THE G-20 IN 2050: POLICY CONSEQUENCES OF LONG-TERM GROWTH DYNAMICS

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1 THE G-20 IN 2050: POLICY CONSEQUENCES OF LONG-TERM GROWTH DYNAMICS TUESDAY, FEBRUARY 23, :00 A.M. WASHINGTON, D.C. WELCOME/MODERATOR: Pieter Bottelier Senior Adjunct Professor, China Studies Johns Hopkins University School of Advanced International Studies SPEAKERS: Tim Adams Managing Director Lindsey Group Uri Dadush Director, International Economics Program Carnegie Endowment Ambassador James F. Collins Director, Russia and Eurasia Program Carnegie Endowment Moisés Naím Editor-in-Chief Foreign Policy Transcript by Federal News Service Washington, D.C.

2 PIETER BOTTELIER: Good morning, all. Very pleased to welcome you to this Carnegie seminar on the future. How long term that future is depends on your perspective. If you are Chinese, you think 2050 is tomorrow. We are pleased to have a very distinguished panel of futurologists. I will serve as the moderator. My name is Pieter Bottelier and I am a teacher at Johns Hopkins SAIS and I m also a nonresident visiting scholar at Carnegie. You have the bios of the speakers in your program, so I will be very short in introducing them. Our first speaker will be Uri Dadush, who for many years was the director of the future in the World Bank. He is currently senior associate at Carnegie and director of the international economics program. The second speaker will be Tim Adams, on my right. Tim is managing director of the Lindsey Group and previously undersecretary for international affairs at the United States Treasury. The third speaker will be Ambassador Collins, on my left, who is the director of Carnegie s Russia and Eurasia Program. He served as ambassador to the Russian Federation from 1997 to And finally and not lastly, Moisés Naím, on my far right, well-known to you, is the editor-in-chief of the Foreign Policy magazine and has a CV too long even to summarize. I got to know him first when he served as executive director of the board at the World Bank many years ago. I would like to start by inviting Uri to make the initial presentation, and then we will go through the program and we hope to have the last 40, 50 minutes or so for discussion. Thank you. URI DADUSH: Yes, thank you very much, and good morning, everyone. This is a presentation based on papers, also jointly, with Shimelse Ali and Bennett Stancil of the International Economics Program at Carnegie. They are both here today. And it is based on two papers that were distributed with the invitation to this seminar. They are also available on the Carnegie Web page and you also have the URLs where you can find the papers on the sheet here with the projections. About 250 years ago, the world was poor pretty much uniformly. The variance between different countries most countries were between $1 a day average in today s prices and $3 a day average. And then in the Western periphery of Asia, a small peninsula inhabited by a few million people, a peninsula we call Europe, saw the eruption of an Industrial Revolution that gradually over a long period of time led their income per capita to rise very, very sharply. And so that today, the gap between the richest countries and the poorest countries is not 3-to-1 but 100-to- 1. And this process of the Industrial Revolution spread actually relatively slowly outside of Europe. It spread to the English-speaking colonies the United States, Australia; much, much later to Japan in the middle of the 19 th century; and then most recently in the second half of the 20 th century to a few countries in Asia. So until about 25 years ago, very few people in the world had made the rich club, or indeed seemed likely to make the rich club perhaps, 15 percent of the world s population as the advanced technologies struggled to spread to other parts of the world. In the current era the last 25 years, the next 25 years is exceptional in that a much, much larger group of people is in a sense joining this revolution. I realize this is an oversimplification but the reality is that a huge acceleration affecting a very large share of the world s people occurred in the course of the last 25 years. It goes beyond the scope of my presentation to discuss the causes of this. Let me just say that peace has something to do with it and openness to ideas and market-oriented policies. Clearly, the spread of these has something to do with the fact that the rest of the world is rising.

