Welcome everyone. It's great to be here and it's fantastic to welcome Mohammed El-Erian as our new chair of the board of the Center for Global Development. I'm Rachel Pennister, president of CGD. We're so excited to have him as our new board chair, as someone with incredible intellectual leadership in the area of international finance, passion for development, and already engaged so deeply with a number of staff, asking lots of difficult questions, as you would expect, and exactly what we would like. So now it's his turn to answer some difficult questions. He is going to be interviewed by Judy Woodruff, another member of our board, and of course, a longtime reporter for the NewsHour on PBS. So without further ado, I'd like Judy and Mohammed to come up and to hear the discussion.
Thank you, Rachel. I think the microphone is on. We're good. We're good. Delighted to be here this morning to have this conversation with our new board chair, Mohammed El-Erian. Thank you very much for sitting down to have this conversation. We are going to be taking questions from you in the room and some questions from you who are paying attention online. This is streaming as well, and we welcome everybody here. So Mohammed, so many things to ask you. First of all, with all the things you have already on your plate, teaching and writing and doing a lot of journalism, what was it that was so irresistible about this job as chair of the board of Center for Global Development that made you decide to do it?
The institution and the people. Let me just start by thanking everybody for being here and thanking the board for electing me. It's a wonderful opportunity. Thank you for doing this. I'm glad you didn't share with them how you used to torture me on the NewsHour and CNN. We've had this situation before, and that's why I'm a little bit anxious about all the questions. So as you said, I've been passionate about development from a very early age. I think this is a particularly challenging time for low and middle-income countries. I think it's critical to have an institution that does important and impactful work, and to be able to be part of that is not just something that I love. It's incredibly stimulating, but it's a huge honor.
Well, I want to ask you about that, about the opportunities and about the challenges. Before I do that, I want to ask you about something that's in the news right now. This appears to be a deal, a memorandum of understanding between the United States and Iran, bringing to a close a war that's gone on longer, I think, than most people expected that it would. What effect do you see it having on the world economic picture, assuming it holds? It was just signed yesterday, but at this point, what does it look like to you?
So I think we should welcome something that has the potential, and I stress has the potential, to end a war that has hurt lives and livelihoods not only in the region but around the world. It's far from a done deal. So if you look at the four major challenges, the first one has to do with transforming a memorandum of understanding of 14 points into something that is comprehensive and implementable. That requires a lot of negotiations. The second is the parties involved go beyond the two parties that have signed this agreement. So there's a question: will other parties also abide by commitments that are made on their behalf in the agreement? Third, there's this notion that restoring oil production, shipping of fertilizers, of oil, is like putting on a switch. You turn it on and off. That's not reality. It takes time. And then the final issue is what I call the economic scarring. There are longer-term effects, including some that haven't been felt yet, that's still in the pipeline, and we've got to manage that. So it's wonderful that we have a deal, but I think we should be focused on how do we make this deal something more meaningful to stop a war that has undermined lives and livelihoods. If you look at developing countries and if you look at the last six years, this is the third major shock that they've had to deal with. Lots of minor shocks, but the third major shock. The first one was COVID. The second one was what happened to wheat prices and energy prices following Russia's invasion of Ukraine. And then there's a third one. Then there's a trade issue. And even though developing countries haven't captured the headlines, what typically happens when you have a shock is everybody focuses on what happens in advanced countries and need a crisis of some sort in developing countries to pay attention to developing countries. So the good news is we haven't had a systemic crisis in the developing world. The bad news is we've run down whatever element of resilience was left that has been used up for every one of the shocks. I'm talking about financial resilience. I'm talking about human resilience. So this shock is going to have long-lasting effects at a time when most countries are already squeezed, especially investing in the social sectors, health, education, and most countries have to invest in new technologies so that they don't get left behind. So it's a very serious setback for development, and it's one unfortunately that if we're not careful is going to play out over the next months, quarters, and years.
What are you going to be watching for in the near term to see whether the damage that's been done over these last weeks and months is being alleviated in any way?
So it varies. The big issue is do you get more normal flow of goods through the Strait of Hormuz, and with that, do you start reducing some of the pressures that come from lack of energy, lack of fertilizers? I mean, that part of the world accounts for a lot of things. The longer-term issue is going to be country by country. There are some countries that bought time, used reserves, valuable reserves, subsidized energy consumption, and have to restore whatever buffers they had. There are other countries that have been pushed further towards debt problems and now have to come back. And then there's another set of countries that have had to once again cut on investments, on spending on health and education, because that's the easiest thing to cut unfortunately, but it has the worst effects longer term. So it will be country by country as to how they can restore the resilience that they have run down.
