Kevin Rudd on RN Breakfast: Global Economy

[audio mp3="https://kevinrudd.com/wp-content/uploads/2020/04/bst_20200415_0736.mp3"][/audio] E&OE TRANSCRIPTRADIO INTERVIEWRN BREAKFAST, ABC RADIO NATIONAL15 APRIL 2020SUBJECTS: Coronavirus, global economyFRAN KELLY: Former Prime Minister Kevin Rudd led the country through the GFC 12 years ago, and he's just been appointed to an expert group advising the IMF. Kevin Rudd, welcome back to Breakfast.KEVIN RUDD: Good to be on the program, Fran.KELLY: A crisis like no other, that's what the IMF says, with world growth set to plunge by 3 per cent this year. All up, how much worse will this be than the GFC?RUDD: Well this is a double-barrel crisis, as we all know. Its heart is in the public health measures which need to be taken and, as a consequence of that, until the public health measures have full effect, both in Australia and abroad, then the economic measures are always going to lag in terms of their effectiveness. So there is a degree of deep policy complexity about this crisis, which makes it different to the last one. But the other point I would add, Fran, is this: in each crisis, we are confronted with what we could call the economic fog of war. And at the beginning of the global financial crisis, we were also staring into the distance, not knowing whether, in fact, we were going to see the collapse of financial institutions around the world, in fact triggering the second Depression back then. So, there are some dissimilarities: the public health dimension. There are some similarities: simply the degree of uncertainty as you try to make sense of the future when the data points are often elusive.KELLY: Given your experience with the GFC, what do you think of the IMF predicting a sharp V-shaped rebound in global growth of nearly 6 per cent next year? What do you think the chance of that happening is given, well, not just the reach of the pandemic as it moves in towards developing countries, but also the chaotic response we’ve seen in the world's biggest economy, the US, for instance?RUDD: If you look carefully at the IMF’s report this morning, it's got a bunch of caveats around what will happen in 2021. And it goes back to what we just discussed. How long do we maintain lockdown, how long do we maintain social distancing, and how long do we maintain quarantine – as it were, the three underpinnings of public health policy – until such time as we have a vaccine? That's the huge variable in all of this. And if you read carefully in the fine print of the IMF report, its 2021 rebound projections are very much conditional on that.I think the other thing to be said is that the quality of the recovery – which in my own judgment is not going to be V-shaped, but at best U-shaped and, if we think about it, possibly W-shaped with constant fluctuations in public health recovery and public economic recovery – is that our policy measures will need to continue to be adapted. Measures on the fiscal side covering the demand gap are good and important. Monetary policy measures are important as well. But frankly, preventing this crisis from metastasising into a financial crisis is a core challenge for all policymakers around the world at present. Certainly that was the central part of the first meeting of our advisory panel with the Managing Director of the IMF two or three nights ago, which I participated in.KELLY: I'll come back to that and the global reach of this pandemic and how it might play out, but in Australia, our economy is particularly exposed to a global downturn. We have a high reliance on exports – commodities, tourism and education. We entered this crisis too with relatively high levels of household debt. How well do you see Australia bouncing back from a recession because the IMF predicts a 6 per cent rebound for Australia next year which, if that happened, if that was achievable, would be a very positive result?RUDD: Again, I simply have to apply the same conditionality to my answer before, Fran, in all intellectual honesty. It depends on the trajectory of the virus itself and our containment mechanisms. This is the dilemma not just of Australia but of every single economy in the world. In China, for example, Australia's largest economic partner, right now there's not just active concern but total seizure by the risk of a second-wave effect of the virus in China itself, not just through the arrival home of returning Chinese from abroad, but also across the border with the Russian Federation. So therefore, the whole nature of policy responses, whether it's in Australia, or other major partners of Australia, like China, is going to be very much conditional on what’s involved on the public health policy front.KELLY: Yeah and speaking of China, according to the IMF, it’s one country that's still forecast to grow positively, and modest 1.2 per cent this year, and then 9 per cent next year. China helped save Australia’s skin during the GFC by continuing to buy our exports. That was a major part of our recovery. Do you see it playing a similar role this time around? Are you worried given what you just said about the concern of a second wave that that IMF forecast is again too positive?RUDD: It’s not that the IMF prediction is too positive; it's projecting what