Bank of Italy - The Global Foundation
Rome Roundtable 2018
Rome, 15 June 2018
Dinner address of the Governor of the Bank of Italy
Ignazio Visco
Your Excellences, Ladies and Gentlemen, it is a pleasure to welcome you to the Bank of
Italy. I would like to thank Steve Howard, Secretary General of The Global Foundation, for
bringing together so many distinguished guests to discuss the state of the world and how it
might be improved. I also thank Jock Murray, Chairman of The Global Foundation, for his
kind introduction. I am honoured to set the stage for the keynote address by His Eminence
Cardinal Pietro Parolin.
Unfortunately, I could not attend the sessions of the first day of this meeting. I regret it
very much because you have been addressing themes of fundamental importance for the
global economy. These themes appear remote from the main tasks of central bankers,
preserving price and financial stability, but at a deeper level all the issues are connected and
we should not lose sight of the major changes that affect our societies and economies.
In January 2017, Pope Francis' address to The Global Foundation inspired the main
theme of today's and tomorrow's discussion. He stigmatized "an ideology of capitalism"
that shows "little or no interest for the realities of marginalization, exploitation and human
alienation, a lack of concern for the great numbers of people still living in conditions of
grave material and moral poverty, and a blind faith in the unbridled development of market
forces alone" and invited us "to discern just ways of attaining a globalization that is
'cooperative', and thus positive, as opposed to the globalization of indifference".
Obviously, I do not have a clear and short answer to the questions posed by Pope
Francis, but I do believe that the issue of labour is central. It relates to social integration and
personal identity. At the economic level, it should not be seen solely as a cyclical problem:
the economy's growth depends on the quantity and quality of the labour force and on the
capacity to provide adequate jobs in these ever-changing times.
Therefore, in my remarks tonight I will first consider the main forces shaping our future
and the challenges they pose; then I will hint at the traps that - as policy makers - we
should avoid in order to move towards the "cooperative globalization" that we are invited to
realize.
Over the last decades, four overarching forces have been shaping the world economy:
globalization, technological progress, demographic transition and climate change.
For the most part, globalization and technological progress have been positive and
powerful engines of economic progress and social change. But given their heterogeneous,
pervasive and differentiated effects, they have also been the object of fierce critiques and
deep-seated fears, which policy makers should not neglect.
Globalization is a complex, multidimensional phenomenon, consisting not only of the
deeper integration of goods, services and capital markets, but also of the greatly increased
mobility of people, information and ideas. The globalization we have experienced over the
last quarter of a century could not have been achieved without the technological revolution
that today is symbolized by the wide diffusion of computers, the internet, smartphones and
robots.
This technological revolution is inexorably permeating all aspects of economic and
social life. It is radically changing people's habits and firms' activities, as well as our way
of working, producing, consuming, exchanging information and interacting socially.
Statistics concerning the digitalization of the economy tell a clear story: in 2016, about 95
per cent of businesses in the OECD countries had a broadband Internet connection; more
than 75 per cent had a web presence; half of the adult population had purchased goods or
services online, compared with 36 per cent in 2010. These numbers suggest that, in this
digital era, financial, economic and even social inclusion are closely related to technological
inclusion.
The formidable achievements of globalization and technological progress are too often
forgotten as the discussion turns to their shortcomings and risks:
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The world economy is today six times larger than 50 years ago, while the total
population has increased little more than two-fold, so that average per capita GDP has
more than doubled.
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Over the last 25 years or so more than 1 billion people have escaped extreme poverty
(defined as an income below 1.9 dollars per day) while 2.2 billion have been added to
the world population. Therefore, about 3.5 billion people have never entered or have
escaped this condition. The target of halving the share of people living in extreme
poverty has thus been achieved five years earlier than was established within the
Millennium Development Goals agreed in 2000 by the United Nations, notwithstanding
the exceptional increase in the world population.
- The so-called emerging economies - once excluded from the global economy and hosts
for the largest share of the poor - have substantially narrowed the gap with advanced
countries and are today the main contributors to world growth.
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The mortality rate for children under the age of 5 was halved globally between 1990 and
2015.
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Thanks to greater labour mobility, today about 260 million people live in a foreign
country, up from less than 80 million in 1970, and flows among developing countries
now exceed those towards advanced economies.
However, not everybody has benefited in the same way from the economic expansion
provided by trade and innovation. Economic backwardness, poverty and high mortality rates
are still dramatic problems in many developing countries, especially in Sub-Saharan Africa.
Even in the more prosperous countries, many have been left behind. Inequality in the
distribution of income has declined dramatically over the last three decades at a global level,
mainly as a result of the fast growth of China and other emerging markets that has reduced
their distance from the richer parts of the world. However, within most countries differences
in income and wealth have risen to historically high levels.
Finally, the rapid pace of technological progress and its unprecedented nature make it
possible not only to replace physical labour but even to displace intellectual contributions in
a variety of tasks once believed to be a prerogative of humans. This has raised fears of a
new form of technological unemployment, to which the medium-skilled population is also
vulnerable, and has helped to spread a sense of insecurity, raising the demand for protection.
The two other factors shaping our present and future conditions - demographic
transition and climate change - are not independent from, and have actually been reinforced
by, global economic integration and technological progress.
Higher living standards and wider access to better healthcare have increased life
expectancy across the globe. For the first time in our history, the world faces not only a
growing population - estimated to reach almost 10 billion in 2050, up from 7.5 billion today
(and 2.5 billion in 1950) - but also an ageing one: there are almost 1 billion people aged 60
or over in the world (13 per cent of the global population) and this age group is growing
faster (at 3 per cent per year) than younger age groups.