I wanted to ask, as you think about this organization focused on those low and middle-income countries, are you literally watching for some of these countries to go under? I mean, to go into a deep crisis mode? What could happen?
I had the honor of having a town hall, and I said that if you think of where we are in the development process, we have three now really big challenges. Whatever issues we had before, whatever headwinds to development we had before, debt, climate, governance, have been made worse by the external effects of the war. So the external spillovers have made existing challenges much worse. Second element, this is happening at a time when aid flows are being cut, when private finance hasn't stepped up yet to the opportunity. There are too many market failures that stop that from happening, and therefore countries are also dealing with lower funding. And then the third element is the world has changed, and the typical development paradigm that people thought was the north star, if you like, it's not clear if that still is applicable, and we haven't got an alternative development paradigm. So this is a really important time for the development process and for CGD that can help the thinking on this, can have an impact on policy. It's a really challenging time that the war has made more challenging.
Before we turn away from Iran, how long do you think it will take? When do you think it will be that oil prices will return to levels that they were before the war?
So I'm surprised how fast oil prices have come down. In the last week, we're down 20%. There's been a massive reaction. So this morning when I came in, WTI was trading around 75, 74. We were at 100 not so long ago, and we were in the 60s before the war. So we've come back quite a bit.
Does that hold? Do you think that holds? So I should ask you, do you think the memorandum of understanding gets translated into something that is lasting or not?
There's no way I'm going to answer that question.
Yeah. And that's the answer. I mean, who knows what will happen? So many different pieces of the puzzle.
What's your take on that?
I'm like you. It's uncertain, you know, and it's fascinating. The markets have declared mission accomplished, finished, etc. The economists are much more guarded.
Well, let's I want to ask you about that. I mean, why the divergence between what the smart folks, the economists, are saying and thinking and what the markets are doing?
So I think if you want to explain the markets, I'll give you an incredible example. Okay, SpaceX was a private company this time last week. SpaceX yesterday was the fifth most valued company in the US. Think about that. More valued than Amazon, almost equal to Microsoft. Okay, that is market hype, enthusiasm, whatever you want to call it. Why? And this then pulls everything else up. I think you've had the following factors play out in the marketplace. One, an enormous love affair with the potential of AI. So people have brought forward the productivity gains that AI promises, and they have monetized it. The second is behavioral. Because of the policy response function, investors have been conditioned over and over again to buy every dip. It doesn't matter why the markets are going down. It's a profitable opportunity, and it has been a profitable opportunity. So whenever there's a bit of a dip, you immediately get more investors in. The third is, as you know, as much as there are things with the US, if you look at private capital, the US is the cleanest dirty shirt. It's not pristine, but it's a lot more attractive than markets elsewhere. So the US also attracts a lot of foreign capital, especially on the back of the AI promise. So that momentum builds such a strong tailwind to the market that the market will overshoot on the way up, just like it's overshot on the way down.
And the risks to that are?
It depends how it unfolds. Okay. So finance normally is the tail, and you think the fundamentals matter. That's what really matters. But we learn every once in a while if the imbalance in the financial sector is so bad that the tail wags the body of the dog. We saw that in 2008 during the global financial crisis. I don't think we're looking at something systemic, but we could well have a correction at some stage. But it's going to take a major setback to change the behavioral elements of the market right now.
Are there particular effects on the low and middle-income countries as a result of the markets potentially overshooting?
Yeah, I mean it's the old problem that whatever happens outside can impact you more than where it happens, right? So yes, it could disrupt normal financing as people become more risk averse. But you know, there's also a bit of a loss of trust. I travel a lot around the world, and there's a lot of questioning of the construct. So the construct is the US is at the core of the system. The US produces a lot of public goods, the reserve currency. The US provides the deepest financial markets. The US has a strong voice, if not a veto voice in some cases, in multilateral institutions. The US is viewed as a natural leader of the G7, the G20, etc. And the implicit contract is the US benefits from every single one of these things. I mean, the reserve currency, you issue pieces of paper and people give you goods and services. That's a great deal. Being the financial center of the world, you get much more capital. Therefore, your borrowing costs are much cheaper than they would be otherwise. You have enormous opportunity to influence, if not impose, outcomes on other countries through the multilateral system. Against that, there was the expectation, the implicit contract, is the system will be run responsibly. And then people look and say, so wait a minute, the 2008 global financial crisis that originated in the US, the first trade war that originated in the US, the US's behavior during COVID in terms of sharing vaccines was not what we expected. Now we have other things coming from the US. So there's a lot of people that question this implicit contract. And that's why you're seeing efforts to build little pipes. No one can replace the US at the center of the system, but you're seeing lots of little pipes being built around the US to try and increase resilience of the system. And that's increasingly the view from the rest of the world is we cannot replace the US, but we have to reduce our sensitivity to the US.
