[00:00:00] Rachel Glennerster: Welcome, everyone. It's great to be here and it's fantastic to welcome Mohamed El-Erian as our new Chair of the Board of the Center for Global Development. I'm Rachel Glennerster, President of CGD. And we're so excited to have him as our new Board Chair, as someone with, you know, incredible intellectual leadership in the area of international finance, a passion for development, and already engaged so deeply with a number of staff, asking lots of difficult questions, as you would expect and exactly what we would like. So now it's his turn to answer some difficult questions. He is going to be interviewed by Judy Woodruff, another member of our Board, and of course, a longtime reporter for the NewsHour on PBS. So without further ado, I'd like Judy and Mohamed to come up and to, you know, hear the discussion.
[00:01:39] Judy Woodruff: Thank you, Rachel. I think the microphone is on. We're good. We're good. Well, we're delighted to be here this morning to have this conversation with our new Board Chair, Mohamed El-Erian. Thank you very much for sitting down to have this conversation. We are going to be taking questions from you in the room and some questions from you who are paying attention online. This is streaming as well. And we welcome everybody here. So Mohamed, so many things to ask you. First of all, with all the things you have already on your plate, teaching and writing and doing a lot of journalism, what was it that was so irresistible about this job as chair of the Board of the Center for Global Development that made you decide to do it?
[00:02:29] Mohamed A. El-Erian: The institution and the people. And let me just start by thanking everybody for being here and thanking the Board for electing me. It's a wonderful opportunity. Thank you for doing this. I'm glad you didn't share with them how you used to torture me on the news hour on CNN. We've had this situation before. And that's why I'm a little bit anxious about all the questions. So as you said, I've been passionate about development from a very, very early age. I think this is a particularly challenging time for lower and middle-income countries. I think it's critical to have an institution that does important and impactful work. And to be able to be part of that is not just something that I love. I mean, it's incredibly stimulating, but it's a huge honor.
[00:03:21] Judy Woodruff: Well, and I want to ask you about that, about the opportunities and about the challenges. Before I do that, I want to ask you about something that's in the news right now, this what appears to be a deal, a memorandum of understanding between the United States and Iran, bringing to a close a war that's gone on longer, I think, than most people expected that it would. What effect do you see it having on the world, let me just ask you, on the world, on the world economic picture, assuming it holds? And it was just signed yesterday. But at this point, what does it look like to you?
[00:03:59] Mohamed A. El-Erian: So I think we should welcome something that has the potential, and I stress, has the potential to end a war that has hurt lives and livelihoods, not only in the region, but around the world. It's far from a done deal. So if you look at the four major challenges, the first one has to do transforming a memorandum of understanding of 14 points into something that's comprehensive and implementable. That requires a lot of negotiations. The second is the parties involved go beyond the two parties that have signed this agreement. So there's a question, will other parties also abide by commitments that are made on their behalf in the agreement? Third, there's this notion that restoring oil production, shipping of fertilizers, of oils, like putting on a switch, you turn it on and off, that's not reality. It takes time. And then the final issue is what I call the economic scarring. There are longer-term effects, including some that haven't been felt yet. They're still in the pipeline, and we've got to manage that. So it's wonderful that we have a deal, but I think we should be focused on how do we make this deal something more meaningful to stop a war that has undermined lives and livelihoods. If you look at developing countries, if you look at the last six years, this is the third major shock that they've had to deal with. Lots of minor shocks, but the third major shock. The first one was COVID. The second one was what happened to wheat prices and energy prices following Russian invasion of Ukraine. And there's a third one. Then there's a trade issue. And even though developing countries haven't captured the headlines, what typically happens when you have a shock is everybody focuses on what happens in advanced countries, and you need a crisis of some sort in developing countries to pay attention to developing countries. So the good news is we haven't had a systemic crisis in the developing world. The bad news is we've run down whatever element of resilience was left that has been used up for every one of the shock. I'm talking about financial resilience, I'm talking about human resilience. So this shock is going to have long-lasting effects at a time when most countries are already squeezed, especially investing in the social sectors, health, education. And most countries have to invest in new technologies so that they don't get left behind. So it's a very serious setback for development. And it's one, unfortunately, that, if we're not careful, is going to play out over the next months, quarters and years.
[00:06:55] Judy Woodruff: What are you going to be watching for in the near term to see whether the crisis, the damage that's been done in over these last weeks and months, is lifting, is being alleviated in any way?
[00:07:11] Mohamed A. El-Erian: So it varies. So the big issue is, do you get more normal flow of goods through the Strait of Hormuz? And with that, do you start reducing some of the pressures that come from lack of energy, lack of fertilizers? I mean, that part of the world is accounting for a lot of things. The longer-term issue is going to be country by country. There are some countries that both time, literally both time, used reserves, valuable reserves, subsidized energy consumption, and have to restore whatever buffers they had. There are other countries that have been pushed further towards debt problems and now have to come back. And then there's another set of countries that have had to once again cut on investments, on spending on health and education, because that's the easiest thing to cut, unfortunately. But it has the worst effects longer term. So it will be country by country as to how can they restore the resilience that they have run down.
