so we're starting a bit late but you see that professor spence is so fast that he's festival now in this festival we will speak about the euro crisis and we will openly discuss without any bias without any prejudice about the possible future prospects being aware that remaining in this statement is probably the worst scenario possible so we will discuss to each extent we should go on towards the economic and monetary union thus giving up some prerogatives or if we have to go backwards and we will listen to very authoritative stances for example jane merlice who will speak about the possibility of the exit from the euro but now speaking about this issue that is the giving up of sovereignty and the future of the euro we need to have an overall vision an overall picture because certainly this giving up of sovereignty has some implications for example the emergence of some emerging countries and we couldn't but have someone like mike spencer who will give us this overall picture you will certainly remember mike spencer who was already with us four years ago and who on that occasion anticipated the conclusions of the commission on prospects and development that was a very influential commission that he presided over for various years and today he will tell us about the future of europe starting from a global vision a global viewpoint and he will discuss the issue about the transfer of sovereignty where we will have win-lose situations or where we may have a situation where everybody wins and above all haven't we already lost some prerogatives and nostalgia about the past is ill-posed my spencer has the merit of being able to express very complex notions in a clear and easy way and simple way also thanks to the fact that he has a background which is different from a traditional background of an economist because it took a degree in philosophy and mathematics and he was one of the economists who was awarded the nobel prize when he was still young and he's a very dynamic incredibly dynamic he is very productive when you look for him the only way to join to reach him is to send an email message and he will answer one day from hong kong the other day from berkeley chicago london singapore in just a few days he trotters around the world and again he is very enthusiastic in communication and he is a very passionate also in his teaching activity and our country is enjoying is enjoying that because he is also lecturing at the bocconi university i don't want to take away any time from him thank you very much it's a it's a great thrill to be back at this festival i think it's an extraordinary event um and and this year i think you're talking about a multi-dimensional set of issues that are of enormous concern to citizens of pretty much every country i've i've been in so i think my role um is to try to indicate to you something about this very rapid evolution in the sort of market structure of the global economy and and try to in a relatively short time at least give some hints as to what these pressures that we feel are my uh my sense of the kind of i'm no historian but my sense of the evolution of of over very long periods of time like centuries is that we are becoming more inter interconnected at a long distance and our governance structures then adapt to that and we happen to be at a point where we may be trying to figure out uh how to adapt our government structures to match the way in which we interact with various people in the world so let me launch into it i'm going to sort of try to tell a story but let me start i wrote a book called the next convergence based on my experience in the developing countries in a sense of their you know growing importance and their growth giuseppe le terza was good enough to publish it and change the title to la convergence and ev inevitably which doesn't mean quite the same thing it's the english version but it's close and i went around talking in america uh when the book was published to a lot of interested people you know and the fear was palpable and and after i finished giving a few remarks on what i thought i was doing in this book people said the most common question is the thing on the top here and it's if they win do we lose uh and i think in some sense that is you know at least on the economic dimensions some of what people are worried about i'm going to try to give part of an answer to that today the answer is their growth is not coming at the expense of our growth in fact at some deep level our interests are aligned i spend a lot of time in china if you ask chinese are the risks that we face mostly internal or mostly external they would say most for usually external and if you say well where is the biggest risk they would say it's in europe europe is china's largest market external market if you ask what would you most like to have happen they would say a rapid restoring of growth and and and a stable sustainable path uh in their european union they would say a similar thing about america it's a little further along but we've got a long a long way to go this growth is going to make the global economy bigger so it's not a zero-sum game but those of us who thrive in that environment the one i'm going to try to describe to you in a minute are going to be people who adapt to a very rapidly evolving sort of market and global environment uh and i and i and some of those pressures i think i can illustrate for you i was at a conference recently uh in which the proposed topic was redrawing the map of the global economy this is not a bad idea in principle but i put it up here because what i want to convey to you today is that it's it's not basically conceptually the right way to think about it a map is a static thing and so the idea that you can redrop the map and then you know what's going on is in this environment that's changing so quickly you know likely to produce a map that's out of date within five years if you go back 10 years ago the chinese economy was a relatively insignificant part of the global economy didn't have much impact on anything people sort of noticed it because it was growing at a big rate now china is half the size of you know the american economy or the european economy is the growth engine for most of the developing world that's in 10 years so what i think what i urge the way i urge you to think when you're trying to understand these things is to try to understand the forces that are at work so that you not only understand what the global economy looks like now but where it's going and what kinds of pressures it's putting on different kinds of people which in the end is what we sort of care about now you can't read this so let me tell you you know kind of my story if you go back in the early part of the post-war period we lived in a world that consisted of 15 percent of the world's population living in our countries now called the advanced countries we dominated the global economy we were rather similar in economic structure we interacted pretty effectively especially with the architecture that was put in place after world war ii there wasn't a lot of complexity when we had to coordinate you know i mean i don't mean to oversimplify it we were we were dealing you know with people in economies who had similar goals similar patterns of behavior similar governance structures similar everything and we got the job done and that's not the world that we live in today so the developing world at that time in the old world you know was maybe 25 or 30 percent of the global economy it was consisted mostly of countries with per capita incomes well below a thousand dollars so they didn't buy anything interesting their presence in the tradable part