Grave New World: The End of Globalisation, The Return of History

TIME: 18:00-19:00, 15 June 2017

VENUE: The Henry Jackson Society, 26th Floor, Millbank Tower, 21-24 Millbank, London SW1P 4QP

SPEAKER: Stephen King

Chair: James Rogers

James Rogers: Ok good evening everyone, to this event by the Henry Jackson Society high upon Milbank tower. I suppose I should introduce myself first, I’m James Rogers, I recently joined the society as the director of the global Britain programme. This programme will be looking at the role of the UK after and during Brexit – looking at British foreign policy, defence policy and so on and so forth – and there will be a lot of publications and events in relations to this program forthcoming in the next few months. But tonight, we have with us Stephen King who is going to talk to us a little bit about his new book “ A grave new world”. Steven has come to us to discuss the actual components of the book and particularly why globalisation as he feels, is being rejected and why international institutions, which we’ve been putting together, or the west has been putting together for the past 70 years are beginning to fail. And he is going to look at migration, technology, and currency wars in the coming period. So he has built up quite an array of publications focusing on these kinds of events and issues, and his recent books are “when the money runs out” (2013), and also “losing control”(2010). The former was announced as book of the year by both the economist, the times as well as FT, so he has a wide portfolio of knowledge in this particular area relating to globalisation and the collapse or the decline of western economic interest and influence. He has a number of different prestigious positions. He is currently senior economic advisor to the bank HSBC and before that he was the global chief economist of the same bank from 1998-2015. He has also acted in capacity on the UK government’s Asia task force as well as the ECB shadow council. So without further ado, I would like to thank you for all attending and coming to listen tonight, and I will hand over to Steven who will discuss his book, thank you.