[00:08:21] Judy Woodruff: I wanted to ask. I mean, as you think about, of course, this is an organization focused on those low- and middle-income countries. So for-as you focus on them, as opposed to the world overall, are you literally watching for some of these countries to go under, I mean, to go into, I don't know, a deep crisis mode? I mean, what do you-I mean, what could happen?
[00:08:52] Mohamed A. El-Erian: So I had the honor of having a town hall. And I said that if you think of where we are in the development process, we have three now really big challenges. Whatever issues we had before, whatever headwinds to development we had before-debt, climate, governance-have been made worse by the external effects of the war. So the external spillovers have made existing challenges much worse. Second element, this is happening at a time when aid flows are being cut, when private finance hasn't stepped up yet to the opportunity-there's too many market failures that stops that from happening-and, therefore, countries are also dealing with lower funding. And then the third element is the world has changed. And the typical development paradigm that people thought was the North Star, if you like, it's not clear if that still is applicable. And we haven't got an alternative development paradigm. So this is a really important time for the development process and for CGD that can help the thinking on this, can have an impact on policymaking. So it's a really challenging time that the war has made more challenging.
[00:10:23] Judy Woodruff: Before we turn away from Iran, how long do you think it will take? When do you think it will be that oil prices will return to levels that they were before the war?
[00:10:34] Mohamed A. El-Erian: So I'm surprised how fast oil prices have come down. In the last week, we're down 20 percent. And there's been a massive reaction. So this morning when I came in, WTI was trading around 75, 74. We were at 100 not so long ago. And we were at-in the 60s before the war. So we've come back quite a bit.
[00:10:58] Judy Woodruff: Does that hold? Excuse me. Does that hold? Do you think that holds?
[00:11:03] Mohamed A. El-Erian: So I should ask you. Do you think the memorandum of understanding gets translated into something that is lasting or not?
[00:11:11] Judy Woodruff: There's no way I'm going to answer that question.
[00:11:15] Mohamed A. El-Erian: Because it's uncertain?
[00:11:17] Judy Woodruff: It's uncertain.
[00:11:19] Mohamed A. El-Erian: Yeah. And that's the answer.
[00:11:19] Judy Woodruff: Who knows? I mean, who knows what will happen? So many different pieces of the puzzle. What's your take on that?
[00:11:25] Mohamed A. El-Erian: I'm like you. It's uncertain. You know, and it's fascinating to me. The markets have declared mission accomplished, finished, et cetera. The economists are much more guarded. And we'll...
[00:11:39] Judy Woodruff: Well, let's... Well, let me ask you about that. I mean, why the divergence between what the smart folks, the economists are saying and thinking and what the markets are doing?
[00:11:50] Mohamed A. El-Erian: So I think if you want to explain the markets, and, you know, I'll give you... I don't know what's happening today, but I'll give you an incredible example. OK? SpaceX was a private company this time last week. SpaceX yesterday was the fifth most valued company in the U.S. Think about that. More value than Amazon. Almost equal to Microsoft. That is market hype, enthusiasm, whatever you want to call it. Why is... And this then pulls everything else up. I think you've had the following factors play out in the marketplace. One, an enormous love affair with the potential of AI. So people have brought forward the productivity gains that AI promises, and they've monetized it. The second is behavioral. Because of the policy response function, investors have been conditioned over and over again to buy every dip. It doesn't matter why it is that the markets are going down. It's a profitable opportunity. And it has been a profitable opportunity. So whenever there's a bit of a dip, you immediately get more investors in. The third is as... You know, as much as there are things with the U.S., if you look at private capital, the U.S. is the cleanest dirty shirt. It's not pristine, but it's a lot more attractive than markets elsewhere. The U.S. also attracts a lot of foreign capital, especially on the back of the AI promise. So that momentum builds such a strong tailwind to the market that the market will overshoot on the way up, just like it's overshot on the way down.
[00:13:49] Judy Woodruff: And the risks to that are?
[00:13:52] Mohamed A. El-Erian:It depends how it unfolds. So finance normally is the tail, and you think the fundamentals matters. That's what really matters. But we learn every once in a while, if the imbalance in the financial sector is so bad that the tail wags the body of the dog. We saw that in 2008 during the global financial crisis. I don't think we're looking at something systemic, but we could well have a correction at some stage. But it's going to take a major setback to change the behavioral elements of the market right now.
[00:14:33] Judy Woodruff: Are there particular effects on the low- and middle-income countries as a result of the markets potentially overshooting?
[00:14:41] Mohamed A. El-Erian: Yeah. I mean, it's the old problem that whatever happens outside can impact you more than where it happens. So yes, it could disrupt normal financing as people become more risk-averse. But there's also a bit of a loss of trust. I travel a lot around the world, and there's a lot of questioning of the construct. So the construct is the U.S. is in the core of the system. The U.S. produces a lot of public goods through reserve currency. The U.S. provides the deepest financial markets. The U.S. has a strong voice, if not a veto voice in some cases, in multilateral institutions. The U.S. is viewed as a natural leader of the G7, the G20, et cetera. And the implicit contract is the U.S. benefits from every single one of these things. I mean, the reserve currency, you issue pieces of paper, and people give the goods and services. That's a great deal. Being the financial center of the world, you get much more capital, therefore your borrowing costs are much cheaper than they would be otherwise. You have enormous opportunity to influence, if not impose, outcomes on other countries through the multilateral system. So there was that. There was the expectation, implicit contract is the system will be run responsibly. And then people look and say, well, so wait a minute, the 2008 global financial crisis, that originated in the U.S. The first trade war, that originated in the U.S. The U.S.'s behavior during COVID in terms of sharing vaccines was not what we expected. Now we have other things coming from the U.S. So there's a lot of people that question the implicit contract. And that's why you're seeing efforts to build little pipes. No one can replace the U.S. at the center of the system, but you're seeing lots of little pipes being built around the U.S. to try and increase the resilience of the system. And that's increasingly the view from the rest of the world, is we cannot replace the U.S., but we have to reduce our sensitivity to the U.S.
