Abu Dhabi : Four years ago this month, John Micklethwait took over as the 16th head of one of the most recognised global brands: a 167-year-old weekly magazine, or newspaper as its staff still like to call it, called The Economist.
Of all the unique aspects and style practices that make up The Economist, including the continued ban on printing the by-lines of its reporters, perhaps it is the publication's resilience in the face of the sharp decline in print media in favour of electronic news that has turned heads.
While newspapers and magazines worldwide, especially in the West, have been forced to cut costs and circulation just to stay in business, The Economist has been expanding its staff and has even seen its circulation grow.
While on a trip to Abu Dhabi for one of the publication's regional CEO conferences, Micklethwait offered his views to Gulf News on media, economics and politics.
Following are excerpts from the conversation:
GULF NEWS: Mr Micklethwait, your circulation is up from 1.2 million to about 1.4 million in the past two years, a period that has seen the onset of the global economic crisis and the acceleration of the print media's decline. Has your publication benefitted from the recession?
JOHN MICKLETHWAIT: I think to begin with, it helped. I think the crash, the original Lehman Brothers spate helped from the point of view that people desperately wanted to know about it. But now it definitely isn't helping. The answer is we've done better than other people, but we would be mad to pretend we were doing fantastic. Circulation is still going up, but it's going up slower than it was. Advertising is down.
The reason I think why we continue to do better than other people is the fact the business model helps. We tend to rely on advertising less than other people. There are two main reasons. One is globalisation. Around the world, people care a lot more about what happens in other countries than they used to. So you can be based in Dubai and what happens in Delhi or Detroit matters to you and vice-versa.
The second thing is our sister magazine Intelligent Life. That makes a big difference because everyone talks about the media going down market. It's true the bottom of the market's got bigger. But actually, if you look at all of the statistics at the top, for example the number of people who are college educated and are reasonably well-off, all those numbers have gone up hugely. So you see people much more prepared to mix and match. So they will buy Hello Magazine as well as The Economist. That I think is the preferred reason; one, which to be honest, I didn't really appreciate about a year or so ago.
In the four years since you took over as the head of The Economist, you've witnessed the peaking of global markets and the worst economic decline since the Great Depression. Do you see the life span of the economic cycle changing?
If you look at what happened to cause the crunch, it came with fancy new names like credit derivatives and various new financial shenanigans that dealt with sub-prime. The basic thing was fairly simple: people borrowed too much largely against property and got into trouble. Derivatives certainly made that worst.
I think economies which have been through these balance-sheet recessions take time to recover. It's a fairly standard form of economic event in terms of what has happened. That doesn't make it any less devastating in terms of what has happened for people, but in some ways it's the same as previous recessions.
What was extraordinary about it was the severity, the levels of debt that people bought up, the scale of which governments had to intervene. I don't think anyone is entirely clear as to how long this will continue. Most of the evidence says when you have a balance-sheet recession, it takes quite some time to come out of it. That said, this amount of money going into it could have an effect earlier than some people think.
Some people call it the "LUV" effect, where you have "L" [representing] Europe where the economies have gone down and are now flat-lining. You have "U" [representing] America which gradually seems to be coming out. And you have "V" [representing] China and India which have gone down a bit and shot straight back up.
I don't see anything fantastically new; I see new components. You now have emerging markets in a way you never had before. You've got the state present in quite a lot of things in a way we haven't seen before and sovereign wealth funds. You've got a series of new characters but the play to some extent remains the same.
Do you subscribe to the view that traces the severity of this recession to financial deregulation that took place in the United States in 1999, namely abandoning the separation of commercial and investment banking, a rule which had been in place since 1933?
No. That was a factor. But there were other things as well. The monetary policies of a lot of countries around the globe also [contributed]. There was the monetary policy of America, but there was also China. The excess of savings created a kind of war of money which pushed various economies.
There were also other small things at work. Many people talk about regulating the economy and that all the problems were down to deregulation. But if you look at the epicentre of what went wrong, that was the American mortgage market which is probably the most regulated market anywhere. You've got two federal agencies and they have their own regulator as well. You have God knows how many laws set by Congress about who's allowed to borrow what.
So it was a mixture between traditional panics, manias and crashes. The cycle got out of hand; money piled in, debt went up. The excess of savings from the emerging world, too loose monetary policy in America, and the difficulty people ran into trading derivatives [exasperated] the problem.
But a significant pool of economists and politicians have been outspoken about the need to reintroduce the separation between investment and commercial banking, including President Obama who is now pushing for legislation to do just that. Are you saying it is not necessary?
Separating investment and commercial banking was a factor, but it would not stop there being more crashes. The people who are concentrating on it to that degree are wrong, because you have to look at the way that banks work. In some ways having a broader spread of risk helps. In other ways it doesn't.
People have looked at what would the effects of the Obama plan be? The amounts of proprietary trading that banks do tends to be a small amount. I don't think it would address the fundamental risks that people talk about. In the end, the "too big to fail" argument doesn't come down to the gap between investment and commercial banking. I think people who see that as a silver bullet to answer everything else are wrong. Look at Dubai, Northern Rock and some of the big American lenders. It was straight-forward lending too much. The investment banking bit didn't make a big difference. It certainly made a difference for Lehman, but it didn't make a difference for all.
So is more regulation not the answer?
I think better regulation is the answer. I'm not convinced more regulation is the answer.