Stephen King: Thank you. First of all I’m delighted to be here on such a gorgeous summer evening. I just realized you have a better view than I have because you can see beyond this screens to a fantastic view on London. Secondly I wanted to apologize for those of you who were expecting the other Stephen King and got me instead, although I have got a bit of reputation for writing factual horror stories instead of fictional horror stories. And it’s also very handy to be called Stephen King because sometimes when you arrive at a hotel you get an upgrade to a pent house suite, because for some bizarre reason, the hotel thinks there’s only one Stephen King in existence and therefore it must be the other one. So there are some benefits of having some famous persons name. I started writing this book back in 2015. When I started writing it, the end of globalizations or the west’s rejection of globalization, because that will only happen of there is a Brexit or a Trump victory. And they say of course that’s never going to happen, so your book is going to be completely irrelevant, but then it turned out shortly thereafter that there was a Brexit vote and Trump produced a remarkable victory, relative to any of the expectations that existed back in 2015. I should tell you actually that I was in Washington in October 2015, and I was talking to people in the “no”, in the beltway I think is the right description to use in the no in the U.S. and they assured me – these are republicans by the way – there is no chance what so ever of Trump winning. It would be either be Jebb Bush or possibly Rubio, but there was absolutely no chance that Trump could win. So their expertise turned out to be not quite such expertise after all. So there have been some remarkable things that we’ve been trough over the last few months. Anyway, the theme of the book is that there is this end of globalisation, specifically I suppose the rejection of globalisation by the West. And the odd thing about this is that the West has been very much at the forefront of the process of globalization over many many decades, so it might seem slightly odd to suggest that the West is becoming increasingly nervous about it. In terms of globalization I mean that there is sort of the idea of orders being dissolved, disappearing and that we have an ever-greater economic integration between countries, between continents, between geographies, and of course the borders dissolve in not just a political sense but also in term of the freer movments of people, of capital, of goods and services. In many ways you could say that the EU reflects the kind of freedoms that one would associate with globalization, and that immideatly of course raises the issue, that globalization from an economic point of view can potetntially be in conflict with the idea of what the nation state stands for, and of course that conflict has waxed and waned throughout history. I would like to randomly, arbitrarily chose a year whereby the West was perhaps reaching a sense of peak globalization or peak enthusiasm for globalization, and if I had to pick that year, I would probably chose 1989 and there are two reasons for this. The first and most obviously, this was the year when the Berlin wall came down, and there was a strong sense that the West had won, that communism was in retreat and that as a consequence countries around the world be free to choose western economic and political values and everything would be absolutely fine. And the second in 1989 was that the whole idea was reinforced by an incredibly influential paper that you all know about, which of course if Francis Fukuyama’s paper, “The end of history”. Fukuyama made three key claims really that were strongly held as beliefs for many years after. The first claim was that liberal democracy western-style had really won. The second claim was that free market capitalism was an immensely successful model and as it spread through to the rest of the world would lift living standards elsewhere and the implications were as, as the living standards were raised then the West would continue to do well because it would simply increase the number of countries elsewhere in the world that the West could trade with. The third big conclusion of the paper was that authoritarian regimes were absolutely in retreat and for many years thereafter this was something that many people enthusiastically believed because it did seems as though as this was not simply a statement of reality, but it was also a series of positive judgment calls about how the world could be in the years that followed.  What I feel now is that somehow, some of these predictions that were implied within the end of history haven’t really worked out quite in the way that Fukuyama had suggested, which is why my book is subtitled the end of globalisation and the return of history so in that sense, Fukuyama is a strawman within the book itself and to go through some of the things I think would come as a surprise to the West, first one, really o obvious, is the immense economic success of China. Whether you think of the regime in China, it has had an epic transformation in terms of living standards over the past 30 or 40 years. Here’s a little bit of context, now in 1980 when Deng Xiaoping started his reform and began to open China up to the rest of the world. China’s per capita incoming, living standars were roughly the equivalent of those in the U.S. right about 1780s or 1790s, just after the U.S. had gained independence. By 2010, living standards in China were up to what we saw in the U.S. in about the 1930s, so there’s been a reasonable increase in that time span. So as a rule of thumb is that China has delivered every 10 years increases in living standards that took the U.S. every 50 years to achieve. Now of course China had lots of advantages, simply taking existing technologies and incorporating them, while in America’s case it was typical to get the technological frontier at any particular point in time. But it’s nevertheless the case that we have seen an epic transformation in China, and that has meant 2 things: the first one is that China now has an extraordinary gravitational pull economically on the rest of the world whether you like it or not and it also means that, because of growth in China, China constitutes, depending on the exchange rate you use, either the second biggest economy in the world today, or possibly the biggest economy in the world. I’m not convinced by the latter, but some exchange rates will tell you that China is now the biggest economy in the world. So the first challenge in the Fukuyama thesis is that there was a strong belief back in 1989 that economic success would only really come through as a consequence of economic liberal democracy, and China to date has disproved that particular story. I’d even go further and say that much of East Asia has disproved that story to the extent that we’ve seen increases in living standards in parts of the world that don’t necessarily have those liberal democratic values we take for granted in the West. The second biggest challenge has been the much more localised western challenge and that is simply that western growth has slowed down dramatically and the pace of the increase of living standards, particularly the last 15 years or so actually pre-dates the global financial crisis has been pathetic compared with what we’ve seen in earlier decades. If you go back to the 50s, 60s and 70s, the pace of increase of living standard in the West was extraordinarily rapid. It continued pretty good in the 80s and 90s, but from around 2000 onwards there has been a dramatic slowing down. Now this creates enormous political problems, because we in the West are very good at making promises to ourselves on extrapolation of the past growth rates. We say we can have pentions, we can have healthcare, education and defense. You name it we can have it, so long as the economy continues to expand, so long as they deliver strong productivity gains. But few people 15-20 years ago were asking the question what happens if western growth kind of grinds to a halt? How do we deal with that? and you get into a whole new political gain which is about how to divide up the cake which is now fixed in size, rather than the previous one which was about how to increase the size of the cake. And I think it’s striking that in the general election last week in the UK, I felt that neither of the major political parties really discussed the issue of how to increase the size of the cake. They focused instead of how it should be divided up, how the slices should apportioned, which I thought was unhelpful and also something that I think would lead to a kind of almost sort of bi-polar problem for the country itself, with the centre ground being divided and disappearing, and things polarising into either right or left. So this absence of growth is a problem, particularly when the rest of the world is growing quickly, and this has been true over the last 10 years, that China, India and others have continued to expand rapidly, the west has done quite a lot more poorly. And the third issue, a specifically western issue actually is the increase in inequality, which hasn’t really happened worldwide. One of the striking features of globalisation is that it’s been associated with a specifically narrowing of income inequality from one nation to the next. In other words, China and India have grown faster than the West and therefore the gap in terms of living standards has sort of narrowed over time. But in the West there have been some striking difficulties, in the U.S. if you look at gains in GDP for the last 30 or 40 years, the bottom 60% of the income distribution have largely seen hardly anything in terms of wage gain over that period of time. The top 0.0001% (not entirely correct, but roughly speaking) have seen absolutely enormous increases in living standards. So there is a difference in what you may describe as the ‘have nots’ and the ‘have yachts’ which has come through quite remarkably in recent times. Now, it is important to stress that, I would say this is a peculiar US phenomenon, it’s not something you see quite as clearly in either the UK or in Europe. I think it’s important to emphasize that distinction. In the UK there was an increase in income inequality in the 1980s and 1990s, but over the last 15 years, nothing as much as we’ve seen in the US, and in Europe, hardly anything at all but nevertheless, there are still difficulties in both the UK and Europe. A difficulty in the UK which might be associated with globalization at some point is that there are some parts of the UK that are very well connected to the rest of the world, notably greater London, have actually seen very big increases in living standards, whereas if you were living in say Wales, or the North of England, you would have struggled to see anything like the same kinds of gains. Regional inequality has grown over the last couple of decades. And in the Eurozone it’s not so much a regional inequalities, it’s rather national inequalities, so a striking feature of the Eurozone experience over this period of time has been that, well since 1999 when the euro was first introduced, Germany has extraordinary well, Italy has done extraordinarily badly and the contrasting fortunes are really quite striking because if you go back to 1999 itself, Italian living standards were roughly 90% of those in Germany and today, they are 75%. Now, these gaps that open up, either