Martin Wolf interview on OECD Podcasts

Making sense of the world economy under COVID-19

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The global health crisis brought on by COVID-19 has triggered what is likely to become the worst economic recession in a century. Martin Wolf, chief economics commentator of the Financial Times, talked to chief editor of the OECD Observer, Rory Clarke, about the challenges and the hopes, and offers advice to policymakers, young economists and international organisations alike, as they try to make sense of the coronavirus crisis. Go to the OECD Podcast

TRANSCRIPT

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Making sense of the world economic crisis under Covid-19, with the FT's Martin Wolf:

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The global health crisis brought on by COVID-19 has triggered what is likely to become the worst economic recession in a century. And it has also brought huge uncertainty, about how long the crisis will last, how it will affect our jobs, our societies, and our thinking. Martin Wolf, chief economics commentator of the Financial Times, talked to Rory Clarke about the challenges and offers advice to policymakers, young economists and international organisations alike, as we all try to make sense of the coronavirus crisis. Food for thought as the OECD prepares to mark its 60th anniversary in 2021. Mr Wolf's views are his own, and do not necessarily reflect those of the OECD or its member countries.

 

TRANSCRIPT of interview with Martin Wolf

 Making sense of the world economic crisis under Covid-19, with the FT's Martin Wolf

Introduction

Rory Clarke: The global health crisis brought on by COVID-19 has triggered what is likely to become the worst economic recession in a century. And it has also brought huge uncertainty. How long might the crisis last? How will it affect our jobs, our societies, and our thinking? And in this uncertain time, how might international organisations help bring the crisis to an end?

Rory Clarke: I'm Rory Clarke, and to make sense of it all, I'm delighted to be joined by the Chief Economics Commentator of the Financial Times, Martin Wolf. Martin, welcome to OECD Podcasts.

Martin Wolf: It's a pleasure to be with you.

Rory Clarke: 00:55]The Covid-19 pandemic has been with us now for half a year, wreaking havoc, and unless we find a cure, we remain a threat for some time to come. OECD is like the very uncertain outlook to a tightrope walk. Is that how you see it, too?

Martin Wolf: Well, it's an interesting metaphor. And I have actually no problem with it. I mean, I don't think it's a perfect metaphor because obviously if you fall off a tightrope and it's high enough, you die.

Martin Wolf: And I think we're not going to die. [1:24]We are going to survive. The way I see it, it's like going through a colossal storm, which we know we're going to get through, but we don't know how damaged the vessel will be during the storm and what shape will be after it's over.

Rory Clarke: In the OECD economic outlook issued on the 10th of June, we painted [two scenarios:  a single wave of infection which sends global economic activity falling by six percent with a worst fall of seven point six percent from a second wave. Both of them likely at this point. You've also warned of a second wave. Are we right to be so pessimistic?

Martin Wolf: [2:05] Well, I have to stress, as all economists working [00:02:00] on this unique shock and in its full magnitude and dimensions, this is a unique event. We've never done this before, in this way that I'm relying on what the medical people and particularly the epidemiologists tell me and what they're telling us.

Martin Wolf: It seems to me pretty obvious and plausible, which is that this is a highly infectious disease. Now, actually globally increasingly prevalent. We have no cure and we have no vaccine. And this being so subsequent, waves of infection seem enormously plausible. We are reminded quite often that the last pandemic of this kind was the Spanish flu of about a century ago, and that came in three waves. So it doesn't seem to me the [ least implausible that we'll have another wave, possibly because of winter when we're all together and also more vulnerable or because it comes back from the emerging and developing countries where [03:18] actually the first wave is not over. Indeed, in some many places, the first wave has only really just begun.

Rory Clarke: [00:03:25] Is there any one area or trend in the crisis that is worrying you most?

Martin Wolf: There [00:03:50] are so many. It's really quite difficult to separate out. Obviously, if we look back on it, we were far less prepared than I thought we were. That was pretty worrying. We have failed to an extremely high degree to co-operate effectively globally. The responses have fragmented the world [economy in ways that might well turn out to be permanent.

Martin Wolf: And we have found it very, very difficult to get the disease fully and securely under control, which gives us the risk of second waves. And [0415] above all, what this disease has done is to inflict upon us globally and basically everywhere a simply monstrous recession and immense costs, social costs, fiscal costs and, of course, economic costs. And that's the biggest thing of all. And we don't know when this will be over.

