Interfax, Michael Milken: Economic growth shouldn’t depend upon a handful of banks
February 25, 2010
Legendary American financier Michael Milken, the man behind the booming development of junk bond trading in the U.S. during the 1970s and 80s, is in Moscow to attend The Russia forum 2010, organized by Troika Dialog. Mr. Milken, who has shifted his career focus to the humanitarian aspects of economic growth, spoke with Interfax about the prospects for Russia’s economy during the post-crisis period.
– Mr. Milken, Russia’s economy has been hit quite hard during the current financial-economic crisis. In your opinion, where does its greatest potential lie, and what will help it to overcome the crisis aftermath?
– Russia has significant potential deriving from its natural resource wealth and ability to incorporate other countries’ experiences. The main task for Russia at the moment is to redistribute its natural resource profits so as to diversify its economy.
Russia’s main source of wealth, as well as perhaps its greatest natural resource, is its human capital. True, oil, gas, coal, timber – this is important, but what is far more important is human potential, which can be increased through improvements in education and increasing life expectancy. Furthermore, it is important to concentrate on infrastructure. Russia has always been a world leader in the sciences. What I have always been intrigued by in Russia is the opportunity to apply Russian scientific achievements to industry and the economy. Regrettably, the application of the sciences has always been inhibited by defense and state orders.
– Do you get the feeling that Russia’s battle with the crisis amounted to lending support to old and inefficient businesses?
– I wouldn’t start comparing Russia’s behavior during the crisis to other countries. This is natural for government and society – hanging onto the past, because this is something that’s very familiar. I have to say that creating new jobs is critically important for economic prosperity. For the most part, this happens in smaller businesses. In the U.S., for example, between 1970 and 2000, over 62 mln jobs were created by small and medium businesses. Larger businesses, meanwhile, lost 4 mln jobs over this same period. Even so, the U.S. government has bailed out large and inefficient companies. So Russia is the rule rather than the exception. One of the challenges for economies that depend on natural resources is that very few new jobs are created. Therefore, in order to have a prosperous economy, new jobs have to be created. You have to realize that growth in efficiency in a number of sectors will lead to job losses. Therefore, the key is to create new industries.
– In your opinion, are investments in Russia still a bet on oil?
– Not just in Russia. The markets in Australia and Canada also move in line with changes in the oil price. The challenge is to figure out how to use the resources to diversify the economy. To cite an example from America’s experience – Boeing, which is headquartered in Seattle, decided one day it would relocate to Chicago. The local population thought that the departure of a leading company would create a catastrophe in the city. But this didn’t happen. Eventually, companies like Microsoft and Starbucks appeared in Seattle. None of these companies existed when Boeing was in the city. Seattle survived because of future industries, not older companies. Or take a look at Saudi Arabia, which derives its wealth from oil and gas. It is trying to diversify its economy by creating chemicals factories, aluminum plants and reforms. So Russia isn’t alone.
For the future, it is critically important for Russia to develop its financial market. For the past 30 years, economic growth in the U.S. was supported by tens of thousands of individual and institutional investors, not by leading financial institutes and the banking system. They invested in venture companies and small and medium business. If the strength of society rests upon just a few financial institutes, then it will always be at risk of losing access to financing should any problems arise. Over the past year, companies across the world raised $2 trillion, and not by means of the banks, but through private and public placements.
– That is, Russia must develop its investor base?
– Yes. You can’t build an economy without a normal corporate bond market. And in order to create it, you need thousands of financial investors. If someone has an idea for a new business but can only borrow money in five banks, then competition to attract financing will turn into a beauty pageant. For example, Bank of America at the start of the 1980s was the world’s biggest bank. By the end of the decade, it didn’t even rank among the top ten, because it had issued loans to emerging markets and companies in the real estate sector. Its balance fell by 50% in real terms. It spent the entire next decade recovering its capital structure. If the U.S. economy had depended upon this bank, its prospects would be unenviable. So the secret to success for Russia is to develop its own capital market and bond market, where financial institutes could play the role of underwriter or middlemen. A situation where economic growth depends upon a handful of banks cannot be allowed.
– Where do you see Russia’s place among the other emerging economies: China, India and Brazil?
– In my opinion, Russia will rank among the ten largest economies in the twenty-year horizon. The exact position it takes will depend upon how well government and business are able to diversify the economy and foster social development based upon information.