Webcast interview with Jim O'Neill, Chairman of Goldman Sachs Asset Management - transcript

The former Chairman of Goldman Sachs Asset Management is best known for coining the term ‘BRICs’ as the acronym now universally applied to the world’s four key emerging economies – Brazil, Russia, India and China – symbolising the current shift in global economic power. O’Neill also led the attempted Red Knights takeover of Manchester United in 2010.

Jim O'Neill


TB: Todd Benjamin (interviewer)
JO'N: Jim O'Neill

TB: I’m Todd Benjamin and welcome to this live broadcast from the International Bar Association. During the next hour we’re going to be talking with Jim O’Neill. Jim O’Neill just retired as the head of Goldman Sachs Asset Management. He retired in April and of course he was with Goldman Sachs for many, many years. He’s a well known international economist and it’s great to have you here. And of course you have a broad perspective, Jim. What is your assessment of where we’re at now because it’s been a volatile five years since the financial crisis?

JO’N: That’s for sure. Look at the strain it’s taken on me. That’s a tough question to start with and it’s not easy to give a little, nice simple packaged answer.

TB: Take your time.

JO’N: Well, coincidentally, the day we’re having this discussion, if you look at what was said last night by the Federal Reserve, the US Central Bank, I think one could tentatively say that the Fed is starting to have more confidence that there’s some sort of virtuous private sector recovery beginning to take place.

We’ve had hints of that for each of the past two years but it kind of fizzled out. What is so intriguing about this year is that it hasn’t fizzled out yet and importantly that’s despite the fact the US authorities have tightened fiscal policy quite a bit this year. So I would say there’s some more justifiable hope about the US today than probably most times since that terrible sort of epitome of the mess five years ago. Japan is showing some signs of life and of course they’re on a degree of policy aggression that is almost unheard of anywhere in the developed world. But we have enormous challenges in Europe... so you’ve got the US sort of leading the developed world, if you could simplify it that way, in terms of showing signs of sustainable private sector recovery but the other intriguing development is we have more and more so-called emerging countries showing the opposite signs of having their first really big challenges since. One of the reasons why the whole BRIC thing kind of became so big is in 2008/2009, it looked like many of them were unscathed and here we are five years later and I find my mind wondering whether there is some kind of linkage that is not so obvious superficially, but below the surface you can think why, a number of these countries are showing signs of certainly slowing down and in some cases some challenges.

TB: It’s very interesting you should mention that because in 2001 you wrote a paper in which you were so optimistic about some of these emerging economies. You coined the term BRIC referring to Brazil, Russia of course, India and China. And when I look at those big four economies, yes, they have a tremendous amount of potential but some of that is now being called into question.

JO’N: Yes and no. I mean again there’s no straightforward nice little box answer but let me try and give you some flavour briefly. The big story in the first decade of BRIC life, let’s call it, is that each of the four did way better than even the most optimistic scenario that I had of the three in that first paper. And so as with a lot of things in life, people assume that what has happened will just go on. So many people are judging the standards of what’s happening in these countries by the standards of that first decade which is probably a mistake. The second thing is, linked to the big 2050 stuff that we started about the world in 2003 and the one that really made the whole BRIC thing so popular… I’ve been working with assumptions about each five-year period as we go through that 50 years, and so far this decade China is actually still growing by more than I’ve assumed despite the fact it’s slowed. So China’s a disappointment for people who thought the drug of 10 per cent growth would go on forever, but I would suggest anybody that’s looked at it closely might not be so disappointed. The other three – Brazil and India are definitely disappointing, but Russia, again if you really focus on what their growth potential is, Russia’s actually by and large doing what I assumed it would do. But Brazil and India are definitely disappointing so far this decade.

TB: And by the way for all of you listening, if you have any questions please submit them and we’ll get them to Jim. Let’s go back to China a moment because I tend to be more sceptical on China and part of the reason is because I see certain things happening in China, potentially they could grow old before they grow rich but I think there are even greater problems. I think credit is a major issue there. If you look at the amount of bad debt, especially in local governments, by some estimates it could be 20 to 40 per cent of GDP. There’s a lot of debt that’s been rolled over because they invested in enterprises to create employment that aren’t profitable. Water is another major issue in that country. I mean we could talk about other things as well – corruption obviously. And then this whole question of whether or not they truly do have the right leadership to help the country transform to a more service oriented economy versus export oriented economy.

JO’N: You’ve cited some of the best known challenges. You could probably add another ten, and I hear about them all the while. A couple of things to start this off, and I could spend the rest of our time just talking about China, I think it’s really important to focus on China first of all and I’m sure many of the listeners appreciate it but what happens in China is the single most important thing that happens for the world in this decade. Even with it slowing, China is creating huge impacts on the world economy. I’ve assumed that this decade China will grow by 7.5 per cent. So far in the first two years of the decade it’s grown by 8.3 per cent. 7.5 for China is equivalent to the US growing by four or less. The US has not grown by 4 per cent for any decade in my life. So if China grows by 7.5 its global impact is bigger than if the US grew by four which it has never done. To give some specifics, China in 2011 created another Spain that year. It creates another Greece every 13 weeks. As I joked to a number of people during the Cypriot mess, by the time the Cypriot banks opened again, China created another one. And within the BRIC thing, I only discovered this myself when I was preparing some charts for the last events I was at with Goldman Sachs, since the end of 2010 China’s created another India. So my first big point is what happens in China is huge. If China gets it really badly wrong, that’s going to be a really big new negative for the world. If China gets this transition right, it’s fantastic for the world.

