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Mohamed El-Erian on Egypt, Japan, and the U.S. economy

By Mohamed El-Erian
April 4, 2011

Below are Mohamed El-Erian’s responses to questions asked by readers during the March 31 Reuters Newsmaker interview with Global Editor at Large Chrystia Freeland. An earlier set of questions and answers can be found here.

Would you give us your views on how Egypt shall grow economically and socially?

It is important to remember that Egypt is still in the midst of its revolution whose objective is greater democracy and individual freedoms. In the process, it is navigating a complex set of economic and social transitions, as well as a political one.

The economic component must deliver the conditions for sustained and inclusive economic growth, curtail rent seeking activities, and re-establish financial stability. Importantly, this speaks to both policies and institutions.

On the social front, Egypt needs to make urgent progress in reducing poverty, countering income and wealth inequalities, and enhancing the range of social services provided to the most vulnerable segments of society—particularly in the areas of health and education.

All this requires the critical and sustained implementation of a well-designed multi-year effort that has broad support among Egypt’s population. This can only happen in the context of political progress, including delivering on promises to lift emergency laws and to hold free and fair elections for parliament and the presidency.

What do you think about the next steps for Bank of Japan in the near term?

The immediate emphasis is on opening and maintaining emergency liquidity and credit windows in order to minimize the decline in economic activity.  Down the road, the BoJ will have important and difficult decisions to makes about the scale and scope of monetization of debt issued in connection with what is likely to be a large reconstruction program.

The U.S. is approaching the end of QE2. What do you think would have been a better option?

You are right, QE2 is now in its final phase. Moreover, absent major economic and political developments, it is unlikely that there will be a QE3.

The net impact of QE2 is yet to be established. Indeed, the benefits of the program have come with a set of still developing costs (what we call collateral damage) and risks (unintended consequences).

I do wonder whether the Fed would have opted for QE2 had it known that there would another set of fiscal stimulus measures at the end of 2010 (extension of all the Bush tax cuts, payroll tax cut, etc.)

Do you really feel the full faith and credit of the U.S. Government is at risk?

Yes but not immediately. It will erode over time if the U.S. fails to design and implement an appropriate medium-term fiscal adjustment program.

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