there's always nobody in the hall i know that even there's another room with us another screen and there's a whole hose again as is usual with the festival kaushik basu was a guest of the festival in its first edition so and he was already a professor at the cornell university he was an advisor to the indian government he was an economist who had been a scholar with a martial and over the years that went by he took a leave from the canal university he was called upon by the world bank where he is the achieving economist and vice which is beyond the invisible hand rethinking economy for our and this book has just been translated into italian indeed it was published may 2013 in italy and i believe that this is the greatest contribution by professor kelsey this is a book that is going to be presented during the afternoon with the meeting with the author with tonia professor is going to talk with professor luigi zincalis about the subject matter of this book i don't know if you agree on anything it's going to be quite a challenging meeting again indeed i'd like to get ready to that meeting i looked at the book i skipped through it i started reading it and i think it is quite an important book i like to go through the main features of this book of what i think are the main features of this book before giving him the floor on reading this book i felt i could understand it despite me not being an economist and so i believe that this is truly a book which is addressed to the wide audience not just to the experts the second reason why i appreciate this book is its timeliness indeed over the past few years all of us have been ruled by the dictatorship of economics we know that very well in italy we've called upon the economist to rule the country in the last one government in italy so we look at economics as a something that rules the world that makes us do what we have to do that sets its laws and rules on tells us that this is not necessarily the case indeed the book tells us that the economy can be discussed and looked upon in a different perspective especially from people mainstream economists so i believe that this is about more deported economic thinking and uh it also it questions the mainstream economic thinking this is a book that certainly um and by somebody who's actually made because it is mainstream economy and that challenges mainstream economy as well when i looked at the book by khao shek basu i was really very much taken aback by the fact that there is an issue which is discussed because uh and that's something that is considered as inevitable very much as the weather is and this issue is an equality's inequalities in this as we read in the very first pages we see that inequalities is increasing and as a matter of fact inequalities are at top level uh and at an unparalleled level indeed the gap between the hub and the have-nots is really at the highest level and the writer says economic thinking all too often choice and justify this but as the author says this is not necessarily the role of economists and as a matter of fact the author believes that the role of economist is in fact that of challenging this approach and to try and tackle the problem so the problem of inequalities is also very closely closely correlated to the issue the main issue of the festival this year sovereignty in conflict because when inequality takes place within societies and when it takes place among nations and economies this role is very much questioned it's by well-being well-being can only be on condition that you are um have to bear with an ill being well then the causes for conflict certainly are all there having said this much i'd like to give the floor to professor kaushik without any further ado pietro thank you very much for that very warm introduction i should also begin by thanking um tito boyeri here giuseppe latarza for the invitation to come back to trento and i say come back because i was here actually eight years ago and it gives me just great pleasure to be here i have to say walking around and seeing the squares with people gathering for discussions it is reminding me of what one has read i know the analogy is not exact but third and fourth century bc gatherings around socrates and plato people gathering students gathering for discussions in squares it is reminiscent of that and having the backdrop of the beautiful buildings of course makes that feel even more real so thank you very much for giving me the opportunity to be back in that setting we are living through one of the most unusually difficult phases for the global economy for two reasons one happens to be the immediate problems the problems that you living in italy you're feeling it directly a lot of it is caused by things which happened in the short run the subprime crisis in the united states in the housing market the sovereign debt crisis in europe but i also believe that a lot of this has deeper causes of the problems that you're seeing causes which are rooted in globalization causes which are rooted in new technologies which have developed over the years no one is responsible for these causes and let me begin by telling you what my belief about globalization is globalization is not done by any single individual taking a decision about it it's the outcome of thousands and millions and billions of individuals discovering little bits of new technology little ways of doing things that has led to globalization globalization is now a fact of life a bit like gravity you may not like gravity but to have a discussion about whether to have gravity or not is a completely pointless discussion and globalization is a bit like that there are aspects of globalization which you need to tackle there are important challenges which you need to tackle and i plan to come back to this and the conflict of sovereignty is a very nice title for me because my book which was just mentioned by pietro has a lot of discussion on the notion of sovereignty and its conflict and i will towards the end of the talk come into that matter today's crisis is a crisis of these economies but it's also a crisis of economics economics as a discipline that is what my book is about and i do want to touch on the crisis of the economics discipline and how we have to chart out on into new paths you know i've been very lucky in observing the global crisis because i've seen it from different places there are some scientists who specialize in studying storms who get into planes and follow the storm as a storm is progressing i had a natural advantage of that kind when the crisis was developing in the beginning it was the mortgage market in the united states where the crisis first developed 2007 2008 i used to be a professor in united states reading the newspapers reading magazine columns and trying to understand the subprime crisis then by 2009 the crisis had moved out to the rest of the world and i was very lucky just then i also moved out from the united states and went to india as an advisor so i was now following the crisis to the rest of the world and in over the last seven months i've been with the world bank so as the crisis becomes a global crisis i'm getting to see get a perspective on that which is very very rich i'm going to discuss today's topic from both the challenges in industrialized countries europe included but a little bit from the perspective of emerging economies developing countries for two reasons i got to see it