3 And the implications of this are, of course, far-reaching because by 2050, the world order will be transformed. And the financial crisis has, by all indications, if anything, accelerated this process because for example, last year, domestic demand in China grew 12 percent whereas it declined sharply in all of the advanced countries. And India also grew rapidly. Now, in the time available, I am my job really is to set out the numbers and the projections and to leave to this extremely distinguished panel the job of drawing out some of the policy implications, some of the lessons for international relations and for domestic policy. So let me then tell you a word about the projections that are included in the paper and that are also illustrated in the PowerPoint handout that you have been given. Basically, the projections are based on a pretty standard model. By now, many of these exercises are being carried out. And the model the basic drivers of the model are four. They are demographics, the rate of investment, the rate of technological convergence and the real exchange rate. Let me just say a word about each of these briefly. Demographics is in a sense one of the most powerful variables but also the simplest one. The main message about demographics is in chart 9 of your handout. The numbers are at the bottom right-hand side. In chart 9 of your handout, you see that in the course of the next 40 years, there s going to be a large rise in the world s population of working-age people between 15 and 59, but all of the rise will be in the developing countries. And in fact, the population of working age in the industrial countries is going to decline in the course of the next 40 years. It will decline much more sharply in countries like Japan, Russia, Italy than it will in the United States. So this is one factor that accounts for the rise of importance of developing countries. The second factor is investment. The simple message here is that developing countries invest a lot more than industrial countries. Again, there s variance here. But if industrial countries invest about 20 percent of GDP, most developing countries invest 25 percent of GDP and several Asian developing countries invest 35 percent or more of GDP. And this is a factor contributing the rate of return to capital is higher in the developing countries. The third and most important factor accounting for the difference in the growth rate between at least the successful developing countries, which are an increasing number, and the advanced countries is the spread of technology. And it is not many people don t realize in the rich countries that there are over a billion people in the world who do not have electricity these days. And the issue is not that countries don t know how to do electricity. Virtually all countries of the world have some capacity to do electricity. But electricity in the poorest countries remains confined to certain areas, certain elites. In other words, the message is that even very old technologies like electricity and sanitation, et cetera, have not spread inside many developing countries. And that revolution is happening now. The second is that new technologies are actually spreading quite a bit faster than old technologies we re talking about cell phones, the Internet in part because they re relatively cheap and require less government investment to do. Now, this is a huge abbreviation of a complex topic but the bottom line is that the overall economic productivity in the industrial countries tends to rise between one and 1.5 percent a year. In the most successful

4 developing countries, it is rising at five or 6 percent a year. And this you have to attribute largely to the spread of technologies. The last factor is a little more technical, is the real exchange rate, and explains the fact that as developing countries grow, they become more interesting trade partners not just because they are able to produce more goods and buy more goods but because the real exchange rate tends to appreciate, which is a reflection of the fact that the real wage appreciates. So on top of the volume growth, you have an appreciation of the real exchange rates. These are the four factors which are included in the model and now I want to say a word about the results. And here, if you go to chart number 3 in your handout, you see the growth rate projected over the next 40 years for China, India, United States and Japan, you see how China and India are growing much faster and have been growing much faster than those two countries, and how the United States continues to grow at a relatively rapid rate partly because its demographics is favorable. Japan decelerates because it has very unfavorable demographics. There are other factors at play here. And China and India in these projections continue to grow rapidly but over time, their growth rates converge to those of the advanced countries so though India remains much faster growing even in 2050 and the reason for this convergence is if you go through the list of factor the four factors that I ve mentioned each of these plays a less important role as time goes on. However, the fact that for 40 years, these large countries grow much faster than the advanced countries leads us to the change in the world economic order, so to speak. And here I refer you to slide number 5 where you see that already in 2030, China s GDP is about the same side as the United States and by 2050, it is about 20 percent bigger. This is in dollar terms. But if you count in purchasing power parity if you account for the fact that prices in the United States are much higher than they are in China than in And here you see in chart 6, China s PPP purchasing power parity of GDP is twice the size of the United States. And India s purchasing power parity of GDP is about the same size as that of the United States. And these become by far the three largest economies of the world. So India is a much bigger economy than Japan and Germany, for example, in This point about relative size applies more broadly to the emerging markets as a group if you turn to slide number 7, you will see that in 2050, the GDP of the emerging markets in the G-20 will be about a quarter bigger than that of the advanced countries even though they are only about a third as large today. One important observation this is not a new observation but very important to restate it is that in 2050, even though China, India, Brazil, Indonesia, a few other developing countries, will be among the largest economies in the world, they will be no means be among the richer economies of the world. The advanced countries will remain much wealthier in 2050 measured by income per capita than the developing countries. And this you see in chart 11 where the advanced countries, even in 2050, have per capita incomes which are still three to four times larger than that of the emerging markets. And United States GDP per capita is about three times bigger than China s GDP per capita in There are many other implications of these projections. I ll just mention them very, very briefly. The first is that poverty absolute poverty essentially disappears but remains a factor in India and remains a factor in sub- Saharan Africa and a few other countries, which does not mean that relative poverty is no longer an issue. Relative poverty remains an issue. It may even become a more important issue in the future as people living less than $2 a day, which is still a pretty miserable experience. There ll still be very large numbers of people in that vicinity and looking at much, much richer people in different parts of the world.

