Hello, welcome to visit Shanghai Forum
2014 Nobel Laureate in Economics;
Honorary Chairman of the Foundation JJ Laffont- Toulouse School of Economics (TSE)
Thank you so much for your invitation. I will be addressing some global challenges. My speech is going to recall some of the considerations that were expressed in the last talk. The outline will be in three parts. The first is the threats the world is confronted with. The second is whether we are going to witness the end of globalization. And the third will be the innovation imperative.
We are facing a number of threats today. I'm going to start with a riddle. What do the following have in common? The first is the climate change, which is an existential threat, and yet the problem is getting worse and worse. The second topic is inequality. The third topic is insufficient education provided to the children. The fourth is a shortage of innovation. The fifth is excessive public and private debt. The problem is that they are all time bombs. So that means that if you don't do anything, it has limited consequences. And on top of that, the impact is delayed. However, as the impact is delayed and the consequences are small, this political procrastination may imply decades of inaction. So that's what I call time bombs.
Currently we are facing a perfect storm, with a worrying situation, such as the Covid and future pandemics and disruptions in supply chains, the further rise in inequality, the piling up of debt, the inflation, the geopolitical tensions between the West and Russia/China…, and the populism. That adds to the existent challenges, including the time bombs discussed earlier, antitrust, privacy, labor consequences of artificial intelligence, cyber and bio security, development financing, and so on.
We can solve these problems. We know there are obstacles. At home there is the rise of populism. Internationally, there is the decline in multilateralism. There is a good question about why don't multilateral organizations work better. We see a lot of nationalism, and the decision making is based on consensus. So it's not surprised that the core process doesn't work pretty well, because, for example, those economies which export for some fuel energies don't really want to have any carbon price. There is an increased popularity of protectionism and the ubiquitous popularity of slogan “My country first”. And we see some belligerent attitudes that serve only the rulers, not the people.
How will debt be resorbed? We have too much debt before the Covid already. I’m not talking about every country of course, but a number of countries. That means that we discovered even less room for manoeuvre today. That may not be a concern，if the growth rate is greater than the interest rate and the debt grows at the rate of interest. Whereas the growth rate will increase the production of the country, and therefore, the ability of the country to reimburse that.
But that may not be the case. One possibility is the primary surpluses. So basically high taxes is one-shot as at a time it is a fiscal instrument. But more likely there will be taxes right over time. And that requires a lot of more commitment. The second possibility is debt repudiation and restructuration. That could be very costly on the country which does that because it will be a cut from borrowing abroad. The third possibility is inflation and debt monetization. All those are labeled in nominal terms of the domestic or foreign currency.
The second point is about “the end of globalization”. One very important question for both the west and the emerging markets is whether we're going into a disappearance of globalization, in front of which is a perfect storm. During the Covid crisis, my view at the time was that international trade would remain strong once the virus is kept under control. The fact is that supply chains proved to be relatively resilient. And furthermore, the investment supply chain has been sunk. It takes a large amount of money and knowledge to build a supply chain. But once it has been sunk, it's easier to use. I would have predicted or at least hope some qualitative adjustments so as to better protect globalization’s losers. Because in the west, we have had some losers, for example, the workers in the midwest of the United States have suffered a lot from the Chinese imports. The Chinese imports have been very good for China and for U.S. as well, but some people in the U.S. have suffered a lot and they need to be better protected. Otherwise there will be a backlash against globalization.
I am not so sure anymore, because I think the main tensions for globalization is geopolitical tensions. There are new forces for “slowbalization”. When you are lack of trust, countries are less willing to purchase key inputs from or invest financial assets in countries that are not perceived as friendly. Globalization requires a peaceful environment. And you see that we are talking about producing at home (“reshoring”), or sourcing only from friendly countries (“friendshoring”). However, we should remember that international trade is a fundamental factor of growth, especially for poor and emerging countries. But for rich countries, it is also very important for the living startups, because globalization of the best of the world, the lowest price.
So summing up on the end of globalization, I will expect more diversification to avoid disruptions in the supply chain, especially for essential supplies, such as national security, ability to respond to health crises, etc. Globalization will remain strong unless there is prolonged geopolitical conflict. In order to have globalization, reshoring would imply a tension between the citizens’ demand in the west for an increase in purchasing power, and a double whammy, which is that we have a complex economic situation, and at the same time if we have the closure of borders, then the price of everything is going up. On the other hand of supply chains in place is the sunk cost. In my view, the choice is not between globalization and no globalization, but how to combat the perverse effects of globalization. And for that, we need to control resulting increase in inequality in rich countries, compensate workers who lose their jobs, and try to anticipate transitions.
Let me conclude with a few words on the innovation imperative. There's been a lot of technology or progress, but it's not enough. We like technological progress because it creates new products and processes. It destroys entrenched positions. Technological progress comes with its own hazards. For example, the deprivation of privacy for Tech, the workers protection for artificial intelligence. But at the same time, technological progress is a solution to many of our challenges. We see that innovation faces a deficit of incentives in some areas. Sure there is a prospect of intellectual property for the inventors. But in practice, innovation can be only partly appropriated by the inventor. In the west, we see more and more in terms of the pull & push mechanisms. Additional pull & push mechanisms are offered for innovations that are crucial for society, or for neglected diseases. And there is some kind of international free-riding on innovation as well.
For example, for green technologies, we need disruptive innovation. We need disruptive innovation because nations are exerted low efforts to be green. In many countries there is still very low carbon price, prolonged use of coal, large subsidies to fossil fuels. That means that disruptive technological progress will be necessary, although not sufficient. We need both destructive innovation and control of pollutions. That's bad news. Good news is that, for example, the vaccines. Nobody believed that within a year there will be vaccines, and that means science. When lots of money are spent and spent right, it can be extremely powerful. I don't see the reason why we should not be able to achieve a similar outcome on green innovation if we spend what it takes in cooperation across countries. And we have to adapt the proper governance for the grant award process.
Finally, in the health domain, we also need this kind of new incentive. Just give you one example, we are short of antibiotics. Now. We have very few new antibiotics in the pipeline. We need a new model because there is no business model now for the antibiotics, for interesting reasons actually. We also need better stewardships for the control of the use of antibiotics. There are various ways of doing it. One is to give prizes to the inventor. An alternative is the transferable exclusivity extensions, which basically gives the inventor the possibility of extending, for example, 6 months or a year, the patent on some invention. And the debate now is which one is more efficient. Are we going to do it? But the basic bottom line is that we need a new mechanism for those important issues in health and climate change. Again, those are world public goods and cooperation across countries going to be needed in order to benefit from scale.
Let me conclude here. I mentioned that the way forward is really to invest in the future. It's a very very bright future. If we solve the problems like climate change— and that's a big “if”, of course—this is a very bright future because of the technological progress. And the rise of emerging nations, what has been done in China and many other countries is remarkable. But we have to solve our common problems. These problems are solvable. And for that, we need international cooperation. I would like to thank you for your attention and wish you a very successful Shanghai Forum. Thank you very much.
(This article is edited based on the recording and has not been reviewed by the speaker.)