from india when the crisis was first developing and in the world bank that is my charge and that is what i get to do you know when i went to india in the beginning it felt as if it's the same group i'm interacting with because at the top where you're having discussions whether in rome or washington london new delhi or daares salaam the discussion is very similar people are educated in the same places very very similar discussion but when you go down into society that you begin to see differences i have to tell you my first realization that i'm in a totally different country when i went from the us to india was in my first week i i was the chief economic advisor to the government i had a government driver who was in charge of taking me around and my very first week when i got into the seat and was reaching out to put on my seat belt in the car my driver in delhi a proud driver of the government who knew that i used to be a professor and now i'm the main adviser to the indian government he turned to me and very shyly said sir now that you're the chief economic advisor of the country you don't need to use a seat belt anymore you know it's a sudden realization that it is a very very different view that you're contending with it's a respect of individual liberty taken to its extreme where he's telling me that i need not put on the seatbelt anymore it's my decision from here onwards in fact i'm remembering the only other time i've had a similar experience was a flight from zanzibar to dare salaam only time on a flight where no one told me to fasten my seat belts and i really respect the respect for individual liberty on that it was my choice whether i did it or not well with that let me get into uh the more serious problems and let me straight away show you the kind of thing which led to the problem that italy is today engulfed in it is to do with the following the subprime crisis was yes it played a major role but the subprime crisis simply lit the match on something which was ready to light up so it's not fundamental it was a problem i've written about it analyzed it i will not go into it in the united states but by 2010 we are seeing the sovereign debt crisis of europe and the european sovereign debt crisis is a bigger crisis and beneath that are faults in the creation of the eurozone there are defects and faults in the creation of the eurozone i'm saying this a bit self-consciously and not at all critically because the creation of the eurozone is one of the biggest experiments deliberate human experiments in the economy it's not surprising that there will be defects in that but it is some of these defects which showed up and created the first crisis i'm going to show you one picture which to me summarizes this actually perfectly this is a picture of borrowing costs of different countries in the eurozone from 1999. when the eurozone got created everyone misunderstood i don't think there was anyone who fully understood the fault line and the fault line was this i'm going to explain this picture to you in one moment the fault line was this eurozone was a monetary union but it was not a fiscal union when a government in the euro zone borrows money it is the responsible of that government to pay it back it's not a collective responsibility of the eurozone this was not realized by anyone including the investors in the beginning so soon after the eurozone got created 1999 at the start of that picture the borrowing costs for all the eurozone countries were roughly the same so germany and greece borrowing at roughly the same interest payment that they are making this continues for a long time then what happened with the subprime crisis is 2008 lehman crash and the whole eco global economy being in trouble made investors go very cautious and one realization dawned that eurozone has the same money but the borrowing is done by different governments with their individual responsibility to pay back and then you suddenly see like a fan opening up the borrowing costs of different countries become different very very suddenly and the opening up that you're seeing at the end over there greece extremely expensive for greece to borrow money the bottom end is germany and the northern eurozone countries borrowing money at a much lower cost this realization is the crux of the problem and i want to explain this to you a little bit more in detail you know uh the problem that arose with this is the following and i realized this understood this in india very very clearly on a particular day the days in my head because that's the day when standard and poor's downgraded united states it's a sign of a globalized world that united states being downgraded became a major news all around the world i remember that evening very well because i was actually in a fish market buying fish in new delhi when my cell phone began to ring more frequently than it usually does and finally i was recognizing the names of journalists whom i knew they were calling me repeatedly in the evening and i knew something important had happened it was the u.s being downgraded by standard and poors we immediately that evening it's a globalized world you knew there would be consequences for the rest of the world you get together you huddle together and try to see what will happen we didn't anticipate quite what happened after that and this is very important for my story over the next few days it was united states that had been downgraded but money was being pulled out investor money from all over the world and the money was going into the united states into united states into treasuries people were buying treasuries what had happened why was this happening and the reason is now we can see and it has to do with the construction of the eurozone countries let me explain first of all when there is insecurity in the world investors want to put money in safe countries that money would be pulled out of brazil money would be pulled out of india money would be pulled out of even south korea and south africa was not a surprise these are newly emerging countries and people feel insecure but money being pulled out of europe and being sent to the united states was new the reason why that was happening is very simple it is to do with this graph with the sudden realization which had taken place by 2008 and 9 you realize that unlike before 1999 if you give money to spain the spanish government if you give money to the italian government you know that there will not be a default italy and spain will not tell an international investor in united states or in korea or in japan that we will not pay your money what will they do in the last resort they will turn to their central bank and tell the central bank look spain can't default italy can't default we have to print money and pay back printing money is not a good thing to do to pay back but as a last resort you do that today that is not possible because italy does not have its central bank that can create money spain does not have its central bank that can create money so the investors realize that the one big powerful country which has its own central bank is united states so though united states was the cause of the trouble people were putting in money into the treasuries because they knew that if it comes to a default risk it will not happen because united states the federal government will ask the federal reserve to monetize this and pay back the debt that is what happened when