5 Another important implication is the fact that the global middle and rich class these are the people that are defined by the World Bank to be above $4,000 per capita these are people that can afford basic consumer products or even reasonably advanced consumer products. The number of people in the global middle and rich class will be as big in 2030 in the developing countries of the G-20 as they will in the advanced countries in the G-20. And by 2050, there ll be over 50 or 60 percent more people that are middle class and rich in the developing countries as there are in the industrial countries. Other implications relate to world trade, and these are reported in slides 14 and 16. Not surprisingly, developing countries become the largest part of world trade. They re about a third of world trade right now. They become two-thirds of world trade in But trade is reoriented in a much more fundamental way. For example, China becomes at the center of the main trade relations in the world. so if you take according to a certain taxonomy proposed in the paper if you take the main payers of world trade, four of the five largest payers of world trade have China as a partner. And the only one out of the five large payers of world trade where China is not a partner is intra-eu trade. However, intra-eu trade greatly declines in significance as a share of world trade in these projections. On the other hand, intra-regional trade in Latin America, sub-saharan Africa, and of course in East Asia becomes much more important than it is today. The United States to give you a sense of the changes that are implied by 2050, the United States trades more with China and with Latin America than it does with the European Union. This is simply a reflection of the relative growth rates of these different regions. Finally, let me say a word about risks. Everything I have said is a discussion of economic potential. Indeed, the models that I have discussed are about potential GDP growth. Realized growth could be quite a lot lower than that. I suspect it will not be much higher than that, but could be quite a bit lower than that. The risks are on the downside. And let me just quickly enumerate these risks; again, they are discussed in the papers. The first is geopolitical strife. Bear in mind that what we are projecting here is an enormous shift in world economic power. These things very rarely happen elegantly, if history is a guide. So how that will be managed is a critical question and I hope that the panel will be talking about that. The other big source of potential source of geopolitical strife is the fact that the biggest and most powerful economies are no longer the richest economies. So the priorities, in some sense, of the international community may no longer be as easy to set as they are when you have a homogeneous set of nations at the helm. So it may be that China and India may want to pay less attention or may want to take a little more risks on the environment, given the fact that they have very important development priorities to address. And it may be that they may be less concerned about pushing intellectual property rights, and so on and so forth. There are many areas where this lack of homogeneity could lead to strife. The second risk is a repeat of financial crisis and depression. Let me just say that I am among those who believes that we have not taken the needed measures to reduce the vulnerability of the world economy to another bout of financial crisis. The third source of risk and potentially a very important one is protectionism. Protectionism is always there and it gets worse during economic recessions, as we are observing at the moment. But these projections suggest also another important source of protectionism, which is that you have the rise to enormous prominence of low-wage economies in a way that has never really happened. So it s one thing when a low-wage economy is a small economy. It s another when it s China and India, et cetera. And this also could give rise to protectionism.

6 And I m not going to say although a very evident source of risk, I m not going to elaborate on it is climate change because the implications or the projections would be for a big increase, of course, in carbon emissions, greenhouse gases. And that s one reason that the projections could go awry, is the deterioration in the climate. Let me say in conclusion that my own judgment having gone through this exercise and many other exercises like it at the World Bank before I joined Carnegie my own conclusion is that while these risks are significant and they may very well decelerate the process that I am describing, I do not think the fundamental message is going to change. The history of the 20 th century, a very troubled history, shows that even wars and depressions, while they slow the advance of technology or can slow the advance of technology and the advance of globalization, in fact do not stop it. Thanks. MR. BOTELLIER: Thank you, Uri. Our next speaker will be Tim Adams. TIM ADAMS: Thank you, Uri, for that presentation. It is an honor to be with such a distinguished panel and to see so many dear friends out in the audience. When I spoke with Uri several weeks ago obviously, this first session was rescheduled because of this inclement weather, the snow snowmageddon as it s been referred to I said, well, what do you want me to talk about? And he said, well, do you believe it? And let me say that I certainly respect. And one of the lessons I had and it s the research, and it s outstanding work, the two papers. One of the lessons one of many lessons I have learned through this crisis that, as Uri knows, we re still suffering through, is that complex systems the global economy, national economies, regional economies behave in nonlinear fashions and they are often unstable in ways in which we don t foresee. And so I think it s easy to get in the habit of extrapolating current trends and looking into the future and saying what the future look like today, just larger and bigger and richer. When I first moved to Washington 25 years ago, we did that. And Japan was seen as the great villain for the U.S. economy that was going to take over literally the U.S., buying noted properties. And of course, that didn t happen. I think this is different and I think some of the countries noted in here China and India specifically are very different; a very different set of dynamics and certainly demographics and just size and scope. So let me say that I don t know whether I believe it but I certainly have enormous respect for it and we should think about and plan for the implications of what this means because the implications are enormous for everything that we do in this city. Before I get to that, let me just say, look, there s a lot of good news in here, right? The notion that hundreds of millions of people are lifted out of poverty in absolute terms, we should celebrate that. The dramatic changes that will have occurred in our lifetimes or our and our children s lifetimes is of historic proportions and we should note that. and so it truly is remarkable if, indeed, it comes to fruition. A growing middle class, and as the theorists posit, the political stability that comes with that. the notion that a middle class will want governments that are accountable and transparent; that will have some form of democratic institutions; that those in and of themselves are an important end, and they are a stabilizing force. That, too, is something to celebrate.