within nations or within income distributions or across nations, they need an explanation. There needs to be some kind of political narrative to explain what’s going on and actually within the west, there are a series of potential explanations you could use for the difficulties that have materialized. The first one is technology, which we know within the US has led to particularly to a hollowing out of what you may call white collar, clerical work so far, rather than just destroying manufacturing jobs, which is a part of the story in previous times, it’s now having bigger and bigger impact on the service sector as the whole issue of robotics has become important over the last few years. And those that lose their jobs in the service sector, maybe 1 out of 10, ends up being geared up into the global economy, ends up doing better as a consequence of the change through robotics, and maybe 9 out of 10 end up in a situation whereby those exisiting jobs are gone, they are forced to compete for lower paid jobs, which of course extends to putting even more pressure on those already lower paid. And one of the current features of the US currently is that the unemployment rate is very very low, but unusually, there has been no acceleration in wage growth, and I think technology has a role to play in that. you can talk about the importance of the role of education or lack of investment in education of educational failures in differnent parts of the world. If you look at the so called Pisa test, I’m not saying they’re reliable entirely, but supposedly ways of comparing educational attainment at the ahe of 15 in different parts of the world, what is striking about the lastest results is that if you happen to be in East Asia, you’re probably extremely numerous, extremely literate, and with a good ground in scientific knowledge whereas if you’re 15 and you’re in the UK or the US, you might be lucky and you might be ok, but the general picture that’s emerging is that the UK and in particular the US have dropped down in these international league tables, in terms of educational attainment, so that may matter when it comes to competing on a global level. It may point to social mobility. If you go back to JFKs comment to before he was elected actually, when he talked about a rising tides, raising your boats, that was very much the American dream back in the 1950s and 60s, whatever your background, your social background your economic background, you could make it! There were opportunities there to do well. Whereas during the last 20 or 30 years, it’s no longer quite so obvious if you come from an underprivileged you really can make it, a sort of glue that got stuck in the works has reduced the mobility of people compared with the 50s and 60s. Now these are explanations that have not much to do with globalisation. You might say well, you know, what’s the big deal about the threat to globalisation in regards to all this, and the answer is very simple, which is that, these explanations are politically difficult to deal with. Education is a reform process that can take years, decades to really pay off. Social mobility which can play all sorts of tensions between those who want reform and those who are very happy with how things are when it comes to technology…you don’t really want to be a politician, like King Knut, trying to stop the advance of technology coming through. Technology is advancing in such a way that you’re not sure that you can legislate in an effective way that you can deal with some of the consequences and the unexpected consequences of technology. So what you do instead is that you form a new narrative. And the new narrative is that you form is that actually, what’s happening in our country is a direct consequence of what is happening elsewhere in the world. We will blame somebody else for the difficulties that we have. So if you’re Trump, you’ll blame China or you’ll blame Mexico or you’ll blame for example Islam or whatever it might be for the difficulties that the US is faced with. And in one sense a narrative that seems to have a fairly wide appeal because if you think about globalization, people can believe, rightly or wrongly that they are directly affected by it. To give you an example, an imaginary one, of let’s say a woman who’s working in the Midwest in the US, and she’s working for a manufacturing company, and then I think to myself, well is she a winner or a loser from globalisation. Is she a winner or loser over the fact that capital can move to other parts of the world, her job could be outsourced etc. and actually the answer is very very difficult to provide in a theoretical sense because there are a series of gains and losses that this woman will go through so the first loss is the threat of her job being outsourced to China and maybe her wages are under downward pressure, she’s not very happy about that. but imagine that this company is an enlightened company that pays her not just in terms of her wage, but also in share option scheme, and the fact that the company is thinking about a diversifying into other parts of the world means that the share price goes up so what she loses on the wage she gains in terms of the shares. And then also imagine that she’s driving a gas-driven SUV to work each day, and as a consequence of China’s rise, oil prices are unusually elevated from what they were previously so her gasoline prices have gone up so she’s definitely a loser and then imagine equally that she loves watching TV and she’s bought lots of flat screen TVs to basically cover the walls of every part of her house, and of course she’s a winner for that because flat screen TVs are made very cheaply in Asia and elsewhere and so in that sense she gains. So overall, is she a winner of loser from globalisation, the answer is NO, it’s difficult to work out, but it means that a politician can take advantage of this story and say well perhaps we can easily blame the rest of the world for your difficulties and indeed we can do something about it. And my point about this story is, because we’re seeing it not only in the US and the UK, but in many parts of the world is that this marks a really quite dramatic change in the emphasis relative to the values and incentive engagement the west had, I would say, starting with roughly 1944, with the creation of the Bretton Woods institutions that came out of WWII. And at the end of the Second World War, there was a sense that the west had got it badly wrong after the First World War. First of all there is a breakdown in the institutional arrangements that existed pre-first world war, so basically it was the end of the Empire, secondly, there was an attempt to replace that with self-determination, the values of the nation state and so on, but that proved to be difficult partly because the Americans chose not to be involved in the league of nations. Particularly because Germany was hacked off by the way it had been treated in the treaty of Versailles, and everyone knows what happened subsequently. But after WWII there was a determination to offer a different sense of how the world should work. First of all, this was from the Americans in particular were determined to put the empires of the past to bed. I’m not the British had quite the same view in 1944 but nevertheless the Americans clearly thought this was something that had to be dealt with and then they said well, in exchange for the absence of empires, the absence of coercive ways of influencing people elsewhere in the world, we want to have nation states, so the Woodrow Wilson doctrine was still out there, but you really want to make sure these nation states can engage with each other in an international rules-based system, so you end up with the creation of institutions that would provide those rules, whether it be the IMF, the World bank, the general agreement on tariffs and trade, the forerunner of the WTO. Whether or not it was oddly enough the seed capital that went into Europe which of course is associated with the Marshall plan, which, depending on your point of view is either an incredible act of generosity on behalf of the Americans, or simply a way of stopping Soviets spreading much further westwards but nevertheless the Marshall plan lead to the creation of the OECD and in time the European steal and coal community, which of course thereafter became the EEC and then the EU, and you can also add to that the creation of NATO too. All these instituions were created after WWII and they kind of set the rules of the game but a way in which counties would interchange with each other and for many years these institutions succeeded, they succeeded because living standards in the west grew incredibly quickly, they succeeded because countries in the West stopped fighting each other. The succeeded ultimately in 1989 because the west had done so well that the rest of the world simply couldn’t keep up.  So it also has pressured in some sense the end of soviet style communism. But thereafter, I think difficulties began to come through, some of which I’ve already explained, and I think something else happened which is also quite important. Actually two things are important, one of which is technology which I’ll come back to, but the other was this faith in free markets, which began to grow to such a degree that thus we ran out of institutions to govern if things subsequently went wrong. And to show this, this has been the case in recent times, has been the cross border flows of capital and the internationalisation of capital markets, and I want to give you a little flavour of how extraordinary this change has been over the last 40 or 50 years. There are different ways of measuring this but if you think of globalisation as a story of cross-border ownership of capital, rather than local ownership of capital, you can use that as a way of gaging how much globalisation we have today in terms of global capital markets. Some very good data from this exists, which goes all the way back to the 19th century. The way the data is expressed is to say, of all the assets that exists around the world, what proportion of assets are owned by foreigners in a particular country as opposed to domestically. And what is that figure as expressed as a share of global national income, global GDP? So I can tell you that in 1900 or so, before WWI, the end of sort of peak 19th century globalisation, the figure was 20%, so 20% of all the capital that was owned. The foreing component of it was 20% of world GDP back in 1900. In 1945 that figure had totally collapsed and was down to 5%, a sort of move toward autarky in the global economy. By 1980, the figure had risen to 25% of the now much higher level of global GDP. And by 1980 we had a more integrated global capital market compared with the overall size of the global economy than was true of 1900. By 2007, on the eve of the global financial crisis, the number had risen to a little further than 25%, any guesses to what the number was? The answer is 210%, an absolutely gobsmacking increase. And this all happened really in the 1980s and 1990s and of course all the way up to 2007. It’s a fantastically large number. And it’s a large number that we had to think of ways of coping with. So, do we have an international institution that works with that? and the answer is no. so how else could you cope with it? Well you could pretend that markets always work and never ever go wrong and say hey look don’t worry about it will all be ok. Then we discovered in 2007-2008 