THANK YOU VERY MUCH FOR YOUR KIND INTRODUCTION. I AM ALSO VERY GRATEFUL THAT SO MANY PEOPLE TOOK THE TIME FROM YOUR BUSY SCHEDULES TO COME HERE TODAY. IT IS AN HONOUR TO BE ASKED TO ADDRESS THIS DISTINGUISHED AUDIENCE, ON THE OCCASION OF THESE VERY IMPORTANT AND PRESTIGIOUS AWARDS. AS AN AUTHOR MYSELF, I NATURALLY WELCOME INITIATIVES TO REWARD AND RECOGNISE THE BEST THINKING AND WRITING, AND THIS IS ESPECIALLY WELCOME IN THE FIELD OF BUSINESS AND ECONOMICS.

THE TOPIC I HAVE BEEN ASKED TO ADDRESS TODAY IS VERY LARGE: THE WORLD, AND THE PROSPECTS FOR THE GLOBAL ECONOMY. NORMALLY, I WOULD FIND IT DIFFICULT TO KNOW HOW TO BEGIN TO TALK ABOUT SUCH A BROAD SUBJECT, WITH SO MANY COUNTRIES INVOLVED WITH SUCH DIFFERENT CIRCUMSTANCES. BUT RIGHT NOW, IT IS EASY TO DECIDE WHERE TO BEGIN.

ONE SHOULD BEGIN WITH A DATE, AUGUST 9^TH OF THIS YEAR. THE PLACE CONNECTED WITH THAT DATE IS EVERYWHERE BUT NOWHERE IN PARTICULAR: THE INTERNATIONAL CREDIT MARKETS. BUT IN REALITY THE PLACE CONNECTED WITH THAT DATE IS AMERICA, AND NOTABLY ITS SUBPRIME MORTGAGE MARKET. UNTIL THE PAST FEW MONTHS, MOST PEOPLE DID NOT KNOW WHAT A SUBPRIME MORTGAGE WAS. BUT ONCE LOW-INCOME HOUSE-HOLDERS STARTED TO DEFAULT ON THEIR SUBPRIME MORTGAGES, THE NAME BECAME RATHER WELL KNOWN AND EVEN QUITE WELL UNDERSTOOD. IT TOOK SEVERAL MONTHS, IN FACT, BEFORE THE RISING DEFAULT PROBLEMS IN SUBPRIME MORTGAGES CAUSED A CRISIS IN CREDIT MARKETS. BUT THAT IS JUST WHAT BEGAN TO HAPPEN ON AUGUST 9^TH.

THE STORY SINCE THEN IS FAMILIAR TO ALL OF YOU. BANKS LOST TRUST OR FAITH IN EACH OTHER AS CREDITORS. THE VALUE OF MORTGAGE- AND ASSET-BACKED SECURITIES OF ALL KINDS WAS PUT IN DOUBT, AND SO WAS THE VALUE OF THE COMPLEX SECURITISATION PACKAGES THAT HAD BEEN DERIVED FROM THEM. THE FUNDING MECHANISM FOR MANY ACTORS IN THESE MARKETS, THE ASSET-BACKED COMMERCIAL PAPER MARKET, COLLAPSED. LOSSES BEGAN TO BE REPORTED BY BIG BANKS ON BOTH SIDES OF THE ATLANTIC: SWISS BANKS, GERMAN BANKS, AMERICAN BANKS—AND IN SEPTEMBER THE CRISIS CAUSED AN ASTONISHING PANIC AMONG DEPOSITORS AT A BRITISH MORTGAGE LENDER, NORTHERN ROCK, WHICH HAD MADE NO INVESTMENTS AT ALL IN SUBPRIME MORTGAGES. THIS WAS THE FIRST PANIC WITHDRAWAL OF DEPOSITS FROM A BRITISH BANK SINCE 1866. NORTHERN ROCK HAD TO BE RESCUED BY LOANS FROM THE BANK OF ENGLAND, AND BY A PROMISE FROM THE GOVERNMENT THAT IT WOULD GUARANTEE ALL ITS DEPOSITS.

IT WAS DRAMATIC. I WAS ESPECIALLY SHOCKED AND RATHER ASHAMED BY THE RUN ON THE BANK IN BRITAIN, NORTHERN ROCK, WHICH I WOULD NEVER HAVE PREDICTED.

NEVERTHELESS, MUCH OF WHAT HAPPENED HAD BEEN WIDELY PREDICTED. THE CREDIT-MARKET CRISIS REFLECTED MANY THINGS THAT MANY PEOPLE HAD BEEN WARNING ABOUT FOR A NUMBER OF YEARS: THEY HAD SAID THAT ABUNDANT SAVINGS AND LOW INTEREST RATES HAD LED TOO MANY BANKS AND OTHER LENDERS TO RELAX THEIR LENDING STANDARDS. RISKS WERE BEING UNDERPRICED, BOTH IN RETAIL LENDING TO HOUSEHOLDS AND IN CORPORATE LENDING FOR HUGE PRIVATE EQUITY-LED BUYOUTS. THIS WAS A BUBBLE. AND IT WAS BEING INFLATED FURTHER BY ANOTHER BUBBLE, IN THE HOUSING MARKETS OF A LARGE NUMBER OF COUNTRIES: THE UNITED STATES, BRITAIN, IRELAND, SPAIN, FRANCE, AUSTRALIA AND OTHERS. THE HOUSING BUBBLE WAS ENCOURAGING THE RELAXATION OF LENDING STANDARDS, AS WELL AS SUPPORTING RECORD LEVELS OF CONSUMER BORROWING AND OF CONSUMPTION.