of the global economy was minimal tradeable just means goods and services that are traded and that that is exactly you know what's changing now so that the developing world is 50 of the global economy the large part the large entities in it are growing at six and seven percent so we're going to live in a world for the second half of the century of convergence in which they become a larger and larger fraction and they become more and more like us and that and the the issues that we deal with now at least from an economic point of view are this long transition where we've passed the point where they were relatively unimpactful on us but we're well before the point like decades before we're all relatively similar as advanced countries and it's this transition you know this interim period of three or four decades that's going to be so difficult for us so here's the developing country share of the global economy even 10 years or 13 years ago it was only 40 percent now it's 50. within 10 or 15 years it'll probably be 60 percent a lot of that depends on what happens in north america and europe um having said that either 85 percent of the world's population lives in the developing countries and so the fact that they're getting big in aggregate size and increasingly impactful on us doesn't mean they're rich so these are the per capita incomes of a group of advanced countries systemically important advanced countries including italia and then you see the per capita income in the world on the right hand side still under 10 000 dollars in purchasing power adjusted terms if you look at the developing countries especially the ones that grew in east asia you see basically japan that's made the full journey it's like us hong kong macau is basically an outlier because of gambling taiwan and south korea are pretty much advanced economies now asean as a whole that's south asia is way way down still and china is at about six thousand dollars a per capita income even though the the aggregate size of the economy is half the size of the american or the european ones this is just to calibrate so if you ask the question when is china going to be as big as we are the answer is somewhere around 10 years from now we'll have one more partner to work with and try to organize sort of global things if you ask when is it going to have a per capita income that sort of somewhere in the oecg the advanced country range we're talking you know probably three decades or more so that so incomes and lifestyle and so on are different than than mass i just did this for entertainment i was sitting in a meeting what you have here is a picture of the size of of various economies so on the left-hand side you have china on the the light blue lines are the are the bricks the other bricks russia brazil and india and then i decided just to add mexico and indonesia as important high-growth economies and if you add up everything to the left of china you get the green bar and it's a little larger than the chinese economy by itself and at the relative growth rates these are experiencing even though some of these are high growth countries for example indonesia is growing at six percent and so is mexico these are both major turnarounds china will pass them in the near future uh so so that's the kind of world we live in now what is it doing uh to us well let me talk about some trends i've already said the developing economies are more than half the global economy a second really important trend has to do with technology and the way the global economy is stitched together so the way i describe that is network structure is changing very rapidly in part in response to these growing relative sizes of economies and in part in response to the technological and managerial capability to stitch together global supply chains so the way i've put it here is it's diversifying away from the major hubs in the advanced economies i will show you pictures very briefly that illustrate these points third point is the global economy from the point of view of what interacts is the tradable part okay so i need to tell you something that then i'll use later on which is if you look at an advanced economy you will not find this in textbooks yet by the way if you look at an advanced economy like this one and ask yourself what fraction of it consists of of producing goods and services that are in principle tradable internationally and what fraction produces things like government education health care construction and whatnot that are largely non-tradable the answer to that question is an advanced economy about a third of it is tradable and about two-thirds is not so if you look at the tradable side of the global and that number differs a little bit for developing countries because they don't have big domestic economies so the tradable part tends to get big pretty quickly when they start growing so the tradable part of the of the of the global economy is basically shifting toward the emerging markets and and just to illustrate that the the most recent mckinsey global institute assessment of the middle income group in china that's people with incomes over three thousand dollars is that it will go from the current number 230 million out of a population of 1.3 billion to 630 million in 10 years 630 million is larger than the population of the european union and twice the population of the united states so just so you calibrate you know this is sort of like standing in front of a tsunami now this is not a bad thing in fact this may be one of the most important opportunities in terms of growth in our future so i don't want you to misinterpret it but but it would be very hard to ignore this development in sort of thinking about global trends advanced economies i'm afraid i have to say are in somewhere between low and for a short period at least in europe negative growth and we don't know how long that will last you will spend a fair amount of time talking about that in the course of this festival and and the political and and economic structures that go with it just for what it's worth i'll give you my assessment the american economy is recovering it's further along than the european economy it's by far not at full potential and it won't get there until the government stops under investing and that's going to take a while on the european side you have the complexity of a of a structure that probably won't be a durable structure in the long run without alteration and i think it's fair to say that we will have negative growth for the next year or two and then a and then a difficult recovery even if the downside risks that we all know about don't don't materialize sovereign sovereign credit risk meaning the credit risk on sovereign debt in in the world used to be entirely in the developing world nobody ever up until the last decade considered that an advanced country sovereign debt had any significant credit risk in it now it's reversed most of the credit risk is somewhere in the advanced country group if you'd asked me as a middle-aged economist 20 years ago i'm pretty old now if i'd ever see that the answer is no the global supply chains are atomizing which means they are becoming more complex and split into smaller and smaller parts and that has two effects both of which are of first order importance in terms of the way we feel one is it expands the global economy's tradable sector why because things that weren't traded before were sometimes not traded because it was too expensive to put them somewhere else that is if you have some competitive operation here in northern italy then you used to have a whole bunch of stuff around it that was there mainly because it was too expensive