Thursday, May 14, 2009

Phong van GS Krugman

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Sustain domestic demand: Krugman urges

Professor Paul Krugman, the winner of the Nobel Prize for economics in 2008 and a well-known columnist for the New York Times, will be visiting Vietnam for the first time to take part in a business conference organized by PACE Institute of Directors on May 21. He agreed to talk to the SGT Weekly exclusively via email exchange on this occasion.

The SGT Weekly: In "Obama's Nobel Headache," you told Newsweek: "What I have is a voice." What do you think is the role of a public intellectual?

Prof. Krugman: I think the main thing I can do is provide a bridge from more abstruse analysis to the intelligent public. You can't expect ordinary citizens to know about, say, the arguments for and against bank nationalization, or the analysis of the required size of fiscal stimulus. But I can do the math, then try to get it across in plain language.

Will that role be at the expense of the economist theorist both due to time constraint and the popularizing language?

- I don't think the language is a problem -- it's actually good for professional economists to translate their work into ordinary language, as a way to clarify their own thoughts and avoid fancy-sounding nonsense. The time constraint is real; but I don't do administration, I don't consult with corporations, and anyway academics in their 50s often do more interpretation than basic research. 

Professor Dani Rodrik once said, "Blame the economists, not economics." Since what is good for a section of the population might not be good for the rest, how can you be certain that what you are writing is the best course for the economy?

- I do my best. Let me say that a recession hurts almost everyone, so that there aren't any real distribution issues. And when I recommend policies with strong distributional implications, I try to say that. 

Vietnam has been an avid learner of the free market principles. But the current global crisis proves that many of them to be not so effective in the long run. What do you think are the options for Vietnam to escape the exposure of the export-led model?

- I still strongly favor the export-led model -- it's the only strategy that has led to rapid development. What hasn't worked well is close integration with world capital markets; I think countries want to be very cautious about liberalizing the capital account. Even so, countries with strong export orientation are exposed to global shocks, but I don't think there's anything to be done about that.

Vietnam is a small economy which means there is limited room for maneuver. But you can certainly mitigate the slump by acting to sustain domestic demand. You can keep an eye on your own financial system to make sure that it doesn’t have the problems that have affected so many others.  Vietnam has the virtue of not being caught in the extreme financial crunch. But this is really a situation which small, export-dependant economies don’t have a whole lot of independent room. They can do some things, but to a large extent they really have to rely on the world — larger economies getting their act together to engineer a world recovery.

But I would say that when we emerge from this, it’s not going to be the same world that we had on the eve of the crisis. At the beginning of the crisis, we had a world where there were a few countries that were consuming a lot more than they produce, the United States chief among them, and a number of other countries that were very much export-oriented without very much focus on their own domestic markets. The world that is going to emerge at the end of this is going to be more balanced. The combination of large deficits and large surpluses will not be as dramatic as it was just two years ago, which means that I believe the domestic markets will grow in the exporting countries. There will be more opportunities at home and while obviously exporting will continue.

People might say globalization is inevitable. But don't you think people, especially the poorer people, should have their own choice?

- I've never believed that it's inevitable; and it certainly shouldn't be imposed. But the world's poor are the big beneficiaries of globalization, at least on the trade side. Global poverty wasn't invented by the modern world, and in fact trade is one of the main mitigating factors.

The global crisis might be sending out the wrong lessons for policy-makers as they don't see the reform of the state-owned sector, the establishment of an independent state bank, the separation of fiscal and monetary policies as having urgency as before. What lessons do you think developing countries should take to heart?

- I actually don't see much of that happening. If your idea is that we should have 19th-century policies, the crisis response will dismay you; but the basic ideas of central bank independence and public-sector reform aren't really under threat.

What is the role of China in terms of regional trade and investment?

China is big -- what can you say? Asia has become in effect an integrated production area, with China and Japan as its two main centers.

Could Vietnam offer the ideal investment destination for the "China+1 investor," given the huge economies of scale of China?

- Vietnam does offer somewhat lower wages plus proximity. Vietnam, as much of Asia was organized into a kind of integrated manufacturing platform selling goods to the United States and Europe, so I think it’s important in understanding the internal development. In China, really, what I know is that the new economic geography plays a crucial role in understanding what’s been happening in China because although their exports to the United States are largely based upon traditional comparative advantage, there’s a high degree of localization of production within China, with specific regions emerging as exporters of particular goods.

And finally, what do you think the world economy will be like after the current crisis is over?

I think it will be a lower-key affair, less capital movement, less speculation, more regulation of financial markets; but otherwise not that much changed. China will eventually overtake Japan, but that will probably be a long time from now. Japan will still be a major economy, in terms of current economics, we will still be a two-and-a-half-power world with Japan being the half. What will happen, I think, is the few things that have happened. One is the United States will be less preachy, it will be less willing to go and tell the world how to do things because the United States hasn’t done so well itself.

On the other hand, Europe, as a potential rival for the United States, in some ways has fallen short. There was a lot of discussion that the Euro might challenge the dollar as the world’s leading currency. That challenge has been stepped back, I think, by European disunity during this crisis. The Euro does not look as good a bet as it did before the crisis broke out. So I think we’re looking at a world that will be somewhat re-arranged but not in any very clear way. The United States will not be demoted. It will still be the world’s leading power. Europe will actually be, if anything, a bit weaker than it was. China is not yet ready to really be part of the inner circle of economies. So, I think, in terms of all that, it’s not going to change as much as many people imagine.

By Nguyen Van Phu