Mario Draghi: In memory of Enzo Grilli
Memorial lecture by Mr Mario Draghi, Governor of the Bank of Italy and Chairman of the
Financial Stability Board, at the Johns Hopkins University, Bologna, 21 February 2011.
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1. Introduction
Enzo was not a neoclassical economist, or a Keynesian one, a conservative or a liberal.
What I miss most is Enzo's tendency to challenge intellectual clichés and fads, which made
every conversation with him a learning and eye opening experience. He was a truly
independent minded person and scholar, passionate at defending his opinions but ready to
accept others' points of view, if based on sound economic thinking or empirical research. He
was a strong believer in free trade but also a firm advocate of market regulation. He
defended the global institutions at the time of the antiglobal movement but also openly
criticized the influence that the main shareholders exert on those institutions.
Enzo held important leadership positions both in academic institutions and international
organizations. As an official or government representative in these organizations he always
resisted political pressures on the decision making process, a factor that made his life difficult
on many occasions, but which helped him gain high respect. His brief experience at the
Italian Ministery of Budget in the early eighties was one of these episodes. He had a
distinctive ability to combine research with actual policy making. In his own words, "the two
aspects - theory and economic policy - cannot be distinguished too clearly from each
other"1.
Most of Enzo's life was spent in the US but he remained passionately attached to his own
country with which he communicated mainly through his opinion pieces on the "Sole 24 Ore".
His last book, "Crescita e Sviluppo delle Nazioni" was written in ltalian in order to "enhance
also in our country the reflection on economic development, whose presence or absence has
fundamental consequences for "humanity"2.
2. The environment, economic and institutional
Enzo Grilli's thinking as an academic was certainly influenced by his unique exposure, during
his many years at the World Bank and particularly in the mid-nineties, to the debate on the
evolution of the world trade system with an increasing number of developing countries.
Enzo was a convinced supporter of multilateral trade liberalization. This process culminated
at the end of 1994 with the conclusion of the Uruguay Round and the subsequent
establishment of the World Trade Organization in 1995. For the first time developing
countries committed to partly opening their markets and to well-defined international trade
rules; in exchange, they could benefit from more open export markets and a greater
possibility to protect their stakes through the new mechanism of trade dispute settlement.
However, the Uruguay Round Agreement left open a number of unfinished issues: large
agricultural markets in rich countries are still relatively closed; international trade rules are
costly to abide by for a number of developing countries; poor countries need foreign aid to
develop their supply capabilities and engage successfully in international trade.
The Doha Round of multilateral trade negotiations, which was launched in 2001 was partly
devoted to address these issues. Yet, negotiations have been stalemated for a long time. As
stressed with foresight by Enzo3, the failure to conclude the Round poses dangers,
particularly in two respects. Firstly, by inducing as a defensive response a more widespread
pursuit of bilateral and regional trade agreements it could result in a loss of bargaining power
of the weakest and poorest countries. Secondly, a failure could threaten the very process of
rebalancing of the global economy in which the international community is engaged.
3. Enzo Grilli's analytical contributions
Enzo firmly believed that international trade by contributing to economic development could
significantly reduce poverty by fostering specialization of national production of goods
according to countries' comparative advantages and by increasing knowledge that would
help less developed countries to overcome their significant technological gaps.
Enzo stressed particularly two facts. At the global level, greater efficiency of production
raises the return to capital. At the national level, trade in capital-intensive commodities tends
to equalize the domestic and global return to capital. Both effects stimulate investment, which
is an extremely powerful engine of economic growth. The spectacular performance of
exportoriented economies mainly in East Asia is a good example of how trade can unleash
economic development.
The importance of trade was confirmed during the recent crisis. World trade collapsed in
2009 as a consequence of the recession, then recovered to pre-crisis levels, and it is poised
to revert to strong trends. World economic integration is continuing. Emerging and
developing countries have become engines of growth for the economy of the world.
According to World Bank's estimates about 60 per cent of the increase in world trade in the
recovery has been brought about by the rapidly growing demand from emerging countries,
especially for capital goods and consumer durables. The surge of those exports has been an
important contributor to the recovery in high-income countries, in particular in Germany4.
In order to help transform the aftermath of the crisis into an opportunity it is necessary to
proceed now more than ever to the structural reforms already envisaged by Enzo Grilli in a
number of articles. Reforms capable of enhancing high and sustainable growth rates in
developed as well as in developing countries, which may also be conducive to rebalancing of
domestic absorption in deficit and surplus countries, most notably US and China.5
He emphasized accumulation of human capital, education and Research & Development as
essential elements to raise countries' productivity and to drive endogenous technological
change.
In his analyses Enzo devoted much attention to China. To sustain high growth rates, China
should move, he argued, on to a new development phase where accumulation of human
capital would outpace that of physical capital. In the process a desirable rebalancing of the
supply side of the economy (from manufacturing to services) would be coupled with a parallel
development on the demand side (a rise in workers' incomes and in public and private
consumption)6.