you put in money into another country you also worry about exchange rate of course even if there is no default if the exchange rate crashes you can lose your money so if from italy you put money in united states treasuries you know that default won't happen the u.s has its own central bank but the dollar could crash if the dollar crashes you will lose the value of your money there we have another kind of security which is china china has so much of its foreign exchange reserves in dollars that a crash of the dollars is going to have china's wealth suddenly collapse china can't afford to allow the crash of the dollar so i think for some time now the dollar is in terms of exchange rate is safe enough because china has a vested interest in that dollar you know there is that old kendriyan story john maynard keynes said that when you borrow 10 dollars from your bank you are under the control of your bank but when you borrow 10 million dollars from your bank your bank is under your control after that and it's something similar between china and the us there's a lot of mutual dependence now because china holds huge amounts of u.s dollars in reserves we don't know the exact value no central bank will tell you the exact value but there are ways of calculating and we know must be close to the half of chinese reserves chinese reserves are four trillion dollars uh close to half of that will be in us dollars so it's a massive amount in u.s dollars being held so that's the guarantee over their virtual there's no guarantee in economic life but virtual assurance let me now come back and explain to you a little bit more about the um central banking and the borrowing by the government here i do believe that there is a flaw in the lisbon treaties article 125 which makes it very difficult for the central bank to rescue directly a government now i think this is being recognized there are lots of people who are writing criticizing article 125 of the lisbon treaty but the change of a clause of a treaty takes a lot of time it's not easy also the lisbon treaty inherits this clause from the earlier maastricht treaty so there is a long history of this clause i do think it will need a revisit and probably an amendment but that is going to take time what do you do in the meantime let me quickly show you the consequence of the graph that you have over here when borrowing becomes cheap as it did from 1999 countries tend to over borrow and you can see the overborrowing in this picture where you see the debt to gdp ratio of the euro area and of greece the red or these colors get changed what are you saying red or maroon magenta bars is are greece's debt to gdp ratio and that goes up very steeply for the euro area as a whole it goes up you know in the olden days since i've worked with the indian government every time europe would be given as an example of a country where the fiscal deficit is being managed well public debt is being managed well and you would be told in india that look you have to learn from that and do better it's very different now today in the world the debt to gdp ratio in europe is much higher than what you will get in the emerging economies i know india's figure india the debt to gdp ratio figure is roughly 60 to 64 debt to gdp and here you can see euro area is close to 100 percent greece is 160 japan i should point out is 200 but japan's borrowing is mostly in its own currency so to that extent the risk is less the diffic the pain that this crisis caused is clear but i thought i'll use a graph from italy to demonstrate to you that what is being felt is indeed true it's an amazingly deep crisis that we are caught in the middle of the italian figure is as follows on the left hand side above my head you're seeing the rise in unemployment and you're seeing the drop in the national income the gdp going down and it's a very sharp change that is taking place over a five six year period so it's a very very painful period for the world and the figure on this side is not surprisingly that's unsurprising that industrial production is also going down it's being mirrored in the united states unemployment is not as high as in europe the total unemployment is 7.5 percent but underlying that unemployment figure there is something very deep that is happening which is very worrying of the people who are unemployed in the united states 40 percent of them are long-term unemployed so they've been unemployed for a very long period this is very unusual in the united states in fact has not happened in the last several decades i don't know if it has ever happened from 1944 after world war ii such a large fraction of long-term unemployed people when you have long-term unemployment people begin to lose the skill for being in the labor force and of working so there is a certain amount of de-skilling that is going on in the united states so even though the unemployment is less the problem is indeed very very acute well just a very quick picture and i'll leave that to you people talk in terms of decoupling because i do want to go into decoupling and the emerging economy story but what is happening today is a somewhat strange decoupling where the real economy is doing badly and the financial sector actually over the last one year has done moderately well the stock market indices are picking up even while the real economy is doing badly and what is this to do with i'm going to give you one quick piece of advice and a little bit of a looking into the crystal ball about the future and then i want to talk about developing countries this picture is capturing something which is not totally unexpected the financial markets began improving around 2011 end of 2011 more so from the beginning of 2012. the reason was that the industrialized countries decided collectively that they are going to inject more liquidity into the system and you will recall that into the end of 2011 and beginning of 2012 there was injection of liquidity of 1.3 trillion dollars into banks in europe to allow the banks to survive this is called the ltro ltro injections took place huge amounts they saved the banks they injected liquidity and really if i was an european policy maker i would do exactly that then in the middle of 2012 mario draghi made the statement whatever it takes the ecb will stand behind the sovereigns whatever it takes and the omt was announced once again if i was an european policy maker i would do exactly that however you have to remember that what all these things are doing is they are injecting liquidity and giving you time to solve the problem they are not solving the problem they are giving you time you need the time because you're in the middle of the crisis but they are simply giving you the opportunity to do that here is my one concern which i must express that to you this injection of liquidity that took place the large injection of liquidity this is not money injected endlessly this is money which has a three-year window the money has to be paid back and it's going to be pulled back from the banks at the end of 2014 and at the beginning of 2015 and unless some deep reforms go in from now up to then i'm afraid that there is going to be a one more round of turbulence for the eurozone at the end of 2014 at the end of 2015 when this money has to be paid back fortunately there are important moves that are being made like a common supervisory authority for the banks of europe very small steps have been