TB: What is your biggest concern then?

JO’N: My biggest concern is not any of those that you said. One of the things that is great about China is the Chinese authorities worry about all this stuff that you’ve cited and more, more than you do. And what I love from my experience of being in finance for over 30 years, I like countries where the policymakers worry. The places that I really worry about are where they don’t. I love going to Beijing, a few famous hedge fund kind of guys that I’ve been to Beijing with at the end of the first day have said ‘Oh my God, this is a disaster.’ They’re all worried about everything. I said well, you know, isn’t that good that they’re focused on those problems? And so of course they have these huge challenges but the policymakers are focused on a lot of them. The thing that worries me is one of the most basic things; if you delve into the five year plan which is governing what they want to do in this transition, they talk a lot about trying to support more creativity and knowledge-based growth. How do you do that without giving 1.3 billion people more individual choice and freedom? And at some point that is the thing that’s going to probably be the biggest problem, not stuff about credit. There’s not really a credit prob... There is a problem in some sectors. China’s biggest problem on things like this is they save nearly 50 per cent of GDP. They don’t need credit. If you spend a lot of time in any urban area, still today, you will see people paying for ridiculously expensive things with cash. There’s the famous stories of these Lamborghini showrooms, five minute walk from Tiananmen Square, people go in and pay for them in cash. So it’s not an economy that’s really suffering in aggregate from things like that. Everybody talks about it all the time but I don’t think it’s really true.

TB: What was really interesting, up until I’d say maybe two years ago – correct me if I’m wrong – everyone was always debating, you know, who will be on top, India or China? Remember? And it was sort of the dragon versus the elephant. And now no-one’s really talking about India in the same way except in terms of worriment, you know, it’s had its slowest growth in a decade, corruption’s still a problem there, bureaucracy. Have you become much more pessimistic about India?

JO’N: I used to joke to people and still do, as you know I’m a big football fan and comparing India and China is a bit like comparing Manchester United and Manchester City. It’s just so unfair to the Indians. I mean, as I said in the past two years China’s created another India so, you know, it’s kind of crazy on many levels. Now, funnily enough, at the start of this week I just spent a day in India meeting a rather controversial figure, the possible head of the Bharatiya Janata Party (BJP) party going into the election. And I would controversially put it to you that India in the next 20 years could be way more important for the world than China because in contrast to China, where I think you mentioned yourself this famous phrase, ‘they will get old before they get rich’, India’s demographics of course are incredible. Back in the day with some of these papers we showed that from 2000 to 2020 India’s population could increase by the size of the US. Its working population could increase within that by the combined size of the working population of the UK, Germany, France and Italy. And if they can do things to unleash productivity, and that’s partly why this guy is so interesting, India could conceivably grow by maybe even 10 per cent if not more some years in the next 20 years. So, India’s had a tough couple of years but I think, you know, because they’ve done so little policy-wise in contrast to China, if they get some of it right, I mean India’s a really exciting place still. And so I’ve come back from that and I’m probably going to write a big piece about it I think. I think people are right in India, you know, Manchester City are making an effort to challenge Manchester United, let’s put it like that.

TB: So in terms of the BRIC, we’ve talked about China, we’ve talked about India. In Brazil, there’s a very interesting situation right now because as we speak there have been demonstrations going on in recent days, people upset that they were going to raise bus fares, now the government seems to be backing off of that. But like so many of these demonstrations, it starts with a singular spark and then morphs into other things and of course these demonstrations now are about corruption in Brazil, they’re talking about the lavish spending on stadiums for the World Cup. How do you see Brazil, how do you see these demonstrations?

JO’N: [Joking] I think it’s a more subtle thing because they realise they don’t have that good a football team these days and they’re not going to win the World Cup on their own, so they want to get it abandoned. You know, Brazil has some aspects of the same problem as Russia. In particular of course it’s a huge commodity producer and the famous ‘Dutch disease’ phrase was created about big commodity-producing countries that get stuck on the drug of assuming commodity prices will help you all the time and it’s created this environment in the past decade. As I said, Brazil like all the others have done better than I thought but what a lot of Brazilian policymakers themselves haven’t focused on is that in their case it was  probably because of this massive rise in commodity prices. And with commodity prices turning down, it exposes the rest of the economy’s vulnerabilities without that constant drug. Another consequence of it is of course the Brazilian real rose to an incredibly strong level which made the non-commodity sector of Brazil highly uncompetitive. And so they’ve got some big fundamental issues to deal with. The problem they have, as with many of these other exciting countries and some we haven’t talked about yet, you get the levels of wealth rising and it gives more and more people a lot of hope, and when things slow down and they see some signs of the old life returning, they get upset. And so this is an important moment for [President] Dilma Rousseff and her advisers to try and respond to some of these basic challenges. As you imply, the Olympic Games protest or bus fares is probably just an excuse for much broader simmering resentments.