AT THE SAME TIME, PEOPLE HAD WARNED ABOUT THE HUGE MACROECONOMIC IMBALANCES IN THE WORLD ECONOMY. THE FACT THAT CHINA, A DEVELOPING COUNTRY, IS RUNNING A CURRENT-ACCOUNT SURPLUS OF MORE THAN 10% OF ITS GDP, AND EXPORTING CAPITAL. THE FACT THAT THE WORLD’S RICHEST COUNTRY, AMERICA, IS IMPORTING MUCH OF THAT CAPITAL TO FINANCE A CURRENT-ACCOUNT SURPLUS OF MORE THAN 6% OF GDP. THE FACT THAT CURRENCIES LOOKED MISALIGNED, WITH THE CHINESE RENMINBI AND THE JAPANESE YEN LOOKING FAR TOO CHEAP AGAINST THE DOLLAR, AND THE EURO AND THE POUND STERLING LOOKING RATHER TOO EXPENSIVE. TEN YEARS AGO, WHEN EAST ASIA FACED ITS FINANCIAL CRISIS, A CRISIS DRIVEN BY EXCESSIVE FOREIGN BORROWING AND BY CURRENT-ACCOUNT DEFICITS IN MANY ASIAN COUNTRIES, VIRTUALLY NO ONE WOULD HAVE PREDICTED THAT JUST A DECADE LATER THE MAIN CHARACTERISTIC OF ASIAN ECONOMIES, APART FROM THEIR FAST ECONOMIC GROWTH, WOULD BE THAT THEY WOULD BE EXPORTING CAPITAL TO AMERICA, AND RUNNING OVERALL A HUGE CURRENT-ACCOUNT SURPLUS.

SO THERE WERE LOTS OF WARNINGS. MANY PEOPLE EXPECTED THAT DRAMATIC CHANGES WOULD BE NECESSARY TO RESTORE SOME SORT OF EQUILIBRIUM OR NORMALITY TO THE WORLD. THEY HOPED THOSE CHANGES COULD BE STEADY AND ORDERLY, RATHER THAN SUDDEN AND DISORDERLY, BUT THEY STILL THOUGHT THE CHANGES WOULD HAVE TO OCCUR EVENTUALLY. HENCE, WHEN AUGUST 9^TH CAME, AND WHEN THE CREDIT CRISIS BEGAN, IT LOOKED AS IF THESE DRAMATIC CHANGES WERE BEGINNING AT LAST.

SINCE THEN, THERE HAS BEEN ANOTHER SURPRISE. IT IS THAT NOTHING MUCH HAS HAPPENED IN THE WORLD ECONOMY. EQUITY MARKETS HAVE STAYED HIGH. THE US ECONOMY RECORDED A 3.9% ANNUAL GDP GROWTH IN THE THIRD QUARTER OF 2007, A PERIOD WHICH INCLUDED AUGUST WHEN THE CREDIT CRISIS WAS OCCURRING. THE IMF PUBLISHED ITS OFFICIAL FORECAST FOR THE WORLD ECONOMY AT THE TIME OF ITS ANNUAL MEETINGS IN WASHINGTON DC IN OCTOBER. IT FORECAST A SLOWDOWN. BUT THE SLOWDOWN THAT IT EXPECTS WAS VERY VERY SMALL: IT REDUCED ITS GLOBAL FORECAST FOR 2008 FROM 5.2% TO 4.8%. IF THAT FORECAST TURNS OUT TO BE ACCURATE, THEN THE IMPACT OF THE CREDIT CRUNCH WILL HAVE PROVED TO BE VERY MINOR INDEED.

BUT IS THAT FORECAST CREDIBLE? ADMITTEDLY, THE IMF PREDICTED THAT AMERICAN GROWTH WOULD SLOW BY A FULL PERCENTAGE POINT, FROM 2.9% TO 1.9%, ASA RESULT OF THE CREDIT CRISIS AND THE SLUMPING HOUSING MARKET. BUT IT ARGUED THAT STRONG GROWTH IN OTHER COUNTRIES, ESPECIALLY CHINA, INDIA, RUSSIA AND OTHER EMERGING MARKETS, WOULD ENSURE THAT THE OVERALL EFFECT OF AMERICA’S PROBLEMS WOULD BE SMALL. ON THIS ARGUMENT, GLOBALISATION IS EXPECTED TO HELP SUPPORT THE AMERICAN ECONOMY BY PROVIDING INCREASING DEMAND FOR AMERICAN EXPORTS.