taken more will be taken in 2014 so who knows maybe we will be lucky to avert that but that is indeed a risk that we have to live with where do we go here let me point out that the developing countries are deeply concerned about this crisis and are embroiled in this crisis you know the growth rates of developing countries today in the global situation don't look bad india is growing at roughly 5 per annum china is growing at seven point seven percent per annum seven point five to seven point seven percent per annum um indonesia is growing at over six percent per annum brazil's growth has come down to two percent less than two percent per annum but in today's world these figures don't look bad but you have to remember that these are countries with a lot of poor people let me give you the example of india which i know very well india was growing in the middle of 2000 from 2003 to 2008 at close to nine percent per annum very rapid growth the country was seeing it's now come down to five percent but in india there are 300 million people who are poor and poor means abysmally poor so any rocking of the economy a sudden rise in food price can affect this segment of the population very acutely so the emerging economies even if they are growing they are extremely concerned africa sub-saharan africa where till 1995 which was really disturbing for the world that the percentage of people below the poverty line was rising up to 1995. fortunately over the last 10 years it's declining very clearly from 1995 itself it had slowed down but it is coming down but still you have countries with 50 percent 60 70 percent of the people living below the poverty line and poverty line is 1.25 dollars a day so very low poverty line large segment of the population living over there times are hard over here but you have to remember that if the global economy does badly it's going to rock the developing countries and there you can see a kind of suffering which no matter how big the crisis in europe is not going to happen so the big question is what do we do it's a collective problem of the world it's a problem of globalization we have to attend to this problem with collective global rules one of the important ones is to do with monetary policy and i believe that we have to get global central banks to come together to coordinate and do their monetary policy together and coordinate on this in an important way and let me explain to you why this is important and why i also feel that the eurozone experiment is an important experiment and it's a move in the right direction i know there are difficulties people are very critical of the construction of the euro but it's a move in the right direction you know in bank of england was established in 1694 when the bank of england was being established and even before that there were central banks like rick's banking in sweden when central banks were being created in the 17th century economists even just thinking individuals policy makers realized that it is good to have competition in the product production of goods for producing cars for producing clothes for producing anything it's good to have competition but when it comes to producing money for the economy to run central banking you don't want competition one economy should have one money creating authority so the central bank was created so one economy with one central bank see the way the world has gone increasingly we have a globalized world the whole world is becoming tending to become a single economy now we had created one central bank for one nation over the last 200 years 300 years but today the world economy is almost like a single economy which means we are back again to where we were in the 17th century a single economy with lots of money creating authorities there must be over 200 central banks in the world 200 money creating authorities but increasingly one global economy and this does lead to tensions of a kind that the world has not seen before look at japan with the new central bank chief kuroda it was decided japan decided that japan is going to inject liquidity into the system because both japan needs to get its inflation a little bit up japan usually suffers from deflation to get a bit of inflation going and also that the japanese exchange rate had got appreciated massively so japan wanted the exchange rate to be a bit more realistic and i have to say as just as an independent economist i think what japan has done is right that's the direction in which japan had to go but in today's world with separate decision-making bodies as soon as one central bank and one government follows this policy other governments begin to worry that look what will happen to our exchange rate after all exchange rate is no single person's entity if it goes up it's going up vis-a-vis someone else's exchange rate so others begin to react and we are seeing reactions and statements from china from a whole host of countries about the japanese move and there is a concern in the world that there could be a currency war breaking out with every central bank and government trying to go in for policy changes which will be countering one another so one country injects liquidity then few months later another country injects liquidity now we have to get to the root of this and one way to do that is to create a global group i have in one of my writings called this a g major not g20 g7 or g8 but g major g major sounds like uh uh um something to do with music which is all to do with coordination you need the major countries involved so yes you need united states you need europe with the ecb you need japan you need china you need india you need also emerging economies because today's world is a very very globalized world get together some 20 25 countries together and have this g major group of countries have coordinated central bank policies so the risk of a currency war breaking out is vastly diminished because countries are working together is the direction in which we need to go this is to do with policy coordination let me show you now to do with another very important domain and i know this is of concern to italy and this is going to bring me down to the questions of sovereignty so we need coordination in terms of monetary policy but there is also some something happening in labor markets in the world which is creating global tensions and giving rise to greater inequality i want to comment on but in going to that let me first show you the deeper causes of today's problem which is to do with the changing structure of the entire global economy here is the first picture which gives you a demonstration of what is happening in the world actually concentrate only on the blue line which is the brics country's share of the global gdp so if the whole world has a gdp of 100 the share of that which is the brics countries used to be about 16 in 1990 it is now 27 percent you know it's a kind of change that is very very rare to see this kind of a dramatic rise of course the main driver within the brics is china which is driving this but from 1994 india is also growing very rapidly so the indian growth is also being captured in this so that's the dramatic rise of the brics and with that you will see the trade which earlier used to be southern countries developing countries would be mainly trading with industrialized countries there is a huge rise in trade of southern countries that's this picture look at it for one moment