TB: Do you see a difference in terms of what people are protesting about in Brazil than the demonstrations that we’ve seen in Turkey? Turkey actually has had a phenomenal record of economic growth and accomplishment over the decade with its prime minister. Now there’s a severe reaction to him becoming more authoritative and I just want to get your thoughts on whether you see parallels, or do you see it as a very different situation?

JO’N: I think there are clearly some specifics which are very different. The reason why the Brazil thing is so broadly interesting for the whole emerging world, is that within the BRICS, Brazil is the only one of the four that succeeded quite well under [former President] Lula in having very inclusive growth. The so called Gini coefficient that measures the wealth divide, that improved a lot in Brazil. And yet despite that we have these protests. Turkey was also one of the better emerging countries in that context. With many others, ironically China being perhaps one of the most guilty, there’s this huge growing wealth divide. And so in Brazil, there’s a bit of a difference in that Brazil was the best of that and yet despite it you have these protests. The second thing, at least so far, of course is you don’t seem to have had the same degree of violent response by the Brazilian policymakers that you’ve seen in Turkey. But away from those two specifics, in some ways I think it’s pretty similar. You know, these are, on my 40,000 feet level these are people in countries that are showing signs of breaking through the so-called middle income trap which is a huge test case. In our lifetime, Todd, probably the only emerging country of any sizeable population that has done that is South Korea. Today, South Korea has a GDP per capita not far off the levels of the lower G7 countries. Brazil and Turkey, if they can get through these problems, maybe a really encouraging consequence of that is that they’re on this path and they’re going to continue with more and more responsiveness to the things their growing wealthy people want more and more. So it’s a huge moment but I think for Turkey in particular it’s a big, big moment. And essentially when you talk about the challenges of China, they were in a sense along the same lines. As people acquire more they want more freedom and democracy and studies show at a certain level that people start to push for that more. And that’s a very interesting dynamic. The reason why I talk about it in that sense, is that Brazilian wealth is much bigger than Chinese wealth. Today, Brazil’s wealth is somewhere probably close to US$15,000 a head, partly because of the remarkable strength of the real, it’s probably exaggerating it a bit but the Chinese are still, what, half that. So those problems are certainly going to

grow in China which, going back to what we what we touched on earlier, is partly why I say this creativity and knowledge and wealth, at some point is going to  be a huge test for the Chinese to get through.

TB: You alluded also to this idea of income inequality and of course it’s not only a problem in China and Brazil and a lot of other places, it’s certainly a problem in the United States – a growing problem. In 2010, 97 per cent of the wealth, income gains, went to the top one per cent of the population and a third went to 15,000 families. Globally 80 per cent of the wealth is created by 8 per cent of the population and the gap is widening. And this is a very disturbing trend, especially if you have aspirations to move higher. And even though the middle class, as you predicted, is growing, there is a lot of income disparity or a lot of stagnation for certain people in middle class. So what is the right answer to social inequality, you know, is it taxation or is it other things or is it a combination of both?

JO’N:You know, I’ve sort of exited my long Goldman career with quite a big philosophy in my head that this decade is all about more adaptive capitalism, I’d call it, and maybe aspects of responsible capitalism linked to these issues. In so many geographic areas of the world more people want to be part of it and you can see more people wanting to reject the status quo if they’re not going to be part of it. And it’s not easy to know the exact response and whether the response is the same all over the place but policymakers have clearly got to think more carefully about a whole host of things, including the taxation system. Before I lose the thought, in intellectual, economic, academic circles there’s quite a lot of people that look at Scandinavia as being perhaps the model for so many of these different countries; I would argue perhaps South Korea in an emerging market sense because these are countries that have done so well in terms of wealth of so many of their people, although of course there were Stockholm protests and violence breaking out recently. So nowhere is free of these kinds of things. All that being said, I think a very important point that I really want to emphasise, is that a lot of it is to do with national geography and identity. It’s difficult to get good data, but if you truly look at it globally, inequality is declining. There are more people that have escaped poverty, significantly more, you know, hundreds of millions of people have escaped and are still escaping poverty, so the gaps seen on a global basis have narrowed. Inside national geographies, as you pointed out, there is a huge divide that’s happened in most places, not Brazil as I said but in many others and it’s tough to see how some of those societies can stay so... what’s the right phrase? I guess calm, and accepting of it unless something changes. You can see the pressure on that from many policymakers and politicians in so many diverse parts of the world today, including obviously here in the UK.

TB: It’s interesting you say one of the things you’ve been thinking about since you’ve exited Goldman Sachs is this idea of responsible capitalism. How did we get ourselves in this mess to begin with? I want you to see it from a banker’s perspective.

JO’N: I thought you might get onto that. You know, I’m not sure I’d describe it necessarily as ‘getting into this mess’. As I said a few minutes ago, first of all there are hundreds of millions of people around the world that have been taken out of poverty in the past decade. If you look at the UN’s infamous millennium goal of halving poverty, and I sometimes joke about this – I don’t know why it doesn’t get more publicity – but actually they reached that goal five years earlier than expected. I’m pretty sure it’s probably the only goal the UN has ever actually reached! So the world as a whole has been a pretty prosperous place, and this notion of ‘how did we get into this mess’ is a very geographically biased view and in many cases it’s a highly western-centric view.

