Health, education, climate. United Nations, the World Bank, private actors. Locally rooted institutions, locally rooted experts. What we're really talking about is a very complex ecosystem. How do we find the interlinks to innovate and come up with the best solutions to actually rethink what we do as a broader development community. You're listening to the CGD Podcast. Where we explore smart policies for a better world. Each episode highlights an important development topic. Hosted by a CGD researcher. And featuring experts from around the globe. Tune in to learn how independent research can bring global prosperity.
Hello and welcome to the Center for Global Development Podcast. I'm Rachel Glennerster, president of the Center for Global Development. Today we're going to have a little bit of a different format. We're going to bring you a conversation between Mohamed El-Erian, our incoming board chair at CGD, and Judy Woodruff from PBS. Now, Mohamed El-Erian is a very well-known commentator on financial market issues and emerging market economies. He was CEO of PIMCO, one of the largest investors in emerging markets, and also President of Queens' College, Cambridge. He is currently the Chief Economic Adviser at Allianz, which includes PIMCO. You will hear him a lot on CNN and other places discussing international finance issues, so we're extremely excited to welcome him as CGD board chair. To kick off his tenure, we asked Judy Woodruff, another member of our board who is a longtime journalist on the News Hour at PBS, to interview him. Something that she has done many times in the past on PBS, and they're going to talk about the Iran war, its impacts on Low- and Middle-Income Countries, on the global economy, why markets and economists differ in some ways on what they think the impacts are going to be and what reforms are needed, et cetera. I will pass over to the discussion that was held at CGD today when I'm recording this.
Thank you, Rachel. Delighted to be here this morning to have this conversation with our new board chair, Mohamed El-Erian. Mohamed, I want to ask you about something that's in the news right now. What 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, the world economic picture, assuming it holds, but at this point, what does it look like to you?
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. If you look at the four major challenges. The first one: 'Transforming a memorandum of understanding of 14 points into something that's 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. There's a question of: 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, oils, like putting on a switch, you turn it on and off. That's not reality. It takes time. Then the final issue is what I call the economic scarring. There are longer-term effects, including some that haven't been felt yet. They're still in the pipeline, and we've got to manage that. It's wonderful that we have a deal, but I think we should be focused on how to make this deal more meaningful to stop a war that has undermined lives and livelihoods. If you look at developing countries, if you look at the last six years, this is the third major shock. 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. Then there's a trade issue. What typically happens when you have a shock is everybody focuses on what happens in advanced countries. 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. 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. It's a very serious setback for development, and it's one, unfortunately, that if we're not careful, it's 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?
The big issue is: do you get more normal flow of goods through the Strait of Hormuz? With that, do you start reducing some of the pressures that come from lack of energy, lack of fertilizers? The longer-term issue is going to be country by country. There are some countries that bought time, literally bought time; used 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. 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. It will be country by country as to how they restore the resilience that they have run down.
This is an organization focused on those Low- and Middle-Income Countries. As you focus on them, as opposed to the world overall, are you literally watching for some of these countries to go into a deep crisis mode? What could happen?
If you think of where we are in the development process, we have three now really big challenges. Whatever headwinds to development we had before—debt, climate, governance—have been made worse by the external effects of the war. 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's too many market failures that stop that from happening. Therefore, countries are also dealing with lower funding. Then the third element is the world has changed. The typical development paradigm that people thought was the North Star, if you like, it's not clear if that still is applicable. We haven't got an alternative development paradigm. 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 policymaking. It's a really challenging time that the war has made more challenging.
When do you think it will be that oil prices will return to levels that they were before the war?
I'm surprised how fast oil prices have come down. In the last week, we're down 20% and there's been a massive reaction. 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. We've come back quite a bit. Does that hold? 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. Because it's uncertain or--
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. It's fascinating, too. The markets have declared mission accomplished, finished, et cetera. The economists are much more guarded. I want to ask you about that. Why the divergence between what the smart folks, the economists, are saying and thinking, and what the markets are doing? I'll give you an incredible example. SpaceX was a private company this time last week. The fifth most valued company in the US, more valued than Amazon. Almost equal to Microsoft. That is market hype, enthusiasm, whatever you want to call it. This then pulls everything else up. You've had the following factors play out in the marketplace. One, an enormous love affair with the potential of AI. People have brought forward the productivity gains that AI promises, and they've 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 it is that the markets are going down; it's a profitable opportunity, and it has been a profitable opportunity. Whenever there's a bit of a dip, you immediately get more investors in. The third is, 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. The US also attracts a lot of foreign capital, especially on the back of the AI promise. 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.
It depends how it unfolds. Finance normally is the tail, and you think the fundamentals — 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. It's going to take a major setback to change the behavioral elements of the market right now.