Rory Clarke: [00:04:39] After the financial crisis in 2008, you quoted Keynes, that when the facts change, you change your mind. Is  this pandemic causing you to change your mind about the global economy and how it operates?

Martin Wolf: [00:04:50] in this case not really. Except to one degree. We all knew, at least intellectually, that a pandemic was a risk. So when it happened and we were there, one couldn't say, well, that's a surprise because it wasn't a surprise. In a way, the financial crisis, perhaps that was real folly on my part, was a bigger surprise or the scale of [518] the financial crisis was a bigger surprise because I didn't think the economic system itself could generate such a shock. Now, this sort of thing. Yes. That's not so surprising at all. What has been more surprising is how difficult we have found it to manage. But it was pretty clear [00:06:30] that any pandemic was going to be very, very disruptive. And so I would say it's not in that sense really a surprise. But when you experience it, It's, of course, a shocking event.

Rory Clarke:  Some commentators have argued that the world economy was going too fast, breaking things, pushing limits, [00:07:00] notably on the environment climate.  What's your view on this?

Martin Wolf: [Martin Wolf: [00:05:59] Humanity has suffered enormous destructive, I mean, just colossally destructive waves of disease in the past. Probably the most important examples have been the waves of plague that have come across the world many times over the last two thousand years. [6:26]There were great plagues in the last years of the Roman Empire, in the second century A.D., in the sixth century A.D., if I remember correctly; of course, also there’s  the Black Death and thereafter, and they were much, much more destructive. Well, the economy was tiny then. I mean, [6:48] the argument that diseases are the product of the modern economy just seems to me to be really absurd. We are subject to natural forces of which diseases are one.  Martin Wolf: [00:09:04]

 

WILL COVID-19 CHANGE HOW WE BEHAVE ECONOMICALLY?

 

Rory Clarke: [7:00] Now,  several countries have been through several months, several weeks anyway, have locked down, others are still going through lockdown. And we have new operative words such as social distancing and we're seeing an effect on economic sectors such as sport, culture, cinema.

Rory Clarke: How do you think this will reshape the way we run our economies?

Martin Wolf: Well, there are two dimensions of this, at least.

Martin Wolf: [00:11:06] Once we are living with a highly infectious disease, which we cannot cure, at least not fully, and which is potentially lethal, at least for significant parts of the population, the older parts of the population, then society's behaviour changes. The lockdown is an extreme form of social distancing I suppose. [7:52]We start changing our behaviour and that's inevitable and it has economic effects. And the biggest economic effects are obviously on the sectors of our economy that depend most on our being close together, which are travel, tourism, entertainment, restaurants, cinemas, theatres, this shock was inherent in having this sort of disease.

The second part of this is : How long will this go on for and will it last when the disease is gone? We don't know whether we're going to get either a cure or a vaccine, and we don't know when either will come, if they do come. If we have a cure or a vaccine, which is credible in both cases, so it could be easily dealt with, then I would assume we will go back to some significant degree to “business as usual”, though I think there are some aspects in which technology has transformed our ways of life so profoundly--for instance, the sheer ability to work from home for so many activities to go virtual---as it were, is so striking.

OFFICE WORK CHANGE…FUTURE OF PLANNING!

Martin Wolf: that many organizations hadn't realized that. I suspect that's a permanent shift. [9:10]I think alot of conferences, a lot of offices will now organize themselves, particularly if they’re global, more through virtual contact than through travel because it's just so efficient.

Rory Clarke: [00:9:26] I suppose, based on what you're saying on going to work and working from home, that this means a whole new future for office development and perhaps the way we plan our cities.

Martin Wolf:  I think yes. And I think it's even perhaps broader than that. I think it generates as it were if [945] we are a technological at so at a leap in the social acceptance of technological  change. And, you know, I suspect a lot of people will never go back to going to shops to buy things that are completely standard items which they could just as well buy online. On the other hand, if you want to go and buy clothing that fits, you'll still want to go to somewhere where I think from where you can try it on. Though, of course, even there, there's virtual ways of doing this. But, yes, I do think nonetheless that if [10:17] I were running a business in future, I would be very surprised if this didn't end up--I'm not sure--with people saying, well, do we really need this great big office in the middle of London? Quite a few businesses will say, you know, really, we don't need all this stuff. We will hire a meeting room for once an hour or two a week, and it'll be and the offices will go, at least in part. And I think that would be a rather good thing. As you say, it will mean our cities will look a bit differentNow, how far that will go? I don't really know. But [10:50] I suspect the future of retail and the future of office work will be different. On the other hand, know you go to the theatre to be a live event. It's not the cinema. So I will still want to be inside the Olivier Theatre at the National Theatre, and I want to be in a concert hall and I want to go to the opera because that's human. So it'll be a bit of.