that it wasn’t going to be ok. And I think we learnt something about the growth of international capital markets in that period, that we still have to actually deal with properly. And that is, that when you have a collapse in asset values, and you have a relationship between the creditor in one nation and the debtor in another nation, we are a long way from working out who takes the share of the burden when things go wrong. An d we’re always very happy to take a fair share when things go right, but when things go wrong, who is it that pays? Now of course within countries there is a big debate whether its tax payers, shareholders, bondholders, who pays….whether its recipients or public servants or whether it’s through austerity. But across countries, this was a new challenge. And one way of demonstrating this perhaps is by demonstrating the example of Germany and Greece. Pretty familiar one of course, but just to think about it on the point of view of what happened, and who was at fault. Now of course the Germans will say, we are the good, upstanding creditor nation, we’ve done nothing wrong whatsoever. And this is almost like a replay of Victorian morality, back to the mid-19th century. But creditors and debtors are simply two sides of the same coin, you can’t have one without the other. And in the case of Germany and Greece, we know that Germany was the creditor of course and Greece the debtor. But in terms of the causal relationship, in terms of who was driving what, was it the Greeks who tried to borrow more than the Germans wanted to lend to them or was it instead the Germans who wanted to lend more than the Greeks wanted to borrow from them? It’s a really important question to answer, and really you can provide and answer. And the answer comes from the changes in interest rates before the global financial crisis, because the bigger and bigger the Greek balance of deficit got, which was a measure effectively of how much was borrowed from the rest of the world, the lower and lower Greek interest rates went. Now that’s really odd. Usually you think of a country with a large balance of payment deficit as one that has to pay a lot to borrow, but the fact that interest rates were coming down tells you effectively, it was the generosity and foolishness of the Germans, not so much the idiocy and craziness of the Greeks that had led to the situation in the first place. It was the Germans saving pouring into Greece, taking advantage of an interests spread of 300 basis points, 200 basis points, a 100, and then 10, and the money kept pouring in. until it stopped pouring in, Greek economy got into trouble and suddenly the Germany want to be repaid, which is understandable. But Greece is in a position where it’s done all sorts of stupid things at home, but nevertheless, somehow its position of sovereignty is under threat as a consequence of the German demands to be repaid. Now there are echoes of the 19th century in the story because, in the book I refer to a similar story that existed, with a loose cork in the Ottoman Empire, after the construction of the Suez Canal, Egypt went through a sort of borrowing binge, and everyone thought Egypt was the future, and it raised huge amounts of money then it got into trouble and eventually there was the equivalent of a Troika, lead by the British and the French, in the 1870s and 1880s that had basically replaced Egypt under a sort of austerity program, which eventually triggered a military upheaval within Egypt itself. In a sense what the Egyptian story tells you is that themes of creditors and debtors is a story that repeats itself century after century, and when it goes wrong ,there’s usually some kind of chaotic result that begins to come through. So one of the lessons I think is, one of the lessons of globalisation is that you have this massive increase of global capital, we have these relationships between countries followed up by assets and liabilities, but we haven’t really worked out what we do when things go wrong. I’ll come back to suggestions to what I think we could do a little later on. On the technology front, there is a powerful belief that says technology is a driver of globalisation, the sort of King Knut argument, when he says that nothing can possibly go wrong because technology brings down barriers all the time, and I’m deeply sceptical about that. I think it depends on what you do with technology, although technologies can certainly break down barriers, it can also create completely different belief systems, talking about social media and how it operates. Whereas the internet originally was an idea of discovering the truth, actually what it’s doing increasingly is creating an environment whereby if you have an existing belief, rather than trying to challenge that belief, you can find like-minded people who share that belief, and if you end up with 50 000 followers on twitter who have exactly the same views as you do, you can feel very happy about your beliefs, and you can be very comfortable that you don’t have to change them at all. And that I think is an important part of how technology again has changed political discourse in recent times. And just to emphasize the point, I want to read one little section of the book, this has to do with technology, to reflect what you would describe as the Davos’ belief in the wonders of the world and how things always get better rather than worse, and this is a view from Davos: ‘as technology brought nature increasingly under its control by creating new lines of communication and by triumphing over climatic conditions, it was also providing to be the most dependable means by which to bring nations closer together, furthering the knowledge of one another, paving the way for people to people exchanges, destroying prejudices, and leading at last to the universal brotherhood of man’. Yes, this is exactly what Davos is all about and technology does exactly these things. I am now going to tell you that that was a fictitious Davos, this was actually from Thomas Mann  ‘the Magic Mountain’, which is of course set in Davos in 1913, of course the book was published in the 1920s, the views were those of Ludovico Settembrini who was the Italian rational optimist at the time and of course in that sense he is a comic character because you as the reader know what happened in 1914.  And yet you can see how convincing his views were about the wonders of technology and how nothing could possibly go wrong because we were cementing the universal brotherhood of nations. And to finish off I wanted to think about that from the point of view of the future, because going back to this sense of loss of Western Enthusiasm for globalisation, it has also created a vacuum in which other countries can operate and a real-life Davos speech on the contrary of a fictitious one comes from President Xi from China in Davos of this year when he spoke of China’s need to pick up the baton and progress economic globalisation. Now, it’s not clear what he means about economic globalisation, it certainly doesn’t suggest the sense of universal values that the Americans will push in terms of their view of globalisation, but nevertheless, it’s interesting to see China making the push and saying ‘we can do something even if the Americans pull away’. And of course with the whole Paris story has emphasized that the US has lost its enthusiasm for some of these international engagements. But one that struck me particularly was the abandonment of the Trans Pacific Partnership which was based on seeking a trade deal which would connect North America with the West coast of Latin America through to many of the coastal areas of Asia, and was an opportunity for the US to sort of spread its values, to spread its governance into Asia and to be almost an extension of the Bretton Woods institutions is gone, and it probably would have gone under Hillary as well, it’s important to stress that it’s not a specifically republican view, it was something that had been expressed by many American voters, a distaste for free market trade deals. And then the question is what happens with the vacuum that is created and the answer is that China is creating its own version of Bretton Woods instituions for the 21st century. You may say they’re not going to last very long, you may have doubts about China’s future but let’s just imagine for a moment that these things do take off and that China’s economical pull becomes more and more gravitationally powerful particularly in the Asian region. You have a series of instituions now that China is pushing which other countries are signing up to, one of which is the regional comprehensive economic partnership which is basically a trade deal for Asia which can fill the fill the void that has been left by TPP. Another is the Shanghai cooperation organisation which forces the energy and security relationship between China and Russia, the central Asian Republics, and I think this last weekend, India and Pakistan signed up too. Another is the Asian infrastructure investment bank which you can arguably say is like a Chinese Marshall plan to the 21st century with immense ambition for Belts and roads initiatives as they are called through parts of Asia. And ok, you might say these things are not going to last or succeed but let me just offer you a final though, which is associated with maps of the world. For the second half of the 21st century the map of the world of the west is one that is shaped by western instiutions, by the idea of the EU, by NATO, by the IMF, by all these things, and that map of the world has been building slowly really since Columbus discovered the Americas because at that point all of a sudden political and economic power shifted westward decisively and remained in that camp ever since in that way or another. The map of the world of China is being drawn and created, and it would be much more familiar to someone who was born in let’s say 1100 or 1200 AD and if you can transport that person into the modern era and say, what do you recognise, they would say all these things that china are doing and say ‘yeah, that’s the world that I recognise, that’s how the world is’. And I think for the future we have a world were china is creating institutions that rival those of the US. I think that Russia is trying to create a sort of 19th century imperial dream, which might be a nightmare for everybody else but certainly is a dream for Russia, and I think you put these three together, and you could end up with an underlying narrative of George Orwell’s 1984 when he talks about these 3 rival powers that are at war with each other, two against one typically, and they are Oceania, East Asia, and Eurasia. Just change the names to the US China and Russia and you got something remarkably similar and the final point I would note on all this is I haven’t mentioned Europe at all, and the reason I haven’t is because, for all its internal difficulties, faces actually an external difficulty, does it look westward to the US, which might be showing signs of abandoning Europe in some way or another, as It becomes increasingly insular. Does it still see the US as the beacon of liberal democratic values, or does it instead like many other countries get drawn up into the economic opportunities existing to the east, regardless of the absence of liberal democratic values, and that I think is a huge political challenge for the years ahead. And on that note, I’ll bring my formal conversation to an end, thank you very much indeed.