I HAVE TO ADMIT THAT I AM SCEPTICAL ABOUT THIS FORECAST. FIRST OF ALL, I AM SCEPTICAL FOR A BASIC REASON OF PRINCIPLE. THIS IS THAT ECONOMIC FORECASTS ALWAYS DO A BAD JOB OF FORECASTING TURNING POINTS IN ECONOMIES. THEY DO SO FOR A SIMPLE MATHEMATICAL REASON: THE DATA AND EQUATIONS USED BY THE FORECASTERS HAVE TO BE DERIVED FROM THE PAST. AT A TURNING POINT, PAST DATA AND PAST RELATIONSHIPS CANNOT PROVIDE A GUIDE. THERE IS NO GUIDE. THE FUTURE IS GOING TO DIFFER FROM THE PAST: THAT IS WHY WE CALL IT A TURNING POINT.

SECONDLY, I AM SCEPTICAL BECAUSE OF A BELIEF ABOUT HISTORY, AND ABOUT WHAT HAPPENS DURING FINANCIAL CRISES. THESE CRISES, SUCH AS JAPAN’S FINANCIAL CRISIS OF 1990 OR THE EAST ASIAN FINANCIAL CRISIS OF 1997-98 ARE HARD TO ACCOMMODATE IN ECONOMIC MODELS. A CRUCIAL FACTOR DURING A FINANCIAL CRISIS IS PSYCHOLOGY, THE CONFIDENCE AND ATTITUDE TO RISK OF LENDERS, INVESTORS AND BORROWERS. IF THE CRISIS IS SEVERE, THAT CONFIDENCE AND THAT ATTITUDE CHANGES, IN A RADICAL WAY. THE EFFECT OF THAT CHANGE IS NOT IMMEDIATELY VISIBLE. BUT IT EMERGES GRADUALLY. AND AS NEW INFORMATION ABOUT FINANCIAL LOSSES, DEBT BURDENS AND BANK INSOLVENCY COMES AVAILABLE, THE CHANGE IN PSYCHOLOGY, THE LOSS OF CONFIDENCE, CAN EASILY BECOME SELF-REINFORCING.

THAT IS WHAT HAPPENED IN JAPAN IN THE EARLY 1990S. AT FIRST, AS PRICES ON THE TOKYO STOCKMARKET COLLAPSED, THERE SEEMED TO BE LITTLE EFFECT ON THE REAL ECONOMY. GDP GROWTH CONTINUED TO BE HEALTHY. BANKS, BUREAUCRATS AND EVEN ECONOMISTS SAID THAT THE PROBLEM WAS JUST TEMPORARY AND NOT VERY SEVERE. BUT LENDERS, INVESTORS AND BORROWERS WERE DRAWING A DIFFERENT CONCLUSION. EVEN THOUGH THE BANK OF JAPAN STOPPED RAISING INTEREST RATES IN SEPTEMBER 1990, THE PSYCHOLOGY HAD CHANGED, WITH THE RESULT THAT PROPERTY PRICES ALSO COLLAPSED AND THE BANKING SYSTEM BECAME INSOLVENT.

SOMETHING SIMILAR IS LIKELY TO HAPPEN IN THE UNITED STATES. BANK EXECUTIVES, BUREAUCRATS AND ECONOMISTS WERE SAYING DURING SEPTEMBER THAT THE EFFECT OF THE CREDIT CRISIS ON GDP WAS GOING TO BE MINOR AND TEMPORARY. BUT PRIVATELY, THEY AND THE CENTRAL BANKERS AT THE FEDERAL RESERVE WERE MUCH MORE WORRIED. THE PSYCHOLOGY OF LENDERS AND BORROWERS IS LIKELY TO HAVE CHANGED, QUITE SHARPLY SINCE THE CREDIT CRISIS BEGAN IN AUGUST. AS A RESULT, VALUES OF THE MOST COMPLEX CREDIT SECURITIES AND OF THOSE BACKED BY MORTGAGES ARE STILL FALLING.

THE ANNOUNCEMENT OF BIG WRITE-OFFS BY INVESTMENT BANKS SUCH AS MERRILL LYNCH SHOW HOW BIG THE PROBLEM REALLY IS. THE EFFORT LED BY CITIGROUP TO FORM A SPECIAL FUND TO TAKE OVER COMPLEX SECURITIES HAS MET WITH CRITICISM AND OPPOSITION. THE CHIEF EXECUTIVES OF TWO OF AMERICA’S LEADING FINANCIAL INSTITUTIONS, MERRILL LYNCH AND CITIGROUP, HAVE HAD TO RESIGN.

MEANWHILE, THE AMERICAN HOUSING MARKET ITSELF IS FALLING, RATHER SEVERELY. A NATIONWIDE DROP IN PRICES IS TAKING PLACE. HOUSING STARTS HAVE PLUMMETED. AS LENDING STANDARDS TIGHTEN AND AS DEFAULTS AND FORECLOSURES INCREASE, PRICES ARE LIKELY TO DROP EVEN FURTHER. THIS WILL HURT CONSUMER SPENDING AND CONSUMER CONFIDENCE. FOLLOWING THE RESIGNATIONS OF THE HEADS OF MERRILL LYNCH AND CITIGROUP, THE TOP MANAGEMENTS OF OTHER FINANCIAL INSTITUTIONS ARE NOW GOING TO ACT MUCH MORE CAUTIOUSLY, ANNOUNCING BIG WRITE-OFFS BUT ALSO CUTTING THEIR LENDING TO CONSUMERS AND CORPORATE CUSTOMERS.