while i take a quick decision about what i want to cover i've taken that decision so look at this picture this shows the trade that the southern countries developing countries do with developing countries in the 1960s it used to be less than 15 percent in the first decade of this century it is just less than 30 percent and something which is not there in the graph but world banks data shows unmistakably that in between 2010 and 2011 southern countries trade with southern countries crossed 50 percent so more than 50 percent of southern purchase is taking place from southern countries again china is a major driver but in this case even if you leave out china the rest of the south is trading massively more with the south so this is a bit of a southern resilience over here and one more picture about investment global investment coming from the south even now the high income countries are the major investors in the world south is less but a recent study by the world bank shows that just before 2015 in the total investment in the world the southern investment will overtake the high income country investment and it's going to go higher and higher over the next 15 years actually i can give you one very interesting piece of data which i uh during my indian job as advisor to the indian government i realized over the last six years the amount of foreign direct investment from unite united kingdom britain to india and india to britain in three years of the six years there was more investment from uk to india and over the other three years there was more investment from india to uk which is something which was unthinkable yes it is the big indian companies like tata and other groups investing in uk but this is a pattern that we had not seen in the world before so there is a certain change of the structure which is indeed taking place in the world where is it coming from and what do you do and this changing structure is causing a lot of turbulence part of is this is to do with globalization change of technology and labor market so let me go into these deeper causes um pietro tell me if i take another 10 minutes am i doing okay for time okay so where um is this coming from see technology has done something which it has made almost a common pool of the global labor market this is i know causing great difficulties but this effect of life there is a lovely paper by eric maskin and michael kramer about this but let me give you in a nutshell what's happening work earlier the most valuable resource for economic development which is labor was balkanized in two countries so indian labor lived and worked in india for indian firms south african labor did that for south africa philippines labor did that for the philippines but this has been changing because of technology it is possible to have basic services not the high skilled work a lot of the basic labor market has today become a common pool you know the irony of the global economy i remember in 2003 2004 on american television in the evenings prime time there would be a lot of conservative television commentators who would repeatedly talk about unpatriotic american firms that are sending work abroad for cheaper labor in the whole world as a consequence of this repeat attack on television in the evenings what happened was more work started going out to the rest of the world because it was almost like an advertisement on television saying that you can make more profit if you send out your work to the rest of the world and advertising on prime time television is extremely expensive in the united states these small firms located in the philippines and south africa in china would not be able to advertise on american television but the attack repeatedly amounted to that and work started going out now good or bad it is a fact of life that thanks to technology a whole lot of different kinds of work is going out all over the world and you can see the effect of this in terms of inequality what's happening is the rich end of the developing countries are becoming richer so inequality in poor countries is increasing dramatically because the more skilled workers in these countries are participating in the global labor pool the less skilled workers in the uh global uh the industrialized countries are a part of the same pool and they are finding a downward pull on their wages and inequality in industrialized countries is on the rise in inequality is rising in united states inequality is rising in china inequality is rising in india within these countries it's getting pulled what do you do about this i feel first of all we cannot grudge this because the people who are benefiting the lab from the labor market in the emerging countries and today africa is beginning to join in in this in a big way they are very very poor people we should celebrate the fact that they are today coming into the global market but there are structures to do with economic policy that need to be changed in a very deep fundamental way the crisis of economic the economies today is also a crisis of the subject of economics of the discipline of economics you have to think of very different ways of solving the problems i think it is possible there will be a period of intellectual churning where you have to think you have to ruminate you have to cogitate you have to discuss to get newer policies onto the table and i have to say that the kind of thing that you are doing in trento i feel is important i'm going to try to push this idea in india that if once a year they can get together in a small town and get a whole lot of actors in the place to think and deliberate to get a country going we must do so i want to tell you a little bit about the fundamental problems of the economic discipline which we have to open up because of globalization because the global structure has changed the global structure has changed in a way where there is nothing that you can do individually i can do individually that's a fact of life that is a bit like gravity john stuart mill giving a lecture in 1858 had said about the laws of the market that you may not like the laws of the market but you can't deny the laws of the market the laws of the market are there it is to deny the laws of the market john stuart mill said is a bit like a sailor who is going out into the sea who does not like the laws of the winds and the waves and says that i will deny the laws of the winds and the waves that sailor will come to grief the sailor has to recognize the laws of the winds and the waves and take advantage of that likewise the laws of the market the laws of globalization you have to recognize these laws and take advantage of that what are the problems that these laws are causing you will if you look at global inequality you will realize that what has happened in the world is there has been economic globalization by the way globalization did not start today globalization started 70 000 years ago when our ancestors all our ancestors common ancestors from africa set out from africa into the rest of the world globalization started globalization went on in a small way every 5000 years there would be a movement of people from one region to another but globalization became very rapid from 1945 after world war ii massively speeded up globalization what has this led to the opportunities for income and wealth have become huge but there is while there is economic globalization we have not had political globalization