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Lagarde's Challenge; Managing the World's Balance Sheet; Imagine a World
Aired May 1, 2014 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CHRISTIANE AMANPOUR, CNN HOST: Good evening, everyone, and welcome to the program. I'm Christiane Amanpour.
From Ukraine to Iran from Egypt to Latin America, today's major wars are being fought as much on the balance sheet as on the battlefield. So today we devote this program to our guest, Christine Lagarde, managing director of the International Monetary Fund.
With billions of dollars in her portfolio, she is responsible for ensuring economic growth and stability all over the world. And the most urgent need today stems from the crisis that Russia has prompted with separatists continuing their takeovers in Eastern Ukraine.
Now this display of military might, the first time Russia's May Day parade has been held in Red Square since the collapse of the Soviet Union, simply underscore's President Putin's saber-rattling over Ukraine, which the West responded to with another round of economic sanctions this week.
But do Europe and the United States have the stomach to take the economic pain in order to inflict it? The IMF says Russia has slipped into a recession now and it's just announced an emergency $17 billion loan to Ukraine.
Plus the massive and growing global gap between rich and poor and the man of the moment, the French economist Thomas Piketty.
What does Lagarde think of his solution to tax the wealthy's assets? That plus the Asian tiger and much more as Christine Lagarde joined me from IMF headquarters in Washington, D.C.
AMANPOUR: Madame Lagarde, welcome to the program.
CHRISTINE LAGARDE, MANAGING DIRECTOR, INTERNATIONAL MONETARY FUND: Thank you so much, Christiane.
AMANPOUR: The IMF has just announced a massive package for Ukraine, $17 billion.
Is that a good bet?
Is that a safe bet?
LAGARDE: It's a program which has been under negotiations for the last few weeks with the Ukrainian authorities. And it's obviously not without risk. But it's a necessity to respond to a member's request.
And we have tried everything we could to mitigate the implementation risks.
Just to give you an example, prior to agreeing, we asked the Ukrainian authorities to take a few of their hard measures which had been under discussions for the last few years and which they were reluctant to take, such as for instance, letting the exchange rate fluctuate, such as for instance revisiting the procurement law in order to establish a bit of governance in the way they deal with companies.
Second, it's a program that sequences over two years the disbursement. So it's not as if we were disbursing $17 billion tomorrow.
AMANPOUR: Right. And can they survive?
LAGARDE: We begin (ph) to do that over time.
AMANPOUR: Can they survive on your disbursement?
LAGARDE: It will not be enough. Let's face it. But as usual, the IMF has to intervene in times of crisis and when we do so, we take all the precautions we can and then we try to catalyze additional support.
And we have received assurance that various countries, other organizations such as the World Bank, such as the European Reconstruction Bank, will also provide support and funding to the country.
All in all, we believe that another $15 billions will be coming out of those other international institutions and other countries. And that, together with our $17 billion package should be OK to sustain the country in the next two years and help it through the bold economic reforms that they have to take.
AMANPOUR: Meantime, Russia, I believe you assess, the IMF, that it has entered recession.
How deeply has the Russian economy been hurt since the sanctions, since this crisis with Ukraine?
LAGARDE: Well, as you know, we have just revisited downwards our forecast for Russia, both for this year and for next year. For this year, we have revisited down to 0.2 percent and next year 1 percent. And next year 1 percent is predicated upon the current geopolitical tensions easing off, thanks to negotiations, thanks to multilateral settlement, we hope.
AMANPOUR: You hope. But it's not happening.
Clearly there have been consequences. If you look at the monetary policy, if you look at the capital flows, if you look at their own forecast, there have been consequences on the Russian economy as a result of the geopolitical situation, the uncertainty and the sanctions that have been decided.
AMANPOUR: Well, do you see any move in your talks, in your negotiations, any move by the Russian government to deescalate the tensions to reverse this economic decline?
LAGARDE: You know, it's not the business of the IMF to get involved in that side of the equation, if you will. We look at the economic terms; we look at the economic consequences. We also policy advise and we have a mission, which is on the ground at the moment in Moscow, because we are doing the annual audit and review of the Russian economy as we would do every year.