Rory Clarke: [11:13]  Martin. Even this podcast is being done remotely. You're in one country, I'm in another. You came to the OECD at the beginning of the year and we were thinking of doing a podcast in physical space. Here we are doing it now. But to what extent is are we now becoming more exposed, more dependent on the digital infrastructure?

Martin Wolf: [11:35] Well, obviously, vastly so. But that, again, has been happening increasingly for, what, 30 years. [11:43] The Internet, which is the most visible sign of this aspect of digital culture, emerged into our consciousness in a big way in the 90s. It's increasingly transformed our lives on many, many dimensions because [00:18:30] of the sorts of things we do So, yes, this was the way I think of it--this this shock in this in this way is that it's accelerated an ongoing revolution. It [12:12] was ongoing already and it has accelerated it. In another way, we're thinking of all these tracking and tracing systems around the world. And we are thinking of using artificial intelligence for this sort of thing. Well, that's another way in which we may be me may be accelerating in the future with all the concerns about privacy that's associated with that.

 

Rory Clarke: [12:37] Now, of course, countries have also been locking down and this has had an effect on world trade. There's a whole debate on right now about just in case, sourcing locally. How do you see that trend developing? And what would you do? What would you recommend?

Martin Wolf:  Well, again, this is quite a complicated question. So let's separate out different items. Well, first, let's look at what has happened, obviously.

[TRADE, SUPPLY CHAINS, PROTECTIONISM]

Martin Wolf: [13.00] There has been a breakdown of some supply chains, quite important ones, and this has led to a desire to shift supply chains closer to consumption. And it's also true that more broadly international relations have [13.25] been hit partly by things that were going on before the crisis. We already had lots of trade conflict before that, notably between the US and its trading partners. And that's pretty clearly been exacerbated, I think quite especially between the US and China. I think that's a fair description. Now, on the former, I understand the anxiety. But I think it's in some important dimensions misconceived. The basic problem we had, it's part of the failure of preparation. There weren't enough of the things we needed or round the world. [14:00] We didn't have the capacity, if we had the capacity in a way I don't think it would have mattered where it was, because then everybody could have got the stuff. The problem is there wasn't [ the capacity and because there wasn't the capacity, the countries that produced this stuff tended to hoard it for themselves and that broke down everything. So when we look back on this,[14:25] I think a really big lesson is, okay.

these things are gonna happen from time to time. How much are we prepared to spend to make our systems less fragile, more resilient? And that will mean either having redundant capacity or stockpiling essential materials or both. That's the first point.

Second point is [14;50] getting capacity to produce everything that's  important in a disease in every country in the world so they can have their own is insane because it will obviously be enormously expensive. Now, there are some items having redundant capacity produce facemasks might make it a bit of sense. But do we really want every country in Europe to have huge, redundant capacity to produce facemasks? There are huge costs for every country to be self-sufficient in everything that might become essential in some extreme circumstance.

Martin Wolf: [15:27] There are reasons most countries trade for a lot of items and it isn't true that the safest place for production is necessarily going to be in your own country. Let us suppose that the factory, the one factory in your country that you rely upon for the most important item of all is in an area away in an area where you'd want to impose a lockdown. And it becomes sort of a problem, doesn't it? So I think we have to approach this question of being prepared globally, being prepared in stockpiling times, being prepared in terms of where capacity is and being prepared in terms of not being too exposed to one source of supply, be it at home or abroad. But I agree, the direction we're going in is pretty clearly towards breaking down supply chains and becoming more self-sufficient. And I'm not at all sure that will work out to our benefit.