[00:17:13] Judy Woodruff: And you're saying that's something that started not just in the last couple of years, but it's been going on, it's been going on. So as you know, the center's mission is low- and middle-income countries. I want to read the mission in just a few words. I'm going to read it. To reduce global poverty, to improve lives through innovative economic research that drives better policy and practice by the world's top decision-makers. You touched on this a minute ago, but talk about the opportunities that you see at this moment. You mentioned some of the challenges. And clearly, they're there. But how do you see the opportunities at the same time we're facing the challenges that you're talking about?
[00:17:58] Mohamed A. El-Erian: So the greater the challenges, the more the opportunities, typically, if you're able to respond to the challenges. And this is what this institution has, is the ability to respond to the challenges. Typically, what do you need? You need people. And if you look at the work that's come out of here, you have got the people. You need the platform. CGD is respected in really important decision-making places. And then the third thing is you need sustainability. You need to be able to be around, and CGD has that sustainability. So if you look at who can respond to opportunities in a sector that right now is under tremendous pressure, which is development, and that's development economics, development finance, development policy. You can add whatever word you want after development. It's being challenged. The Center for Global Development is uniquely placed, in my opinion.
[00:19:06] Judy Woodruff: And you want to be any more specific than that about what the opportunities are?
[00:19:11] Mohamed A. El-Erian: No. I mean, look at the work that's being done on AI. Something that I believe is absolutely transformational and can be transformational, but is not automatic at all. In fact, if we leave it to the invisible hand, developing countries are likely to be left behind. So you need work to be done in that area to help the development of AI that can be applied in a way that is a transformation-developing country. Look at the debt issues that are facing us. Look at the development finance issues. Look at the role that the private sector should play. I was at a meeting in South Africa last week, and the complaint you hear, which is a very genuine complaint, private capital isn't coming to opportunities. And then I said, OK, so where's the market or the institutional failure? Tell me why it is. They have no view of that. They just are concerned that it's not happening. So you need people to be able to research these issues in a policy-oriented way in order and to use the word that Rachel likes so much, to have impact. And the potential for impact is huge when the challenges are so high.
[00:20:34] Judy Woodruff: When it comes to AI, actually, before I turn to that, and I do want to ask you about it more than what you touched on just now, when you talk about the harm that's been done to the development sector, clearly some of that has happened just in the last year and a half, dismantling the Agency for International Development, other education programs, health programs around the world. Can you quantify how much effect these decisions that have been made, these moves that have been made just over the last 18 months have had on the development sector?
[00:21:07] Mohamed A. El-Erian: This is why we have great people. That's their job. But I can tell you, don't focus too much on the U.S. It's happening elsewhere. Look at what's happened to the aid budget in the U.K. It has been radically reduced, not only in terms of a role, but because some of it has been diverted to domestic purposes and no longer flows. I mean, it's not just the U.S. This is becoming a more general process, and it's because fiscal constraints are starting to hit. Growing up, it would have been unthinkable, unthinkable that the markets, the bond vigilantes would attack three of the seven G7 countries, unthinkable. But in the last four years, the U.K. had a market crisis, Japan, and France. So the constraint on fiscal is becoming more and more real around the world, and unfortunately, an easy response is to cut your development budget. So it's not just the U.S. We're seeing it elsewhere. I was at the IMF for 15 years. The easiest thing to cut is spending on social sectors, but that has a really bad immediate and longer-term effect. But governments find it easier than to cut spending on military. So as the budget constraints amplify, it's much broader than the U.S. And that's why I go back to development as being fundamentally challenged by changes in what we thought were parameters that have become variables.
[00:23:02] Judy Woodruff: I had a question prepared to ask you about, you know, does this — does all this provide openings for countries like China? Of course, the news in the last couple of days about their bottom line is giving us, I guess, a new — a different — at least some of us who don't follow it as closely as you do — a new understanding of what's — a different understanding of what's going on in China. How do you see China taking advantage of this or not being able to? What does that look like?