So we are discussing with them as we speak the financial and economic consequences of the current situation.
AMANPOUR: It may not be your --
LAGARDE: We are not the agent -- we're not facilitating deescalation, if you will, over --
AMANPOUR: -- right, but you must be telling them --
LAGARDE: -- this escalation is horrible.
AMANPOUR: -- you must be telling them precisely that. If they want to get their economy back stable and out of recession, they've got to deescalate.
What do you think Vladimir Putin will do?
LAGARDE: I wish I knew. But I don't.
And it's clear that, you know, the uncertainty, the difficulties at the moment related to the Russia-Ukraine relationship and surrounding relationships is having an effect, whether it's foreign direct investment, reluctance of anybody to invest, including domestically, the capital flows that we have witnessed out of Russia, all those are consequences of what is happening at the moment.
AMANPOUR: Ms. Lagarde, you know that there's a bit of a debate about how tough to make the punishment and the consequences on Russia. There's a debate between the United States and Europe and perhaps even between Europeans.
From your point of view, from your IMF perspective, how bad a hit would Europe's economy take if more sanctions were put on Russian companies and the Russian economy?
LAGARDE: You know, Christiane, it's hard to quantify because it's going to vary depending on, number one, the harshness of the sanctions; number two, what countersanctions are used eventually by Russia; number three, the level of dependency of those countries -- and clearly you have a number of Central and Eastern European countries that are fairly heavily dependent from Russia for the supply of gas, their supply of energy and part of their trade.
Then you have other more larger economies, such as Germany, for instance, that have a strong relationship based on the supply of gas. So clearly any hardening of the sanctions and bilateral sanctions, obviously, would have an effect on the European economies. But they would be varying degrees.
And our hope, given the fragile recovery that we are seeing around the world, particularly out of the Eurozone, is that these matters can be resolved otherwise than through escalated sanctions that clearly will hurt the economy.
AMANPOUR: Clearly everybody hopes that that will the case.
However, as a former finance minister yourself, as the head of the IMF, do you believe that the international system must be upheld, the principle of sovereignty and territorial integrity, and therefore consequences need to be leveled, despite the economic pain it might hurt -- it might inflict on those imposing those consequences?
LAGARDE: You know, it -- that is for sovereign states to decide. And -- but to give you an example about the sovereignty and the integrity of territory, clearly the program that we have designed for Ukraine takes into account the entire economy of Ukraine, Crimea included.
I'm going to phrase it a different way.
Do you believe that no matter the cost, no matter the economic pain, the international system must be upheld and these kinds of violations of territorial integrity and sovereignty, such as Russia has demonstrated, should be sanctioned?
LAGARDE: You know, I'm going to give you the same response, which is that it's for the sovereign states, either unilaterally or more likely as a group to decide how they want to address the issue and how they want to deal with it.
AMANPOUR: Do you worry that the same kind of violation of territorial integrity could happen in Moldova or elsewhere, not to mention Eastern Ukraine?
LAGARDE: I certainly hope that this is not the case.
AMANPOUR: Let's move on to China because there is a bit of a difference between the IMF and your sister organization, the World Bank.
The World Bank seems to think that China's economy is going to outpace that of the United States. In other words, number two is going to take over number one very, very soon.
What do you assess at the IMF?
LAGARDE: We see China growing at a -- at a, you know, significant pace and although some complain that it's less than it used to be, we still see China at 7.5 and continuing to grow, probably at the slightly reduced pace over time in the next five years or so because the country's developing so much.
But it's a fact that a very large economy with a significant population is growing faster than the United States. Now if you look on a per capita basis, China is still way behind the United States. But in global aggregate numbers, it is growing and it is growing at a faster pace.
AMANPOUR: So what are your concerns when you look at China?
The whole world looks at China and they draw a huge, deep breath, hoping that that economy will not slow down because it'll affect the rest of the world.
On the other hand, conscious that there is a -- also looming debt crisis to be solved in China as well, how do you think they will resolve that?
Does it worry the IMF?
