Kazakhstan to be dominant force of Eurasian Union - Professor Pham Chi Thanh

ASTANA. March 30. KAZINFORM /Rizvana Sadykova/ As part of series of publications devoted to the Second Astana Economic Forum on ?Economic Security in Eurasia in the System of Global Risks?held in Astana, 11-13 March, 2009 we introduce our honorable guest Pham Chi Thanh, Professor Emeritus, American University, U.S.A., a renowned international economist.

He was also a member of the Nobel Prize nomination committee of the Swedish Academy of Science. He is an author of numerous publications on mathematical economics, economic theory, political economy and development strategies for transition economies. Dr. Thanh was also an advisor to central banks and governments of the USA, Canada, UK, India, and Vietnam. He has been involved with the Vietnamese economy since the late 70's, was advisor of Foreign Minister N. C. Thanh on economic liberalization, Deputy Prime Minister N. M. Cam and Minister of Trade T.D. Tuyen on the bilateral trade agreement with the US and the membership with WTO. What do you think about the principal objective of the Forum? What in your opinion will be the contribution of the Forum to address the global economic crisis? I think the principal objective of the Forum is what was set out by the organizer of the Forum, namely, to look at the Economic Security in Eurasia in the System of Global Crisis. Many speakers were invited to speak at the Forum, but not every speech was devoted to this issue. Also each speaker was given less than 5 minutes to speak which is much too short to address any issue adequately whereas the moderator was given more time than the speaker on the Podium, which is a very strange procedure. I hope the Economic Research Institute will collect and publish all the papers submitted to the Forum in the form of a Proceeding in three languages, Kazakh, English and Russian. This proceeding will then serve as the contribution of the Forum to address the global economic crisis. Although a Forum is meant to be a place where many different ideas can be put forward and discussed, but the common consensus from this Forum is that there are two areas where the international community needs to address, one is the issue of control and regulation of the financial and banking system and the other is the currency issue. If the economy is in so much trouble, what does this imply in regard to economic policy, both in terms of sensible crisis management or medium-term attempts to rebuild a reasonable global system? I believe what is in trouble is the way these activities are organized. Banking and financial system is supposed to provide a framework so that these activities can run smoothly. But developments in the banking and financial system in advanced industrialized countries, particularly development of the so-called ?structured? financial instruments have transformed it into an uncontrollable and difficult to regulate behemoth. Policy responses to the kind of economic crisis we witness today are of two types: the ?rescue? types are ad hoc measures designed to save a particular institution from collapse resulting from its risk taking activities and the ?stimulus? types are Keynesian tools to halt the fall in demand resulting from the economic downturn. These are ?sensible crisis management?, as you call it. But they may not work. It all depends on how large are the losses of these institutions, some of which are yet to be revealed, and how deep is the fall in demand caused by the losses of income and wealth by the consumer. Besides there is also the issue of transmission, how the crisis started from one country can propagate to other countries. It is in this context that the currency problem was raised. Here I think the Chinese proposal of an international reserve currency is the most promising because it is achievable in the medium term. The difficulties lie basically in the negotiations with regards to the exchange rate between this international reserve currency and each of the national currency. The U.S. will most likely resist to this proposal because it does not want to see the dollar losing its prominent role of a key currency and therefore its economic hegemony may no longer be tenable. But a key currency that can serve as an international reserve currency has to be a constantly reliable store of value and the present crisis exposes the fact that neither the dollar, nor the euro, nor the yen has this intrinsic characteristic. Do you think global economic growth requires a rebalancing away from the financial sector and toward non financial industries such as manufacturing, retail and health care? The contribution to economic growth from the financial sector varies a great deal from country to country. In some countries or territories the financial sector is the most important one, such as the Cayman Islands or Switzerland. In some other countries, the financial sector is extremely large such as the U.K. or the U.S.A. If the economy of these countries is large then the contribution of the financial sector to global economic growth is substantial. One cannot ask the Cayman Island, for example, to ?balance away? from the financial sector since its size and its resource endowment does not allow such movement. Financial sector is a must for any country engaging in economic growth and economic development. The financial and banking sector of Kazakhstan is more developed than any other CIS country and this contributes significantly to its impressive growth, alongside with the petroleum sector and construction sector. Sometimes, during the process of economic growth, there is a tendency to ?overshoot?. In the early stage of its development, Kazakhstan, for example, has more than 200 banks for a population of less than 16 million. That is excessive and inefficient. In more mature economies like those of the U.K. or the U.S.A., the enormous size of its financial sector is partly the result of a blind zealous pursuit for profit rather than ?overshooting?. The crux of the matter here is how to allow for a financial sector expansion just appropriate to serve for the economic expansion. On the other hand, when a country is engaged in the process of economic growth, it does not concern itself with how much it contributes to global economic growth. If it does well then its contribution is substantial, if it does badly then its contribution may be negative. Each country can have a different growth strategy. For Kazakhstan, past economic growth was largely due to the depletion of its exhaustible resources. For the long term strategy, rent and proceed from these resource depletions must be used to build infrastructure for a more diversified economy so that growth can be sustained once these resources have been completely exhausted or can longer be economically viable. New industries, including manufacture and service, can be developed, as well as agriculture and renewable resources. Trade with other countries would be more diversified as a result, and the country would be less affected by the volatility of commodity price. What do you think about President Nazarbayev?s recent call for the creation of a Eurasian Union? Please, give your comments on the anti-recessionary measures taken by the Government of Kazakhstan. This is a two part question so my answer will also be a two-part answer. With regard to the President?s call for a Eurasian Union, I have been an enthusiastic supporter of this idea for a long time. In fact, 10 years ago, when I was invited to speak at a conference in Tehran, organized by the Islamic Conference Organization, to find ways and means to create an Islamic Common Market, I had provided an analysis of pro and con for such creation and voiced my strong support for such initiative. Of course, given the vast geographic distribution of the Islamic countries, an Islamic Common Market, styled after the European Common Market, is difficult to achieve. So I had suggested regional unions as the first step. The Eurasian Union would be good for Kazakhstan, both for economic and security consideration. Once the Union is formed, Kazakhstan would be a dominant force, both inside and outside of the Union. So I think Kazakhstan should take the initiative and your President is absolutely right in making the call. With regard to the anti recessionary measures, the steps taken by the Kazakhstan government are appropriate in my view and are in line with the measures taken by other countries. However, to paraphrase Leon Tolstoy, all happy economies are similar, but each unhappy economy is unhappy in its own way. From a broad outline, the recession in Kazakhstan is not much different from that of other countries: unemployment, many banks and firms are in the verge of collapse. But if you look at it closely, there is also a problem of banks external debts, the payment due to foreign creditors this year and the difficulties of refinancing the debts due to the low rating by the rating agencies. These are very serious problems and they may have adverse effects on the government anti-recession measures. Fortunately, there are ways to deal with this problem and I myself have submitted to the authority my proposal to solve this particular problem. What immediate measures do you think each country should take to protect their people to overcome the crisis? What are the main ideas or recommendations that you propagated during the summit? In economic activities, one of the most important factors for recovery is psychology. If people are optimistic and predict that things will get better, then their prophecy is usually self fulfilled. By showing that the government does care and is prepared to take whatever measures which are needed, the government has provided a good environment for this optimism to develop. In this crisis, some people are much worse off than other. The invisible hand of the market may not be able to help those that have been made absolutely worse off by the crisis since the market is distorted. Therefore the visible helping hand of the government is indispensible for those people who have been marginalized by this crisis. As for the main ideas and recommendations, I do not think any of us speakers at the Forum was given enough time to elaborate. However, in my case, I truly appreciate this interview for the opportunity to express my support for the stimulus and rescue measures that the government has taken and for the President Nazarbayev?s call for the creation of then Eurasian Union. I have already mentioned that I had also submitted to the authority my proposal to deal with Kazakh banks external debts problem. Thank you for asking these questions and for your concern. Kazinform information Dr. Pham Chi Thanh, Professor Emeritus at American University, Washington, D.C., received his Ph.D in Economics and Mathematics from the University of New South Wales. He taught at the University of Sydney and University of New South Wales and was a research economist for the Australian central bank, the Reserve Bank of Australia. He also taught economics and conducted joint research on economic growth and development with the famed Norwegian economist, Leif Johansen then at Southampton, Oxford and London university. Elected to the most prestigious editorial board of The Review of Economic Study, he was appointed to the board of directors of the UK's Economic Study Society, and received a joint Professorship appointment with Queens University of Canada. He joined American University in 1977 as Chairman of the Economics Department and has also given lectures by invitation at Delhi School of Economics, India, at the University of Tehran, Iran, University of Western Ontario, Canada and many universities and institutions of higher education in the US such as Stanford University, University of California at Berkeley, Northwestern University, University of Wisconsin, University of Minnesota, University New York at Buffalo, Harvard University, Massachusetts Institute of Technology.