the Jerome A.

chazen institute of
international business

Predicting the
Future of
The World Economy:
Who, if anyone, can forecast whats ahead?

A Panel Discussion With:

jacob frenkel
Chairman, JPMorganChase International

glenn hubbard
Dean and Russell L. Carson Professor of
Finance and Economics,
Columbia Business School

gideon rose
Editor, Foreign Affairs magazine

ruchir Sharma
Head of Emerging Markets and Global Macro,
Morgan Stanley Investment Management

joseph E. stiglitz
University Professor, Columbia University

shang-jin wei
NT Wang Professor of Chinese Business and
Economy; Director of the Jerome A. Chazen
Institute of International Business,
Columbia Business School
 P r e d i ct i n g t h e F u t u r e o f T h e W o r l d E c o n o m y

T
he Roman philosopher Cicero once wondered how two soothsayers

could pass each other in the street without laughing. Today, given

the turbulence of markets and governments, the idea that one can

predict the future of the global economy seems like pure folly. In

an age when economic crises catch the worlds policy makers by surprise,

and when monkeys throwing darts at a newspaper pick as many winners as

seasoned stock analysts, who, if anyone, can predict whats ahead? Five of the

foremost economists of our time, prodded by Gideon Rose, editor of Foreign

Affairs, attempted to do just that on a snowy evening at Columbia University

in February, 2014. Their opinions and pontifications spanned the globe and

encompassed a range of political leanings. If there was one point of consensus,

it was that definitive answers are hard to come by, and perhaps framing the right

questions is the first step in making the future just a little less unpredictable.

by these features. In fact, countries with strong

Foreign affairs Jacob Frenkel
magazine was the Chairman, JPMorgan Chase International
media partner
for the panel What economists cant (or shouldnt) do:
discussion. The purpose of economics is not to predict
tomorrow but to understand processes as you
go forward. So I will disappoint those who ask
what should be his or her action tomorrow as
they call their broker. This is not the type of
analysis we bring.
Why some countries win: What is common
to those countries that made it during the
most recent crisis versus those countries
that did not is that, by and large, market
economies are doing better than centrally
planned economies. Its not an accident that
the latter collapsed. The most recent crisis has
highlighted the critical role that is played by the
financial sector: a banking system that is well
capitalized, that has ample liquidity, and that
is not excessively leveraged is much stronger
than a banking system that is not characterized
banking systems weather the storm in a much
better way than those with weak banking
systems. Great attention must be given to
strengthen the financial system in general and
the banking system in particular.
The importance of financial regulation:
Good regulation is an intrinsic part of a well-
functioning market economy. It is important,
however, that these regulations are fully
enforced. Hence, supervision, especially of
financial markets, is also an integral part of a
market economy. Clarity and transparency are
two important building blocks that facilitate
a well-functioning system. As is said about
transparency: what you see is what you get,
and what you dont see gets you.
The credibility crunch: When we speak about
the concept of credibility we say basically that
the future matters. Because if we did not care
about the future consequences of what we do
today, we would not worry about being or not