LAGARDE: We have a really solid partnership and dialogue with the Chinese authorities. And clearly what we are seeing is a very progressive, gradual journey towards internationalization of the capital account, opening up of the economy. And this is happening in a very controlled way from what we see.
So we are not of those that believe that China will have a hard landing, no. We believe that growth will, over time, gradually and in a fairly controlled manner, slow down, which is not a bad idea, actually, because the focus from the Chinese authorities will be to produce more quality growth than quantity growth.
And that is certainly desirable as is desirable the fact that they will focus on domestic consumption more so than domestic investment and more so than exports. So gradually you have a shift of the Chinese economy on the basis of different engines than from the past.
AMANPOUR: Christine Lagarde, stand by just a moment.
When we come back, we'll continue our conversation because all any economist can talk about these days is the growing inequality gap. But they can't agree on how to bridge it.
Lagarde's take on the guru du jour, Thomas Piketty, the French economist whose study of inequality is flying off the shelves -- after a break.
AMANPOUR: Welcome back to the program and more of my interview with the IMF managing director, Christine Lagarde.
For much of its history, the International Monetary Fund has focused on global economic stability and focused it on the bottom line, spurring growth by cutting spending and keeping inflation low.
But with the growing dangers of growing inequality and with Thomas Piketty's book, "Capital in the 21st Century," making him the man of the moment, Christine Lagarde tells me that she put the IMF ahead of the curve on this crucial issue.
AMANPOUR: Madame Lagarde, let me move on to the buzzword that is on everybody's lips right now and that is income inequality.
First and foremost, the IMF paper that was released just before your annual meeting earlier this year talked about income inequality and the dangerous ramifications around the world.
And many people said, wow, that's unusual.
What are you so worried about right now?
LAGARDE: Well, first of all, we're not late to the party because -- I think it was at the -- at the Davos meeting over a year ago that I actually mentioned that as one of the looming risks on the horizon.
Second, it is a worrying factor because of its excess and, you know, I'm of those who believe that excesses in all matters are not a good idea, whether it's formation of bubbles, whether it's excess in the financial market, whether it's excess of inequality, it has to be watched. It has to be measured and it has to be anticipated in terms of consequences.
Third, we believe that excessive inequality, which we have observed lately, actually have a macroeconomic impact and should be addressed in order to make sure that we continue to have or renew having sustainable growth, continue to have social stability and have a chemistry of society that can actually sustain us through the future.
AMANPOUR: Let me put it to you this way, the man of the moment, the economic guru of the moment, the French man, Thomas Piketty, the economist, has said the following, among many other things, that the growth of an inheritance-heavy elite will, quote, "radically undermine the meritocratic values of which democratic societies are based. And the consequences are terrifying."
Do you believe that? Do you agree?
And what are those terrifying consequences?
LAGARDE: That is more for political economic statements than a pure economic statement, although frankly his 600-pages book is full of data and good analysis and all the rest of it.
But I would not, you know, sign off on the statement that you just read.
AMANPOUR: So you don't think it undermines democracy?
LAGARDE: I -- you know, our job is to look at the economic consequences of rising inequality. And we believe that it could have macroeconomic consequences that would undermine the sustainability of growth and the stability of the social fabric of society, which is why we believe it's important.
But our studies, we published just recently two studies, show two things, one is rising inequality are not conducive to sustainable growth. That's point number one.
Point number two is redistribution policies, if well designed and calibrated and not excessive, are not bad for growth, which was conventional wisdom for a long time. You know, people thought redistribution is anathema and not good for growth.
AMANPOUR: Well, right.
LAGARDE: Our studies show that good redistributions, you know, making sure that people have access to health, making sure that people have access to education, making sure that there is a progressive taxation not too high, not to disincentivize people but progressive enough so that there is an element of distribution, that all of that is actually not counterproductive from a growth point of view.
AMANPOUR: Well, it's interesting to hear the IMF say that; the managing director of the IMF. And you say it at a moment where this book is creating a huge amount of hullabaloo, particularly amongst Right and Left in the United States.
