February 16th, 2014
12:10 AM ET

Summers on developing markets

Fareed speaks with former U.S. Treasury Secretary Larry Summers about U.S. economic policy and developing economies. Watch the full interview on GPS this Sunday at 10 a.m. and 1 p.m. ET on CNN.

If you look at what happened a couple of weeks ago, when there were some indications that the Fed might start reversing its course – you know, either raise interest rates or end what is called the quantitative easing policy. What happened was the stock markets here swooned.  Markets around the world crashed and countries like Turkey found themselves in very big trouble, very fast growing countries. Does that suggest that the world is not ready for a return to what would frankly be very normal interest rates?

They are now so abnormally low, that many people believe they have to come up to some kind of historical norm and when that happens, we will see another financial crisis, because assets and markets around the world have got inflated and they're going to get punctured again.

I think there’s no question that in a number of countries, a period when it's been very easy to attract capital because capital could only earn a zero return on U.S. Treasury bills, has bred a kind of complacency and a kind of over borrowing. And the sense that it was going to get a little more challenging in the competition for capital has raised a set of fears and brought a set of problems to light. That’s really the story of the so-called fragile five countries – Turkey and India, South Africa and Indonesia, and Russia, each of which, in their own way, probably has become more complacent than would have been ideal during this period of quite extraordinary financial conditions.

But I think the Federal Reserve is going to have to do all the things that it judges to be appropriate in the context of U.S. economic expansion. And developing countries will need to find ways of standing on their own two feet without the spur of the extra investment that comes from extraordinarily low interest rates.

I think it's also important to remember that the emerging markets have a huge stake in successful and strong U.S. economic growth.  And to some extent, we're getting this tightening of monetary conditions because there's a sense that growth in the U.S. may be accelerating. And that growth in the U.S., if it does accelerate, will bring substantial benefits to them as exporters, which will help to offset any adverse effects of higher interest rates.

So I think it would be a grave mistake for the U.S. Fed, the central bank, to tighten policy absent clear evidence of growth at higher rates than we've seen for the last few years being established.

But at the same time, when the time comes, there really isn't going to be an alternative to a normalization of policy and that normalization of policy will be, and that growth, will bring benefits as well as risks, to the emerging markets.

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Topics: Economy • GPS Show

soundoff (8 Responses)
  1. matslats

    Its called the boom-bust cycle. Its a major source of revenue for banks so don't expect it to change.

    February 16, 2014 at 1:08 am | Reply
  2. USA Corporations

    Is USA market 'over-developed', 'over-opened'? We import from all-over the world, but forgot about our US interests, our jobs, our US corporations, our US banks. We talk smart about 'developing economies-countries', but have almost no business in there. These 'developing markets' are already captured from big Asian Corporations, so it is not gonna be easy for USA Corporations to get a piece of the cake.

    February 16, 2014 at 6:05 am | Reply
  3. chrissy

    We "import" from all over the world because we have too. When was the last time anyone saw a manufacturer of telivisions in the US for example? How can we compete with that??

    February 17, 2014 at 4:32 pm | Reply
    • Marcel, Italy

      We in Europe have TV monitors for you: PHILIPS from Netherlands, Loewe from Germany, Bang Olufsen from Sweden or NEOVO from Italy, ...and you in USA have DENVER ELECTRONICS and Texas Instruments, ... you don't need to import 'samsung from s.korea'.

      February 20, 2014 at 6:57 am | Reply
  4. j. von hettlingen

    The Fed injected cash to cope with the 2007-08 crash. Investors sought better returns, including in emerging economies especially as the large ones such as China, India, Indonesia were largely spared from the US sub-prime crisis.

    February 19, 2014 at 8:29 am | Reply
    • j. von hettlingen

      That the Fed feels it can end its policy of easy money comes as no surprise. The US economy is recovering.

      February 19, 2014 at 8:33 am | Reply
  5. Ron

    The conventional explanation is that the FED taper caused the economic troubles of the fragile five: Turkey, India, South Africa, Indonesia, and Russia.. I believe there is also another likely cause of the economic turmoil: falling commodity prices.

    February 20, 2014 at 9:49 am | Reply

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