And you're saying that's something that started not just in the last couple of years?
No, it's been going on for a while.
It's been going on. So, as you know, CGD's mission is low and middle-income countries. I want to read the mission in just a few words. I'm going to read it: 'To reduce global poverty, to improve lives through innovative economic research that drives better policy and practice by the world's top decision makers.' You touched on this a minute ago, but talk about the opportunities that you see at this moment. You mentioned some of the challenges, and clearly they're there. But how do you see the opportunities at the same time we're facing the challenges you're talking about?
So the greater the challenges, the more the opportunities typically, if you're able to respond to the challenges. And this is what this institution has: the ability to respond to the challenges. Typically, what do you need? You need people, and if you look at the work that's come out of here, you have got the people. You need the platform. CGD is respected in really important decision-making places. And then the third thing is you need sustainability. You need to be able to be around, and CGD has that sustainability. So if you look at who can respond to opportunities in a sector that right now is under tremendous pressure, which is development, and that's development economics, development finance, development policy, you can add whatever word you want after development, it's being challenged. The Center for Global Development is uniquely placed in my opinion.
Do you want to be any more specific than that about, you know, look at the work that's being done on AI, something that I believe is absolutely transformational and can be transformational, but is not automatic at all. In fact, if we leave it to the invisible hand, developing countries are likely to be left behind. So you need work to be done in that area to help the development of AI that can be applied in a way that is transformational for developing countries. Look at the debt issues that are facing us. Look at the development finance issues. Look at the role that the private sector should play. You know, I was at a meeting in South Africa last week, and the complaint you hear, which is a very genuine complaint, is private capital isn't coming to opportunities. And I said, 'Okay, so where's the market or institutional failure? Tell me why it is.' They have no view of that. They just are concerned that it's not happening. So you need people to be able to look to research these issues in a policy-oriented way in order, and to use the word that Rachel likes so much, to have impact. And the potential for impact is huge when the challenges are so high.
When it comes to AI, actually, before I turn to that, and I do want to ask you about it more than what you touched on just now, when you talk about the harm that's been done to the development sector, clearly some of that has happened just in the last year and a half, dismantling the Agency for International Development, other education programs, health programs around the world. Can you quantify how much effect these decisions that have been made, these moves that have been made just over the last 18 months, have had in the development sector?
This is why we have great people. That's their job. But I can tell you, don't focus too much on the US. It's happening elsewhere. Look at what's happened to the aid budget in the UK. It has been radically reduced, not only in terms of a role but because some of it has been diverted to domestic purposes and no longer flows. I mean, it's not just the US. This is becoming a more general process, and it's because fiscal constraints are starting to hit. Growing up, it would have been unthinkable, unthinkable, that the markets, the bond vigilantes, would attack three of the seven G7 countries. Unthinkable. But in the last four years, the UK had a market crisis, Japan and France. So the constraint on fiscal is becoming more and more real around the world, and unfortunately an easy response is to cut your development budget. So it's not just the US. We're seeing it elsewhere. You know, I was at the IMF for 15 years. The easiest thing to cut is spending on social sectors, but that has a really bad immediate and longer-term effect, but governments find it easier than to cut spending on military. So as the budget constraints amplify, it's much broader than the US, and that's why I go back to development is being fundamentally challenged by changes in what we thought were parameters that have become variables.
I had a question prepared to ask you about, does all this provide openings for countries like China? Of course, the news in the last couple of days about their bottom line is giving us, I guess, a new, different understanding of what's going on in China. How do you see China taking advantage of this or not being able to? What does that look like?
So one of the most active countries in building alternative pipes is China, and they've gone through the process. The first one was all about establishing links with commodity exporters to secure that, and it was in exchange for either money or 'we're going to come and build infrastructure, etc.' That happened in Africa quite a bit. Then we had the Belt and Road Initiative, which was an attempt to institutionalize. Then that ran into problems. We now have the second version of the Belt and Road Initiative, and China increasingly is representing itself to low and middle-income countries as the responsible party when it comes to multilateralism. So yes, at the same time, China offers a massive challenge to developing countries because we've never seen a country operate at virtually every level of value add in manufacturing. So normally you exit one and you allow other countries to come in. If you think of the conveyor belt up the manufacturing value added, as development happens, you move higher up and new countries can come in and continue. That's the story of Korea. That's the story of Singapore, Hong Kong, etc. China is able to dominate that whole value added curve, and there isn't as much room for countries to come in as there was before. So China is both taking advantage of the situation, but also having to deal with internal problems that stop it from going up the value added curve. You saw the latest retail sales number. You saw the latest investment numbers.
So a bigger question mark than it was before because they are dealing with serious internal domestic issues.