2

Glenn Hubbard Joseph E. Stiglitz
Dean, and Russell L. Carson University Professor,
Professor of Finance and Columbia University; Winner
Economics, Columbia of the 2001 Nobel Prize in
Business School Economics
being credible. Credibility is a form of capital.
Capital, like flowers, must be watered, must
be maintained, and should not be depreciated.
Credibility is accumulated slowly and lost
quickly. As the saying goes, credibility is never
owned, it is just rented.
What destroys society: I used to be a
governor of a central bank of a country that
had hyperinflation: Israel. I was governor
throughout the 1990s. And I can tell you
one thing: there is nothing that can destroy
the fabric of society more than uncontrolled
inflation. We should really watch for it. There
has never been a situation in which inflation
went out of control without the irresponsible
excessive printing of money. The fact that we
do not have inflation now and we did not have it
for quite a few years in this part of the world is
very good news, but I would never throw away
the old textbooks dealing with inflation because
they might prove their usefulness in the future.
Glenn Hubbard
Dean, and Russell L. Carson Professor of Finance
and Economics, Columbia Business School
On the purpose of economics: I would remind
all of you that George W. Bush once said about
The Panel
Shang-Jin Wei Ruchir Sharma Jacob Frenkel
NT Wang Professor of Head of Emerging Markets Chairman, JPMorgan Chase
Chinese Business and and Global Macro, International
Economy; Director of the Morgan Stanley Investment
Jerome A. Chazen Institute Management
of International Business,
Columbia Business School
me that Glenn cant even predict the past. My
belief is that he meant data get revised, so MODERATOR:
some humility is in order. I definitely think I can Gideon Rose
tell you which questions to ask. Im not sure I Editor, Foreign Affairs
magazine
can necessarily answer them.
Understanding growth: First, on the question
of growth and how we might understand it in
major regions of the world: Ill look through
a couple of lenses one the lens of finance
and the financial system and the other the
lens of public policy. For the United States
I am far more optimistic about the potential
for long-term growth than I think many
are. I say that for two reasons. First, even
with demographic pressures on labor force
participation rates, work is in no small sense
a matter of choice. It depends on policies that
support work. Second, our financial system
has healed greatly since the crisis. Putting
these together, I cannot imagine a place
where Im more excited about the prospect for
innovation and productivity growth than the
United States.
Europes prospects: Looking through the
same lenses, I cannot get excited about
Europes long-term growth prospects. The
financial system there has not adjusted
as fast as the United States. There is not
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 P r e d i ct i n g t h e F u t u r e o f T h e W o r l d E c o n o m y
the same capacity to finance the new,
( left to right) Gideon Rose,
Jacob Frenkel, Glenn the emerging, the innovative. I worry that
Hubbard, Ruchir Sharma, Europe is in a series of very slow growth
Joseph Stiglitz,
Shang-Jin Wei episodes not just lurching between a
recession and slow growth, but a period of
prolonged slow growth that threatens living
standards. Again, part of that too is policy.
The effect of an aging population: There
are several long-term sea-change factors
that I look at in the economy. One of the
most profound is demography. People think
of demography as simply being about an
aging society. Rather, I think of it as being an
opportunity. So in an aging society, are we
going to think of ways to provide financial
services for that? If you look around the
world, aging is not always correlated with the
penetration of financial services that would
support it retirement, insurance. There are
many opportunities for healthcare, for dealing
with older people, for helping older people
work. We are scratching the surface of a huge
opportunity and a policy question wrapped
inside of it, which is, what does it mean to
grow old before you grow rich?
4
The effect of worldwide urbanization: We
are now seeing different parts of the world
growing more urban and more rich. That leads
again to a huge demand for services, for
brands. And my question for this sea change
is, who will win that race for hearts and minds?
Is it American brands and products? Is it
local brands and products? Is it multinational
brands and products from around the world?
That will be one of the great business
questions of the next fifty years.
Ruchir Sharma
Head of Emerging Markets and Global Macro,
Morgan Stanley Investment Management
The limits of forecasting: For most
practitioners the right time frame for trying
to make a forecast is possibly three to five
years. The maximum is up to a decade. I
think forecasts beyond that time frame are
completely meaningless.
Watch out for extrapolation: The most
important mistake I feel people make in the