[00:23:34] Mohamed A. El-Erian: So one of the most active countries in building alternative pipes is China. And they've gone through the process. The first one was all about establishing links with commodity exporters to secure that. And it was an exchange for either money, or we're going to come and build infrastructure, et cetera. That happened in Africa quite a bit. Then we had the Belt and Road Initiative, which was an attempt to institutionalize. Then we now — that ran into problems. We're now on the second version of the Belt and Road Initiatives. And China increasingly is representing itself to low- and middle-income country as the responsible party when it comes to multilateralism. So yes, I mean, at the same time, China offers a massive challenge to developing countries because we've never seen a country operate at virtually every level of value-add in manufacturing. So normally, you exit one and you allow other countries to come in. If you think of the conveyor belt, up the manufacturing value-added. As development happens, you move higher up, and new countries can come in and continue. That's the story of Korea. That's the story of Singapore, Hong Kong, et cetera. China is able to dominate that whole value-added curve. And there isn't as much room for countries to come in as there was before. So China is both taking advantage of the situation, but also having to deal with internal problems that stop it from going up the value-added curve. You saw the latest retail sales number. You saw the latest investment numbers.
[00:25:27] Judy Woodruff: So a bigger question mark than it was before, because they are dealing with serious internal domestic pressure.
[00:25:37] Mohamed A. El-Erian: Yeah, I mean, and they have-they are facing the middle-income trap. Michael Spence, who's a friend of mine, has written a lot about convergence, about how do you overcome middle-income traps. And it's been fascinating to see his analysis of how much more difficult it is for China than most people thought of. I mean, China had an incredible development process, and it has stalled recently. And you're trying to move a very large economy in a system that isn't as accommodating to China as it used to be.
[00:26:17] Judy Woodruff: Come back to A.I. And a reminder, we are going to come to you for questions. And for those of you who are paying attention online, following us online, you have been a warrior, I think it's fair to say, about A.I. You were quoted in a Fortune piece saying the current bubble is going to, quote, end in tears and credit cockroaches. One of the many Muhammad Al-Aryan.
[00:26:43] Mohamed A. El-Erian: No, that's Jamie Dimon.
[00:26:46] Judy Woodruff: Oh, was that him? OK, I got it. Well, end in tears was yours. Where is it going? Again, you spoke about it a moment ago, but, in particular, how do you see it affecting the approach that low- and middle-income countries can take? And how do you see it affecting them and the different ways they can accommodate or not?
[00:27:08] Mohamed A. El-Erian: So, let me answer this question in three parts, the financial side, the economic side, and what does it mean for low- and middle-income countries. The financial side is what I call a rational bubble, OK? The bubble element of it is, at the end of the day, we're going to look back and see a lot of investments prove to be worth very, very little. Why is it rational? Because it's a venture capital approach. The payoff to whoever dominates the AI race is huge, absolutely huge. It's very hard for people to figure out which of the actors will dominate. So if you want to invest in that world, you have a venture capital approach, where you spread your capital across a lot of players, on the hope, the typical venture capitalist hope, that if one or two pays off, it will more than compensate for the losses on the others. Now that is usually played at a small scale. The AI requirements are absolutely huge, so the amount of capital that's now going to different platforms is enormous, absolutely enormous. So at the end of the day, unless we have a situation where there are many, many winners, and most people don't think that this is the likely outcome, a lot of money invested won't be worth very, very little. Add to that that the incentive of the large platforms is exactly what Ronald Reagan did with the Soviet Union, which is engaged in a spending war, an armed race. And you can see the amount of money that will be pulled into that sector relative to what is likely to pay off is going to be very, very concentrated. So for me, it's a rational financial bubble. For the economy, that's great. This is why we praise U.S. capital markets, because they're willing to fund all sorts of risk-taking. Go to the U.K., they have a massive problem with Caleb Capital. There isn't enough capital willing to take these sorts of risks. And if you believe like I do that AI has an enormous productivity potential, it has risks, it has an enormous positive productivity potential, it's wonderful that you get a marketplace that's willing to allocate so much money for people to innovate. Then comes the developing country aspect. And here, I'm going to quote, Marcus, if I may, you and Hans, I don't know if Hans is here, I had a wonderful call, and they are the experts. So I'm going to quote them. It is not like you can simply drop the technology, because A, the development of the technology will not take into account local conditions. You need the ecosystem to be able to benefit from these technologies. So we can have massive gains on what the World Bank calls small AI, health, farming, education. But big AI that really moves the needle on productivity needs a lot more supportive initiatives. And again, this is where CGD comes in. There's work being done on this, both how do you try to inform the platforms to the importance of looking at different country conditions, and also what are the requirements that you would need, the necessary conditions that you would need for this technology to fulfill what I think is a tremendous promise.
[00:31:02] Judy Woodruff: So opportunities, for sure. Okay. It's time for questions from all of you. Raise your hand. I think that's what we're doing. Do we have a microphone? We're going to move around the room. Right here, second row. And here comes the mic. Tell us your name, please.
[00:31:26] Audience Member: Thanks so much. I'm David Evans here at the Center for Global Development. And I'd just love to hear a little bit more. You sound pretty bullish on the productivity potential gains from artificial intelligence. I agree. I hear you on the ecosystem point about how it's likely to affect low- and middle-income countries. But I'm curious which sectors you see globally where we see big potential for gains and whether those are sectors separately, whether those are sectors that low- and middle-income countries are sort of currently active in, and so there's an opportunity that doesn't have to be created out of whole cloth for productivity gains in the developing world, as well.