7 And as the papers note that you have growth that is more widely distributed and as economies become less dependent on commodities and less subject to the wild swings in commodity prices and therefore the terms of trade shock that accompany those wild swings. In some ways, the global economy should be much more stable. That, too, we should celebrate. It reminds me of the paper that Sir Norman Angell wrote in I guess 1913, 1914, called The Great Illusion that said that economic integration, globalization as it occurred in the late 19 th century and early 20 th century was such a powerful force that war was unthinkable. It made war futile. And that was in And hopefully, we ve learned from those lessons, or we will. But I do think there are stabilizing forces and great messages here. But as Uri notes, there are enormous risks. Climate change is one which we could spend an entire day talking about, you noted and ill note; just energy demand and environmental issues beyond climate change. And it s not just the energy usage. Think about in the U.S., we have 800 automobiles per thousand citizens. In China, it s about 40 or 50. For anyone who spends time in the streets trying to drive around Beijing or Shanghai, you know what the gridlock feels like. Imagine what that looks like if these trends are indeed true and what that means for the usage of various forms of hydrocarbons. So there s not just climate change; it s environmental issues generally. But it s not about usage; it s also the extraction and the transportation of those energy sources who will control, who will protect the sea lanes as we move hydrocarbons from one part of the world to the other part of the world. It has implications for security arrangements. What is the future of NATO if indeed and I say this with my good European friends sitting here on the front row if indeed the U.S. and Europe become less important in the global economy? Who will be the security forces to ensure that all this trade integration that we re talking about is indeed protected the trade lanes, the sea lanes are protected? What will become of security arrangements, as they currently exist? And then of course the multilateral institutions that all of us have been a part of. Just the fact that we ve seen the ascendancy of the G-20 in the past 24 months tells you that institutional response are powerful and are coming quickly to the fore. But it s not just the ascendancy of the G-20 or other institutions. There also have to be an effective aspect of these institutions. Can they move beyond the crisis environment that we ve found ourselves in to actually effectively dealing with some of these issues and finding a new model of growth? And I don t think we know yet. And then of course there s the domestic issues. And one of the issues Uri asked me to talk about is in a time at which this town seems to have become obsessed with the idea of gridlock, and it s certainly true. I was on the Hill this morning; I m going back this afternoon. Partisanship and polarization a reflection of the country in many ways has gripped this city. And it lends itself to all of us beginning to question whether this country can actually rise to the occasion that these challenges present. And it s easy to be a declinist these days. I can put together a set of talking points and visit any city of the country and give a pretty gloomy outlook about the state of the U.S. political scene. It s much more difficult to tell the positive story about how we get through this. And you think about some of the issues that are in this paper: the need to constantly innovate and that means that we ve got to protect intellectual property rights, which is a key part of our trade negotiations. The

8 administration has talked about doubling exports over the next 5 years in which Carnegie has done a paper that s up on their Web site questioning whether that s actually achievable. But are we ourselves rethinking the way in which we think about global trade moving into a more protectionist, mercantilistic mode? Will that dominate current thinking among the various players? To the way in which we think about education. A great statistic I use is that if you were to assemble th graders in this room th graders and you were to follow their advancement over the following years, here s what you get: Only 67 of those 100 graduate from high school. Only 38 go to college. Only 26 are still there by their sophomore year. And only 18 graduate within 5 years. And that s including all 9 th graders. If you look at Hispanic or African-Americans, the number is nine. Nine out of th graders end up going to college and graduating in 5 years. That doesn t allow us to compete in this environment and somehow we have to rethink the way in which we address education in this country and focus more on changing those statistics. The way in which we do foreign assistance, international relations. The way in which we think about how we spend our military budgets. The alliances that I talked about before. All these issues are going to come under enormous strains at a time at which our fiscal outlook is the most dismal it has been in modern history. And then as a part of that, we ve got to rethink our relationships. The U.S.