game of forecasting is extrapolation. Basically
a trends plays out for a while and then you draw
a straight line and believe this is going to keep
working for the next decade or two or three.
That is the single biggest mistake people make,
whereas economics or investing teaches you
that most trends are mean reverting. Meaning
that you get a trend and, in 90 percent of the
cases, those trends revert. Youll find there are
very few exceptions.
The life cycle of a nation: Ive been an
emerging markets investor now for 20 years. I
saw the dark days in the 1990s when nobody
wanted to touch emerging markets because
there were serial crises around the globe from
Mexico to Thailand to Russia to Argentina.
Then you get a massive boom in emerging
markets in the last decade. The peak year
of 2007 was the only time that only three
countries in the world reported a negative
GDP growth rate. So youve got this massive
convergence which took place.
What were seeing now is that a lot of the
myths that were built over the last decade are
being exploded one by one. One of those myths
The right time
frame for
trying to make
a forecast is
three to five
is that all emerging markets were destined to years. The
grow faster than the developed world. What maximum is up
happened instead is that when countries have to a decade.
good growth spurts, they get complacent. forecasts
The policy makers stop reforming. All sorts of beyond that
mistakes are made. Very few countries are able are completely
to keep reforming or doing well through cycles.
meaningless.
Japan, the sleeper pick: The crisis in the Ruchir Sharma
developed world I think has ended up being
a bit regenerative. You get new leaders that
emerge after a crisis who try to change things
up. Japan is stirring for the first time. After
20 years of being defeated, of seeing China
overtake them as the worlds second-largest
economy and also the military tensions, theyre
beginning to wake up from a slumber. And yet
everyone has written Japan off because of how
theyve done over the last 20 years or so.
The best way to predict growth: For me its to
be strictly on the lookout for the circle of life.
Countries essentially follow four stages. The
first stage is the boom. But the boom sows the
seeds of complacency. Complacency often
leads to crisis and reforms often take place
5
 P r e d i ct i n g t h e F u t u r e o f T h e W o r l d E c o n o m y
only after a crisis. So today, when Im trying to
see which countries are going to do well, Im on
the lookout as to where these countries stand
on the circle of life.
Joseph E. Stiglitz
University Professor and Cochair of the
Committee on Global Thought, Columbia
University; Winner of the 2001 Nobel Prize in
Economics
when we talk On economists ability to predict: Let me
about growth, begin by distinguishing between different kinds
people on Wall of predictions. Economists may not be very
good at predicting precisely what time and date
street tend
a certain event will occur, such as the breaking
to use gdp. But
of the housing bubble. But that doesnt mean
GDP is a really
they cannot forecast the future. One set of
bad measure
predictions is broad-stroke, where we may not
of economic
be exactly sure of the timing.
performance Consider the 2008 global financial crisis.
in terms of the Well before the crisis, it was clear we had a
well-being of bubble clear to everybody except for those
a countrys in the financial markets, that is. It was clear to
citizens. anyone who took a moment to think about it
that Americans couldnt continue to spend so
Joseph E.
much of their income on housing. They were all
Stiglitz
counting on the continuation of high levels of
capital gains. I and others knew and said this
bubble couldnt continue. But we couldnt predict
when it would break.
Timing is everything: For one kind of
prediction, we know with a very high degree of
confidence what will happen, and even when.
An example of that is climate change. Its a
process thats actively unfolding, though we
wont experience its full effects in, say, the
next year. Rather, the full effects are going to
be happening over the next 20, 50, or 100
years or more. The magnitude of those effects
will depend on whether our policies change.
Unless we significantly reduce our emissions,
6
the consequences will be dire. But there is a
chance we will wake up and adjust. Even if we
knew how we would respond how quickly we
would reduce our greenhouse gas emissions
the severity of climate change is something we
cant predict with perfect accuracy. How many
feet will the sea level rise, for instance? What
part of Manhattan will be under water?
A second prediction: If we dont do a better
job of regulating our too-big-to-fail banks,
and our over-the-counter markets are not
transparent, we risk a significant probability of
another financial crisis. There were underlying
problems before the crisis in 2007 and 2008.
They were hidden by a bubble, and that bubble
kept our economy going. If we dont fix those
problems structural transformation, growing
inequality, global imbalances we will likely
enter into a period of malaise. When I say
malaise, I mean something like a Japanese
malaise not disaster, but not robust growth.
Why GDP is a bad measure of growth:
Economists predictions of future growth
typically center around GDP. But more and
more economists are recognizing that GDP
is not a good measure. Why? GDP tells only
about a narrow part of economic performance,
and it is a particularly inadequate measure
of the well-being of citizens. It is striking that
American GDP has been going up almost
continuously for decades (2009 was the most
recent exception). But median income today
in the United States is lower than it was in
1989, almost a quarter century ago. I hope its
temporary. I hope theres mean reversion. But
there is no evidence at this point. Unless we do
something, this dynamic is likely to continue,
with GDP increasing while the incomes of large
parts of the country continue to decline.
Shang-Jin Wei
NT Wang Professor of Chinese Business and
Economy; Director of the Jerome A. Chazen
Institute of International Business, Columbia
Business School
Why pessimism about China is unfounded:
On the path to catch up with the United States
in absolute GDP, there will be growing pains.
There may well be a crisis or two in China:
financial, environmental, international relations,
and maybe some other crisis for which we dont
have a label yet. Yet the country will grow out of
crisis and will do reasonably well.
Of course, the future is preordained. There
is a 70 percent probability that China will be
recognized as another Korea, successfully
transitioning to a more innovation-based
growth model. There is 30 percent probability it
will be like another Argentina, a once-promising
but eventually disappointing performer.
The eventual slowdown: If China is a so-called
average country, the growth rate should
naturally slow down after three decades of
high growth. In addition, it is common to hear
pundits stating that demographic factors are
not favorable for China. By demographics,
people typically mean either the population
size or the age structure. But China is by no
means an average country. Meanwhile, there
is another dimension of demography that
is very, very important for about a dozen or
so countries, of which China happens to be
one. That demographic feature is the ratio of
young men to young women in the dating and
marriage cohort.
Now, what am I talking about? For most
countries, including the United States and
Germany, the ratio of young men to young
women is one to one. Thats just the natural
ratio. In a few countries China, Singapore,
Vietnam, India, Korea, and Switzerland for
the youth cohort, the young-men-to-young-
women ratio is above one. China happens to
have the highest ratio in the world right now,
about 1.15. That means one out of every nine
young men cannot find a wife, or even a date.
This is a serious situation.
Why sex ratio matters: Because the
preponderance of men want a wife, the
actions they and their parents are willing
to take to avoid involuntary bachelorhood
can affect economic growth rates. Because more
relative wealth is a competitive weapon on the entreprenuership,
marriage market, Chinese men are more willing more savings, and
to do hard work, take risks to be entrepreneurs, more investment
postpone consumption, and save and invest
contribute
than when the sex ratio is more balanced.
to higher
In Chinese provinces, those regions
productivity
with worse-than-the-national-average sex
in ways that are
ratio imbalance also tend to produce more
not captured by
entrepreneurship. Look at the growth of
standard
newly incorporated privately owned firms.
They are more numerous and grow much economics
faster in regions where the marriage market textbooks.
is more competitive. More entrepreneurship, Shang-Jin Wei
more savings, more investment, and
willingness to undertake hard work are
things that contribute to higher productivity
and higher growth rate. This demographic
factor is not captured by standard economic
textbooks.
to watch a video of
the symposium, go to
http://bit.ly/1g44r55
7
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