James: thank you very much Steven for that interesting and stimulating overview, it was extremely well-delivered. I think we have around 20 minutes now left for questions so I think if I take two at the time and I would be very grateful if you could first of all could introduce yourself and your affiliation if you have one. So if we begin with the gentleman at the back please.

Question 1: I’d like to pick up on perhaps the most stunning figure you gave us which was that huge figure of capital relative to GDP. If I can turn that around, that is also a very low GDP given all that capital. So why are we so inefficient at using capital, why do we need so much capital to produce our GDP when previous generations seem to have got by with a lower ratio?

Stephen: so bear in mind this is the share of total capital that is foreign owned as opposed to the overall size of capital relative to GDP so it’s an important distinction. It’s true that capital itself has risen and in the west this goes back to the issue of productivity growth, particularly over the past 15 years has been usually weak. I can put this in a very simple context. In the US we’ve had both one of the longest economic upswings over the last few years but certainly the weakest economic upswing. So the good news is that unemployment has continued to fall to very low rates compared to what was forecast very few years ago the bad news is that the people who are being employed are not being employed in a particularly productive way. So despite all the evidence of new technology there’s really not any evidence of increased productivity. The same is true in the UK, we can talk about exchange rates, devaluation from time to time but the underlying problem where very very weak productivity growth has been in place for 15 years. Which can mean one of two things, either that we are not benefiting from the capital investments that we’ve made in a significant made or it also means that the incentive to continue making capital investments perhaps has gone down. Now I do think there are a couple of things here that are worth mentioning. The first one is population aging, that as populations in the West have aged, their investment preferences have changed, they have shifted towards investing in safe assets. The more safe assets you invest in the stronger the investment for companies not to invest in the long term, instead to return the money to the shareholders in a form of high dividend that certainly has been a big themes in recent times. The other possibility – and certainly the Bank of England would not agree with me on this – but I do think that there is some evidence that zero rates QE had somehow distorted capital markets lifted the values of lifted shares but as a consequence made it more difficult for sort of small start-up entrepreneurial companies to get into an industry in the first place, which is particularly true in the US. The absence of those small start-up entrepreneurial companies is problematic when you think about Schumpeter creative destruction, the sort of underlying foundations of capitalism, so that might be a factor as well. So we’ve forgotten or lost the ability to grow in a certain way. I think this is a profound difficulty for the West.