to run the operation by putting it in indonesia well the cost of putting it in indonesia or india you know or somewhere in eastern europe have just gone down a whole lot and that's a combination of technology and management learning and expertise and so we are seeing the atomization of these global supply chains expand the tradable sector the the other thing we see in global supply chains is the image you will have you know that the east made things and we consumed them that most of the markets were in the west used to be true it isn't true any longer these global supply chains run from more or less everywhere to everywhere and and the way to think about global supply chains is that they go to the place where they naturally fit in terms of you know comparative advantage uh almost without any friction so the only way to retain something in these global supply chains is to actually be competitive in them one ancillary consequence of that is that if you look at these changes and i'll show you a picture in a second what you discover is that the import content of exports is get growing in virtually every economy um finally on the advanced company countryside if i have time i'll show you the graphs very quickly because i'm sort of summarizing what i want you what i want to try to communicate to you this is where i think our challenges come we have short run growth challenges they're more severe in europe but underlying that we have pro we have issues that have been developing over at least a two decade period and i've tried to list them here first technology is taking routine jobs out of the economy not to another part of the global economy just out this is called you know atms this is called the automation of information processing and transactions it's in in the manufacturing sector it's robotics and now 3d printing and whatnot this is pretty well documented by research that was started by economists at mit and these are not only blue collar but white collar jobs so they called the manual and cognitive but if they're routine they're in the process of being reduced or eliminated in these economies and that is is one of the reasons why when you look carefully at the data growth and employment aren't following the same paths if you take the american economy in in the last three recessions 91 2000 2001 and now what you will see is an increasing divergence between the growth recovery of the economy and the way employment behaves afterwards so employment so the notion that if we restore growth will restore employment is something that is probably increasingly not true as we go forward and and the same set of forces technological and global integration is causing two other things one is that the tradable sectors in the economies that i've looked at carefully which is the united states the italian economy in the german economy the tradable side is growing reasonably but it's not generating really any employment and in fact in the italian cases best we can tell the employment's been going down in the tradable sector and the pre-tax income income distributions are shifting in an adverse direction that is income is going to the to capital in the global economy into high-end human capital those are the folks that are that think globalization's just terrific right in the middle income ranges at least on a pre-tax basis and countries do very different jobs about redistributing income and or essential services for sure but in the middle income range uh incomes are have been much more muted in terms of growth so the distributions are going funding so let me illustrate some of these things that i've said so this is the share of the tradable part of the global economy or more precisely world exports relative to production you can see there's a pretty steady steady upward trend this is the global economy you know in effect trading with itself um increasingly over time and there's no reason to to expect these trends to reverse the little dips you see are things like the great recession for example this is a picture that was put together by researchers at the imf as as a number of other these other graphs were i referenced it on the previous one this is the current network structure of the global economy you don't want to try to track around a bunch of online orange lines but but the idea is pretty simple and that is there's a number of developing countries in this and china has become a very significant hub along with the major systemically important if you looked at this graph 15 or 20 years ago it wouldn't look anything like this it'd be completely dominated by the advanced countries this is a picture of of what's happening to export shares in the global economy and again you don't want to spend a lot of time on this so i'll just tell you if you go black green red you're going forward in time so what you'll discover is that the advanced countries are declining they're not unimportant but they're declining importance in the sort of in in international trade and the big upswings uh again i don't know belabor the point but the huge one upswing is is china china is the largest trading nation in the world at the moment you'll notice that china one doesn't have a black graph a black line on it but in 1970 china was invisible interacted zero with the rest of the global economy it didn't start to interact until 1978. if you look at this we we see that one of the reasons that the developing countries have become less dependent on us is they're not reliant entirely on our demand uh our markets they are big markets in themselves with china at the hub uh so if china falters then it will slow down pretty much everybody in the developing world so what you see here is that there's essentially three blocks in the in the global economy now there's uh nafta that's the north american one and there's european union you know in its large version and then there's an emerging block which trades a lot with itself and i could expand this to the developing world which is east asia including china if you look at trade that goes across those blocks as opposed to within them then what you see is a pattern of increasing uh trade within the blocks and again these are all these are all correlated statements basically what you're seeing is the is the developing countries becoming larger trading with each other becoming less dependent on us and more resilient and by the way all of that is good we don't want them dependent on us you know we would like to see what we've actually seen in the post-crisis period which is pretty resilient growth not impervious that the european downturn has actually slowed these folks down because it's such a big important market and the downturn is now sufficiently dramatic as to actually cut into them but what's new is the developing world can generate enough aggregate demand to support its growth in a way that wouldn't have been true even 10 years ago uh i won't spend a lot of time on this but the mix of world manufacturing exports is changing it used to be very heavily textiles and apparel in part because that's the way most developing countries enter the manufacturing side of the global economy and that is not small but it's declining in importance relative to rather more sophisticated products this is associated with these economies moving up what is sometimes called the value-added chain and the process the long-term process that's underway is they're becoming more like us they have a long way to go but they're becoming more like us they move into sectors that are closer to what our economies do in this new atomized tradable sector world and now here we have the atomization of the global supply chain