Enzo was also a passionate communicator. Whether in an IFI's boardroom or in a classroom
he liked to establish a dialectic exchange with his interlocutors. It was only natural for him to
extend his audience through a regular collaboration with the main Italian newspapers, and
since 2002 as a regular contributor to Il Sole 24 Ore. For over a decade he engaged in a
dialogue with the public opinion, a fact that, following the example of Luigi Einaudi, was only
common to a handful of Italian policymakers and academics. The word "dialogue" truly
characterizes his newspapers contributions both for their frequency, almost monthly in his
later years, and for their structure, a series of short questions and longer answers, that is
mindful of Socratic conversations. The occasional reader was always provided with a key
that helped him understand in a plain language the essence of the often complex technical
and political issues being debated in international fora.
What were the dominant themes of these conversations? Perhaps oversimplifying, I would
select three subjects which stand out both for their recurrent nature and for their relevance
today.
A first subject, raised in his commentaries of G7 meetings or other important international
gatherings, was the issue of coordination (or lack thereof) of economic policy decisions by
major global players. Here he was often concerned with the inadequate or delayed European
response to the global challenges that often left the US as the dominant or the only player.
For example, at the time of China's negotiations for admission into the WTO he complained
for Europe's notable silence or absence at the negotiating table. Similarly he was concerned
with Japan's protracted stagnation, which he attributed to the disconnect of politics from
economics in that country, with the result of silencing another important player.
A second item of Enzo's articles was debt management at times of economic crises where
he suggested greater market involvement in sovereign debt restructuring through those very
Collective Action Clauses (CACs) that are now being considered for future Euro area
sovereign debt issues. Similarly, he took strong positions regarding the debt relief proposal
for highly indebted emerging countries launched by the then UK Chancellor of Exchequer
Gordon Brown and approved by the G7 and the IFIs. His view was that the accumulation of
an unsustainable debt is in most cases the result of a wrong policy stance and that debt relief
should therefore not be granted if the country had not taken a firm commitment to reverse
that stance.
A third recurrent subject of Enzo's articles, not surprisingly, was the IFIs themselves: their
effectiveness and their governance. He defended IMF policies during and after the Asian
crisis, at a time when the IMF was under heavy attack due to its crisis management
strategies on the fiscal and on the monetary front. He claimed that in a world of free capital
flows the IMF required a new mandate to be able to effectively pursue crises prevention and
management. Such a mandate should encompass new information requirements, additional
monitoring powers, as well as access to a broader volume of resources. All these issues are
still at the top of the IMF reform agenda. No matter how passionate his defence of IFIs was,
Enzo considered IFIs' criticisms "a normal and even a positive fact" because of the IFIs' own
mandate to pursue public goods with public money.
In fact, Enzo was himself often on the critic's bench, as when he vividly criticized the World
Bank for lending to middle income countries without proof that these loans would achieve
better and more effective (additional) development results than commercial loans. For those
familiar with the aid debate, Enzo's point was an early call for the certification of
"additionality" of aid money.
To the IFIs' governance Enzo devoted a paper, jointly written with another friend that
prematurely left us, Riccardo Faini. The question raised by the paper's title ("Who runs the
IFIs?") was addressed with straightforward intellectual honesty asking the data to reveal
whether IFIs' lending was aligned with the financial and commercial interests of their most
influential shareholders. The empirical evidence showed the US influence to be pervasive,
while Europe appeared to limit its influence to its trading partners and Japan to Asian
countries. Despite the unequal distribution of power, coalitions were nevertheless necessary
to run both IFIs. He and Riccardo really foresaw the debate on the reform of the IFIs.
Shouldn't developing countries' voting power be better aligned with their economic weight?
Should the objective of greater weight be pursued by promoting regional initiatives, such as
the proposal of an Asian Monetary Fund? Could new broader groups such as the G20
provide a better coordination?
After the crisis there is a growing need of coordination of economic policies in order to
reduce instability and uncertainty. Several international fora can coexist and usefully
complement each other. The G20, even though it has no universal membership, has been
particularly effective on a broad set of policy issues even before they are submitted for
discussion to the boards of the International Financial Institutions. Recent experience in
Europe has also shown how regional institutions like the EFSF can usefully collaborate with
the IMF and can greatly leverage the IMF funds.
4. Conclusions
These few thoughts about the life and work of Enzo Grilli bear witness of his eclectic
approach to discipline of economics, as well as of his intellectual and moral integrity.
He once claimed that "economic growth, which is an essential condition for development, is
not a mysterious process ( ... )". Of course, this does not mean to say it is mechanical. In
fact, he remarked that "understanding its diffusion ( ... ) represents maybe the most
important challenge still open". This calls for a firm commitment to continue the work that he
pursued for a whole life. The ultimate goal is "human progress, better quality of life, the
chance to free ourselves from the fatal tyranny of ignorance and from the chains of poverty."7