James: ok can I take two questions at the time, and if we can keep it quite short. The gentleman at the back in the white shirt

Question 2: I’m from a small start-up entrepreneurial company…

Stephen: there you go, congratulations!

Question 2: and thank you for a fascinating talk, brilliant stuff. But you haven’t really touched on demography much and over the course of our lifetime, the world’s population has doubled, and that hasn’t happened before in history and I’m interested to know how much of a driver that has been and as populations age that’s not something that’s going to happen again, and the impact is likely to be…

James: Ok, and Yes, the gentleman in the beige blazer

Question 3: Yes, thank you. Technology, reobotics are likely to reduce job opportunities or increase them, and what about its impact on equality?

Stephen: I love both of you because I can tie these two questions together I think. So on the demography thing there is a whole chapter about changing demographics in the years ahead and you’re absolutely right that in Europe particularly and also in East Asia, China, Japan, South Korea populations are aging rapidly and they are going to shrink, but more than offsetting that that is that in the yeas ahead is what is happening in particularly in Africa. Africa is a continent which is at a beginning of an extraordinary baby boom story and lest we work out how…somehow the Africans themselves or the world can help them raise their living standards, the chances are that if you have been born into this bad loosing lottery ticket as your incomes rise modestly, you will try to go somewhere else. And what we have seen so far with say Syrian refugees or Afghan refugees is sort a small dress rehearsal for the kind of population flows we could be seeing in the years ahead. The numbers are staggering. Nigeria had a population of about 37 million in 1950, and today it is close to 180 million. The UN reckons it will be up to 400million by 2050, and up to 700 million by 2100. You might think those numbers are nonsense but one way of thinking they are nonsense is because people who are born in Nigeria will go somewhere else so that I think is a big issue. On the technology and robotics front, the reason why this connects is because globalisation in the 20th century was all about global supply chains, it was basically making things in lots of different counties and joining the bits and pieces together and the reason for that was because Western companies could invest in China or India with much lower labour costs and create supply chains of various kinds. But if robots are even cheaper than cheap Chinese or Indian labour, than you may see reshoring taking place, and then jobs will come back home which you might think is good, but if the process of robotics means that global supply chains actually close down and go into reverse, than all those parts of the world that have yet to join the band of globalisation will be left behind. And that’s why the demographics matters because those who are left behind are going to say, well I’m not staying here, I am going to move. Whatever the UK or the US says about migration it may turn out that, in fact the supply of migrants is so great that whatever the demand is it will be overwhelmed by the supply itself. I’m not making a judgment here,  but I’m saying that these numbers are going to really matter in the years ahead.