politics remains balkanized small segments looking after their own interests we have to face up to this and think of global democratic norms which have to be brought into place we have to have global decision-making bodies which brings not only united states and europe and japan onto the table but even sub-saharan africa latin america south south asia onto the table to a common platform for discussion and to understand what the lack of global democracy is doing i'll give you one figure inequality into the in the world you know in this is a bit of an old data i have not revisited the numbers for some time but inequality numbers don't change very dramatically in 2007 if you take the world's 10 richest people their total income of the 10 richest people by the way one interesting fact about the 10 richest people in the world is five of them dropped out of their university education they never completed that so in case you people have completed your university education you've deflected yourself from that path of uh being very very likely from the 10 richest people now the 10 richest people in the world if you look at their income it is more than the income in that year of the entire population of ethiopia actually more than double the entire population of ethiopia by some calculations it's three times but certainly more than double ethiopia is 70 million people and ethiopia also has lots of rich people so if you take out the rich segment of ethiopia out you can see where the bottom 90 of ethiopia is compared to the 10 richest people in the world you know i'm an economist i know that you need a certain amount of inequality in the world for that to be a driver of progress for people to strive but inequality of this kind where the 10 richest people have an income more than double the income of the entire country of ethiopia there is something wrong and i'll tell you if there was global democracy if we were sitting down with the global government looking at it it would be considered intolerable this level of inequality is intolerable in italy this level of inequality is intolerable in united states this level of inequality is intolerable in india but it happens in the world because the global democracy institutions are very very weak there is no one who is attending to this problem of global inequality and i think this needs attending too what do you do about this for this once again you need policies global policies to do with labor markets to do with fiscal policy to do with monetary policy which begins to bring up the bottom segment of the world very very rapidly to a tolerable much more tolerable level of income the sorts of problems that we have seen in the middle east erupting those problems will not go away unless we attend to the problem of global democracy the details of how you do that as i said earlier are to do a lot with restructuring of economic thought as well we need changes in economic policy but we need changes in economic thought and i will take three or four minutes to tell you a little bit about the kinds of changes we need in economic thinking and i will stop with that and then take questions from you but before going into economic thinking criticizing my own discipline i need a little bit of water you know markets are extremely important the laws of the market are extremely important the private sector critically important entrepreneurship critically important but to go to the other extreme and to take a market fundamentalist position and to say that leave it all to the markets and things will be fine is a travesty of economics this comes from a supposed wisdom ancient wisdom from 1776 adam smith's book and the notion of the invisible hand the invisible hand says roughly that individuals pursuing their own selfish ends can bring a certain order to the economy that it's like an invisible hand you are doing your work not thinking about the economy you are an economist writing your papers you are a trader doing your trade you are a book publisher publishing books you are a clothes producer producing clothes you are all doing it individually but adam smith made this dramatic discovery that the market plays the role of an invisible hand which allows the all of these to be coordinated together but to treat that as a law which says that individual selfishness is fine let everyone be endlessly selfish and you will get social goodness coming out of it is something that adam smith actually never said and that's a market fundamentalism which should have no room in our uh as policy making space you know one way of realizing that adam smith didn't realize how this would be taken out of context is the term invisible hand in adam smith's book appears after page 200 very late in the book and when adam smith in his own lifetime created the index to his book he never put in the word invisible hand in the index so adam smith didn't even realize how important it would become but people who take this extreme view that leave it all to selfish maximization you don't need any coordinating hand and you will get order they are getting it wrong if you don't believe me one way in which you can prove this to yourself is if you go to old delhi the old part of delhi and look at that traffic over there there will be no shortage of individual rationality in the drivers they drive to maximize their selfish targets driving on any side of the road driving trying to drive as fast as possible just up individual optimization and you don't see you will not see order in old delhi you will see utter chaos in traffic so it is the opposite of that wisdom that leave it all to individual selfishness and you will get order you don't see that you do need the coordinating hand of the state that plays a very very major role but even more than that something which adam smith stressed and our modern guru kenneth arrow wrote very beautifully about the role of altruism about social norms about even culture that those are important ingredients of a society to flourish the society needs social norms needs culture needs coordination economics somehow left those out our early economic textbooks over the last 50 years were cut and dried analysis of individuals maximizing their profit and you think that you will get perfect social order out of that fortunately over the last 10 years 15 years there is a body that realizes that you do need social norms of certain kinds you need culture of certain kind to flourish for society to do well and once again i feel that a group of this kind that has got together over here bringing different kinds of thinkers together plays a role and it's a role that ought to begin to change the way we write our textbooks of economics and that is going to permeate a new set of policy thinking which will lead the world to a better world and i have to say despite all the difficulties i personally remain very very optimistic that we will go through this difficult phase we won't come out of it very quickly at least two years three years four years but we will come out of it and it will be better times for the world as a whole thank you very much thank you very much mr pasco for your very clear and rich presentation thank you for helping us frame our pictures and the windsor waves of global economy so as not to feel too much as euro victims i am sure you have questions you want to address to professor baku please raise your hand if you have any questions i have one question