[00:32:05] Mohamed A. El-Erian: Thanks. So the sectors right now that are benefiting the most in the advanced countries are finance, tech, and health. And that's because they're ready applications that can be done. It's starting to spread slowly through other sectors, but it's proving much more challenging because of turning necessary into sufficient is really hard in the AI world. This notion that you need to, you can just bring in someone and they'll do it for you, but that's not how it works. You have to fundamentally change your system. One of the hardest questions to ask people is go to a CEO and ask the question, if you grew up native AI, what would your company look like? And most CEOs cannot yet answer that question. And until you know what your North Star is, it's going to be really hard. Why do I believe in this promise? And I'm sorry for those of you who have heard it. Let me quote two people that I respect greatly. The CEO of Microsoft says the following to you. When we first heard about AI, it was strategy, it was about four and a half years ago, and it was about ask a question and it answers. A year later, it became give it a task and it will perform, summarize this article for me, write me an email. So it evolved from answering a question to performing a task. Today, it's your intellectual partner. If you know how to prompt it, and if you check its work and everything, it becomes literally your intellectual partner 24 hours. That's a massive change in four years, which leads to the second person I love quoting, James Maneka. You may know him. He's done work with the UN on AI. He was on President Obama Global Development Council. He says, we think of AI as a general purpose technology, like electricity. Takes time for it to change the world, but it's fundamentally changing the world. And you end up doing things completely different when you have electricity. But it takes a long time for you to understand and get electricity. But it's a general purpose technology. But it's beyond that. AI is developing so fast that it is also the inventor of inventions. And that's the whole quest for artificial general intelligence, is the invention of inventions. He summarizes, imagine you get the Industrial Revolution and enlightenment happening at the same time. How excited would you be about that? And that's the promise. The major challenge we all have is that our society is totally in love right now with those working on AI. Is Claude better than Gemini? Is Chat GPT going to come back? We are fascinated by those working on AI. We're spending too little time on the issue of working with AI. And the productivity impact doesn't come from the people working on AI exclusively. It comes working with AI. And that's why thinking about it from a developing country perspective is so important. If we froze innovation at where it is right now in AI, the productivity promise is huge if we know how to implement it. But it's really hard stuff.
[00:35:55] Judy Woodruff: Yes, right here. And tell us your name, please.
[00:36:04] Audience Member Good morning. Thank you so much for this fire chat. I thought it was very interesting. So thank you for your perspectives. My name is Ana Cepeda, and I come from the IMF. I work at the Capacity Development Program. Hold the mic a little bit closer.
[00:36:18] Judy Woodruff: Oh, sorry.
[00:36:19] Audience Member: Thank you. And we do research for low-income countries. So my question is, and going back a little bit to the title of this conversation, what would be the focus of research, you know, considering all of the shocks that you have just explained now? Because we could be looking at or focusing, I mean, like, there's resources, right? But resources are also limited to see the implications for low-income countries. So should the focus be first on ODA, on growth, on fiscal sustainability, et cetera? I just want to understand what perspectives and advice you would give for these teams. Thank you.
[00:37:00] Mohamed A. El-Erian: So people should know, as soon as I hear IMF, I melt. I spent my first 15 years after university at the IMF. I loved it. So I have this, you know. So the minute you said IMF, I just about heard what came after that. But if I don't answer your question... Look, a recent World Bank report, and I'm sorry to start with the bank, had the following. This is the Global Outlook, which was published earlier this week, I think, or last week. It said the following. It said, on the present trends, this decade will be a lost decade for most developing countries. I mean, think how consequential this is. And then it went on to say, in the way you measure development, which is the gap in per capita income, that gap has widened in the last six years in a significant manner. And then it went on to say, out of the ex-vulnerable countries, most of them are flashing red right now. The way the IMF can help is first in terms of awareness. As I said in the beginning, whenever there's a systemic shock, everybody focuses on the advanced economies. And you need the developing countries to end up in urgent care or in intensive care for someone to focus on them, right? So early analysis, awareness, advocacy is really, really important. Second, the policy responses is something that needs to be discussed, including sharing of best practices. And then finally is the issue that you talked about, is the financing. Most of these major shock have triggered a response in the IFIs of creating significant additional financing. Sometimes you get completely new financing arrangements. And there is a need to bridge some of these countries through a period where other sources of financing have dried up.
[00:39:32] Judy Woodruff: Good. We have a hand, lots of them on this side of the room. Let's go to Rachel Glenister, who is our CEO.
[00:39:44] Audience Member: Thank you very much. I think I've introduced myself before, Rachel Glennerster, CCD. So I wanted to come back to the impacts of the Iran war. And something that's puzzled me, a few weeks ago, people were saying, you know, once you open up the straits, it'll take a long time for the oil to get to places. And we are, you know, in the next couple of weeks, we're going to hit these like physical shortages of oil. And I haven't been hearing much about that. Was it that that didn't happen, that we're not hearing about it? Or is it that alternative routes and other places were able to expand? But just, you know, it's the delay that it takes from opening the strait to getting oil seems to suggest that, you know, it would that it's going to take a lot longer to, you know, to solve this problem. And again, as you said, it's kind of quite remarkable how much oil prices have come down. But maybe it's because there's enough rationing in low and middle-income countries that it hasn't affected prices because it's coming through rationing. But it's unclear to me how that circle is squared.
