'No country has better economic prospects than America'

Ex-US Treasury head Summers offers hope despite problems; World Bank ex-chief: China, India well on the way to changing world order.

By NADAV SHEMER
June 23, 2011 02:38
US Treasury secretary Larry Summers

US Treasury secretary Larry Summers. (photo credit: REUTERS/Hyungwon Kang)

Despite its many problems, no country in the world has better prospects, provides more opportunities and has a more globally important role than America, former US Treasury secretary Larry Summers said at a plenary session of the Israeli Presidential Conference in Jerusalem on Wednesday.

It is tempting to write the US off, Summers said, but he added that its downfall has been wrongly predicted many times in the past: In the early 1960s, when then-presidential candidate John F. Kennedy believed the Russian economy was set to surpass the American; in the 1970s, when the US was stuck in an era of uncertainty; and at the end of the Cold War in the early ’90s, when the Harvard Business Review said Germany and Japan had emerged as the big victors.

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“And again today there are doubts about budget deficits, about division in Washington, about strategic interests in the world and the rise of China. I would suggest to you that as before, it is the resilience of the United States, its capacity to reinvent itself that is the United States’ greatest strength,” he said.

“Contrast that record with the response to crises in other parts of the industrialized world if you doubt that the United States has the capacity to function effectively in this world,” added Summers, 56, also a former president of Harvard University and now a professor there.

“Growth has not been as rapid as was hoped, it was somewhat slower frankly than what I or others would have expected six or nine months ago, but let us keep perspective. After slowing down, it is growing faster than most of the rest of the industrialized world. Germany has still not yet seen GDP reach previous peak levels; that milestone was crossed sometime ago in the United States.”

The panel session, titled, “Where is the Global Economy Heading?” and moderated by Bank of Israel Gov.

Stanley Fischer, turned into a debate between heavyweights when former World Bank president James Wolfensohn declared that with the rise of China, India and other Asian nations, “By 2050, we are going to face a different world.”

“Get your kids to learn Chinese,” Wolfensohn, 77, said, pointing out that China recently overtook Japan as the world’s second-largest economy and that according to projections, “by 2050, China and India will have close to 50 percent of the world’s GDP.

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“This is turning the world on its head in terms of the world I grew up in... We last had a swing to Asia in 1500 and 1815, when China and India in those years had 50% of global GDP. It’s happened before and it’s likely to happen again.”

Wolfensohn pointed to two major measures to back up his point: financial reserves, 70% of which he said are now held by developing countries, led by the People’s Republic with $3 trillion; and the number of Chinese and Indian students in the United States, which he said had reached 127,000 and 124,000, respectively, with a majority in engineering programs.

In contrast, only 5% of Americans study engineering at US universities.

Given the chance to respond, Summers said he did not dispute the facts, but clarified that while “the center of global economic gravity will shift to the East well within our lifetimes,” it would take far longer than that for China and India to join the most advanced societies, which – led by the US – would still maintain their positions of leadership in the world.

Former Peruvian president Alejandro Toledo spoke about his own region, saying Latin America had learned the lessons of the past, and having emerged intact from the global financial crisis now saw economic growth at an average rate of 6% – and in Peru at 9%.

Toledo, 65, who was introduced by Fischer as the first person of indigenous descent to be democratically elected in 500 years of modern Peruvian history, also said the developing world could learn lessons from Israel instead of attacking it.

Because you live in a land with no natural resources, he said, “you have been obliged to invest in the minds of your people. That is the lesson perhaps that the developing world should derive from this small country, which still has not been able to transmit its words to the world. I hope that this September in the United Nations [when Palestinians are set to declare an independent state] you will make your case that this is a democracy with a healthy economy with democratic values that we share.”

The other speaker, ex-Bank of Israel governor and now chairman of JPMorgan Chase International Jacob Frenkel, explained why Greece was a problem for all of Europe to deal with.

“Greece is not anymore the name of a country. It is the name of a phenomenon that belongs to other countries too, such as Portugal, Ireland and Spain,” he said.

The problem when dealing with Greece is that its debt is contagious, as French and German banks in particular hold its and other countries’ debts, he said.

“If countries that are in trouble are going to allow themselves to go under, those banks will be in big trouble.

Hence when [French President Nicolas Sarkozy and [German Chancellor] Angela Merkel are saying ‘We need to save Greece,’ they are really saying we need to save the boat that we are a part of and our banks are part of,” Frenkel said.

While the dispute between Summers and Wolfensohn provided plenty of entertainment, all four panelists agreed on one thing – that it is unlikely developed countries will suffer a “double dip” recession, although they all predicted there would still be a bumpy road ahead.


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