Question 4: you mentioned that western economies have rally hit the [46.07] since 1945, there were incremental increases in living standards and that’s all gone. And isn’t this bad news because when things go wrong, people need scapegoats. I mean Trump has already blamed WTO and the Mexicans…and it could have disastrous consequences, he’s already scrapped the green energy stuff and you know as we thought in the 1930s with Hitler and Mussolini had scapegoats, and all your problems were due to the Jewish community etc, and it was all lies, but people believed it and they really thought that you know, if we remove the Jews that our problems will be over, which was the greatest lie of all time. Is it not true that something similar, but totally different is going on with Trump, the fact that one needs scapegoats, and that we could be in a very serious situation.

Question 5: can I challenge you on the idea that we are becoming more like China by saying that quite frankly, they only started to succeed when they became more like the West, the adopted western institutions, rule of law, protection of intellectual property, began to adopt models of western economic governance. If you look at it, you say yes, people are doing all right, but actually people aren’t running to it because TTP had higher levels of protection of intellectual property so I’m wondering, it is a little bit like we have introduced the game of football, and they are starting to win the game of football. You know, we are wearing different jerseys, but we set the rules to some extent, a long time ago, and when people adopt them, the better they do. So I don’t see Chinese cultural concepts like Tianxia and that sort of Chinese imperial model al all when China’s doing well. And if you look at India and the red tape raj, again they started doing well when they began to adopt some of Fukuyama’s writing in that sense.

Stephen: well first of all in the issue of what in the 1930s and parallels with Trump today. When you reject globalisation and try to head back into your nation state, you have to define what the citizen of that nation state is, and defining that is very difficult, particularly in the fluid world where people can travel and move from country to country, and it creates inevitably a sort of a bit of us and them narrative. And if you belong to us it is fine, but if you’re part of them you are in trouble, and that distinction is often entirely arbitrary, which is very worrying in my view. As for the second question, the section in the book for what it’s worth tries to make a slightly different argument which is that rather than everyone converging, is different versions of history as determining how different countries think about their relationships with the rest of the world. And I think the difficulty here is that if you have a western version of history everything you think is marvellous, but if you have a Chinese version of history, you may look at the 19th century and say it’s great for globalisation from a western point of view, but it wasn’t so great with the treaty of ports and the Opium wars. And if you’re in Iran for example you will have a very different view in regards to how Persia has been treated by the Russians, the British, and the Americans over the course of many decades. So my point is really that even if there were some common views on certain areas, it is not clear to me that there is a common recognition that every country can trust every other country in a normal natural way despite the economic engagement that has subsequently expanded. And of course, the biggest thing of all is that china may have adopted many of the economic systems that the west has but its political system is still a million miles away from what the west has and I don’t see any indication that that political system is changing.

Question 6: the issue of debt, particularly sovereign debt particularly in developed countries we all know in the last few decades that it is higher up. And we are not talking just about Greece or Italy or Japan, but also the US, the latter’s debt to GDP is roughly 100%. If you go back to [51.42], nobody got out of the debt if it’s over 90. So what are the consequences from your standpoint on this issue, because if we grow out of debt with a GDP growth of 2%, interest rate accumulating higher (which is going to happen, it is only temporary that we have so low interest rates) it is mathematically possible, and corollary to that is the issue with inflation. It was predicted that inflation will come with vengeance due to all this money printing and the QE etc, so what is your view, where are we going?

Question 7: At the beginning you were talking about the rejection of globalisation, which you equated with two trends, the idea of borders being dissolved and ever-greater integration of economies and yet when you have been talking about population demography you have said that it will be necessary to cope with the aging population in Europe in Asia etc, to draw on a booming population of Africa, which suggests to me that borders being dissolved will not according to your claims about how to respond to aging populations come about. Likewise, is it not the case that China does not have, manufactural-speaking, the kind of raw materials. It relies on aluminium which is a huge component on many of its products, on waste being exported to it from America. Now I don’t see how you are going to get a disentanglement of the degree of integration we’ve got.