[00:41:08] Mohamed A. El-Erian: So let's start with the rough numbers. Net-net, the world lost 10 million barrels a day, a bit more. But there was a lot that was rerouted. Net is 10 million. Demand destruction was 3 million of that 10 million. So the drawdown in inventory was 7 million. The most, the biggest demand destruction came from China. And it included a 20% drop in the oil imports. So the question became, when do we hit critical level at 7 million? And the view was that we would hit it within the next few weeks. And that's, in fact, one argument why we are where we are on the momentum of understanding. The second issue was that inventory wasn't evenly distributed around the world. So the US had absolutely no concern about supply shortages. India had massive concerns about supply shortages. What we found out is that the market is quite very efficient, much more efficient than most people thought when it comes to refined products, to redistribute refined products. And you see this in the US numbers of the exports of refined products to the rest of the world. So a combination of demand destruction with China playing a major role in this, plus a much more efficient market has meant longer runway, if you like. The other surprise now is how quickly countries are saying they can resume production. So the biggest surprise was earlier this week, Qatar. Qatar had announced earlier that it would take up to two years to restore LNG production. They said they can restore half now within two months. Today, Kuwait said they can restore oil production much faster than was anticipated. And I suspect that that is having a huge impact also on oil prices. But it is a puzzle.
[00:43:25] Judy Woodruff: I mean, just to follow on Rachel's question. So the hype, was it hype at the beginning that this was gonna do so much damage? And I mean, was it literally that people didn't know or they just deliberately were hyping?
[00:43:44] Mohamed A. El-Erian: I don't think people are deliberately hyping. I think people underestimated the demand destruction that would happen. So there's four stages. Yeah, there's four stages to a shock like this. The first stage is very concentrated. Energy prices shoot up, that's the first shock, phase one. Phase two, which we're dealing with, is the energy shock starts becoming a broader price shock. Higher oil prices means higher diesel prices. Higher diesel prices means higher cost of transportation for food means food prices go up. So you start seeing the energy shock proliferate through the price shock. The third element that some countries entered, not the US, is demand destruction. That prices start destroying demand or physical shortages start destroying demand. And then the fourth shock that we didn't get to is when that turns into a financial problem because countries fall into recession, credit risk goes up, the markets become much more hesitant to provide financing, so you get a tightening of liquidity conditions. So those are the four. The speed with which you go down is a balance between your buffers and their use. And I think people underestimated first how much use would come down, especially in China, and then underestimated how the buffers available would be distributed in the system.
[00:45:19] Judy Woodruff: There was a hand in here, we'll go to this side of the room, yes.
[00:45:25] Audience Member: Thank you so much, can you hear me okay? Yeah, came a little bit late, but I think I called the part that I really wanted to hear. My name is Isaac Gong, I'm a colleague professor at George Mason, teaching analytics and computer science. Isaac Gong is my name, I'm a professor at George Mason, teaching computer science and analytics. Of course, I heard about the talk about AI replacing us, which is a completely different conversation. But the question that I want to ask is if advising a third world country, low income, about the importance of AI. We see the races between US and China, but all the people are kind of lurking behind. What do I say to them to convince them that this is an important thing to invest in?
[00:46:14] Mohamed A. El-Erian: Thank you. So thank you for bringing up this element. If you were to simplify the impact of AI on the labor market, there is the labor displacement and labor enhancing. And the productivity gains come from the labor enhancing. But that's also the thing that requires most work. But if you really want the productivity gains, the focus should be on labor enhancing. The shortcut is labor displacement, cost minimization. And that is a balance that is impacted by adoption policy. And that's why you'll hear me stress over and over again the need to have clear guidelines on adoption policy. That can be then adjusted to your individual needs. And that's at the corporate level, at the government level, on that. So there is a risk. If you go through the risks of AI, the promise is huge. It's an 80-20 proposition. If you look at the 20, one of the major risks in that, in addition to cyber and everything else, is the labor displacement side. Now what I find really interesting is if you think of most innovations they have an 80-20 element of them. They have huge potential and they have huge risks. You know, when the car came in, great for transportation, pretty awful for people who got hit and injured and everything else. So you've got to manage the 20. And this is where good governance comes in, is the ability to balance the two things. A typical U.S.-based approach is to fall in love with the 80, underestimate the 20 until the 20 hits us. And if you look at the Facebook examples, et cetera, is we fall in love with the 80 and then we realize there's a 20 that has to be managed better. We're doing this with social media today as to what does it do to our kids. The typical European reaction is to focus on the 20 and forget about the 80, and you regulate the 20 away. And the right approach is to embrace both. The 80 you unleash, the 20 you risk mitigate. And that is particularly important, Isaac, when it comes to the labor impact.
[00:48:46] Judy Woodruff: And all the way in the back, yes.
[00:48:52] Audience Member: Hi, my name is Sebastian. I'm a research assistant at CDD. To continue on the theme of AI, I'd be interested in hearing you talk about how low and middle-income countries should think about some of the geopolitical implications. So, for instance, you know, anthropic have in their terms of use that you can't use their model to create competing models, which sort of might limit the ability of other countries, say, to try. If you believe, for instance, that in this recursive self-improvement, or at least that these models give sort of productivity gains in the development of new inventions or new AI inventions, that sort of leads to maybe like sustained advantage in particular places. And given so how important they might be, both for sort of like the balance of power within countries, but also sort of productivity and incomes at large, how would you advise that low and middle-income countries think about how they should, you know, approach, like, the possibility of sort of their own access to AI, but also what an institution like CDD should be thinking about these issues and how it should be, I guess, addressing them or discussing them or even how much focus it should be placing on it?