myself if i may you said that in the flow of interest foreign investments um between uk and india over the past uh six years you said that over the past three years um you saw in u-turn basically in the proportion but are these three years after three years so do you think there's a trend there or is one year one way one year the other pervading second question i think that this is a question on behalf of all of the audience so what did you do with a safety belt i believe they were all wondering what you did for that because i saw that your doctoral thesis was on the choice so perhaps this is a question that has a general interest is not just work as an anecdote so now the question the floor is open to for question do you have any questions raise your hand and you'll be given the mic thank you you refer to a global monetary policy don't you think that in europe we need also a labor policy which is one single european policy so as to actually have one market also on the right side so that we have one single market for labor throughout europe thank you thank you uh yeah let me take both these questions uh the uk and india over the last six years there is no trend it's some years that there's more investment that has gone from india to uk some years it has been from uk to india it's not as if the first three years was one way and the second three years the other way but compared to say uh 15 years ago this was even unthinkable that there would be a single year where india would invest more in uk than uk would in india so if you take a bit of a long term this is probably an indication of a trend and the figure which is luckily still up there is the world bank's more detailed computation which suggests that that is probably going to be a global trend as the seatbelt actually the first day when my driver said that to me i felt very embarrassed to offend him so i did not use a seat belt i just held on to my seat and took that precaution after that i persuaded him that one would have to use the seat belt your question extremely valid and i do believe that you need a common labor market policies and let me get into something which i know is a touchier topic but i still want to get into i do believe you know that you need labor market policies to have a moderate amount of flexibility this is something that i have argued in india in india where the labor laws give very little flexibility and i would argue the same you need a social welfare mechanism whereby the people when they are in and out of the labor market they are being protected but that should be a universal coverage without that much tying up with the particular job in which you are because that will give you flexibility to move from one job to another that is not easy that does need changes but i feel the entire eurozone and maybe eu needs to come together get a much more coherent labor market policy the sort of thinking which is today beginning to go into the banking policy ought to go into labor market policy and some of these tensions would go away if we can attend to that what about a potential currency war you said that the best way to counter that to avoid that is to have one central institution pulling together many countries not all of them maybe 20 out of 30. but don't you think that we're going to have a raw material war because there's going to be a mass of people in this 20 countries which is going to be similar to the massive country elsewhere so the war of currency certainly could change with a new currency but then the only thing which is going to be valuable maybe could be as it was in the 17 countries even to have a guarantee as they have in the u.s that they can co mint as much money as they want or the ownership of raw material don't you think that the possession of raw material could give back new value to the currency don't we think that we're going to go back to a situation where we have currency that has a value against gold so with raw materials being the goal to the new gold let me take this i have to say the gold connection i did not follow fully but the country grouping what i'm suggesting is uh something like 20 25 of the most major economies there will be one kind of war of course even with this which will be a war inside the room when all 20 of them are having a discussion but it's better to have it there than that to spill out it's a bit like you know in 2008 when the g20 countries were talking about fiscal policy there would be a lot of very heated debate inside the room but for the first time there was some coordination on that policy and the crisis they did battle the other risk that you are talking about that there can be other groups of central banks that will battle this i don't think there is that risk if you take the world's 20 25 most major central banks together the risk over there is a little bit of a risk that they will turn aggressively on the other countries that remain out and certainly that would be a dreadful thing to happen i frankly don't have an easy answer i just like to believe that human beings when they attend to their own interest they also realize that there is something beyond the self-interest of the group you have a collective interest of the world i know the world does not always work out that way people when they get together they tend to be collusive but what else do you do we are not yet in a position to bring 200 central banks together into a room for one common policy but at least if the major ones do that and do that with a bit of a changed view you know i want to also touch on one thing human altruism i think economists have played a role in giving that too small a space altruism has a very important role in the functioning of our global economy we need to drum that in so that something which is natural in us does not die down and goes into even the boardrooms of that two more requests for the floor thank you i'm going to voice my question in english my question to you was you talk about the need to challenge and question and rethink a bit about the discipline of economics what is your thoughts on the idea of moving away from kind of the need or the obsession of growth in the more developed economies especially given the lack of correlation past a certain point between gdp and well-being and happiness thank you i'd like to go back to what was just said washi is the final achievement for economics what is the final objective thank you professor uh well my question is about you mention the uh need of collective global rules before and my question is you mentioned that we need a global monetary policy in some sense uh but for the world and uh you also mentioned that we need in europe uh fiscal policy beyond a monetary a common monetary policy my question is should we need in one in the future uh also a global fiscal policy thanks okay let me take these three questions and the first two are connected so let me take them together the rethinking the gdp and happiness i'm coming to that in a moment the main rethinking that we need to do is to situate economics within the larger social disciplines this is something which has had early literature you know karl pollani wrote about the importance of embedding economics in the other social and political disciplines so that's what i was primarily talking about but when you mention targets like gdp and what should we do happiness is important you want to track happiness but i have to say i