so this is for four countries uh it's a picture of the import con content of exports that's the little colored things and while they're not huge yet they're not trivial so if you look at the german case on the right of the screen you can see that if you take the exports of germany and ask what fraction of those exports were essentially imported and incorporated in the products the answer is 26 27 or something percent and rising uh whereas if you go back a number of years i mean this doesn't go back very far the old model uh that we produce things in one country and produce them in you know and sell them in another and that's trade is increasingly not true you know there's lots of examples of this that have been well studied so if you take any apple product like the ipod or the iphone we know exactly where the value is created so a chunk of it's created in in the united states in silicon valley with sort of design and kind of marketing and stuff and then the computer chips come from taiwan and south korea and japan and the displays come from one of those or probably south korea and the parts show up in china and get assembled in a company called foxconn well the amount of value added that's added in china is not trivial but it's not all that large as a fraction of the total and yet when we look at exports we see most of the apple exports come whether they're headed for europe or america or wherever else in the world they seem to be coming out of china and that is caught and that's that's a major data problem so this shift in the way global supply chains are structured means that the way we account for trade is no longer very useful because it gives a completely misleading picture of what's actually happening and so you find the world bank the wto the oecd and a number of others have to have major major project on redoing trade data in value-added terms it's not easy to do uh but it's important if we're going to get a picture of what this economy around us looks like i'm going to skip over some of these things because i've already said it in the advanced countries i think we're in for a tough a tough period and i and i i say this somewhat more bluntly when i'm speaking with the press because i think there's an issue uh in our political and and and policy discussions which is i think people still think that when you have a set of structural and leveraged debt type problems of this type there's some way to fix it quickly and there isn't and so part of the problem is the expectations are out of line with the reality there is no way even if you set aside the structural issues in the eurozone in america we have a pretty flexible economy the private sector is doing most of the heavy lifting the deleveraging is fairly far along but there's lots of things that are keeping us off potential so let me skip ahead to one or two other things i wanted to just mention to you this will seem like a non-sequitur and you may talk about this more at the festival but growth isn't a bad measure of how things are going up to a point but there's a limit and it and specifically growth doesn't account for the distributional changes and it certainly doesn't account the conventional measure of growth doesn't account for whatever we're doing to the sustainability of our growth model what this is is a picture of the of of the greater growth of income in brazil divided into the five to the ten deciles of the income distribution now if you know anything about brazil you know that they were they lost two decades from 1975 to 1995 and then got things together and they started growing and they've had their ups and downs you know so growth has been impressive at times you know five to six percent it's down a bit now you might say struggling along certainly systemically important country at 200 million people kind of the anchor of the latin american economies but what this says is something really important which is the high growth is occurring at the low income levels so what they're doing the the the latin american countries are the countries with the widest most uneven income distributions in the world there are historical reasons for that i mean to exaggerate slightly three people owned all the assets you know at the end of the kind of colonial period and that tends to persist what what brazil has engineered is something that's socially really important as well as economically and that is an inclusive pattern of growth a pattern of growth in which the income distributions are sort of coming the the measures of income inequality are coming down and that means higher growth at the bottom and lower growth up at the top it's it's pretty impressive performance but it means the growth figure doesn't tell you what you need to know this is a complete aside but brazil's problem is that their their investment rates too low so a developing country that wants to grow at six and seven percent has to invest well over 25 percent of gdp to sustain that growth that's not a theoretical conclusion that's sort of an empirical generalization the chinese investment rates 45 percent of gdp that is 45 of the chinese gdp every year is not consumed but invested in generating future growth now nobody thinks that number has to be quite that high and there may be some inefficiency in that but growth from an intergenerational point of view it's important growth requires investment of one kind or another and if i had one thing to leave you with today is whether it's developing countries that aren't doing so well or advanced countries that sort of lost the threat along the way one of the things we've done is stopped investing especially on the public sector side at high enough levels to sustain the growth i mean it's worse than that we not only stopped investing but in many cases we moved aggregate demand consumption in particular and investment to some extent which we weren't willing to pay for from the future to the present using debt and i guess a flamboyant way of describing this but for the for the sake of degenerating some controversy that's an appalling inter-general intergenerational choice and if we keep it up our children and grandchildren will not forgive us for this because it will leave them with burdens that they never never should have had uh let me talk about the advanced countries very quickly so this is the thing i said before i never thought i'd see so on the the lines that are going up are the advanced countries all of them that's the red dotted line and the g20 countries this is the sovereign debt to gdp ratio so we're trending up toward a hundred percent as a group the developing countries including the lowest income and the poorest of them are trending down to 40 percent now many of you may not have thought about this very much but if you thought about it and asked yourself the question would you ever see that in your lifetime that the richest countries in the world would be borrowing and borrowing borrowing at the public sector level and the poorest countries in the world would be bringing that those debt levels down i i guess my answer is i never thought i'd see that and this is part of the trouble that we're now in i like this graph i'm not sure the data are totally accurate but there's sovereign debt and then there's debt and i show you this just for the sake of your future discussions this this week the italian economy is not out of line in terms of aggregate debt it's similar to france and the u.s and whatnot what's different is the composition the two outliers in the world when it comes to sovereign debt which is the black part of these things are japan with an unbelievable 220 debt to gdp ratio and then a distant second