OBG talks to Jim O’Neill, Chairman, Goldman Sachs Asset Management

Interview: Jim O’Neill

In July 2012 the European Central Bank and the Central Bank of China reduced interest rates. What does this mean for emerging economies?

JIM O’NEILL: We have started to see evidence of things slowing in many places, as well as falling job numbers in the US. Obviously the European crisis will have its own ongoing negative consequences. But, I wonder whether there are bigger challenges ahead for some countries, and I do not just mean for the Brazil, Russia, India, China and South Africa (BRICS) and emerging economies, I also mean for the US. Counter to that, however, is the performance of some equity markets. The Next 11, for instance, which comprises Turkey, South Korea and Mexico, among others, averaged 12% in 2012. And although some are negative about India, the market there has risen by 13%. It is difficult therefore to say if the mood or the market is right.

Are you saying that sentiment is too much of a factor in some developing markets?

O’NEILL: I am not sure it is that simple. One of the consequences of the big slowdown and crisis in Europe has been that oil prices have fallen sharply. Of course, for oil importing and consuming countries like India, that is good news. It might therefore be an indicator that the markets view this period of weakness as temporary. And when I reflect back to the 2008-09 period – the last time that the mood was as dire as it is at the moment – everybody said that it spelt the end of BRICS. However, the significant drop in oil prices actually played a really helpful role for a number of emerging markets. That might explain why the markets are demonstrating this disconnect; the numbers are disappointing all over the world.

What is the basis for the current focus on regionalisation rather than globalisation, and what is your forecast for these regional blocs?

O’NEILL: I do not think it is that strong. Take Brazil as an example. The country has been a success story over the past decade, but a large part of this has been because of the remarkable strength of the real, which has created some of the financial problems that the country is currently experiencing.

And, when viewed in real terms, Brazil’s economy has not given us many positive surprises over the past 10 years, as it has only grown by about 3.5% per year.

So, on what are you going to base these regional growth models – a picture such as this? Yes, potentially Brazil could be the centre of the Common Market of the South (Mercosur), or something similar, but I think we need to see some evidence that Brazil really has changed and is not solely on commodities.

Then consider the regional bloc with the most problems, the EU. This is arguably the most established of these groupings and has the strongest political impetus to succeed. If it is not working there, it does not bode well for the other areas.

In many senses Europe is a lesson in how ambitious we should, or should not, be. When I hear discussion of monetary blocs in Asia and elsewhere, it is a fantasy in my opinion. Even in parts of the world where the economies are similar, and there are huge trade volumes between these countries, the picture is not that much rosier. I think governments need to be careful about locking themselves into blocs and really think things through before acting. Indeed, there is an angle here going directly back to the BRIC theory.

People are attempting to forge these unions at a time of considerable economic uncertainty, and that is dangerous. Germany today exports more to BRICS than it does to France. No one, myself included, would have thought that was likely when the European Monetary Union was established.

And if the BRICS countries do what we have so often said that they will over the next two decades, why would Germany be interested in tying itself into tight and binding relationships with the rest of Europe? The economic lives of European countries will therefore be dominated by BRICS, as well as others.