[00:50:01] Mohamed A. El-Erian: So you're going to be very, very unhappy with my answer, and I apologize. If I tried to answer your question, I would cross the line between courage and stupidity, okay, because I don't know enough to answer your question. But I can tell you that given the call I had with two of your colleagues, Hans and Marcus, that's the sort of thing they're working on. And it's just something that you need to ask. So you framed the perfect question. I'm just going to redirect you to other people to answer it. And Marcus has written down notes, I can see that.
[00:50:39] Judy Woodruff: Okay, I see a hand way back in the back there, and then I'm going to come back to the front.
[00:50:44] Audience Member: Hi, Nancy, also from CGD. I wanted to go back to your point.
[00:50:49] Judy Woodruff: Get the phone closer, please. Sorry.
[00:50:51] Audience Member: I wanted to go back to your point about China and this whole challenge for China of shifting to a domestic demand-led growth model, which there have been many efforts externally to try to promote that. And, of course, China is now being positively reinforced by a very large external surplus driving growth. So do you think there's anything that can be done externally that would influence China's behavior? Or alternatively, is there some path internally that you see that would change China's growth strategy?
[00:51:37] Mohamed A. El-Erian: That's a great question, Nancy. Let me start with what Judy referred to, which is the data from this week, just this week. As you know, retail sales are down in China. Investment is down, so the demand side is down. The production side is up 6%. Okay, so whatever imbalance they had is getting worse. How do they reconcile this is 12-month exports are back. The trade surplus is back to a trillion dollars. Last year, despite a 25% decline in exports to the U.S., the trade surplus was $1.2 trillion because they've been able to reorient their exports and produce more for the external world. That has a limit to it, the ability to absorb. And I'm surprised, for example, there hasn't been more pushback from Europe. I was in Germany recently, and I saw more Chinese cars in Germany than I've seen in my whole life. And there's a major, major growth in Chinese cars at a time when the German auto industry is having a problem. So the question you asked is a really good one. And I feel that unless the constraint comes from outside, they're able to achieve their growth targets despite not addressing the demand imbalance that you talked about. And it is getting worse. I mean, it's ironic that it's getting worse.
[00:53:17] Audience Member: Hi, Caroline Atkinson, a board member. I wanted to pull back to globalization. You mentioned that aid is being, and development aid is being cut because of fiscal constraints. My impression is that it's also because of a turn against the idea of globalization and caring about the rest of the world. So I wonder if you have views on that. And, of course, the role of CGD. Thanks.
[00:53:44] Mohamed A. El-Erian: You're absolutely right. If you think back how easy life was, and Caroline and I were at the IMF at the same time, there were two givens that people were buying into the globalization program, that the close integration of countries, goods, services, and labor would result in people being better off. And then the second one was the Washington Consensus, the domestic side, that if you want to prosper, you prosper through fiscal responsibility, and in the event of central bank independence and other institutional independence, you deregulate, you liberalize. And that consensus was so strong that we didn't pay attention to the distributional aspects, the climate aspects, all sorts of aspects that ultimately undermined the narratives, these dominant narratives. Today, what are the one or two things that most people agree on? The global economy will find it very hard to come to something. Globalization is no longer seen as the model because it alienated too many people, and when you alienate people, people get angry, and when people get angry, they become single-issue voters, and when they become single-issue voters, it's very tempting to dismantle something even if you don't have something to replace it. A perfect example, Brexit. I mean, think of Brexit. The attraction of telling someone, I'm going to allow you to regain control. How powerful is this, I'm going to regain control? I'm going to regain control by dismantling my biggest trading relationship and not having something to replace it. But when people are angry because they feel that somehow they've been undermined by some external influence, by globalization, by this, they will vote for that alternative. So we've dismantled globalization, and the best we can hope for right now is what Gordon Brown calls managed globalization light, and that has two elements to it. It's managed, it's more managed, and it's light. It's not the uber-globalization. And if we don't get agreement on managed globalization light, we're going to get fragmentation, which is much more costly. The internal side of it, there is no agreement on the Washington Consensus anymore because Washington itself no longer agrees, no longer believes in the Washington Consensus. We're running a fiscal deficit of 6% of GDP. There's concern about the independence of the central bank. We're not liberalizing, we're imposing tariffs. And we're having more of an industrial policy starting to emerge on that. So we've lost both the external anchor and the internal anchor in terms of narratives. So yes, I mean, I should have mentioned that, and I apologize for not mentioning it, and thank you for bringing it up.
[00:57:00] Judy Woodruff: Maybe a couple of minutes for another hand or two. I thought I saw one. Okay, we do have a question online. Let's see. What reforms are needed in international institutions to help developing countries withstand the economic spillover effects of major conflicts? This one doesn't mention Iran, but major conflicts.