TB: That’s a very fair point you’re making. What I was referring to when I said how did we get into this mess, I was looking really at the genesis of the financial crisis and a lot of what was very reckless behaviour and a lot of behaviour actually, you know, which led to the place that we’re in.

JO’N: Well, again because of the nature of how we’re having the discussion I have to give you the sort of simplified version that, you know, I’ll give you two alternatives and it’s for others to decide which one they prefer. You know, one way of looking at it, and let’s call it the 40,000 feet way, is that the US had increasingly gone down this path of, and I guess Bill Clinton might have been at the core of the original ‘culprit-cy’ for it, if that’s a word, and it was picked up actually by George Bush, and they were quite happy to create this notion that all 300 million American people could own a house irrelevant of their income. And that presided over much of the mid-90s onwards going through the noughties and that was despite the fact that the national savings ratio effectively as measured went to zero. So America was trying to support a notion, consistent with the American dream of course and in principle fantastic, that every one of the 300 million people that live there could own their own house even if they didn’t have any income. And on one level the reason why we had the problem is because many financial institutions were effectively the intermediaries bringing money from some parts of the world, China being the most obvious but very importantly and ironically, German banks were some of the first to have recognised problems because they were all investing in things to basically take their excess savings to satisfy the domestic savings in the US shortfall. So on one level, you know, I sometimes think people glorify banks into being something that they’re not. On one level all a bank is, is an organisation that is the intermediary between a place or somebody that has more savings than they need and another place that has less savings than they need. And what was building up and, you know, the British Queen said ‘how come nobody ever saw it coming’ and there was this huge outcry here about that statement of hers but lots of people did see it coming. I wrote three papers in the 1990s, saying the US current account deficit is not sustainable, and people used to tease me about it. And of course after a while you give up writing these things, but in many ways it was inevitable that that was going to happen at some point. The thing that was so horrible about it and here obviously many people probably need to share some guilt, obviously bankers included, is the scale of the connectivity of everything meant that when it was obvious that it turned, the whole planet wanted out of the trapdoor at the same time. So we had to adjust in some ways in five minutes something that was in the making in over a decade and that’s why it was so severe.

TB: You’re out of Goldman Sachs and you’re out of banking now, and I don’t want to belabour this but it needs to be addressed just momentarily here but, you know, let me just say something from the US Senate Permanent Subcommittee on Investigations. They had an investigation in 2010 that outlined the role investment banks played in the financial crisis, bundling toxic mortgages into complex financial instruments, selling them to investors, spreading risk throughout the financial system, betting against the instruments they sold and profiting at the expense of their clients. A fairly damning review. Do you think that enough has been done to address these issues or do you think that’s a very unfair assessment of the behaviour?

JO’N: I think it’s a highly distorted soundbite motivated by political observation. I was the manager and leader of a group, and I didn’t deserve the credit for it but my US guys published in 2005 for the first time ever, and we did it many times afterwards, that US house prices were overvalued and they would inevitably fall. We were not stopped by people elsewhere in Goldman Sachs in publishing that paper. I remember soon after when somebody in the Federal Reserve Board was asked what they thought about that prediction, because obviously it created quite a bit of attention – ‘oh, that’s Goldman Sachs’. So you know, going back to what I said earlier, there was an environment going through, that grew in the 2000s that house prices would go up forever. And everybody who could see some immediate benefit of that, whether it was an investment bank, whether it was some guy in the middle of Alabama, and whether that was a politician or an individual house owner, everybody thought it was a great and it would go on forever. So just blaming banks as being these sort of sophisticated intermediaries is ridiculous. But banks do that and of course their job, an investment bank job, is to be more creative and risk taking. So yes, all those things that I know they made but in some ways if there was a broader issue, something that I often reflect back on is that maybe too many other banks were trying to be investment banks but an investment bank’s job is to take quite a lot of risk and offer sophisticated clients sophisticated things. That’s what they exist to do.

TB: Let’s step back a second and as a result of the financial crisis there’s been a lot of regulation that has been imposed on financial institutions including what they can and can’t trade in, including you know, higher capital requirements and so on and so forth all designed, caps on, you know, compensation and so forth for a certain level of executive, all designed towards one thing, trying to make sure what did happen doesn’t happen again.

JO’N: Fighting yesterday’s war.

TB: Do you think the proper regulation is in place, do you think they should have gone about it differently and how confident are you that it will prevent another financial crisis?

JO’N: I’ve got contradictory views about this. Linked to the tone of aspects of what everybody’s said, the crisis was a very severe one but it’s a reflection of human nature. Greed and fear are very, very close cousins. And we usually get economic and financial bubbles because people get so comfortable that greed takes over from the fear. And I’m not sure how you can regulate that away. If you regulate one area so aggressively that it can’t happen there, those instincts will find a way out through some other outlets, and typically what happens is the next problem ends up being from a new source that hasn’t been regulated properly because all the policymakers are focused on regulating so that what just happened doesn’t happen again. And it’s funny, if you look at it in the context of how central bank policymaking and regulation are going, those that had the regulatory powers inside the central banks are sort of shifting them out and those that had the regulatory powers outside the central banks are shifting them in. And you know, they’re all putting so much effort into it, probably in many cases far too much, you know, people confuse better regulation with more. The one thing I could virtually guarantee for you, but I don’t know when, is there will be another crisis and policymakers are not going to be able to do a great deal about it.