italy at 120 and everybody else is lower but japan's out of line in total debt and so is the uk and uh and the italian economy is not that means basically that there's more resilience here than people think when they think only about sovereign debt now that doesn't mean it's easy to use the resources why is italy so low by the way this is something probably everybody in this room already knows which is the household sector is not heavily indebted it's not only that it's wealthy because this is a high saving on balance relatively speaking a high saving country but these debt levels are are too high and in the context of the european structure they are threatening uh that is this is what i call i think um olivier blanchard at the imf a friend of ours described this world as sort of replete with multiple equilibrium structures and that's true and the italian the european the eurozone is a classic multiple equilibrium structure where one equilibrium uh is that you know the yields stay down and the sovereign debt eventually comes down and the growth comes back that's the good one the bad one is that the external investors who are already nervous uh are kind of busy staying on the sidelines or exiting uh and then you get a run-up in the yields that undoes however much austerity you think you ought to have uh and kills the process of restoring growth and eventually the citizens say there must be a better structure and a different game to play and then and then it'll be chaotic beyond belief if it ever happens and i don't think it's the most likely outcome but that's the second equilibrium and the reason we are in the middle right now and what my friends at pimco call us a stable disequilibrium uh and the reason we're there is that we have the policy circuit breakers that keep us there which is the the ecb with the german backing that was talked about in the first session on the one hand and fairly strong commitments from important countries like italy and spain to not only get the fiscal house in order but restore uh sustainable patterns of growth and employment um finally this is a picture that i took from data from the united states so this is a long period of time this is the growth or the pattern of the gdp and what what you can see and this is just to reinforce the point that we live in a relatively different world what you can see is that the trend line is in this last recession we're not anywhere near back on the trend line in fact we're not even close and if you take a sort of shorter look at it it looks like this so our growth is coming back after a tremendous shock but it's not coming back the way it used to come back you know so that we got back on the trend line which is about a three percent rate of growth we're well below it and nobody really completely understands why we're down there or whether we're eventually going to head back to the trend line i have my doubts but for sure i think we're not heading back in terms of employment so on that on the lower right i think is gdp uh and that's coming back so on the american side we're we're above where we were after a tremendous hit and a pretty long lag on the employment side we're sort of coming back but we're not really close and we're not growing anywhere near fast enough to absorb the incremental labor force so our youth unemployment problem is not as big as the one here or even worse in spain but it's not trivial for sure this is what i told you before so it just illustrates the bottom is the routine jobs and you can see after the 2000 2001 recession it just precipitous drop in these jobs as technology kicked in and started taking them out of the economy and when you add the fact that the same technology that allows you to do this also is the technology that knits the global supply chains together and allows you to move jobs all over the global economy i think you have a sense of the pressures that we feel in our economies but especially in the middle class you know where many of these blue and white collar jobs resided we know some of what we need to do to respond to this and it has to do with maximizing you know the provision of skills and appropriate human capital and education to people what we don't know is how much of the challenge that we face will solve uh by doing that and finally the tradable and non-tradable sector so this is some research that i did and then we're continuing um and and so we basically took these economies apart as best we could it's not a clean data exercise and asked where were jobs created over the last 20 years in these economies the united states you know created an awful lot of jobs this number by the way used to be bigger if you go back before uh 2008 the number was 26 or 7 million so we're down to 21 increment uh that's a pretty big hit so you'll see similar things in europe so this is post-crisis up to 2010 and you can see that the tradable sector is a negligible contributor to employment uh i'll leave these behind so i'm not going to say this but for those of you who are interested this sector by sector is where the jobs were created and subtracted the blue is tradable and the red is non-tradable the big lines in this graph are government construction and healthcare most people think construction was a boom that was nev not going to last most people think the government's gotten too big and most people think we spend too much in america on health care so if you take away those employment engines you haven't got much left uh i mean it's pretty clear we have a problem this is value added i apologize for the nerdy term but value added as opposed to output has the virtue if you add it up across sectors you end up with the gdp i apologize value added behaves normally so the value added in the tradable sector is actually growing slightly faster than the non-tradable it's not as big because the non-tradable side is such a big part of the economy and so if you look at value added per person employed it's essentially flatlined on the non-tradable side and then rising extremely rapidly especially after 2000 remember that's when we started taking non-routine jobs out of the economy and globalization took this rapid turn and accelerated basically what's happening is that the jobs are either being the middle class routine jobs white and blue-collar being taken out of the economy are moved offshore in the tradable side of the economy especially so what's left is these very high value-added things usually associated with people who are highly educated and so on and there's nothing wrong with this from a growth point of view there is something wrong with it as a pattern from an employment point of view this is the italian economy like if i had germany i'd show it to you but it's similar this is just the fact that the italian economy is smaller and hasn't grown but the tradable sector appears to us to have declined i'm not so sure the accuracy of this data that i want you to sort of take these numbers literally but i think the pattern's pretty clear and and you see the same thing in the german economy the reason i think these three are interesting is the united states is whatever it is and the italian economy has clearly got a growth problem as well as an employment problem the germans had major reforms and yet and and is relatively speaking doing uh pretty well especially on the tradable side although it's running a rather large current account surplus which isn't helping with aggregate demand but you see the same pattern in all these economies so i guess what i'm trying to say is so this isn't a function of where we were and what kind of shock we absorb these are long-term underlying forces that we're