THE RESULT IS THAT I RATHER THINK THAT AMERICA IS GOING TO EXPERIENCE A TRUE RECESSION, NOT JUST THE SLOWDOWN THAT THE IMF HAS FORECAST. THE SHOCK OF THE FINANCIAL CRISIS SINCE AUGUST HAS BEEN MORE PROFOUND THAN THE FORECASTERS ARE ABLE TO SHOW IN THEIR MODELS. I CANNOT PROVE THIS THROUGH ANY MODEL OF MY OWN. BUT I RATHER THINK THAT THE LESSON OF JAPAN’S EXPERIENCE IN 1990 SUGGESTS THAT AMERICA’S ECONOMY IS GOING TO PASS THROUGH A MORE DIFFICULT PERIOD THAN SEEMS CURRENTLY TO BE EXPECTED.

BUT THE QUESTION WE MUST PONDER IS: HOW BAD WILL THE RECESSION BE, AND WHAT WILL BE THE EFFECT ON THE REST OF THE WORLD AND ON JAPAN?

IT IS OF COURSE HARD TO ANSWER. BUT LESS US START WITH AN OPTIMISTIC POINT. IT IS GOOD NEWS THAT THIS CREDIT CRISIS AND HOUSING SLUMP HAS HAPPENED. THE REASON WHY IT IS GOOD NEWS IS THAT AMERICA, AND THE WHOLE WORLD, HAS NEEDED AN ADJUSTMENT OF THIS SORT FOR SEVERAL YEARS. THE LONGER IT WAS DELAYED, THE HARSHER THE ADJUSTMENT WAS LIKELY TO BECOME.

THE WORLD HAS HAD A VERY GOOD PERIOD OF ECONOMIC PERFORMANCE FOR THE PAST FIVE YEARS. IT HAS BEEN EXTRAORDINARILY GOOD, GIVEN THE FACT THAT THE POLITICAL BACKGROUND HAS BEEN THE 9/11 TERRORISM, WARS IN IRAQ AND AFGHANISTAN, AND MANY OTHER FORMS OF INSTABILITY.

INFLATION HAS BEEN LOW. GROWTH HAS BEEN WIDELY SHARED ACROSS THE WORLD. WORLD GDP HAS BEEN GROWING AT RATES OF 4.5-5.5% THROUGHOUT THESE FIVE YEARS, THE BEST PERFORMANCE FOR THE PAST 40 YEARS. THE RICH COUNTRIES HAVE ABSORBED A FOURFOLD INCREASE IN OIL PRICES AND AN EVEN LARGER INCREASE IN SOME COMMODITY PRICES WITHOUT A RECESSION OR INFLATION. IN FACT, THESE HIGH COMMODITY PRICES, CAUSED BY SUPPLY SHORTAGES AND BY RAPIDLY RISING DEMAND IN CHINA, INDIA AND OTHER EMERGING MARKETS, HAVE HELPED TO SUPPORT GROWTH BY INCREASING THE DEMAND FOR IMPORTS IN COMMODITY PRODUCING COUNTRIES, BY STIMULATING CONSTRUCTION, AND BY PROVIDING A LOT OF CAPITAL FLOWING AROUND THE WORLD IN VERY OPEN CAPITAL MARKETS.

THIS EXCELLENT PERFORMANCE HAS COME WITH AN INCREASINGLY STRANGE CHARACTERISTIC HOWEVER: THOSE MACROECONOMIC IMBALANCES THAT I MENTIONED EARLIER. IT IS VERY ODD TO HAVE POORER COUNTRIES, LIKE CHINA, EXPORTING CAPITAL TO RICH COUNTRIES LIKE AMERICA, AND FOR CURRENCIES TO BE AS MISALIGNED AS THEY HAVE BEEN. AT SOME POINT, THIS HAD TO CHANGE.

THAT CHANGE HAS, I BELIEVE, BEGUN WITH THE CREDIT CRISIS, AND WILL BE SEEN FURTHER IN A RECESSION IN THE UNITED STATES WHICH CUTS AMERICAN IMPORTS AND ALLOWS AMERICAN EXPORTS TO EXPAND. THE FEDERAL RESERVE WILL CUT INTEREST RATES FURTHER, AS THE ECONOMY SLOWS. BUT WHILE THIS MAY SOFTEN THE DOWNTURN, IT WILL NOT PREVENT IT FROM OCCURRING, BECAUSE LENDERS, BORROWERS AND INVESTORS HAVE LOST CONFIDENCE, JUST AS THEY DID IN JAPAN 15 YEARS AGO.