PROTECTIONISM

Martin Wolf: [16:25] My view is that if taken to its limits... A world in which every country tried to be self-sufficient would be insane. And that was a world quite a lot of countries tried to be in after the Second World War, in the former Soviet bloc, and of course, many developing countries, and I would say uniformly failed disastrously. So going back to that would be an economic, social and I think geopolitical disaster. Now I mean that seriously. And in addition to that, obviously, multilateral institutions are under great strain. Global co-operation among the great powers is in a poor, poor way. [17:00] So I think it is perfectly realistic to expect that there will be a resurgence of protectionism. I don't know how bad it will be, but it might be that world trade, which is often shrinking now, is permanently shrunk. [17:23]And I think that past experience suggests very, very strongly that that will mean a crippled recovery.

[GLOBAL GOVERNANCE, ROLE OF INTERNATIONAL CO-OPERATION]

Rory Clarke: [17:30] Yes, I was going to refer to an article you wrote actually very recently in the Financial Times when you questioned the breakdown in international relations. Wondered how long it would last. On the political level, do you see a role for international co-operation, a way in for it to maybe get the initiative back? And I'm thinking also a role for organizations such as the OECD to retrieve the situation. What do you think they should do?

Martin Wolf: Well.

Martin Wolf: these institutions were created in a burst of determination by major powers on the western side.

Martin Wolf: Obviously, above all the US at that time, but not only the US. The others, too, Britain, Germany and France played a very important role, to create a more orderly, co-operative, prosperous order of liberal democracies initially and to extend that globally, as far as possible. And the institutions played a crucial role in that. The institutionalization of policymaking was a great achievement. Nevertheless--the point I made many, many times goes back 30 years or so, my writing on globalization and so forth--the roots of the will to do this and the political legitimacy of that process depends [00:31:00] on national political processes--the international institutions  do something very, very important. But a basic they only do so if the significant states want them to do so. They don't have, as it were, a free floating power about those states, which is one of the reasons why this absurd idea of some nationalists, that globalizers of some have taken over and suppressed our sovereignty is so absurd. [19:34] The global institutions are simply an effective way--the only effective way, I thinkof expressing and making real the sovereignty of states to achieve what their peoples want:, prosperity and peace.

Martin Wolf: So to summarize, I would say that these institutions can play an incredibly important role, but they will only do so if they're allowed to do so and they can't do it on their own

Rory Clarke:

 

 

Rory Clarke: [20:00] The OECD will mark its 60th anniversary next year in 2021. Would you see COVID-19 as an historic turning point? And do organizations like ours need to change the way we look at the world economy?

Martin Wolf: [20:15] To me, the OECD is the child of the Marshall Plan, which he was, of course, and that was the great act of creative statecraft. For reasons we know. So it's even older than sixty years. But I won't go into this. I think the institution has.

Martin Wolf: continues to have a tremendous capacity to act effectively. If it's allowed. Now, the question you ask is, is this crisis going to be viewed by historians as the one that definitively ended, as it were, the post-war world? We had a period of [00:35:30] solemn stability and progress of many dimensions became increasingly global, the West as the Marshall Plan, it was part of the Cold War. The Cold War was sort of resolved. It appeared in the late 80s, early 90s. So it became a global order. This was a tremendous  achievement. And we got through the global financial crisis just as we got through the oil shocks. And we got through the Asian financial crisis. We made, had lots of crises. We got through them all. The question is, is this a fundamental turning point? And the only stance has to be, we don't know. We simply don't know. We don't know for two fundamental reasons. We don't know how bad it's going to be, how quickly we'll get through it economically and socially and politically. And we don't know how policymakers are ultimately going to respond. [22:00]  I see no reason why it has to be the end of all that. But it could be and it could be essentially for two reasons which are linked. The first is we are in the middle of an absolutely fundamental power shift. The rise of China is obviously a profound geopolitical event of an immense scale, and that's changing a great deal. And we have to adapt to it. And it's not clear whether we will. The second reason is that our politics have become very fragile. It's pretty obvious, very populist, more difficult to mount co-oporation. If you add these two things together and then into that situation where we still struggling with the aftermath of the global financial crisis is this huge shock.[23:00] Then, of course, things can start falling apart really. And once they start falling apart and you can imagine horrible things happening. The crisis in the EU, which can't be contained and all sorts of political developments are possible, then it might be turn out that this is an absolute turning point. But I don't believe it's at all necessary. It's not at all inevitable. And indeed, I think [23:25]a crisis like this, which is truly a global crisis, it affects everybody ought to bring us all together because it's reminders of our common interests and common fate and the common vulnerability to disease.  So the crucial point is we don't know and it depends on what we choose collectively to do.