Stephen: on the first question on sovereign debt, it is skyrocketing, you are right. One of the problems all western states had is that it assumed that growth would bounce back after the end of the financial crisis, which it hasn’t, and therefore tax revenues have not materialised in the way they thought. Even with very low interest rates the so called primary deficit, which are the ones excluding debt interest payments are in many cases too large to stabilize. I think that the 90% was slightly unreliable, I think that is fair to say. Secondly, I think one of the difficulties of using inflation as a way out is that even if you could create inflation which is a struggle to do a the moment, it does not sit with populations aging. When populations age they hate inflation more and more and more so even if technically there is a way out of it, politically is think it is very difficult, which leaves me with a third option, which is that if you happen to be the country with reserve currency status in international currency well you borrow from the world in your currency, you will devalue and you’ll pass the burden onto your international creditor. And devaluation might lift your economy a bit because it will make you more competitive and perhaps generate some kind of multipolar effect, but the foreign creditor who bought your assets and your currency will now be worse off in his own currency, and you’ll see some of those currency-war effects coming through in the years and decades ahead, so another sense of turbulence if you like. On your question, first on all on demography, in an obvious sense, the fix for the west and East Asia is to have more immigration because the numbers add up. But what I think is striking at the moment is that just at the point when economically, you might say that more immigration kind of helps, politically, it turns out that it doesn’t help at all. I think some of the arguments here are, both for and against immigration, not terribly reliable. For example, I remember one person saying many of the Syrian refugees were all well-educated , and therefore couldn’t understand what was wrong with accepting them. But then you look at the status of Syrian universities compared with the state of universities elsewhere in the world, and they are not very high up frankly, so it is not a worthwhile degree compared to what you may get in some other establishment elsewhere in the world. So what we sort of have now is a kind of mistrust between the indigenous populations and additional immigration. You also got I think a sense interestingly if you look at the voting patterns from Latin Americans in the US elections, many more voted for Trump than what was originally expected. Because once you are in the club, you can pull up the draw-bridge, you are very happy, so there is another issue from that point of view. So what I am getting at is that there is a desire in the west to restrict immigration but there may be a force elsewhere that will encourage immigration and working out how to work with those separate forces seem to be inconsistent with each other. I think there is a huge political challenge. And as for china and raw materials and so on, Yes I think that China…this is not just the one belt one road initiative, will want to expand its relations with other parts of the world, which of course means that China will become more and more heavily involved in Africa itself, probably with Latin American, and will create new trading routes that we haven’t discovered so far, but interestingly trading routes that will exclude the influence of both Europe and the US which changes the whole balance of economic power in the world.

James: ok we have two last questions as we are running out of time, please.

Question 8: Thank you for a brilliant analysis. How do we stop ourselves from going into some kind of populist demagogue spiral here? I mean the stuff you talked about is so profound and it is so spot on, yet in the confines of this room, we listen, we intellectualize, we analyse, you know out there in the great world, these are all very complicated matters and you know our political discussion and discourse in our country is not touching any of this. You made reference at the start of your talk about the elections, you know it’s not about growing the pie, it’s about how we are going to spend it. You know I understand how that is, but how on earth to we actually get to grips that we as a society and as a country with all these immense challenges can have a real proper intellectual and political discourse. I am interested in your thought on how we can move forward.

Question 9: the point you made Stephen is about extrapolation, and one of the greatest errors that we have seen and bringing forward is the East prevailing over the West due to the phenomenal growth that china has seen. But china is an aging population, urbanization is already finished, living costs have gone up and China has now a bigger focus on Eurasia with the one belt one road imitative. The real polarity is with the old nation states of Europe and the America declining, and India, which you hardly mentioned rising behind China, and Africa? Good luck. I mean the leadership, the collectivity, I mean in my lifetime, I don’t see Africa as a major dominant economic force…but great for investment though.

Stephen: of so first of all on the first question, I don’t know, you’ve asked such a huge question we should come back next week and discuss it all over again. But one of the things I struggle with is that I can think of ways of dealing with for example the relationship between large creditor nations and large debtor nations. You can create what I call in the book a global organisation for financial flows, an international body that rules when who’s at fault for when you have an imbalance and someone has to repay someone and you know, how much should be repaid. And it’s not an entirely stupid idea in my view that if that’s the right idea, it will be described in the west by most politician as being some crazy technocratic international body that everyone wants to reject. So you realize creating the right idea but finding out that it has no real political support, so you are back with the potential demagoguery in some respects. As for the extrapolation question, I want to point out a few differences that I think are important, the first is that china is big, but it’s still poor. It has per capita incomes of about 8000$ dollars a year, on the equivalent exchange rates, the US has about 65 000 dollars a year so what we see on the East coast of China is not representative of what we see of China as a whole. Technically, I don’t agree with you on the urbanization story, I think that the East coast has massively urbanized but I think that there is a huge chunk of China has yet to urbanize, which is why belt & road is so important. Thirdly, what you have in China as a consequence is a huge distinction of what we might loosely define as rural workers and urban workers and there is an intentional divide between the two by the so-called hukou system, which is a household registration system that stops people moving from one to the other very easily. If they can move, they move with ungenerous terms. That’s supposed to be abandoned over the next four or five years, and one potential consequence of that is that a lot of capital will go inland to where all the cheap workers are and all the cheap workers will go to where the good capital is which may give China an extra leg of growth even in line with the fact that the population is aging. So I think that there is a bulk of underutilised labour that gives room for china to grow in the years ahead. But I think one challenge that China has is that whereas the growth so far has been mostly with the west, exporting to the West or Europe or maybe japan. This time around it is those connections overland and at sea with the rest of Asia and with Africa and you’re dealing sometimes with regimes that are not particularly reliable. I should say that this is a challenge for China, and also a challenge for India, but if those countries can get over their differences, the opportunities for trade and a better relationship for them would be a major driver for economic growth in the region in the years ahead.

James: thank you for coming here tonight, and thank you Stephen for coming to speak to us. I have to say that we have a number of Stephen’s books in the foyer, which you’re welcome to procure for the price of £15. Thank you all for coming and thank you Stephen for being with us here tonight.


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