THIS LOSS OF CONFIDENCE IS ALSO GOING TO BE SEEN IN BRITAIN, I BELIEVE, WHERE WE ALSO HAD A HOUSING BUBBLE, A BIG CURRENT-ACCOUNT DEFICIT, AND HIGH CONSUMER BORROWING. IT MAY ALSO AFFECT SOME OTHER EUROPEAN COUNTRIES WHERE HOUSE PRICE INFLATION HAD SUPPORTED ECONOMIC GROWTH, INCLUDING SPAIN  AND IRELAND.

THESE DAYS, MANY ANALYSTS ARE FOLLOWING THE IMF’S EXAMPLE AND PREDICTING THAT STRONG GROWTH IN ASIA AND OTHER EMERGING MARKETS WILL SUPPORT THE WORLD ECONOMY AND WILL BE FAIRLY UNAFFECTED BY AMERICA’S RECESSION. I THINK THIS IS LIKELY TO BE HALF-TRUE, BUT THEREFORE ALSO HALF-FALSE.

IT WILL BE HALF-TRUE IN THE SENSE THAT A DROP IN AMERICAN IMPORTS WILL NOT CRIPPLE ASIAN ECONOMIES. WITH THEIR SURPLUS SAVINGS AND CHEAP CAPITAL, THEY ARE NOT GOING TO BE AFFECTED BY A BIG CHANGE IN LENDING BEHAVIOUR BY BANKS, EITHER.

BUT ASIAN ECONOMIES, WHICH EXPORT SO MUCH, DIRECTLY AND INDIRECTLY, TO THE UNITED STATES AND EUROPE, CANNOT AVOID BEING AFFECTED BY AN AMERICAN RECESSION AND A LIKELY EUROPEAN SLOWDOWN. ASIAN GROWTH WILL SURELY SLOW.

THE TRUTH ABOUT ASIAN AND OTHER EMERGING MARKET GROWTH IS THAT IT SHOULD HELP STABILISE THE WORLD ECONOMY: IT WILL PREVENT GROWTH FROM COLLAPSING EVERYWHERE AT THE SAME TIME. BUT IT CANNOT BE WHOLLY DISCONNECTED FROM AMERICA AS LONG AS ITS EXPORTS TO AMERICA ARE SO LARGE.

THERE IS ALSO THE POSSIBILITY THAT AMERICA’S CRISIS MIGHT FORCE SUBSTANTIAL CHANGES IN CURRENCY VALUES ON SOME ASIAN COUNTRIES, INCLUDING CHINA AND JAPAN. THE POLITICAL PRESSURE ON CHINA TO REVALUE WILL INCREASE. BUT ALSO THE DOMESTIC INTEREST IN REVALUING THE CHINESE CURRENCY MAY WELL INCREASE TOO BECAUSE CHINA IS FACING A PROBLEM OF RISING INFLATION AND NEEDS TO GET THAT INFLATION UNDER CONTROL. SO AT LONG LAST IT MAY ACTUALLY BE IN CHINA’S OWN INTEREST TO REVALUE ITS CURRENCY.

I MUST RETURN TO MY QUESTION: HOW BAD MIGHT THE AMERICAN RECESSION BE? MY INSTINCTIVE ANSWER TO THAT QUESTION IS THAT IT COULD WELL BE QUITE BAD BUT ALSO QUITE SHORT. THE GOOD NEWS ABOUT AMERICA’S CREDIT CRISIS IS THAT THE PERIOD OF COMPLACENCY, OF DENIAL ABOUT THE TRUE IMPORTANCE OF WHAT IS GOING ON, SEEMS TO HAVE LAST ONLY TWO OR THREE MONTHS. IN JAPAN IN THE 1990S THIS PERIOD OF COMPLACENCY OR DENIAL LASTED MUCH LONGER. AMERICAN FINANCE AND AMERICAN ACCOUNTING AND THE AMERICAN MEDIA WILL NOT ALLOW SUCH A LONG DELAY IN ADMITTING TO LOSSES. FOR GOOD OR ILL, AMERICA IS A “MARK TO MARKET” ECONOMY AND SOCIETY, IN WHICH THERE IS GREAT PRESSURE TO ACCOUNT QUICKLY FOR LOSSES, TO ADMIT TO THEM, AND THEN TO PLAN A RECOVERY STRATEGY.

AS A RESULT, I AM OPTIMISTIC THAT THE RECESSION, DRIVEN BY CHANGES IN LENDING BEHAVIOUR AND BY FALLING HOUSE PRICES, WILL BE SHORT. I DO NOT EXPECT A LONG STAGNATION OF THE SORT EXPERIENCED BY JAPAN. THE ONLY FACTOR THAT MIGHT LENGTHEN THE RECESSION WOULD BE POLITICAL INTERFERENCE: SUBSIDIES, NEW TRADE PROTECTION, REFORMS TO ACCOUNTING, OR OTHER MEASURES THAT AIMED TO HELP AMERICAN COMPANIES AVOID THE PAIN OF RESTRUCTURING OR RECESSION. IF THAT WERE TO HAPPEN, IT COULD END UP PROLONGING THE PAIN. THAT IS EFFECTIVELY WHAT HAPPENED IN JAPAN IN THE EARLY 1990S. BUT SUCH POLITICAL INTERFERENCE IS HARD IN AMERICA’S VERY TRANSPARENT AND ARGUMENTATIVE SOCIETY. ALSO, HOWEVER, OUR TIMING MAY BE LUCKY. IN 2008, BOTH THE PRESIDENCY AND THE CONGRESS WILL BE OCCUPIED BY ELECTION CAMPAIGNS. SO ALTHOUGH THERE WILL BE FAR TOO MUCH OPPORTUNITY FOR POLITICIANS TO MAKE NOISY SPEECHES PROMISING PROTECTION, THERE WILL BE NO REAL OPPORTUNITY UNTIL 2009 FOR THEM ACTUALLY TO TURN ANY PROMISES INTO LEGISLATION. BY THE TIME THE NEW PRESIDENT IS INAUGURATED IN JANUARY 2009 AND THE NEW CONGRESS HAS BEGUN WORK, MY HOPE IS THAT THE RECESSION WILL BE OVER.