dealing with so that's value added in the italian economy and so on same graph tradable and non-tradable the the divergence you saw in america is not occurring in the italian economy and it's much more muted in the german economy so that's that's an element of difference rather than commonality finally this is uh this data is notorious tito would agree with this notoriously difficult to collect on a comparable basis across countries but the oecd made an attempt to figure out how much of national income in the oecd read advanced countries went to labor now the problem is you know you have services delivered to labor and you know health and other things it's just a nightmare to kind of sort it all out but as best they could tell for about 30 years after world war ii the fraction of the went to labor was going up and then it reversed quite suddenly and it appears to be going down what that means is there's only two other places for income to go uh one is capital meaning businesses and the people who own them and the other one's government and i don't think governments change that much which means that that the way the global economy is configured uh more and more income is going to capital and i would include that in that high-end human capital why is that i mean at the most basic level we created a structure that allowed several hundred million people to enter the global labor markets and they probably had an effect on the price of labor and it may be you know although the details get more complicated that simple i'll skip over this and simply conclude i think the multi-speed world that we're living in developing countries north america now recovering fairly long period of slow growth in europe is is here to some time for some time i think the convergence pattern that we're seeing the developing countries eventually joining us will will continue um i think we have enormous challenges adapting our institutions uh to this evolving pattern of kind of global interaction it's not impossible i don't want to leave you with the feeling i think the german reforms that were undertaken into remember in 2000 the german economy was described on the cover of the economist magazine as the sick man of europe it had ingested east germany at an exchange rate of one to one had enormous productivity differentials and they were in trouble they were in trouble in terms of employment growth competitiveness and labor market flexibility and and they went after it what it took is first of all it cost gerhard schroeder's job so this is not politically popular stuff to do and secondly they had to get business and labor and the public sector on board and in specifically if you're going to have labor market flexibility and they had enormous labor market in flexibility you couldn't close a plant you couldn't move stuff easily to eastern europe where it belonged you couldn't do all the things that you'd expect would happen in a global economy it was a significant part of the trouble but they didn't go to labor and say we need flexibility they went to labor and said if we get flexibility we promise you growth we will share the restrained income growth across the spectrum and we will rebuild the social safety net so that the social safety net that was embedded in the fact that we could we couldn't eliminate your job your plant your company and replace it with something else focused on people and i think we need the same thing here we can't do these things one by one it's got to be a deal i think if we do that if we manage to get that kind of process done in a number of countries then actually we may not solve all a problem but we will solve a fair amount of it notwithstanding the fairly rapidly changing world we live in and in terms of sovereignty i'm not an expert on sovereignty but i would say a couple of things one i think there's a clear permanent loss of sovereignty in the sense of at the national level controlling your own destiny i can't think of any practical way of isolating yourself from these forces you can cut yourself off from financial flows you can cut yourself off from knowledge flows that would be a very dumb idea you can cut yourself off from trade flows and try to protect particular markets but you can't prevent your people from going somewhere else so if you kind of create an environment that isn't very interesting then the human capital will move because there's lots of interesting places in the world for it to go so when i try to think it through i just don't think there's any way to do that you may modulate the the transitions you know by sort of intervening in certain ways but by and large i think we're living in a world uh in which the sovereignty losses is permanent and we we have to learn to live with it and the second thing is we live in a world that's very volatile because the economic interdependence isn't matched even close to matched by the governance structures that surround it so this relative to an older period when we had relatively homogeneous advanced countries working collaboratively with her with each other in a in a global economy that they dominated uh this one is relatively unregulated and and uh and volatile and probably as a result scary to people um you know my children and grandchildren you know if we solve some of these problems on the transitions and deal effectively with the sustainability issues i think are going to be in a world uh with an even more complicated governance structure you know if most people in the middle ages lived in a in or around a manner and somewhere in the 19th century we got nation states uh i think we're in a natural evolution we live in multiple places we live in cities we live in provinces we live in countries our identity evolves and is associated with all those things i don't see any future that doesn't have multinational governance structures and that's why the european experiment it's by far the most experiment being conducted in the world so if you who live here permanently unlike me solve these problems then the rest of us will clap and follow you thank you well thank you thank you michael this was really fascinating and it was just what we need because we were saying that we needed a global picture uh to frame also our discussions at the festival you went so effectively but clearly fast over such a number of very important facts that um if i can you know complement one thing that you said because for the sake of clarity uh on the uh you know this obvious labor share data the labor share this is something related to the functional distribution of income it's not related to a personal distribution of income it is also possible that some of the workers are shareholder themselves and so therefore this decline in incomes may not be certainly uh may not be so close to the evolution of the of the incomes of of the workers themselves um and talking about data there is a effective thing that uh was coming to my mind by looking at uh your very nice slides and this is uh you were clearly pointing out of the measurement problems related to the unbundling uh or the uh global supply chain in measuring what is tradable but there is also a serious problem in measuring uh service trading services which is uh so i wonder whether part of the decline in the tradable sector in uh uh in in advanced economy has to do with the fact that it's there is a lot going on in in services but also a broader issue related to to finance if you talk to employers in in europe right now employers tend to tell you that the issue is not really trade is not competition right now the problem they face is not competition from developing countries the problem is credit squeeze