-European relationship is going to be tested, without question. And it already is in some ways. But we have such a shared history, a shared sense of values that it will require both sides of the Atlantic to ensure that those institutions and those relationships remain durable throughout this period of time. But other key alliances Japan. I spend a lot of time in Tokyo and the new government is certainly looking to its east and to its west and constantly reevaluating how it thinks about its security arrangement in the 21 st century. And if I were them, I would probably be making the same set of self-assessments. India no longer a part of the non-aligned movement and a country which the U.S. has spent the last seven or 8 years trying to better integrate and develop closer ties. And I hope this administration the current administration continues the progress that we made in the previous administration. And then of course, China. No matter where I go in the world, the first question is always about the U.S., second question is always about China. The idea of the G-2 whether you believe it or not, whether the Chinese believe it or not it s immaterial. It is two of the most important economic relationships in the world. We will grow more interconnected with each passing day. And if this report is right, the sense of leverage, the shift in the balance of power that bilateral relationship is going to change and change dramatically. And that has real implications for the way in which we think about ourselves and we think about China. People like to cite the two statistics the two 10s now: 10 percent unemployment in the U.S. or approximately, a 10 percent growth in China and how that might color our relations over the coming months as we go into midterm elections and at a time in which we think unemployment will remain high for a considerable period of time.

9 I suspect we will see the political forces in this town begin to focus more on China as the spring hopefully eventually arrives and we get tired of beating up on bankers and it s Toyota this week. But we ll find that we need new villains and China will find themselves an easy target. In fact, if you look at recent pollings, a Pew research poll that asked Americans about China do you see them as an unfair competitor? seven out of 10 said yes. Five out of 10 half those polled saw them as a military threat. I m sure if you were to poll the officer corps at the Pentagon, you would get something similar. So this relationship is incredibly important. I spend a tremendous amount of time shuttling back and forth between here and Beijing. I worry about the way in which both sides may manage this relationship. Hopefully cooler heads will take a very sober, long-term approach in the way in which we address each other and that we will manage through what will I think will be some very tough times ahead. Let me just close and say again, outstanding work. I respect it. I think it just highlights the challenges the political, domestic political challenges we have in this country. And I hope that others around town look at these trends and we find our way out of this gridlock in putting in place policies that allow us to compete in this incredibly hypercompetitive environment. Thank you. MR. BOTTELIER: Thank you, Tim. Our next speaker is Ambassador Collins. JAMES F. COLLINS: Well, thank you very much. And I will start by simply saying that I m no economist, so my perspectives here are taken from what I think are two extremely interesting papers and the conclusions of which I believe certainly have to make us think about the kind of global order that will exist as we come up to, say, 40 years from now. Now, I was asked to talk about Europe and the non-institutional Europe East. And I guess my fundamental points not to repeat what Tim has said and what Uri has said will focus a bit more on the question of adaptation to what I think is fairly clearly a consensus about trends that are clear. And those trends for Europe and Eurasia or Russia/Eurasia are for the most part which will require them to accept a new place in the world, which I would submit for both is going to be quite difficult and traumatic. Fundamentally, what these statistics tend to show, or these figures and trends to show, is that the great powers who managed the global system in the last 200 years just aren t going to do that anymore. And I think it s perhaps easier to adapt if you re in one of these rapidly growing developing countries where the world looks like a bigger possibility every day. And you have new opportunities each year because you re wealthier, you are more sought after, you are an object of greater attention, et cetera, than is going to be the case in societies where I would say to some extent at least, I would say to a considerable extent the opposite is going to be true. Now, in Europe it seems to me the one thing I would say about these charges, they don t really talk about the EU too much. And I would suggest that in many ways the way in which Europe is going to address these questions will depend in the first and most primary way on whether or not the EU is a success. As we look today, there are some very serious challenges afoot. I don t pretend to be enough of a crystal-ball gazer to know just what s going to happen to the Greek and EU situation or other strains and stresses that have emerged in the EU over its new treaty, over how it will govern itself, how it will integrate its economic systems and so forth. But I think one has to note that we are far, far from a Europe which is an integrated economy, much less an integrated polity.