SO, THE WORLD LOOKS LIKE IT IS AT A TURNING POINT. A CREDIT CRISIS THAT LEADS TO AN END TO ASSET-PRICE BUBBLES IN VARIOUS HOUSING MARKET, AN AMERICAN RECESSION, PROBABLY A RECESSION IN BRITAIN, A SLOWDOWN IN THE REST OF EUROPE, SOME SLOWDOWN IN EMERGING MARKETS SUCH AS CHINA, INDIA, BRAZIL AND OTHERS. THAT LOOKS TO ME THE MOST PROBABLE OUTLOOK FOR 2008. IT MIGHT WELL MEAN THAT ENERGY AND COMMODITY PRICES WILL FALL, AT LEAST TO SOME EXTENT. THEY HAVE BEEN RISING BECAUSE SUPPLY AND DEMAND HAVE BEEN SO EVENLY BALANCED IN MANY MARKETS, WITH LITTLE SPARE CAPACITY. A DROP IN DEMAND IN AMERICA, AND SLOWER GROWTH IN DEMAND IN CHINA AND OTHER EMERGING MARKETS, WOULD SURELY CHANGE THAT BALANCE. IT MIGHT NOT MAKE MUCH DIFFERENCE TO THE OIL PRICE, AS THE SUPPLY OF OIL IS A POLITICAL FACTOR NOT AN ECONOMIC ONE. BUT OTHER COMMODITY PRICES WOULD BE LIKELY TO REACT.

WHAT, THEN, MIGHT THIS MEAN FOR JAPAN? IT MUST MEAN WEAKNESS, BUT NEED NOT MEAN DISASTER. THE LONG-TERM TASKS FOR JAPAN, FOR GOVERNMENT POLICY AND FOR CORPORATE INVESTMENT WOULD REMAIN THE SAME. BUT THE SHORT TERM OUTLOOK WOULD WORSEN.

IT MUST WORSEN BECAUSE JAPAN’S MODERATE RATE OF ECONOMIC GROWTH HAS REMAINED MORE DEPENDENT ON EXPORTS AND CAPITAL INVESTMENT THAN ON HOUSEHOLD CONSUMPTION. NET EXPORTS HAVE NOT BEEN VERY IMPORTANT IN RECENT MONTHS. BUT THEY HAVE MATTERED, AND A FALL, OR SLOWDOWN, IN EXPORTS TO EITHER OR BOTH OF JAPAN’S MAJOR TRADING PARTNERS, AMERICA AND CHINA, WOULD CERTAINLY HURT GROWTH.

THIS WILL PROLONG STILL FURTHER THE PERIOD OF STABLE OR SLIGHTLY FALLING PRICES. THE BANK OF JAPAN’S HOPE THAT INFLATION WILL RISE NEXT YEAR WOULD BE LIKELY TO BE DISAPPOINTED. AS A RESULT, THE NORMALISATION OF MONETARY POLICY BY RAISING CENTRAL BANK INTEREST RATES FURTHER IS ALSO LIKELY TO BE DELAYED.

WHAT, IF ANYTHING, CAN THE JAPANESE GOVERNMENT DO ABOUT THIS? THE ANSWER IS THAT IT CANNOT DO MUCH IN THE SHORT TERM. BUT, AS ALWAYS WITH GOVERNMENT POLICY, THERE IS A LARGER RISK THAT THE GOVERNMENT COULD DO HARM TO THE ECONOMY IN THE SHORT TERM THAN THAT IT WILL HELP IT.

ANY GOVERNMENT POLICY THAT IS LIKELY TO DISCOURAGE CONSUMERS FROM SPENDING HAS THE POTENTIAL TO DO HARM. THE ABE ADMINISTRATION DID SOME HARM TO THE ECONOMY THROUGH ITS REFORM TO THE CONSUMER-FINANCE REGULATIONS, AND ITS IMPOSITION OF TIGHTER CONTROLS ON CONSUMER FINANCE PRICING. THE INTENTION WAS GOOD, BUT THE EFFECT WAS HARMFUL TO THE ECONOMY, FOR IT HAS REDUCED CONSUMER LENDING AND AS A RESULT IT HAS HELPED TO RESTRAIN OVERALL CONSUMPTION. THE EFFECT IS PROBABLY QUITE SMALL. BUT IT IS HARMFUL.