TB: And what do you think, if you had to guess, would be the trigger of that crisis?

JO’N: Well, I find myself thinking in a sort of mini turbulent way that the central banks exiting from the super easy monetary policy, which we got a hint of since the end of May or since the start of May should I say, you’ve got US bond yields bouncing up 70 basis points. If the US is ever going to get back to normal, as I said right at the start it’s showing signs of, US bond yields are going to go to at least 4 per cent. All those people all over the world that have made bets in bonds, particularly because of going back to fighting the last war, it’s so trendy and fashionable to be in bonds and not equities, the next bloodbath is probably going to be in the bond market. And in some sectors of the bond market and some parts of the world where the bond markets have attracted a lot of lazy money, there could be unforeseen consequences about that. And so if I had to guess I would think it will have some aspects and some fallout I would think.

TB: I want to talk about the eurozone but before we get to that I just want to ask you about some of the frontier markets because of course you made your name focusing on the BRICS but there’s a lot of buzz about Africa right now, you know, and there’s been tremendous growth in terms of the fastest growing economies being in Africa. Now they’re growing from a much different base than some of these others. Your thoughts there?

JO’N: I don’t really understand this frontier phrase myself. What is frontier? But anyhow...

TB: I think it’s more what they think our market cap is but that’s okay.

JO’N: Okay. But actually, I was in Nigeria, seven weeks back and it’s impossible to not get caught up in the infectious sort of excitement about that place. And I found myself thinking, and maybe this is me behaving bubble-like, I found myself having some sympathy for this nation, thinking that this could be Africa’s moment. I think there are three broad things that are sort of happening, and of course I should add that the idea that you can regard Africa as one is kind of ridiculous. You’ve got South, East, West, North...

TB: There are more than 50 countries...

JO’N:... all completely different. But ignoring that important point, for many of these countries it could be their moment. Three reasons: number one is a lot of them have obviously had a lot of this commodity boost à la Brazil and Russia. Importantly some of them don’t appear to have squandered it, you know, quite as much as those two may have done, and that could be a problem as well but the other two are something more unique. First of all the era of modern technology that we’re going through with the internet and mobile, for very undeveloped societies these are things that can allow jump stepping through generations, and I saw it in Nigeria. So in banking or in agriculture the way creative people can introduce technologies to create markets that can have huge impact on productivity for the most basic forms of life – incredible. And I think that’s partly why Africa’s doing pretty well at the moment. That is happening. Secondly, with it we have a generation of leaders in one or two places, or maybe more than one or two, of younger people that are not part of the sort of inherent and post-colonial ownership; a lot of them trained in the West and they’ve gone back. I know a guy that used to work at Goldman, in cabinet in Nigeria. And they’re committed to applying some of the things they’ve learned from the West to try and do what they can to reduce corruption and try and bring these places into a sort of more normal life. And so all of that is quite exciting. One should not underestimate the scale of where the challenge and where these guys are coming from but I think it’s pretty exciting.

TB: This point you made about leapfrogging because of technology is a terrific point. Can you just broaden on that slightly because others have also echoed that and I think it’s a very, very important point?

JO’N:Well, I think the World Bank actually published a piece maybe four years back now saying that every 10 per cent penetration increase in mobile telephony boosts emerging market countries’ growth rate by close to 1 per cent and at the heart of that is just allowing really remote people to connect. So if you’re in some little village in the middle of some really rural state of Nigeria, for most of the past 30 years, how do you find out the underlying demand and supply competition or usage of what it is you’re producing and how do you get the damn stuff from where you are to users beyond where you are? And it was really hard and that’s why you get a lot of wastage and all the rest of it. With these technologies you can have instant communication with people in all sorts of distant locations, so there’s actually agricultural pricing markets that take place through the internet on a mobile telephone. There are some signs that the whole Nigerian banking system is developing without bricks and mortar. And so different from the world which we grew up in and very importantly so different from the era for emerging markets to try and develop 50 years ago.

TB: When you look at emerging markets, be it Brazil where they’re protesting about corruption, or China where there is corruption, or India where there is corruption, or Africa where there is corruption, there’s a seam that goes through all of this. Why do you think that corruption exists? Is it because of economics, is it cultural, and what would be the best way to eliminate that corruption?  You know, is it possible?

JO’N: It’s not like we’re free of corruption in the West.

TB: No, it just takes a different form. It could be argued that lobbying is a form of corruption.

JO’N:Some people would argue there’s plenty of corruption that’s been going on in Italy for the past 20 years. If you look at aspects of the Spanish crisis, there are some signs that political allies, if not the leaders themselves, have been highly insulated from many of the issues…And I say that because on one level it goes back a little bit to human nature that if any individual is faced with a set of choices and they see that, because of the position they have in the local society or something broader, they can game it that they benefit more than all the others, particularly if you’re not very well educated I think, I suspect, it’s a human tendency on some level, Todd, to just do it.