they can't get access to to credit um and you know i i kind of start thinking that the current crisis as well as the previous one is basically a banking or a financial crisis you know we were it's not the hou was not a housing crisis it's true we started in the supply market this crisis started in the debt in greece but it's now a banking crisis so i wonder whether uh you know your story is telling us that basically what is really preventing europe to go back because it's you know also we are more distant from trend growth than the other continents is the fact that we need to reallocate a lot to be able to grow and given that we are in the middle of such a bad banking crisis this relocation cannot take place because banks are not there to finance this reallocation that badly needs banks to be done but before yeah we and these are just the questions that were coming to my i'm sure you have demanded there any questions from the audience i would like to entertain uh questions from the audience the idea is that the uh it's the audience it's the people we just get some questions from from the floor gentleman is not using the microphone so the interpreters cannot translate thank you very much well uh growth and employment didn't go hand in hand for a long time second not investing means betraying young generations indeed well they uh cried but we didn't listen to them i'm a priest and a small man thank you we have a question down there good evening you talk about sustainable growth and china so i think that china is going to a big problem right now because uh is struggling to grow but there is an over investment rate so economy is uh global economy is getting smaller for china and since china is going to play a big role in the future what do you think china uh will be will do in the future to overcome this problem thank you very much we'll entertain another question and then we'll have the answers yeah reason can you okay if you stand down perhaps it's better so that everybody can see you yes uh it's a pleasure to be sharing the same space with you once again uh as you mentioned the developing countries need to have investment level to gdp ratio of at least 25 percent if they need to you know look at some decent prospect of growth uh in the future but then again these countries are plagued by different problems especially relating to revenue mobilization domestic revenue mobilization and a lot of other problems uh dealing with debt servicing or structural flaws and all of that so when the odds are stacked so highly against uh investment to the levels that you mentioned how do you expect that to you know uh go through and yeah that's pretty much it thank you so maybe we start with this is it okay with you you want to take another one no it's fine i'll forget my age you tend to forget come on thank you for the comment i i think we're in the process of rectifying this kind of inner temporal pattern on china you know i spent a lot of time there tried to be helpful in formulating among other things the 12-5 year plan which is the current operating game plan for reform in china i threatened tito with talking about china and he said no way so you will find if you get a hold of these slides that the whole last 20 of them deal with china structural change and it's complicated but basically this is an economy that has to significantly change its growth model to stay growing it's a export and investment-led growth model that has almost outlived its useful life and so the shift that's coming other than big structural changes on the supply side so you associate china with relatively labor-intensive manufacturing or assembly process-oriented manufacturing that's all going to disappear in the next five years if it doesn't disappear you'll know there's something wrong it will slow it and slow them down now they could do it they could keep it you know sit on the exchange rate subsidize it you know there's 150 ways to make a mistake so that's one the big interesting change is for me somebody who spends a lot of time thinking about growth is on the demand side of the economy so the the chinese economy has a a declining ratio of household income to total income it's actually under 60 percent a household savings rate of 30 percent and most people think consumption the hypothetical future driver partial driver of growth in the economy is under 40 percent now if you look at any one of our economies and you know it'll be 65 or 70 percent so this isn't just going to do it and this means transferring income in by one channel or another from the corporate sector from state-owned enterprises and government to the household sector so their share is bigger and then changing the growth model to domestic aggregate demand which includes investment and they have to screen out the low return investment which is what they're getting from using the investment growth driver they just keep investing and investing this is a system that was built to invest on autopilot that's why it's 45 percent of gdp and if they don't stop it about now then they'll start to make low return investments and then that growth model runs out of gas i mean you can see why investment works because it makes things bigger later on but if it's low return it doesn't okay so that's that's a kind of snapshot this is an extraordinarily complex transition it's called the middle income transition most developing economies that enter the middle income transition at about four to five thousand dollars per capita income either slow down or stop and there's only five exceptions uh japan when it was a developing country korea taiwan and the city states hong kong and singapore and nobody's tried it at china scale or complexity having said that you know i spent a fair amount of time there and i think they know what they're doing so i'm optimistic there's all kinds of risks they could screw it up i i don't think the risk that they don't understand what they're doing is very high but that's a personal judgment having spent time there the risk that a big vested interest like the state-owned enterprises gets in the way of crucial reforms uh competition driving innovation a whole bunch of things like that that could easily i mean the state-owned enterprises you know are a major focus of high-level corruption uh and if people get angry enough about that they'll kind of blow the lid off um the answer to the last question is i think fairly simple you there isn't really any thing you can do in a developing country from outside that solves the you know the sort of political and or structural impediments they have to be solved from within and that's because people don't like even when they're in trouble they don't like outside interference it's a lesson i learned when i did the growth commission work that tito referred to and so there's a number of countries that that have some fairly hard work to do to to get dysfunctional things out of the way i mean many of us are very attached to democracy but there are many many democracies that have developed pathologies you know where people buy votes or use their control over resources to either steal them or you know or or control via power and violence uh and there's lots of examples of that um so those are the thing that you can do from the outside to help once things start to go well whether it's because a crisis that finally turns things around or whatever you can swing in behind it and when the international institutions in the advanced countries are doing well that's part of what they're doing and i think increasingly you'll see developing countries do that china's become a pretty major controversial investor in africa for example