If you look at the 25 years before the crunch, the big thing in that period was not Lehman Brothers or Goldman Sachs paying themselves bonuses. It was a billion people leaving poverty and jumping up towards the middle class. So from that perspective the broader trend toward globalisation is one of the most remarkable things we've ever seen and certainly remarkable economically in terms of the good it has done for people. You certainly don't want to regulate that, in the sense of the broader trend toward globalisation.
The debate is over what might be described as financial globalisation. I will not tell you it was a brilliant world where we had $62 trillion (Dh227.73 trillion) worth of credit default swaps. And people like me also exaggerated the levels which we thought securitisation was going to help.
But I think you have to be very careful about regulation, because you have to remember the epicentre of this was the most regulated market. People are always regulating to deal with last time's problem, when to some extent markets self-correct.
I think some part of being a supporter of markets in the way The Economist is means you have to accept that there are going to be panics and bubbles. We spent four or five years warning of those bubbles, but in the end it's part of the way markets work.
So what regulatory reforms do you feel are most essential right now?
I think it goes back to capital. If you police banks through capital, that's still your best chance of preventing them from doing something terrible. And that means essentially telling them to allocate more capital against more risky activities.
Most of the issues that come out now such as bankers' pay… those have not completely dealt with that, but they are largely dealt with today. If people want to pay themselves huge bonuses and yet leave their bank in a more risky position, then by the same token they should have to put up more capital for that.
Capital is still the best way to deal with quite a lot of it. It doesn't get you all the way through. You still have the prevailing issue, the "too big to fail," and that's not just an investment-commercial banking problem. To some extent, it has been made worst by the crunch because now there is the implicit assumption that government will step in. The sooner governments get out of banks and the banks are left to the market, the better.
Do you think global recovery still hinges on US recovery as we've seen in previous recessions?
I don't think it does entirely. But America is still more important than everywhere else. You can see that because [even as] China and India are moving along, they are not big enough to pull the rest of the economy along.
If Europe and the rest of the emerging world began to pull ahead, you can just about get by without America.
America is still the main possible way of resuscitating the economy. The last economic boom was driven heavily by the economy consumer. And there isn't really that many signs that the American consumer is putting her hand back into her purse and spending as much as she used to.
We've seen ambition for regulatory reform in the last six months as economic recovery began to take hold in the West. Do you think that poses a risk to the momentum of the overall recovery?
I think in the short term regulatory reform is not going to make a gigantic difference to the recovery. In the longer term, you hope they will do things right.
To some extent, the clearer the regulations are and the sooner, the better. But people are not exactly sure what's going to happen. Some people say regulation is impossible because there are so many financial centres… which is why you should get the top seven or eight financial centres to follow the rules and most of the rest will click in behind them.
It's a very difficult moment now because everyone is looking at the world economy and it strikes me that there's three judgement calls that you can make. These are the ones financial policy-makers around the world are looking at: One is what do you do about the banks. It's essential that you start pulling state money back out of them. But if you do that too soon, you're going to kill the recovery.
Second one is the economic stimulus. When do you call back stimulus. You've already seen quite a lot of places, obviously Greece first and even Great Britain is very much in this category… if you don't get your fiscal house in order, the markets will start punishing you in other ways.
Lastly, you have inflation versus deflation. People are still worried about deflation on the whole rather than deflation. But you still have to have a plan for what to do when the cycle reverses.
The reasonably prudent outlook for the world economy is that the people who've run the economy for the past two years will handle those three challenges pretty much in the same ways they have done so far. On the whole it's very easy to be resentful, but we did avoid a depression.
2010 looks promising for some Middle East economies, namely Qatar, Saudi Arabia and Egypt, according to economist projections. What challenges do they face that could put their growth prospects at risk?
The obvious difference between those three is Egypt is not a resource-driven economy.
In terms of the overall picture, for Qatar and Saudi Arabia, they have had this continual sustained bonanza from natural resources and it's a question of whether they can turn that into more forms of productivity.
Egypt is different. It's closer to Morocco… it's a straight-forward emerging economy. It's about an emerging middle class and how that develops. It's about whether there is a way to make the Mediterranean the sort of region people have talked about. And you have this huge population pressure, but which in one sense is a source for growth.
Then there's politics. For Saudi Arabia, I think it's a country which sort of makes its own problems. People would kill to have the sort of figures it does, even now. It's what it does with the money that comes in.
Do you see it's possible that the Middle East can continue to do essentially what China has done, in continuing to reform and grow economically while doing very little to reform politically?
I've got problems with comparing the China model with this region. The first is the sort of growth that the resource-driven countries have had is almost exactly the opposite growth China has had. China has not been driven by natural resources like this region had.
There's a slight comparison to be made but if you want to be paranoid about this region you always come back to politics very quickly and if you want to be paranoid about China, you also come back to politics.
The level of social dislocation in both regions is huge. Here, you see buildings sprouting up and people coming in. Throughout the Arab world, you see the issue of loads of young men wanting jobs and that's before you start mentioning words like Iran, Iraq and the Middle East peace process.
That also applies to China. China also has bigger political problems than people here might immediately think of.
I'll give you two statistics: In one year, and I'm pretty sure it's 1998, more people moved from the country side to the cities in China than across the Atlantic in the 100 years before 1920. The second is due to the non-births or early deaths of vast numbers of girls, China is heading towards a situation where it will have more young men without brides or women they can conceivably marry than the entire male population of Western Europe.
I think this helps explain why the regime in China remains jumpy. Even though China is doing very well, the regime remains jumpy and nervous in some ways more than governments here.