TB: But look at Singapore where, you know, for public officials the pay levels have been so high that they don’t have those same issues. Is it a question, let’s say, of what one’s paid or is it human nature?

JO’N: This is the third reason I said about Africa, these policy types being trained in the West. What you have to do is to apply economic policies to change the incentives. So if the natural human tendency is to do something, let’s call it for individual corruption or gain, you introduce the incentive system using the tax system or other mechanisms to discourage you from doing that and to give you incentives to do the right thing. And of course that’s why Singapore is, and some other economies are such interesting models. That’s why I often think a lot of people in the US get confused about this. If China has a model it’s not the US, it’s Singapore because that is a sort of controlled society that’s got wealth which is higher than the US. So the Chinese say, why do we want to copy the US when we’ve got these guys that are sort of part-Chinese anyhow who’ve done it... I mean obviously there are issues in Singapore these days as it happens but by and large very broad buy-in to the way life is.

TB: One of the biggest consumer blocks is of course the eurozone, and it’s struggling. You mentioned just off the top a lot of problems there that are still obvious to all of us. Can it recover and how long do you think it will be before it recovers?

JO’N: I’m going to start with a crazy statement. In some ways the eurozone crisis is the least necessary crisis I’ve ever seen in my professional life. Most of the big crises I’ve gone through have usually had some kind of balance of payments deficit at the core of it. An irony of this mess in Europe is if you look at the aggregate of the eurozone together, it’s one of the few parts of the world that is in balance with the rest of the world. So that leads me to the conclusion that if these 17 member countries genuinely behaved as a United States of Eurozone, I don’t know whether there would have been a crisis. And the problem we’ve got is that they all generally speaking behave as 17 individual countries, some more noisily than others, and the markets have sussed that out now for three years and so they’re treating it all as though it’s 17 countries in a game of sort of chicken. And that’s why... it’s not a debt crisis. There are debt aspects to it but for people to describe it as a debt crisis is crazy. Look at the weighted GDP average debt position of the eurozone. It’s too high but it’s nowhere near as high as the US and of course it’s nowhere near as high as Japan. So if it’s a sovereign debt crisis, how come only I know what I just told you? How come people haven’t figure out it’s a problem in the US? And so it’s a problem about the structure, governance and most importantly, in my opinion, the leadership of the eurozone. It’s really a problem about leadership in my opinion.

TB: What should the leadership be doing that they’re not doing? I mean in my opinion it was a flawed model from the beginning, it was basically between Germany and France for political reasons and when it began, they started with monetary union. That probably should have been the last thing that...

JO’N: Well some important Germans always said if you don’t have political union from the start it won’t survive, and it looks like some of these guys were right. I’m just completing a paper for a special booklet about the future of Europe that I’ve been working on this week and I think there’s a generational aspect. I call it, the solution is sort of twofold but it’s not easy. One is a bit more honesty. I think it would help if the euro supporters and Europhiles admitted that the purpose of creating the EMU was not primarily economic. It was to do with the Second World War and to have a permanently secure European future. Because if they did that it wouldn’t have everybody primarily focused on the economic issues because of course, and it’s implicit in what you said, the realistic problem is they shouldn’t have had all these countries joining the damn thing in the first place on pure economic criteria because how could you have Greece permanently locked into an exchange rate with Germany just for economic, simple narrow economic reasons? It doesn’t really make a lot of sense as we’ve now found out. So I think that’s one of the things that’s needed. The second one, I think there’s a generational issue and the mindset of the leaders has got to be to think more carefully about that. It’s now over 70 years since the Second World War. My own kids never sit around thinking about the Second World War. And as we creep through time, and you touched on employment as an issue very temporarily at the start, in some of these European countries you’ve got the most massive youth unemployment problems. And the generation that created EMU has got to recognise that for the future generations that don’t care about why it existed, they want a job and something better. And so I believe, in the post-German election environment, not the election itself, but after it’s over because there’s not any real dispute about EMU in Germany, the post-German period, there has to be a big mental shift in thinking. They’ve got to stop being so proud of why they created it and the fact they created this thing in the first place and start focusing on it actually being something that is useful for people rather than why it happened.

TB: And what probability do you assign within the next five years that the eurozone could break up?

JO’N: I’m going to be a typical naughty economist; I’m not going to answer what you asked me. So before, when people had asked me in 1999 did I think it would survive the first 20 years, I did say there was zero probability of any countries leaving or a break up. It’s no longer zero. I think in the next eight and a half years, if they can’t deal with these kind of big philosophical issues, it might not survive because to compound the challenge, and again as ‘Mr BRIC’ I seem to realise this more than most, the scale of world trade changes is so vast that whatever economic rationale existed in the first place are vanishing. I love to tease some of my policymaking pals, if we carry on the same path as the past 12 years since BRICS came about, Germany will be exporting twice as much to China in seven and a half years, by 2020 twice as much to China as they do to France. And so my joke is, what I say to people is Germany would rather be in a monetary union with China than it would with France. So if you’re going to solve the problem you’ve got to do it now. You can’t keep just kicking it down the road forever because the economic incentive will vanish.