they call a base scenario from which there can be very many variations based on public health. But in the case of China – and I was participating in a presentation on China's stimulus strategy last night with the Asia Society, where I work – we have yet to see a full blown fiscal policy response from the Chinese. We have seen a regulatory reaction. We have seen a level of taxation adjustment. But in terms of a repeat of what was virtually a 10 per cent of GDP fiscal stimulus by the Chinese back in 2009-10, we have not seen a repeat of that so far. And there are concerns within China about the current magnitude of their own debt servicing ratio, which currently runs at about 14 per cent of GDP, as to whether China itself has the fiscal grunt and capacity to replicate what it did last time around. So I think what that means for Oz, for us here in Australia, we have to be highly cautious about pinning our hopes on an early Chinese recovery turbocharging either a pan-regional or global recovery.KELLY: Okay, I want to get to the global picture but, just before we do, just talking about fiscal response, Australia's fiscal response so far. The government thrown more than $220 billion at this crisis. Unemployment will peak at around 10 per cent but it would have been 15 per cent without the Jobkeeper scheme, which is the bulk of that government spending. In your view, has the response been “proportionate to the challenge” as Treasurer Josh Frydenberg has claimed or will more, perhaps much more, be needed? What do you think?RUDD: The problem I have with the response so far is two-fold. One, in relative terms, it came somewhat late. And number two, we still do not yet have publicly available the government's own econometric forecasts in terms of what growth gap it needs to fill. The reason I say both those things is that they are based on our learnings from the last crisis. Last time around, when we were much criticised for the magnitude of our own fiscal policy response, we engineered those particular measures across the whole spectrum of the Australian economy – from private consumption through to residential construction, through to what needed to be done as far as school modernisation was concerned – we did all of that to trigger various demand points within the economy, but all within an overall assumption we had a growth gap over two years of something like 5 per cent or 6 per cent of GDP to fill. Now, secondly, we do not yet, until the production of this data, frankly, in the context of the IMF report today, have parallel assumptions being put forward by the Australian government as to what the growth gap is that they're seeking to fill. That's a critical point, therefore, in evaluating whether it's too much, too little or whatever.The second point is important and that's about sequencing of these measures. My criticism of the Australian government was that they came to this late, but also the initiation of measures to bring about various levels of public lockdown preceded by as much as a week or more the announcement of the job package, or the wage subsidy package, and there’s a problem with that. It's a real problem. Employers began throwing off their staff in hundreds of thousands before they knew that this was coming. There's a real important question in sequencing here and on that the government in fact has not been as effective as it needed to be.KELLY: Okay. Can I just ask you finally, you've got this role on the IMF advisory board, the IMF is warning of a flight of capital from the developing world as the appetite for risk evaporates. That could lead to sovereign debt problems. When you couple that with the inadequacy of some health systems in some of those countries, do you think we will see serious instability in some developing countries? I mean, the Prime Minister has warned earlier that some economies might collapse altogether.RUDD: It's a really important question which often escapes the attention here in Australia, because we've focused partly understandably on what's happening here at home. A couple of months ago, in February, I said the following: that China's January and February would become the rest of the world's March and April. Unfortunately, that's proven to be the case. What I fear is, what we're going to see in May in June is what you've just described, which is the explosion of the virus, as well as its economic consequences in much of the developing world and Africa, Latin America and across South Asia and parts of Southeast Asia. That has direct consequences for us in our neighbourhood and more broadly.Where the International Monetary Fund is ahead of the curve, in my judgment, is that it has already announced a trillion-dollar loan facility, four times the size of what we got the IMF to do a decade ago. That's being ahead of the curve. And secondly, the IMF is also working closely with the Financial Stability Board, the G20 finance ministers, the G7 finance ministers, on this most critical question of sovereign debt relief. The last thing we can afford is for a country to collapse because of the reverberations across the global financial system. So, so far, so good on that one.KELLY: Okay. Kevin Rudd, thank you very much for joining us.RUDD: A pleasure to be with you, Fran.