So do you agree, when you talk about redistribution, with what Piketty's concluded, that tax the assets of the rich, because it's the investments that are creating so much inequality, not necessarily the income, but the investment gap.
LAGARDE: That is what we have seen in this post-crisis period, because of the -- you know, asset pricing that has resulted from the uptick in the -- on the security markets essentially, we have seen a significant increase in the assets or the wealth, if you will, of those who actually own or hold these assets.
And that's why you see these staggering numbers that have been mentioned by Oxfam, for instance, where you know, less than 100 individuals actually own pretty much the same as half of -- the poorest half of humanity.
And that's an issue, clearly.
AMANPOUR: So you agree with Piketty's conclusion?
LAGARDE: No, I don't -- you know, first of all, I have not finished his 600 pages. So I don't -- I certainly would not want to agree with conclusions of a book that I have not finished. He has some very interesting data. He has some good analysis. He has some very good and solid points.
But I'm not going to say that I agree with all his conclusions.
AMANPOUR: Let's quickly move on to Egypt. They're about to have elections. The economy was the reason for the revolution, amongst other things, several years ago. And now they face trying to stabilize and grow their economy.
There is a difference of opinion, some in Egypt believing that if General al-Sisi is elected, it will stabilize the economy and attract more investment.
Others say that, hang on; the military there does not know how to run an economy; 30 percent of Egypt's economy is spent on subsidies and it's going to be really heavy lifting to stabilize it, not to mention the IMF's ruptured relationship in terms of negotiations with Egypt.
So what do you see ahead for the Egyptian economy after these elections, investment and growth or continued problems?
LAGARDE: Well, first of all, as the relationship with Egypt is not broken, we do have a relationship. We do provide technical assistance at the moment, concerning VAT, concerning the energy subsidy reform and we will certainly continue to be available as needed when the Egyptian authorities ask us to help.
Second, what we are seeing is rather encouraging concerning energy subsidy reform, for instance, and we certainly hope that under whoever is the new president of the country and then thereafter the new parliament, those reforms will continue.
I think, you know, no matter who is in charge, economic reforms will be a must. And if that is done thoroughly, decisively, I'm sure that there will be growth and investment. But the reform stage is certainly a condition to that.
AMANPOUR: Madame Lagarde, thank you very much indeed for joining us.
LAGARDE: Thank you, Christiane.
AMANPOUR: And after a break, the IMF may be pouring billions into Ukraine and economic sanctions against Russia could further deepen its recession.
But what about that unusual May Day parade that brought tens of thousands of Russians into Red Square today to shout a defiant "nyet" at the world? We'll explain next.
AMANPOUR: And finally tonight, as we've just heard from Christine Lagarde, if the chill of the Cold War is once again in the air, it likely won't be waged with weapons of mass destruction but with money in the form of massive loans and stringent sanctions.
Now imagine a world where Russia is shouting "May Day," not in distress but in defiance. It was back to the future in Moscow's Red Square today. Communists are now capitalists, of course, but 100,000 of them turned out to make like comrades of old. They were marching in the first May Day celebration outside the Kremlin wall since the fall of the Soviet Union back in 1991.
They proudly waved Russian flags and carried signs supporting President Putin, including let's go vacation in Crimea.
Now imagine that May Day, an annual workers' holiday actually began in the United States in the 19th century, to mark the creation of the eight- hour workday. Today it's celebrated around the globe, including in Greece, the birthplace of democracy, where thousands rallied in Athens, calling for a strike to protest what they perceive as unfair labor laws. And across the Aegean Sea in Turkey, May Day was devoted to defying the government ban as well as police tear gas to protest alleged corruption and creeping authoritarianism in the administration of Prime Minister Erdogan. It's enough to make a Bolshevik raise a glass of vodka and recall the good old days, when tanks rumbled through Red Square and Lenin and Stalin looked on approvingly.
Today, the president must have been smiling somewhere at signs saying, "We trust Putin." His dreams of restoring empire alive at least for one more sunny day in May.
And that's it for our program tonight. Remember you can always contact us at our website, amanpour.com, and follow me on Twitter and Facebook. Thanks for watching and goodbye again from London.