TB: Would it be massively disruptive to the markets or only temporarily?

JO’N: Well, linked to what I’ve just said, and again it’s so funny, I’m just eight weeks out of Goldman, my mind’s drifting off in ways I didn’t naturally think it might. I find myself thinking that as we get closer to 2020, if that’s how world trade continues to evolve, what’s the big deal? If EMU is really important then breaking it up would be really important. But if it becomes less important anyhow then breaking it up doesn’t mean so much.

TB: A question for you here, and thank you for submitting this. Some argue that legal but aggressive tax avoidance is no better than tax evasion. Where do you stand on this debate?

JO’N: Oh, that’s a tough question. I hope the rest of them aren’t going to be as tough as that. Thank you. You know, I do have quite strong views about these things. In my fortunate position in life I’ve got to meet many, many really wealthy individuals, some of which live in these some of these tax havens and I often end up teasing them and say ‘why do you want to live here? There’s nobody…what is it about living here that’s so cool, other than the fact you don’t pay any tax?’ And I’m not sure if it does those locations where these people live any great favours, never mind the fact that there’s some kind of moral obligation. So I think it’s true on an individual basis and I think it’s kind of true for some of these companies. Funnily enough I was in debate over a friendly dinner last night, and I suspect for some of these companies that have come under focus, they are going back to the adaptive and responsible capitalism. The focus of global angst as we recover from the mess of the past five years, is maybe going to shift a bit from the banks to these kind of guys because how can you seemingly generate such incredible personal wealth if one of the ways you do it is to be so successful at shifting your liabilities from location to location so you don’t actually really pay any tax? And, you know, I have sufficient wealth to keep me happy for the rest of my life and occasionally I have bankers that tell me ‘oh, why don’t you do this scheme because you pay less tax if you do it here.’ But I’m perfectly happy paying my tax.

TB: You touched on corporations although most of your remarks were geared more towards individuals.

JO’N: I mean it about both.

TB: The counterargument would be but Jim, look, these corporations aren’t doing anything legally wrong. So if we do feel that what they’re doing should be changed, doesn’t it have to come from new laws?

JO’N: You know, I’ll answer you by the opposite statement of the same issue. Often what really smart people do to evade tax becomes so big that it results in a policy and law being introduced. The second thing is against that, so smart people that understand how the world may change presumably do things to ensure that too much policy restrictivity isn’t brought in. Making a shift back to the banking discussion, I was a partner at Goldman Sachs when it was a partnership and we didn’t have bonuses. We had a capital account and the capital would accumulate in your account and you’d take a draw each year. And you’d only touch the money when you retired or, actually really only seven years after you retired. And I think, it was obvious to me in the build up to 2007/2008, the whole cash bonus thing in finance was crazy. I think by the way Goldman Sachs was actually rather good about this compared with some because we had this culture of the partnership, but it was obvious that that was not having the right structure of incentives. And of course a lot of people inside the system avoided it so surprise, surprise, we now find in Europe it’s close to being law that bonuses are going to be capped at X, whatever X is of salary which I don’t think is a particularly smart thing to have happened. But as I said in the sort of example or the anecdote, the way I put it is if smart people don’t anticipate the consequences of evasion then you end up getting, you know... So yes, there is a difference but laws are usually made for the protection of the benefits of the greatest.

TB: We’ve been talking about certain big issues, we’ve been talking about macro issues as well in terms of country and country specifics. I want to talk about energy for just one moment because, you know, shale is the big game changer. I just want to get your thoughts on it. It’s having a tremendous impact in the US in terms of cheap energy, in terms of its competitiveness and so on and so forth, even to the point where some people wonder if the US becomes totally energy independent, which it probably will at some point...

JO’N: They’re exporting oil to Saudi.

TB: What will its responsibility be or commitment be to the Middle East in terms of, you know, opening, keeping the shipping lanes open? So a lot of thinking right now along shale.

JO’N: So I have spent quite a bit of time thinking about this. If I go back a few thousand decades, I did my PhD about oil during the second oil price crisis and I often say to people theonly thing I learned is that trying to forecast oil prices makes forecasting foreign exchange seem easy – who knows?? But I have a large stack of research from the late 1970s about why oil prices were going to go to $100 a barrel and of course they spent the next 30 years going down before the last 15 years. And I say all of that because the shale response is basically because of ten years of rising oil prices. And to put it in economic parlance, the long term elasticity of supply and demand is always higher than people realise as you’re going through it and that’s what I really learned from my PhD. And so I said to my guys that I was working with three years back, you know, because we’d done a lot of research on this supplying all the BRIC 2050 stuff to it and we’d said that we’d have a 20 year commodity super-cycle. Three years back I said you know what, the price moves have been so big I think it’s going to come to an end before that. The shale thing is one of probably a lot of other examples that may be happening in other commodity areas we don’t focus on so much in the early stages of this. So I think it’s a huge, huge story. Maybe one of the reasons why the US is more on a sustainable recovery is because it’s a new technology, the new thing to take over from whatever it was before. It’s a huge story. You have big old industrial companies, I think both Dow Chemical and DuPont for  example, first time in my professional life, saying they’re going to shift some stuff back to the US because of this so it’s huge. Huge. And of course it could have many consequences for all sorts of geopolitical things, obviously the Middle East included.

