Back in 2008, the world teetered on the edge of an international financial crisis initially sparked by banks’ excessive risk-taking and the bursting of the US housing bubble. What resulted was the worst global recession since the Great Depression of the 1930s.
Thirteen years later, with global economic upheaval once again dominating the headlines, business leaders and politicians can learn from the blunders of the past.
That’s the message of Dr. Mohamed Aly El-Erian, president of Queens College, Cambridge, and adviser to international financial services provider Allianz and investment manager Gramercy.
“The world has faced two ‘once-in-a-century’ crises in the past 12 years,” said El-Erian, who from 2012 to 2017 chaired President Obama’s Global Development Council. “To avoid making the same mistake of a muted recovery, leaders must restore counter-party trust and invest in the recovery through measures enhancing high, inclusive and sustainable growth.”
NUSACC’s online event attracted 450 participants from some 40 countries, including nine Washington-based Arab ambassadors representing Algeria, Bahrain, Djibouti, Egypt, Iraq, Libya, Oman, Tunisia and the League of Arab States.
Bahrain-based Investcorp served as lead sponsor; additional sponsors included Capital Advisors LLC and the National Bank of Kuwait. The event included three partners: the Beirut-based Arab Federation of Exchanges, the US Export Assistance Center in San Francisco, and the World Trade Center of Greater Philadelphia.
Hazem Ben-Gacem, co-CEO of Investcorp, said he offered his introduction of El-Erian “for those who have missed every single news channel and every single financial newspaper. But what I admire most about Mohamed is his ability to analyze the most complex market chaos and articulate it in a language so simple my 83-year-old Aunt Zeinab is able to understand.”
Added David Hamod, NUSACC’s president and CEO: “Our chamber was honored to host a man of Mohamed’s caliber and character. He is a ‘rock star’ in the finance community, and his advice to our 50,000 stakeholders has been invaluable.”
In analyzing the 2008 financial crisis and the current economic slowdown sparked by the coronavirus pandemic, El-Erian noted wryly that “the good news is we learned a lot from the first one. The bad news is that we risk making the same mistakes again.”
Though their causes are vastly different, at the core of both crises is the same phenomenon: the lack of counter-party trust. In the first case, it was about banks not trusting each other, and in the current scenario, it’s about people not trusting each other’s health—which has led to social distancing, quarantines, lockdowns and, ultimately, economic dislocations for much of the world.
“Learning from the global financial crisis, the policy response to these crises has been to ‘go big, go early, and keep going big,’” El-Erian said. “The goal is to prevent short-term challenges like temporary layoff and corporate liquidity problems, from becoming persistent long-term problems.”
The risk here is obvious, he noted. If stores are shuttered for a long time, their owners may go bankrupt. If people lose their jobs, over time they may become unemployable. Societies become less resilient.
Furthermore, defeating COVID-19 through vaccine distribution in one country is necessary but ultimately not sufficient if people in other countries cannot get vaccinated. That leads to one of two unpleasant choices: allowing people to enter with potentially dangerous mutations of the coronavirus, thereby risking to undermine any vaccination program, or becoming a fortress governed by a bunker mentality.
“We run the risk of winning the war but losing the peace,” he warned. “In the last crisis, we overcame the risk of a global depression, but we failed to establish the economic and financial ‘peace’ of high, inclusive and endurable growth.”
Four issues will define how to get out of the current crisis, he said:
- Limiting dispersion, or the difference in vaccination rates among countries. The bigger the dispersion, the greater the risk of losing control of the virus and failing to establish a lasting recovery.
- Controlling debt. The immediate response to the crisis has been to rein in liquidity problems and prevent bankruptcies by enacting massive borrowing by governments and the private sector—but not everybody can carry that debt, especially some developing countries.
- Reducing inequality. COVID-19 “has been the great unequalizer,” he said, “hitting not just income and wealth but also, tragically, the inequality of opportunity—both within national borders, and internationally.”
- Ending the disconnect. “Because of the choices we’ve made in policy, financial markets have been totally disconnected from the economy. So-called Wall Street is doing very well, while Main Street is struggling. How long can this great disconnect prevail, and how can it be resolved in an orderly fashion?”
El-Erian said success will depend on a mix of human and financial resilience, or the ability to take a hit or make a mistake, and bounce back; optionality, or keeping an open mind and “being willing to consider things that are fundamentally uncomfortable to you” while encouraging diversity with regard to race, gender and experience; and finally, agility, establishing institutional and human frameworks to react quickly once there’s greater clarity.