THE SAME WOULD BE TRUE IF THE FUKUDA ADMINISTRATION PRODUCES A SERIOUS PLAN TO RAISE THE CONSUMPTION TAX. THE INTENTION BEHIND SUCH A PLAN, OF FISCAL CONSOLIDATION AND THE REDUCTION OF PUBLIC DEBT, IS A GOOD ONE. BUT THE TIMING IS HARMFUL. THAT IS TRUE EVEN IF THE ACTUAL IMPLEMENTATION OF A TAX RISE IS DEFERRED FOR TWO OR THREE YEARS.

THE BANK OF JAPAN COULD ALSO DO HARM IF IT WERE TO TRY TO GO AHEAD WITH NORMALISATION OF MONETARY POLICY WHILE CONSUMER PRICES ARE STILL FALLING AND THE ECONOMY IS STILL WEAK. PERSONALLY, I THINK IT HAS ALREADY DONE SOME HARM BY ITS TIGHTENING OF MONETARY POLICY IN THE PAST YEAR. IT IS SURELY UNLIKELY TO DO MORE HARM. AT LEAST I HOPE IT WILL NOT.

ONE IDEA THAT WAS DISCUSSED BY THE ABE ADMINISTRATION WAS A GOOD ONE, IN MY VIEW, AND DESERVES TO BE GIVEN A HIGHER PRIORITY, BOTH FOR ECONOMIC REASONS AND FOR POLITICAL ONES. THIS IS THE IDEA TO RAISE THE MINIMUM WAGE. THE PLAN TO REVISE THE MINIMUM WAGE LAW IS A GOOD ONE. I WOULD EVEN SUGGEST THAT THE WAGE SHOULD BE RAISED BY QUITE A LOT MORE THAN THE SMALL AMOUNT RECOMMENDED IN AUGUST BY THE CENTRAL MINIMUM WAGE COUNCIL.

FOR A FREE-MARKET ECONOMIC COMMENTATOR TO FAVOUR A RAISE IN THE MINIMUM WAGE MIGHT SEEM SURPRISING. IN 1997, WHEN BRITAIN’S NEW LABOUR PARTY GOVERNMENT LED BY TONY BLAIR PROPOSED TO INTRODUCE OUR FIRST MINIMUM WAGE SYSTEM, I WAS SCEPTICAL. I THOUGHT IT WOULD LEAD TO AN INCREASE IN UNEMPLOYMENT, AS COMPANIES WOULD SIMPLY REACT BY HIRING FEWER WORKERS. BUT THAT DIDN’T HAPPEN. THIS MAY BE BECAUSE DEMAND FOR LABOUR WAS STRONG IN BRITAIN’S QUITE RAPIDLY GROWING ECONOMY AT THAT TIME. BUT ALSO, SINCE THEN, THE MINIMUM WAGE HAS BEEN A SUCCESS. IT HAS BEEN RAISED EVERY YEAR, ON THE RECOMMENDATION OF AN INDEPENDENT BODY CALLED THE LOW PAY COMMISSION. THOSE RECOMMENDATIONS HAVE BEEN ACCEPTED BY EMPLOYERS, BY THE TRADE UNIONS AND BY THE GOVERNMENT.

BRITAIN’S MINIMUM WAGE IS MORE THAN Y1400 PER HOUR, WHICH IS ROUGHLY TWICE AS HIGH AS THE CURRENT AVERAGE LEVEL OF THE MINIMUM WAGE IN JAPAN. THE REASON WHY I AM IN FAVOUR OF JAPAN RAISING THE WAGE MORE SHARPLY, AND THEN ADJUSTING IT EVERY YEAR, IS THAT I THINK IT WOULD HELP BOOST CONSUMER SPENDING. IN JAPAN’S SITUATION OF A DECLINING POPULATION AND SHRINKING LABOUR FORCE, THERE IS LITTLE RISK OF A HIGHER MINIMUM WAGE LEADING TO A BIG RISE IN UNEMPLOYMENT. IT MIGHT LEAD TO THE LOSS OF SOME JOBS. BUT THAT WOULD BE A SMALL PROBLEM WHEN PLACED IN COMPARISON TO THE BROAD GAIN IN CONSUMPTION THAT COULD ARISE FROM A RISE IN THE WAGES OF THE LOWEST PAID MEMBERS OF SOCIETY.

