Kenneth Rogoff: ‘The sanctions against Russia can work if China and India join in’

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Kenneth Rogoff is the Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics. From 2001–2003, Rogoff served as Chief Economist at the International Monetary Fund. Rogoff is among the top ten on RePEc’s ranking of economists by scholarly citations. He is also an international grandmaster of chess.

Russia’s invasion of Ukraine has sparked a global political crisis, with a humanitarian one, fueling economic insecurity around the world. The war has gone on to undermine the climate change fight, inflate global food prices, and create a huge refugee emergency. Crypto traders around the world are experiencing their worst nightmares with the sudden collapse of FTX. The collapse of the cryptocurrency exchange FTX shook the entire crypto industry. China’s economy is in deep trouble and has been going through a tumultuous time so far in 2022.

This interview with Rogoff was conducted by the editorial board of The Mero Tribune in this regard.

While the year 2022 is coming to an end, crypto markets have witnessed massive corrections. The first half of 2022 has been very bad for the crypto market. Do you think crypto will bounce back in 2022?

The price of bitcoin is wildly volatile, so forecasting the price is a fool’s game. That said it is worth bearing in mind that most tech stocks have suffered massive declines in price in 2022, similar to bitcoin. The main driving force is the surge in global interest rates; the low value of forward-looking real long-term interest rates (interest rates adjusted for expectations of future inflation) has soared by more than 2% in the past few months and is likely to stay high even into the coming recession. Tech stocks are acutely sensitive to interest rates, they benefited the most as interest rates declined sharply after the 2008 financial crisis, and again during the pandemic, and now they are suffering the most as interest rates rise. Tech companies are very r&d intensive, with big investments today for projects that might only pay off in the distant future. Ultra-low interest rates have flattered tech, but now they do not.

Of course, crypto also is hurting from fundamentals, after the disastrous FTX collapse which will almost surely lead to much tighter regulation of exchanges. This is not the end for crypto, but it probably does point to lower prices even after adjusting for interest rates.

In your opinion, why are the world’s leading economies are sliding into recession?

We are indeed likely headed to a global recession, although the reasons are very different in the US, Europe, and China. Europe is the region that most acutely feels the Russian invasion of Ukraine, both because some countries (especially Germany and Italy) had become too dependent on Russian energy exports, but also because the lingering uncertainty surrounding the war undermines both consumer and business confidence. Europe is set to have both very high inflation and recession in 2023. China has obviously suffered from failing to relax its zero covid policy, apparently for political reasons. But its growth was set to slow significantly even before the pandemic. Real estate and infrastructure are overbuilt in many areas, especially outside the rich coastal cities. Power has become increasingly centralized.

Demographics are a huge problem, with the labor force set to shrink by 200 million within the next two decades. Productivity growth has slowed dramatically. Lastly, the United States is facing persistent high inflation, and the federal reserve is being forced to sharply raise interest rates. The latest reading on wage growth shows that there is much work still to be done in taming inflation. None of these is good for developing economies, which suffered tremendously during the pandemic, with many countries effectively being set back a decade or more in development. According to the world bank, more than half are either in default or nearing default.

What risks does Russia’s war against Ukraine pose for the global economy?

Russia poses a huge existential risk to the global economy. The Russians have lost the war on the battlefield, and the only thing keeping Putin in power is very tight control of information that restricts even educated citizens from fully understanding the extent of the crushing defeat Russia has suffered. On the other hand, if and when Russia is forced to acknowledge its defeat, there is likely to be huge turmoil inside Russia, which could lead to chaos, not a good outcome either. One can only hope US and China will come together to force peace.

Are we using all economic and energy options to end the Russia-Ukraine war?

As long as India and China are buying Russian oil, Putin has all the money he needs to keep the war going indefinitely. Ukraine’s economy, on the other hand, is in a state of collapse, thanks to the fact Russia can bomb its infrastructure at will, and Ukraine cannot strike back because Russia is a nuclear power. This is not a stable situation.

Will the sanctions against Russia end the war in Ukraine?

The sanctions can work if China and India join in, they are very ineffective otherwise.

Do you think will China’s economy overtake the US in the future?

More and more, it looks like the predictions that China will soon pass the United States look like predictions people made about Russia in the 1960s and early 1970s, or about Japan in the early 1990s. Each time, the prediction that a fast-growing region would pass the United States did not come true. Nevertheless, if China does not implode entirely, it should eventually pass the United States in total income, simply because of its size, but the day is not near.


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