caught in the crossfire. Now there is one specific dimension where China is going to play a critical role. And it is a very tense situation, I would say, between China and not just the U.S. but other advanced economies. China is now the biggest official lender. It is bigger than the whole Paris Club combined. And so, how China responds in terms of debt restructuring is going to be critical. So far, the results are very mixed, right? If you look at China under the umbrella of the G20, as one of the key players, as a participant in the common framework, the common framework to which Chad, Ethiopia, and Zambia have all applied to, how quickly will China be willing to provide debt relief. China's approach to debt restructuring and lending in general to the developing countries, it's been very commercial, you know, they lend at commercial rates. And they restructured in their own terms, meaning, mostly offering some grace periods, but not real haircuts, not reducing interest payments, not extending maturities, and not writing off debt. So that is a big...my expectation is that will be a big source of friction, especially, not individually between the U.S. and China. But that will be a very important point of friction for how quickly we overcome the debt problems that we've been discussing.

Kal Raustiala 57:43

What do you think China is so much tougher about debt?

Carmen Reinhart 57:52

Let me say, quite honestly, all creditors like being repaid, whether they're Chinese or, you know, British 19th century, or public or official or private. But I think they are the new kid in town, in that regard. This is the first time that they've had a big global footprint and lending to the developing world. And so it's the first time that they're encountering getting burnt. And so it will be a learning process. You know, let's not forget that the Mexican crisis, that I have alluded to already, was in August of 1982. And the Brady Plan that resolved that crisis was almost a decade later. So you know, at the moment, because of the point you had made earlier, Kal, that these things happen again, it's not just China that is facing hesitancy, but many other governments that are saying, well, look, we wrote off debt in the HIPC Initiative, we wrote off debt during the Brady Plan, why is this happening again? So, I think, they still have to, you know, go through this process of this didn't work, we'll try something else....and that didn't work and we'lll....In my Mundell-Fleming lecture, almost a year ago at the IMF, I sort of did the stages of a debt crisis. And you know, you have the repeated, well, this didn't work, let's try something different and then, by the process of elimination, you get to the inevitable fact that some of those debts will never be repaid. But it's not an easy road.

Kal Raustiala 1:00:23

That's really interesting. And it's interesting especially because debt from a country, really any country, especially a country like China is not just an economic decision or act, but a political one. So I'm curious to see what happens. Let me ask another question related to China, but from a totally different perspective. So this one asks, could you please comment on the importance of the battle for 5G and 6G tech dominance in the new digital economy? And the important role that South Korean, Finnish, Swedish companies, I'm sure there are others, are playing vis-a-vis Chinese companies, trying to dominate the key emerging technologies.

Carmen Reinhart 1:01:02

That's really a little bit farther afield from my area of expertise. Let me say that one of the potential areas which could be quite beneficial to the recovery, is the whole road to digitization. Digitization, including things like transfer payments, how to get funding to the people that need it, is very critical. We're also going to have central banks....are central banks going to be moving to digital currencies? And are there going to be more in the China domain? Or are there going to be more in the western domain? But whichever domain they end up in, I do think that digitization is, you know, including from non-official sources, okay, so, you know, we just saw El Salvador formally adopt Bitcoin as legal tender. So I'm not really an expert on who's winning the race, but certainly the heat is on. You know, the whole issue of central bank currencies are very much a recurring agenda of the G20, and the G7 for that matter.

Kal Raustiala 1:03:03

Since you raised digital currencies, and since you're an expert on financial folly, what do you think about, what's your general view on let's say, Bitcoin, or other currencies, as well as non-fungible tokens? Do you think these are more financial folley? Or do you think this is a thing that we're gonna see increasingly significant?

Carmen Reinhart 1:03:23

No, I think we're gonna see that increasingly. I mean, there's always financial folly. First of all, they're extremely shallow, still shallow markets, extremely volatile, and any shallow market is very volatile. But, you know, there's always...if you look at countries where they are in crises, in extreme crises, Lebanon today, Venezuela, Argentina, you look at Nigeria, or even though they're not quite in the Lebanon or Venezuela stage, those are countries where Bitcoin activity is the skyrocket. And there are a couple of reasons for that, that are also...so Bitcoin has this major risk, it's extremely volatile, right? At the same time, tell me that holding those currencies is not also a gamble. Right? So what am I getting at concretely? Bitcoin! And this is an ongoing study that I have with Clemens Graf von Luckner and Ken Rogoff on the use of Bitcoin and other digital currencies for the purposes of not only of capital flight but also remittances. Okay, so they are playing from the individual standpoint. If I think that the currency of the country that I happen to be living in is going to crash, or that my savings are going to be confiscated, capital flight and the role of Bitcoin is playing an important role. And yes, it's risky but relative to the alternatives. Also Bitcoin, from the evidence that we have, is increasingly also used as a way of remittances because especially in those countries where you do have parallel markets, black markets for exchange rates, where official exchange rates are a work of fiction, more or less, sending money via Bitcoin is....so what I'm getting at, is it's part of the new landscape. It's certainly, you know, like, any market that is thin, it's risky, but it is in both the outward flow, capital flight, or the inward flow, remittances, playing a role. And I think it's, in one form or another, whether it's Bitcoin or one of its competitors, it will stick.

Kal Raustiala 1:06:41

Another question, maybe out of left field, but this is very comfortable for you, I think, just different from the others. So this one is really about economics as a discipline. So given the nascent focus on randomized field experiments as a tool for understanding development and designing solutions, how do you think that the COVID-19 pandemic will impact that research? So in other words, are we going to see a bunch of natural experiments that will be utilized, or are we going to see other opportunities to do studies that may end up enlightening us beyond the pandemic?

Carmen Reinhart 1:07:13

So look, I can tell you off the bat, that it's been an important catalyst to how surveys are done. A lot of the field research hasn't been possible because of the pandemic. We've seen very creative solutions in terms of anything ranging from phone surveys to you know, more internet based. And so, I think, the field work, and what I'm getting at is, I think the methodology will survive the way it's carried out. I think it has been....I think there will be a great deal of learning and in effect, we're already seeing that when you can't do the face to face, when you can't do...I mean, there are certain situations where obviously, alternatives are limited, given that you're dealing with more marginalized groups. But I think, you know, COVID has been a catalyst for new ways of gathering data. And I think that, you know, the approach will survive and I think may even blossom to some degree...we're seeing even, you know, in the midst where so much activity has been paralyzed.

Kal Raustiala 1:09:33

Well, Dr. Reinhart, thank you so much for joining us today for this lecture. Super interesting discussion. There are many questions, of course, I didn't get to, but hopefully we'll have you back and maybe even live at UCLA someday.

Carmen Reinhart 1:09:48

Well, thank you. Thank you for having me.

Transcribed by https://otter.ai