but they're but i don't want to minimize the problem on the other hand the pattern of high and rising growth in the developing world is pretty widespread by now i mean things you think of as really problematic are much less problematic now there's a new generation of leaders in many african countries africa is growing at about six percent i mean this is stuff that doesn't correspond sort of with the old image thank you very much last two questions and then i think now in my opinion imagine economies are not working so well so my idea is that we should move from a profit-based economy to an economy where people do not take advantage or exploit other people i saw that russia has a 77 percent debt europe is about 300 but 77 is far from 300 i don't know if we should look at russia as an example thank you i have a question voila well it's me who decides okay a very short question i'd like to know if it is appropriate to speak about loss of sovereignty also of the market not only loss of sovereignty by governments because markets play a role so i think that it would be appropriate to it would be appropriate for the market to give more sovereignty to governments if we understood the question now you made reference to the public data of italy and japan now our sovereignty is something that we share with other european countries don't you think that at a certain point we could have a situation where the public data is restructured or repealed i realize that it is a bit strange but couldn't we think about such a situation well a very demanding question very difficult one i'm curious what keeps down the united states potential to be maximized okay so i'm going to be brief because people have other things to go to russia has not got itself on track uh it is a potentially high growth country with an enormous amount of talent and a ton of natural resources but it's a it's a very very difficult and somewhat dangerous place to do business and so numerous companies and financial institutions have gone there and exited so they basically they'll probably solve this problem but they haven't solved it yet you know on the loss of sovereignty to markets uh maybe this is going to sound excessively harsh but basically when you borrow money people expect you to pay it back if you don't want to be dependent on markets don't borrow the money okay or borrow an amount that you can be sure you're paying it back and then the markets won't do anything to you the markets are doing stuff to us now because we borrowed so much money that they're starting to wonder if we're going to pay it back i'm oversimplifying a little bit but but the lesson is not to get mad at markets but to sort of structure one sort of way forward in the world in such a way that you know markets don't get control of important things and in the current context that means less leverage by the way i agree with tito's earlier point there especially in europe the financial distress in the banking and financial system is causing uh constraints on growth so basically you can constrain growth by absence of demand that's the main issue in america there's a bit of credit constraint but it's mostly demand you can you do it by not getting credit where it's really needed as opposed to where it's sort of excessive that's clearly true in many parts of europe and then you can do it by failures of productivity growth which not only drives long-term growth but competitiveness on the tradable side so all three are relevant i think i may have understated the uh the issue here in in italy and in the eurozone um on the public debt i think you know you're basically right if but we cannot at this point issue european debt uh and sort of you know socialize this whole thing until because we can't solve the burden-sharing problem so first we're going to have to stabilize it and get people on a path where they're not contributing too little growth and too much debt to the mix and once we get there then i think you know the natural evolution of this structure in the direction of more europe and less uh divergence let me say one thing that you know probably will cause some controversy the reason this is a flawed structure is because the almost everything that i've learned to think about is relevant from a policy point of view in terms of growth public sector investment labor market policies tax systems you know openness of the economy etc is decentralized in europe except for the for the currency so then you wake up one morning and you discover countries have taken different directions in terms of productivity and whatnot and then you ask well how does that normally cause it get adjusted for well part of it is sort of what we're seeing going on now but the other part is inflation that's not allowed an exchange rate adjustment and that's out of the question right so this is a system that looks to me to be designed to produce divergence that then gets to be a problem because the adjustment mechanisms aren't there and and my feeling is you know europeans who are going to decide this thing basically have to choose between more centralization or this amount of decentralization that really matters combined with more effective adjustment mechanisms i i wouldn't presume to suggest which is the best way to go uh that's i think what was the last question it was vote on the u.s right oh yeah it's basically under it so here the american economy story is fairly simple there's a lot of problems that you see elsewhere we don't have for example we don't have inflexible labor markets we you know for example so the capital markets are deep capital labor moves around fairly quickly the recovery you're seeing is basically a combination of deleveraging which has gone fairly fast a housing recovery and private sector structural adjustment including more competitiveness on the tradable side and eventually the demand shortage will diminish so what's left what's left is excessive health care expenditures huge non-debt liabilities in the entitlements area this is the word we use for things like social security and medic and health care and whatnot and under investment i mean the infrastructure for a person like me an american when i compare the infrastructure in los angeles or new york to the infrastructure in china in beijing say the airport i'm embarrassed i mean how can we be out invested by and it seems true of human capital and skills development and other things so until a combination of people and especially government overcome the pattern of under investment will be below potential because there aren't there's no way around it so that that's my short answer to that thank you you answered with a real truth which tells a lot also for our future meetings the fact that in europe we are in a situation where policies that really matter for growth are carried out by single countries and which entails the fact that in the end countries grow in a different way but countries do not have those tools which can help them overcome the problems and this is a way to define the current problems of europe and if you look at data well if you look at growth levels growth rates you will see that european countries have different growth rates trentino is better off than sicily for example but in terms of growth rates there is a difference depending on the country the growth rate in italy is low not only in the north in the south but also in the north of italy so we thank michael very much for his introduction to the festival there couldn't be a better one he worked a lot on this event he prepared many other slides that are on the site on the website of the festival you can download them thank you is that okay so you