After the pandemic, what will the ‘new normal’ look like?
During the Q&A that followed, Marwan Isbaih of the National Bank of Kuwait asked El-Erian how long it will take for the world to overcome its current crisis sparked by the coronavirus, which so far has infected more than 123 million people and killed some 2.7 million—more than a fifth of them in the United States alone.
“We don’t know whether we’re going to emerge from the crisis this summer, or whether we’ll have another wave,” he warned. “Europe is going through a third wave, and look at Brazil. It is absolutely tragic. The virus is mutating, so the answer is there’s a lot of uncertainty. It’s not just an uncertain world, it’s a world of unusual uncertainty. And that’s why resilience and optionality are so important.”
Even so, it’s going to take some time to get the world back on track, and “companies have now realized that they overdid efficiency at the cost of resilience,” he said.
“Globalization will look different because governments are focusing internally, and unfortunately not collaborating enough, and the US was part of that problem,” he said. “But under the Biden administration, they’re starting to look more multilaterally.”
As to what workplaces and classrooms will look like in the post-pandemic world, El-Erian isn’t sure, but he offered some ideas.
“Zoom calls not only bring more people together, but they also level the playing field,” he said. “We have discovered at Cambridge that an interview conducted through a Zoom call seem to put people from disadvantaged backgrounds at ease more than when they come to visit physically. Why? Because most of these people don’t have parents who went to university and can share experiences. Then they walk into a university environment and it risks creating anxiety.”
The Egyptian perspective
Motaz Zahran, Egypt’s ambassador to the United States, said that today’s Egypt is very different from the country El-Erian knew as a child in the 1960s. Its population has quadrupled since then, and 65% of Egypt’s 100 million inhabitants are under age 30.
“Imperfections have led to revolutionizing the whole educational system. We’ve been through huge transformation as well, both politically and economically, and we’ve managed gradual, steady transitions towards an open economy,” said Zahran, noting that Egypt managed to achieve 3.6% GDP growth in fiscal 2020—despite the effects of coronavirus. In addition, Egypt is today Africa’s largest recipient of foreign direct investment.
“We’ve embarked on huge, earth-shaking megaprojects while supporting small and medium-sized enterprises, boosting startups and of course a growing stock market,” he added. “In the midst of all this, we’ve continued to deal with our comprehensive development challenges. We do so with the clear vision that human capital lies at the heart of any progress.”
Rami El Dokany, secretary-general of the Arab Federation of Exchanges, inquired what Arab stock markets must do to remain competitive in the face of current global challenges.
“The members of the GCC [Gulf Cooperation Council] have issued lots of bonds. Also, Egypt has been able to tap international investors very effectively,” he said. “And if you look at the debt markets, we have benefitted from that liquidity, and for good reason: there have been attractive investments. But the equity markets have not.”
This is because “when you buy international bonds, they are normally issued under London or New York jurisdictions, so investors know what the legal system governing their investments is going to be like. But when you start buying equity, you’re subject to jurisdiction in different countries, and it requires a lot more work. And there is still today massive information failures when it comes to assessing the Arab world. We don’t signal strongly enough from a bottom-up perspective, so that tends to undermine equity flows relative to debt flows.”
US-China relations: What’s in store?
Zubaid Ahmad, founder at Caravanserai Partners LLC, asked El-Erian how the much-discussed “decoupling”—or the deliberate dismantling—of the US and Chinese economies that began under the Trump administration even before the pandemic is likely to affect the Arab world in the long term, now that Joe Biden occupies the White House.
“The tone and approach will look different. The content will look the same,” El-Erian replied, explaining that if Democrats and Republicans agree on anything, it’s the need to hold China accountable for violations of intellectual property rights and other WTO norms. Yet “once you weaponize tariffs and investment sanctions, it is very difficult to put the genie back into the bottle. That’s why economists always warn you about protectionism.”
From Beijing’s perspective, he said, China is still a middle-income developing country and will therefore continue to put its domestic obligations first.
El-Erian said several Arab countries have generally followed what he calls the dual-option model, in which they cooperate with Washington on national security but interact with China as a major economic partner.
“Depending on where you are in the Arab world,” he said, “that model has different balances, and that’s what different Arab countries are going to have to navigate.”