[00:57:30] Mohamed A. El-Erian: I'm not just going to say it in terms of major conflicts. I'm going to widen it a bit because I don't think you can address major conflicts without addressing long-standing problems. You know, I was part of the IMF who would go around the world and say merit-based appointments in the civil service are critical. We still have institutions that nationalities matters as to which positions you can hold. Almost impossible to defend. I would go around the world saying governance matter, representation matter, voice matters. We have a voice and representation set up in these international institutions that's more reflective of a world of yesterday than a world of today, let alone a world of tomorrow. These issues are so long-standing, and reform has been so slow that it fundamentally undermines the credibility of those institutions. And we really need the IMF and the World Bank. We couldn't create them today. We would never get agreement to create them today. And it's incredibly powerful to have 189 members, to have these articles of agreement, and not addressing these long-standing issues undermines daily the credibility of these institutions and therefore their impact. The role of these institutions is to inform and influence outcomes. And if you want to inform and influence, you've got to be credible. And you've got to be perceived as being neutral, what I call a trusted advisor. So I think there's a more general issue, is that we need to advance the reform. And to be fair, every single IMF managing director and World Bank president has been keen to do so, but the reality is the governance system doesn't allow them to do so. And this is a question that comes down to Europe and the US. And particularly Europe, which is way overrepresented in these institutions. So unless you address these fundamental issues, the buy-in for a system of multilateralism is going to be complicated. As you can tell, a few people in my life have had a huge influence on me, and Mike Spence, the Nobel Prize winner, is one of them. And he always says, okay, what sort of game are we playing? And I say, what do you mean? He said game theory. Force yourself to think of game theory. Because game theory specifies who are the players? What are their objectives? And how is the game being played? Multilateralism can only be played cooperatively. It cannot be played uncooperatively. And if increasingly people lose trust in these institutions, they will not play it cooperatively. So I go back always to these long-standing reforms that unless you address them, it's like something that eats away at the foundation of multilateralism every single day. And we can address them if countries are politically willing to accept some reduction in their influence. And that's Europe in particular. But it's in their interest because multilateralism serves them as much as it can serve the rest of the world. So I think that's a really important issue. Work has been done here. Work has been done elsewhere as to what this can look like. And it just needs political leadership coming from the capitals.
[01:01:27] Judy Woodruff: I think we are out of time. I just want to ask one final question of you, bringing us back here, but also a question that, of course, affects the whole world, and that is what are your expectations? You mentioned the Central Bank. What are your expectations for the new Fed chair, Kevin Warsh, given what we know are inevitable pressures from the White House?
[01:01:50] Mohamed A. El-Erian: So my expectations is what he pointed out yesterday. And I find it fascinating that people are trying to apply an old playbook to a completely different Fed. This is a different Fed. Kevin Warsh is very different from what we've had before. And in his first press conference, he said here are the five areas of reform. I'm going to forget some. Communication. Sources and uses of data. The inflation framework. And I'm missing two others. Sorry? The balance sheet. And what's the fifth one? I can look it up. But he fundamentally said here are the five areas that I think we need reform, which is something that's really important to say because all those five areas need reform. And then he said something else, that the Fed is really uncomfortable about doing, but other central banks are not. We're going to use the best expertise, including external expertise, to help us think about this. Okay? This doesn't come naturally to the Fed at all. It comes naturally to the Bank of England, but it doesn't come naturally. So this is a reform-oriented Fed under Kevin Walsh. And I think it's really important because as much as we have focused to the critical importance of defending the independence of the Fed, and I am 100% behind that, we must not forget that this is a Fed that has not met its inflation target for 63 consecutive months, so more than five years of not meeting its inflation target. This is a Fed in which five officials have had to resign because of allegations not proven of financial irregularity. So there's a compliance issue. There's a culture issue. This is a Fed whose models have consistently been wrong in the same direction. This is a Fed whose communication, instead of being forward guidance, has been shown to be either confused and or confusing. So if you look at how the Fed has operated, the Fed does need reform. I'm part of the G30. The G30 is the establishment, if you like, of policymakers on there. We've just issued a second report under the leadership of Bill Dudley, who used to be the president of the New York Fed. And the message from that is how the Fed operates is as important to maintaining its political independence as the pressure from outside because ultimately you need to be accountable. If someone gives you independence, it doesn't mean you're not accountable. You have to be accountable for how you perform. So I view this as a huge breath of fresh air into an institution that needs to be reformed in order to be more effective and in order to protect its political independence. The market is not where I am at all. So the market views it through the Powell lens. The Powell lens is every official puts in what's called a dot. There's 19 officials, and they submit the dot plot. The dot plot shows the expectation of policy actions. We had 18 out of 19 officials submitted. The one who didn't submit it is Kevin Walsh because he said, I don't believe in this. I think this is more confusing than anything else. And what the market saw is that nine of the 18 expected at least one weight hike, if not more, this year. That's what the market focused on, and that's why we got reactions that are being reversed this morning of stock markets selling off, bond yields going up, and it's a problem that the market will need, I suspect, one or two more policy meetings, FOMC meetings, to realize this is a fundamentally different Fed. You're looking at me like...
[01:06:16] Judy Woodruff: And on that note, and on that illuminating note, thank you, Mohamed El-Erian. Thank you very much. And thank you for your question. Thank you. Thank you. For sure.