10 And in that sense, it seems to me the great question in front of Europeans as they approach China or India or these developing markets is going to be how they do it. Do they do it as Germans and Dutch and British and French and Spanish or do they really do it as the EU? And I think there is in many ways a lot of uncertainty here. And this is in a sense an institutional political question in most respects. I would submit that it seems to me that if the EU moves toward greater cohesion steadily, or at least even nonlinearly but the outcome is a steady movement toward the EU as a unit, its position in this adaptation will be a much stronger one. And the strains on the institutions will be less. If, however, it is internally divided and difficult times emerge and the focus is within as is often the case it seems to me in Europe much more than what s going on vis-à-vis the outside world, then the adaptations may come as shocks. They may come in much more challenging ways politically and institutionally. So I would say that the one thing that in these papers not in the papers but which the papers suggest as the unknown, in a way is what will happen with the institutions that are going to have to adapt to this changed global role for both individual nationalities and also the entity of the European Union. I won t hazard a guess as to where it goes, but it seems to me that it is a substantial challenge and if we look at I mean, I noted, I guess, to Uri or someone yesterday you know, the EU with the Greek issue, it in some ways is beginning to face the same kinds of issues that the United States has faced in its regional politics and the challenges between regions for 200-plus years. It is a very difficult issue and we still haven t solved it, except we do have a political context that is much more unified, and despite our stalemates and difficulties, the system at least begins from the premise that we have to address these things as a whole. And those things are not yet decided in Europe. Next, I d like to say a word about Russia and I think it s fair to say Russia is perhaps the key to what will happen to the non-institutional Europe East. First of all, Russia begins and its neighbors begin from a very difficult position to meet the challenges that are outlined or implicit in these papers. They are on the one hand a Russia is a developed country. It went through its forced industrialization in the Communist period. It s a nuclear superpower in terms of weaponry. It has in fair abundance an intellectual capacity to compete in the modern scientific and technological marketplace and world. The problem is that it was all developed in essence in a system which has disappeared and which left a burden of historic proportions that is still with the Russian society its elite and its people in a way that is making the decisions about their future even more complex and more difficult than might be the case in Europe or elsewhere in the developed world. A part of the problem is that it s also an undeveloped country or a less-developed country. Russia s economy today is fundamentally a commodity-based economy heavily dependent for much of its citizen welfare or consumer goods on imports, exporting essentially oil and gas, and suffering from what I would say is an extraordinary system of weak institutions that are for the most part not much more than, say, 10 to 15 years old. And it is this society which has now faced not only with having to adapt and change and structure itself to compete in a world that it knew as the Communist experiment ended, but in which the global alignments of economic, political and other realities with whom Russia has to deal is changing rapidly even as it tries to adapt. Now, in this, there aren t many anchors, frankly, for Russian leadership. One of them is not a very favorable one. Most of the demographic projections for Russia s population going out to 2050 are quite dismal. They take the population to somewhere between 110 and 120 million people to inhabit a country which is the largest geographically in the world and 11 times zones wide.

11 Another factoid which is of interest is that east of the Urals there are something between 15 and 20 million people. That is an area that is roughly twice the size of the United States or where you can tuck Europe into one or two provinces. This presents immense demographic reality as a challenge in terms of simply how do you govern, how do you manage this kind of territory. Now, the good news in some ways is that it s also a territory which has an abundance of natural resources that it would be the envy of almost any economy anywhere in the world. They re not easy to get at, they re difficult to exploit, but they re there. The problem is most of them are out in that area where there are only 15 or 20 million people and a pretty undeveloped infrastructure. The second issue, as I said, is the burden of a 20 th century which was dedicated by the Russian people and system and elite to an experiment which failed; an experiment which was the Communist experiment and the Soviet system, which produced a very peculiar way of structuring its economic realities that unfortunately when it disappeared left the system quite unprepared institutionally or even in terms of training to deal with the kind of competition and competitive position that the Russian economy would face as it approached the rest of the world, which was defined largely by the market system and the Western institutions. Well, that adaptation, while remarkable in many ways for what it s achieved in 20 years, is still in its infancy. And it s a reality that most of the Russian system is still institutionally weak, financially financial structures, banking systems, market systems and so forth are still weakened and barely functioning, and in terms of the ability to manage an economy and a country of this size. So the real challenge for Russia it seems to me is how does it take these two great weaknesses that it has today, manage the adaptations and challenges that are going to be in front of this economy and system as the world changes rapidly and its biggest neighbor China and India and others pose new challenges? And Russia has to make a choice about what direction it takes to deal with the problem. Here, I would say the I would go to one observation that was made in Uri s paper. The biggest challenge it seems to me for the Russians and the debate that s going on today about where does Russia go is turning on the question essentially of how will Russia modernize itself and make itself competitive, given all of the limits on the system that it has today? The outcome of that question is going to shape, it seems to me, the future. Russia can remain a commodityproducing exporter. It would be a certain kind of country if it did. It would, it seems to me, be a very different country from the kind of great power, modernized, competitive, 21 st -century society that most of Russia s elite says Russia wants to be. But it s an option. The other option is a much more difficult and challenging one. And that is how do the reforms and the changes institutionally that are required and infrastructure-building take place that will allow Russia to modernize itself and become a modern, competitive, let s say, European-type economy? The answer to that question is unknown. The debate is going on. And it seems to me that we are going to watch a very difficult and traumatic time as Russia tries to make the decisions that will be required for them to move toward a decision on that issue. MR. BOTTELIER: Thank you. Our last speaker is Dr. Naím.