Rory Clarke: [23:45] If there was one piece of advice you would give to policymakers who are facing this pandemic, what [00:39:30] would it be?

Martin Wolf: [24:53] Be honest. Be as honest as you can. About what you know and what you don't know, what you're trying to do, and why you're trying to do it.

Martin Wolf: Because I've become increasingly convinced that effectively handling a crisis like this effectively depends enormously on trust.

Martin Wolf:] And.

Martin Wolf:] In the long run, I'm optimistic. And even in the medium run, that for people to be trusted, they have to be trustworthy.

Martin Wolf: This is this crisis in which the credibility of the public authorities in all dimensions is essential. So if it's just one thing that lots of other things, I would say try to tell the truth. Now, this is a difficult thing nowadays when there's so much fakery.

Martin Wolf: [0] But I actually think telling the truth is a good thing.

 

MASTERCLASS: TO YOUNG ECONOMISTS

Rory Clarke: [24:45] You've been writing about the world economy for many years, Martin. People respect your views, your insights, you are what younger people today would call an influencer. [Chuckle] You've seen several crises. You've [seen us come out of several crises. What advice would you give a young economist this time? Not a policymaker, but someone younger, you, who's watching these events, watching today's crisis and looking for pointers? How would you advise them?

 

Martin Wolf: [25:15] I've said quite frequently a younger me wouldn't have become an economist because it's become so arridly technical.

Martin Wolf: [00:41:56] But I hope that's not true. So let's assume it is a young, younger [00:42:00] me who's interested in policy. I suppose the advice I would give is that there’s two parts. As an economist, one, economics is enormously exciting and important in trying to analyze what's going on in our world and working out what to do. It  provides many very useful tools because economic issues and economic choices and choices where economics is relevant are simply so important. Which is why I went into the subject in the first place. It's a central element. [26:08] And if economics breaks down, economic life breaks down, then we're in a catastrophe, which is sort of the great lesson of the 30s to me by [00:43:00] so interest in the 60s and going into it. So that is the positive thing. This is a thrilling and exciting thing and there will be lots of crises. [26:25] Managing crises is what human beings have to do. So if you are a young economist in your 20s now, you probably have a life of great challenges to confront. And it's important that they be confronted intelligently, sensibly and rashly.

A Second thing I would say is, remember, there is an enormous amount of immensely important reality bearing on economics, which isn't in economics. [26:57] Economics works by excluding a lot of stuff. Where if your interest in the following questions I'm interested in social development, political development, cultural development are all part of what you have to think about. And that's really hard. It's taken me a long time [ to get anywhere with this, I think. And I was relatively well framed from in those other areas by what I did. [27:24] Economics is incredibly important, but it isn't enough. It isn't enough. And so that's the second thing I would sell the future. The map, my imagined economist don't think of this as the window through which all problems can be seen or the tool through which all problems can be resolved that are relevant to human society. Human, social and political development is much more complicated than that.

HOPE!

Rory Clarke: [27:57] And finally, on the Covid-19 crisis, do you see even a glimpse of a light at the end of the tunnel?

Martin Wolf: [28:07] Yes.  this too shall pass. And it's actually certain it will  pass. I think it's quite true. wWe know from history that pandemics pass, as I've  already said, this is by historical standards, not a very serious one. I mean, it's a horrible shock. But if you compare it with the Black Death, it's nothing, absolutely nothing. Martin Wolf: [28:25] The crucial thing is to make sure that at the end of all this, we get out of it in at least no worse shape than we were when we got into it. And I think that's eminently doable.

Martin Wolf: [] And with luck and in a relatively short period of time, the economy will have substantially recovered, that will be permanent losses. But they can be managed and we have to remember--and that's just part of the final thing: [28:53] We can get through it. We will get through it. But we need to get through it in terms of our individual societies and globally together.

Rory Clarke: Martin Wolf, you've given us an awful lot of food for thought. Thank you very much. It was a pleasure to welcome you on OECD Podcasts.

Martin Wolf: It was a great pleasure.

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©OECD Observer Productions June 2020




Economic data

GDP growth: -1.8% Q1 2020/Q4 2019
Consumer price inflation: 0.9% Apr 2020 annual
Trade (G20): -4.3% exp, -3.9% imp, Q1 2020/Q4 2019
Unemployment: 8.4% Apr 2020
Last update: 9 July 2020

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