SUCH A CHANGE TO THE MINIMUM WAGE WOULD IDEALLY BE MADE AS PART OF A MUCH MORE COMPREHENSIVE REFORM OF THE LABOUR LAW, AIMED AT ELIMINATING THE PRESENT TWO-TIER SYSTEM AND HARMONISING LABOUR LAWS FOR ALL WORKERS. BUT WHILE NECESSARY SUCH A REFORM WOULD TAKE A LOT OF TIME, AND REQUIRE A GOVERNMENT WITH GREATER POLITICAL STRENGTH THAN THE CURRENT ONE. SO I WOULD SAY THAT THE REFORM TO THE MINIMUM WAGE LAW IS A MORE URGENT PRIORITY, AND THAT THE FUKUDA ADMINISTRATION WOULD BE WELL ADVISED TO INTRODUCE A BIGGER RISE IN THE WAGE THAN HAS SO FAR BEEN ENVISAGED. THIS WOULD, OF COURSE, HAVE POLITICAL MERITS AS WELL AS ECONOMIC ONES: IT WOULD HELP GAIN THE LDP MORE CREDIBILITY ON THE ISSUE OF INCOME INEQUALITY, AND REMOVE ONE OF THE ADVANTAGES OF THE DEMOCRATIC PARTY OF JAPAN.

THE LIKELIHOOD IS THAT THE GLOBAL ECONOMY IS GOING TO MAKE LIKE MORE DIFFICULT FOR JAPAN DURING THE NEXT ONE OR TWO YEARS. EXPORTS MAY FALL, AND THE CURRENCY MARKETS ARE LIKELY TO BE VOLATILE. DEMAND FOR JAPANESE EXPORTS IN CHINA AND OTHER EMERGING MARKETS MAY REMAIN STRONG, BUT I CANNOT BELIEVE THAT THEY WILL BE UNAFFECTED. THERE IS GOING TO BE A SLOWDOWN, AND IT WILL BE SHARED ALSO BY THE DEVELOPING COUNTRIES IN ASIA.

THE SHORT TERM TASK FOR THE JAPANESE GOVERNMENT IS TO AVOID DOING ANY HARM BY RAISING TAXES OR CURBING CONSUMPTION, AND TO TRY TO DO SOME GOOD BY RAISING THE MINIMUM WAGES. THE LONGER TERM TASK IS THE SAME AS IT HAS BEEN FOR THE PAST SEVERAL YEARS: TO REFORM AND REDUCE THE ROLE OF THE STATE IN THE JAPANESE ECONOMY, TO INCREASE THE AMOUNT OF COMPETITION IN THE ECONOMY, AND TO CONTINUE WITH THE PROCESS OF DEREGULATION. THESE ACTIONS ARE NECESSARY TO ENCOURAGE JAPANESE COMPANIES TO INCREASE PRODUCTIVITY MORE RAPIDLY, WHICH IS WHAT IS GOING TO BE NECESSARY IF WAGES ARE TO RISE, IF PROFITS ARE TO BE MAINTAINED AND IF JAPAN IS TO BE ABLE TO OVERCOME THE BURDENS OF AN AGEING POPULATION.

PRODUCTIVITY IS NOW WIDELY ACKNOWLEDGED TO BE THE ANSWER FOR JAPAN. THE TROUBLE IS THAT IT IS HARD TO FIND POLICIES THAT HAVE A DIRECT IMPACT ON PRODUCTIVITY. IT IS AN OUTCOME OF MANY FORCES, A CONSEQUENCE OF MANY ACTIONS, RATHER THAN ANYTHING THAT THE GOVERNMENT CAN CONTROL DIRECTLY. THE TASK FOR GOVERNMENT IS TO CREATE ECONOMIC AND SOCIAL CIRCUMSTANCES IN WHICH COMPANIES HAVE A STRONG INCENTIVE TO INCREASE THEIR PRODUCTIVITY GROWTH. BUT THEN IT HAS TO LEAVE THE JOB TO THE COMPANIES THEMSELVES.

THAT IS A TOUGH SITUATION FOR POLITICIANS. IN EVERY COUNTRY, POLITICIANS NATURALLY PREFER TO DEAL WITH POLICY TOOLS THAT THEY CAN CONTROL DIRECTLY, WHICH USUALLY MEANS TAXES, REGULATIONS AND PUBLIC SPENDING. PRODUCTIVITY IS TOO ABSTRACT, TOO INDIRECT. AND YET IT IS VITAL. IF JAPAN DOES NOT ACHIEVE AN ACCELERATION IN PRODUCTIVITY GROWTH, ITS LIVING STANDARDS WILL GROW SLOWLY, OR PERHAPS EVEN FALL. IF IT DOES ACHIEVE SUCH AN ACCELERATION, THE FUTURE WILL BE BRIGHT.

IT IS SIMPLE TO SAY, BUT VERY HARD TO DO.

I HOPE MY OUTLOOK FOR THE WORLD ECONOMY AND FOR JAPAN HAS NOT BEEN TOO PESSIMISTIC. I WOULD PREFER TO CALL IT REALISTIC. THE WORLD NEEDS TO GAIN A BETTER BALANCE, AND AN AMERICAN RECESSION IS THE WAY IN WHICH THAT BETTER BALANCE CAN BEGIN. IT COULD BE A DIFFICULT ONE OR TWO YEARS. BUT IT IS A NECESSARY PROCESS. I AM GLAD IT HAS BEGUN. OR PERHAPS I SHOULD SAY IT DIFFERENTLY: I HOPE I AM RIGHT THAT IT HAS BEGUN.

THANK YOU FOR LISTENING LADIES AND GENTLEMEN. I LOOK FORWARD VERY MUCH TO THE PANEL DISCUSSION.