remain a bit skeptical about these happiness studies because when you ask a person are you happy or how happy you are the answer that you give is more culturally dependent than an actual reflection of your happiness so i might say i'm very happy and that this could be that the indian culture says that you're supposed to say you're happy when you're asked that question or the other way around you're supposed to say you're not happy so i find this inter-country comparison of this happiness very difficult to interpret so i would go for more traditional measures measures there are galore and we are looking at a whole lot very important work by stiglitz and amartya sen on how do you measure development we at the world bank have now come out with an important new measure of our country's performance which is actually to me very important which is learning to evaluate a country by focusing on the bottom 40 percent of the population so if that segment does well that country gets a greater tribute so focus on the bottom end of the population which means of course you can't ignore the people above that because if you ignore people above the bottom 40 percent they will fall into your bottom 40 percent but the focus is at the bottom of 40 percent this is the notion of shared prosperity that the world bank has officially declared as one of its two major targets and i think it is a good one what is the final objective of economics the final objective is a better world a better world is a loosely defined term but that is what you're after you want to create a more harmonious world a happier world and i feel a better world has to be defined in a way where when we are thinking of a better world we don't think of our individual identity of my nation my race my religion we must not think along those lines we have to think collectively our common world this is very close to my heart that the world is too small today to think of different identities and our roots are all common we come from the same genetic pool we have to think of a better world but i also have to put in a scientist's word a lot of scientific analysis takes place without really thinking of the larger objectives and that's the way it has to be when an economist is trying to understand the link between monetary policy and inflation usually that person is obsessed with the science of it what does the central bank do what happens to prices is a deep scientific question it's like pythagoras looking at right angle triangles and thinking what is the relationship between the squares on the sides and that's the way science progresses so individual researchers will of course be focused on like a scientist on their little problems but together you're trying to create a better world and finally since i know the name karima ask the question on monetary policy coordination and fiscal policy coordination i think the urgent need right now is monetary policy around the world but the fiscal one is also extremely important and let me since you ask let me elaborate for two reasons one is as the eurozone crisis is seeing that getting a group of countries together under a monetary union without sufficient attention being paid about fiscal coordination can lead to trouble europe is acting on that but there is a larger global question something that everybody is beginning to write and worry about today is with so many different fiscal codes around the world taxation policy is today in a mess you produce in one country open up a little shop in another country show a lot of your profits in that country and you avoid paying taxes the economist magazine had a tougher story about big businesses that pay zero tax i actually don't blame those businesses if you have laws which allow you to take advantage they will take advantage the need is to have a common fiscal code of countries getting together from italy through germany switzerland uh uk india here i would try to bring the entire world together have a common fiscal code which is going to make it difficult for corporates to take advantage of the loophole so yes that is a very very big need for fiscal policy coordination as well you showed a number of charts and we know that analysis is carried out by experts and what i want to know is the movement of capitals by means of corruption and drug trafficking is that ever included is ever heated time is nearly up we have to follow the street rules of the trento festival so i was wondering whether there's one final question before we answer to the previous one question concerning the need for global democratic norms uh that was a very interesting point of your uh discussion are you if i end interpret correctly saying that we need to devise methods so that everybody who is affected by decision by a policy have a right to say is this something related to discussion on global deliberation thank you yeah the first one on drug capital and corrupt capital the figures on which these calculations are based unfortunately don't take into account those capital not because we don't want to but because by their very nature you don't get data on that so drug capital corrupt capital ought to be measured and there is a lot of effort to from indirect sources to get those numbers but by their very nature they are very difficult to get a sense of are we doing that right or not so that's where we are and you know when i was doing my previous job in india that was also extremely important because there's a lot of illegal movement of capital in and out of countries and we had commissions and groups trying to track this very difficult that's all i will say that we are trying to do better global democracy is exactly that problem you know what is democracy if you think of there are many requirements but the most important requirement is that you get to exercise a vote when a leader is being chosen if that leaders actions are going to influence your welfare you get to vote on that strictly if you have united states is such a powerful country that who becomes president of united states has an impact on the well-being of people around the world so if you had a truly democratic system in the world the whole world would be voting for the american presidential election but you know you're not going to get to that you are going to have votes taking place within each countries so how do you do it you have to have more fora different settings and actually world bank is one such setting of multilateral organizations where you give a much greater voice to the small entities in sub-saharan africa who have no voice you want world trade organizations world labor organizations where you begin to give them voice of a kind that they do not have and i feel that is the direction in which we need to move and just like we know that the first constructions of democracy were extremely hard and the early constructions of democracy you left out people that you are not even aware of go back to greece 300 bc democracy within the city state was supposed to be fully democratic but when you look back you realize that there were two categories of people they were leaving out but those two categories were so outside their consciousness that they didn't even realize women were never allowed to vote slaves were never allowed to vote so when you're celebrating democracy you're still living out groups we have to battle that it'll be a slow long drawn battle to get them all included our time is up uh