12 MOISÉS NAÍM: Thank you, Pieter. Thanks for inviting me. It s an honor to be here. I just want to briefly share with you seven surprises that I had as reading the reports and the presentations and also listening to Uri. The first one is how gutsy this is, you know. For those of us that have a hard time planning next week s schedule, thinking about 2050 is just very bold. And I admire that. And I also was, of course, like others here, concerned about issues of linearity and accidents and risks and projecting the past and all that, which is a normal caveat that one makes when doing these exercises, but at the same time recognizing the immense value, the heuristic value of putting oneself in the frame of mind of thinking ahead and looking at this. A surprise related to this still in my first surprise is that I wanted more. After reading this, I just wanted to know more about what would happen if Uri and his team would inject into these projections some of the risks he himself mentioned. What happens if China suffers some growth-impairing accident that has ripple effects of all sorts of places? And those accidents can come they re either from an ecological accident or a financial accident or, you know, the spillover of some of these street conflicts that we know take place quite frequently in Russia (ph) you know, the whole constant state of low-level turmoil that seems to be now a part of life in China and elsewhere. So the whole issue that I would and I know that there are limits to how many variables and complexities you can add to the models, but I would much, much welcome another the continuation of this study and give Uri and his team more work and ask him to give us these projections with a couple of accidents injected and thrown in, and see what happens. And I think we can all agree on what would be some very interesting systemic major consequences of this. The second surprise is how was the emphasis on technology on driving the growth and the projections. And he himself I think in the report they write and Uri mentioned that the main variable is demographics, which is goes without saying is very important; technology and its consequences on productivity and capital as the main drivers of these things. But the report makes the caveat that really what they believe it s very important is technology diffusion. So this is a very techno-centered kind of model. And so inevitably one I ask myself, where is the money going to come from? Where is the finance here, where is the financial system, where is the capital? And of course, the answer is, you know, we re talking about big domestic savings kinds of countries. When you look at the countries that they are projecting to grow and to become the dominant forces, these are countries that have very high savings rates and so the money comes from there. And that s where the capital to fund you know, funding these rates of growth requires a lot of money. It requires a very sophisticated, complex and global financial system; a financial system that is now being redesigned either by authorities or by reality and that is emerging with different kinds of structures, incentives and modes of operation. And so my next point was how does the world financial system looks in 2050? If this is the way in which the pie looks in terms of the distribution of population and GDP and GDP per capita looks well, what is the how does the financial system that supports those kinds of numbers look like? And there, one can start speculating. I can imagine a dual or highly fragmented financial system. We will not have an integrated regulatory system. We re going to have a dual or even a three- or multi-layered financial regulation in which opportunities for arbitrage between different regulatory systems are going to provide opportunities and going to shape the behavior of financial markets. And you will have huge pockets of liquidity.