TB: We’re just about out of time here so I want to ask you a few questions because you mentioned Manchester United in passing, in a kidding way early on. We know that you’ve been a devout Man U fan all your life and of course Man U is a global brand. This is why I’m going to ask you a couple of questions about it. You’ve been a director there, you’re good friends with Alex Ferguson, the manager who just retired. He had an amazing track record. What do you think that business in general could learn from him in terms of running an organisation or in terms of leadership?

JO’N:I do think Alex’s success as a leader is almost unparalleled. You know, people were going on to me about my 18 and a half years at Goldman. This guy, 27 years, and I’ve seen him with a lot of footballers including some recently; they’re scared of him. Even guys that have been playing and are paid ridiculous amounts of money, they’re scared of him. I don’t want to bore people about the years of Manchester United but he’s effectively generated four different really successful teams through this 27 years during wildly different circumstances surrounding world business and world football. When Alex first came to Man United, Martin Edwards nearly sold it for less than £10 million. And here it is today quoted, sort of in a cack-handed way on the New York Stock Exchange and at one moment a few weeks ago it was supposedly worth £2 billion. And here’s Alex still managing, he’s dealt with the structure of an individual owner, a publicly quoted company to the controversial one of the past five years, one of the most highly levered takeovers in many things I can see and Alex just manages to somehow deal with all of that and get on with it and have this staggering success. So I think the underlying message from it all is the adaptability as well as keeping focus is something that so many of us could learn from. It’s just incredible. It’s so hard to do...

TB: The structure of football, especially in the Premier League here which again globally people follow, the pay structure here is off the charts. If you look at it compared to let’s say Germany for instance, German players make a lot less and most of the German clubs actually are owned by the fans.

JO’N: Oh, I love it. I love it. The Dortmund model to me is something not only beautiful but quite important for supposedly declining parts of Britain. Dortmund is at the heart of supposed industrial decline in Germany and yet…I went to the European final and I happened to be in the end with the Dortmund fans and my son was jealous. I think probably half the population of Dortmund was there and the noise and the passion that they created and the excitement of the team, it’s fantastic. I was asked to do a speech at my old university about football and economics and of course first I was just going to do it rather jovially but I realised quite a lot of people that studied these things were going so I put in a lot of effort. And I was thinking at one moment of saying the Premier League is where banking was but with a five year lag because the whole structure and the way the wages are is just insanity. In the past five years the increase in the value of wages paid in the Premier League is the same as that of Germany and Spain put together. Is the Premier League that successful compared to arguably the two top footballing nations in Europe today? I don’t think so. For the premiership clubs the average wages to income ratio is 85 per cent. People complain about what it is in the City if it creeps above 50 per cent. The average is 85 per cent. It is clearly unsustainable.

TB: I know you have no love lost for the Glazers who own Man U but if you could structure football in such a way, would you allow any clubs to have public shareholding and would you allow any foreign ownership or would you make everything owned by the fans?

JO’N: I also chaired an event in New York just before I left about the growth markets in the changing world and there was a session on there about football and I hadn’t realised until that moment that, I believe, you cannot own an NFL club either as a non-American or with leverage, which I hadn’t realised. I wish I’d known it a few years ago. It’s partly why I have this adaptive capitalism thing in my head. I don’t have any views about any nationality owning something in other countries. I don’t see the need to have restrictions against that. I’m a very sort of global person and it’s served me so well and I have friends from all over the world. But what I do think is if you’re going to have a non-resident owner of something as core to people’s weekly lives as football, you have got to have some kind of responsible behaviour of putting something into the community. And I think the notion of some sort of fan ownership, as we’ve seen with Dortmund and a number of German teams, is really healthy. I got interviewed by a guy that runs one of the hardcore fanzines at Man United and the most interesting thing in the discussion is something he said. He said for hardcore United fans the biggest kick they get these days is going to an away League Cup match which is the third tier competition. I said why is that? He said there’s no tourists, it’s affordable and we can have a laugh.

TB: If you look back at the last hour, we’ve talked about excess, be it what happened as a result of the financial crisis or what happens in certain other instances, and you’ve been thinking a lot about responsible capitalism and adaptable capitalism. Ten years from now, given all the trends that we know and given what we know about human behaviour, do you think the world will look very different in terms of responsible capitalism?

JO’N: I think the adaptive bit is clearer to me than the responsible bit. We’ll all be more responsible when it kind of feels fashionable to be more responsible. What is clear is, and I’ve learned this in my own professional life, successful countries, successful people, successful firms are ones that can adapt as you go through a change. I don’t think there is one right model that is always right for anything and I think the way to really enjoy life, that I’ve found through my life, is that you change and adapt what you do and then how you deal with these challenges, hopefully ahead of the issues being so damaging if otherwise you stay on the same path. That I’m sure about.

TB: Jim O’Neill, thanks so much for your thoughts this past hour. I’m Todd Benjamin. Thank you for joining us live from the International Bar Association.