13 So the question is, is the liquidity coming to fuel this growth only coming from domestic savings? Or is it coming from a better, more integrated financial system where money flows from one continent to another and drives growth? And one of the potential we don t know yet because we are still in the middle of the financial crisis in many ways but it may be that one of the consequences of the financial crisis is protectionism not trade protectionism but financial protectionism, which is not potential but is already here. As countries salvaged the financial system and bailed out banks and did all they had to do to deal with the banking system, they ring-fenced their economies; and therefore creating all sorts of new impediments and more complex hurdles for capital movements. And so it s not impossible that we can see a world that has pools of money locked in different regions in the world with higher transaction costs and higher difficulties and obstacles for the movement of capital around the world. So I don t know that that would be the case, but I think it s very important to imagine and start thinking what is the kind of financial system that goes with that. The third surprise is when I started looking with more detail at specific countries you know, discussing the world in such aggregate numbers, it s fascinating. But then you start saying, well, let me look at some countries and see how they do. And then I see that, for example, the model has a projection that Mexico will be growing at 4.1 percent in the next from here to Well, if you tell that to any Mexican, they will just tell you that that s not their country. Mexico has not grown at that rate in a long time. Brazil has not grown I m sorry Brazil Mexico s four, three, 4 percent per year from now to 2050 that hasn t happened in Mexico. That hasn t happened in Brazil in recent years. So the model assumes that some discontinuity some very important discontinuity is happening in some of these countries. Something is happening to Turkey, something is happening to and again, I think that the implicit assumption is that what is happening is technology; that there will be a technological push; there will be a technological explosion that will allow countries that have not shown a great propensity to growth to acquire a sustained level of growth. And I think that that together with demography is part of the story. But again, I you know, when you dissect countries and you start looking at the specific stories the growth stories and the growth performance of these countries in the last 10, 15 years and you look at what is the projection, you see, well, they are assuming a major discontinuity. And that is something that surprised me because in general the model is quite linear. My fifth surprise is Europe. So Tim was saying about how easy it is to go around and give a speech about American declinism. It s even easier to give one about Europe, right? (Laughter.) And so it s all relative. Yes, the United States may be going down and American high schoolers may not end up graduating from university, but the rest of the world is not you know, with some specific countries that you know, it s not that they re doing much better. So Europe so one of the surprises of this study is that Europe shrinks shrinks to the level of irrelevance; shrinks to the level of becoming really a marginal player. I think that s very dangerous for the world. I think that s very bad. I think Europe brings to the conversation values and priorities and goals that are very important to keep as part of the conversation. It s very easy to make fun of the Europeans, right? As we talk now and sit here talking about the big challenges of Europe trying to get their act together to deal with the world in 2050, Europe is in a spat because they

14 didn t like the way they appointed a new ambassador to the United States. And so, you know, if they cannot solve that problem, if they cannot solve Greece, how are they going to solve the problem of doing with China, India and all the numbers that Uri and his team has thrown on us? So the point that I think my surprise is which is not a surprise but is there is that Europe challenges begin after they have solved the insurmountable challenges that they have today. Even if they solved the problem of having a political union and were speaking in one voice, even if they solved the problem of how to govern themselves, even if they solved the problem of the euro and dealing with asymmetric shocks in their community, after they have done all that, that s just the ticket to start the beginning to be part of the conversation. And that s a very dangerous thing because, as I said, it s very important to have Europe as part of the conversation for a variety of reasons. The fifth point that I wanted to make is the requirements that this vision for 2050 has for global governance. In the same way that these kind of outcomes, the world as divided in terms of GDP and population in the same way that has some very taxing difficult requirement in terms of capital, it also has even higher, more demanding requirements in terms of the ability of the countries of the world to work together. And a while ago I wrote an article that I titled, The World s Most Dangerous Deficits that had nothing to do with economic deficits, but it had to do with the deficit that the the big gap that was taking place between the ability the demand for effective collective action at the international level and the supply. As the world globalizes, as the world grows, as the world becomes far more interdependent in a variety of ways, in daily ways, the need for collective action is more important. The inability of any country acting alone to deal with some of these problem is obvious, is growing, is difficult. At the same time that the demand for that collective action is booming, the supply is either stagnant or declining. So we have not seen in recent years major episodes in which the world has gotten together and solved a collective problem. And so in this world of these kinds of descriptions, that dangerous deficit becomes even more dangerous. And it s not going to be solved by a stronger United Nations, you know. It s more complicated than that and requires more a different, perhaps, institutional setting. And without that, then some of these projections are going to be jeopardized by the difficulty of the different countries acting together in very effective ways. Paramount among those, of course, the example that Tim mentioned, which is the G-2 China and the United States and others. You also want India and China to work together better, and of course, Europe. And so that most dangerous deficit is something that is going to be with us for a long time and will be haunting all these kinds of projections. Thank you. MR. BOTTELIER: Thank you, Moisés. We have ample time for discussion. Let me abuse my position as moderator by kicking it off. The danger, of course, of picking a subject like this is that the discussion can rapidly become totally borderless. We can talk about anything long term, short term, geographical issues, political issues, economic/financial issues so how do we bring some order into this discussion? I have no illusions that I can but let me try to pick up on a point that I think was central to Moisés presentation. If the world economy if the global economy continues to grow more or less along the lines that Uri is suggesting it might, barring black swans that we cannot know about the unknown unknowns the way we manage resources, including financial resources and financial systems, is going to be very, very critical. In the United States and to a lesser extent in Europe, I think we still in our collective psychology have this idea that the American dream can materialize for everybody. If you only work hard enough and smart enough and