In most advanced countries, as well as in China, declining birth rates, with increased life
expectancy, are pushing up the so-called old-age dependency ratio, the population over 64
relative to the working-age population (aged 15 to 64). In Europe, ageing is progressing at a
very fast rate: in Italy, the old age dependency ratio has risen from 12 per cent in 1950 to
more than 35 today; in Germany, from 14 to 32 per cent. Demographic transition, however,
is a global phenomenon: Japan has the oldest population in the world, while in China the
dependency ratio has doubled since 1950 and is expected to reach 44 per cent by 2050, up
from 13 today.
This demographic transition will have a deep and long-lasting economic impact.
However, the argument that this impact is inevitably negative rests on the assumption that
old people are only unproductive consumers of government benefits. This is not necessarily
the case:
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Ageing does not automatically imply being unproductive or sick. A 70 year old today is
in many respects much "younger" than a person of the same age 50 years ago and we
now have the means to avoid the marginalization of the elderly and to keep them an
integral and productive part of society for longer.
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While in relative terms the old are outgrowing the young, the number of young people
in the world is the largest in history in absolute terms, but it is not distributed evenly
around the globe. Of the 2.2 billion people added to the world population since 1990,
less than 1 in 10 live in advanced countries. Africa, which hosts some of the poorest
countries in the world, is expected to have the fastest population increase over this
century, reaching Asia in absolute terms. Only an integrated world economy and wise
policies can help to spread the benefits of progress more evenly. This also requires that
the flows of migration be properly managed.
Climate change is linked to what we have been saying so far. The post-war exponential
demographic acceleration - the "population explosion" - prompted discussion of the "limits
to growth". At the start of the 1970s, the Report of the Club of Rome, which centred on the
predicted depletion of natural resources, raised alarm about the survival of the earth's
ecosystem and of the human race. These projections received great attention from the
media, but they were greeted sceptically by many eminent economists of the time. With
some reason, the critics noted that the Report failed to account for two major stabilizing
mechanisms: the ability of relative prices to rebalance supply and demand and the
endogenous response of technology.
Notwithstanding the power of these two mechanisms, which makes any long-term
projection hazardous, the concern has not abated. The debate on sustainable development -
i.e. development that can "meet the needs of the present without compromising the ability of
future generations to meet their own needs" - suggests that today it is impossible to ignore
the environmental balance of the planet and the reciprocal compatibility, or trade-offs,
between economic, social and ecological objectives.
Climate change is no longer a scientific curiosity, it is a fundamental theme of today's
public debate. A series of important international agreements (the Kyoto Treaty of 1997 and
the Paris Climate Agreement of 2016) have made it clear that two aspects are of special
importance: 1) tackling the challenge of climate change at a global level, with the
cooperation of all the parties involved; and 2) devising incentives for the invention and use
of new technologies to drastically curtail emissions of carbon dioxide and other greenhouse
gases.
Globalization, technological progress, demographic transition and climate change
present us with formidable challenges. But economic integration, scientific progress and
improvements in education and health conditions provide great opportunities for forging a
more prosperous, more equitable and more sustainable world economy. However, it must be
clearly understood that attaining a "cooperative" globalization entails governing the world
economy, as it would be illusory to rely solely upon unfettered market forces. As the global
financial crisis has clearly demonstrated, effective regulation, adequately funded
international financial institutions and strong cooperation among nations are necessary to
mitigate risk, grant stability and correct market excesses.
Unfortunately, we live in unprecedented bad times for international relations. A
retrenchment of policies towards narrowly defined national interests and short-termism in
the definition of policy objectives, partly dictated by the continuous monitoring of popular
approval and facilitated by the new digital technologies, are the most significant risks today.
The US decision to back out of the Paris Climate Agreement and the recent failure to sign a
shared Communiqué at the G7 Summit in Charlevoix are clear signs of the dangers to the
liberal world order and global cooperation.
The trade dispute is revelatory of the difficulties we encounter on the road to
cooperation. As is well known, the basic economic teaching on trade policy is that free trade
is by far the best option as it grants full exploitation of comparative advantages to all parties
involved. Indeed, the current trade system based on multilateral agreements underpinned
economic development for decades. Obviously we should not ignore the potential
complications arising from different levels of industrialization across nations and the risk of
specializing in products that might lock in a country at a pre-industrial stage, as may have
been the case for much of North-South trade during the colonial period. But we must
consider that, in trade deals, the interests of producers and consumers are seldom aligned.
Often the benefits of a given tariff or import quota are concentrated in the hands of few
well-organized producers, while their costs, no matter how great in absolute terms, are
spread among a large number of unaware and unorganized consumers. A similar conflict
between concentrated and diffuse interests also arises in the case of climate change, where a
further tension is added, the one between current and future generations.
A final example of the difficulties we encounter on the road to cooperation is the
reaction to migration. Of course, there are many reasons why migration is met with some
resistance by receiving communities. While the concerns of the more vulnerable parts of the
population must be addressed, we should recognize that international mobility is a positive
force for economic and social development: if properly handled, it could help poor countries
to grow by alleviating the pressure on their labour markets, and it could ease the
consequences of ageing in richer economies, which need a young labour force to balance
falling birth rates.
But we should not ignore the conflicts that migration may generate. A first one is
between the citizens of rich countries, who enjoy a "citizenship rent" they have received
without meriting it, and the citizens of poor countries, who try to escape a poverty for which
they have no responsibility. A second one is between young people today, who feel their
jobs are threatened by migrants, and the same people tomorrow, as a young labour force is
needed now to support their living standards in the future.
These are formidable problems that cannot be tackled by policies constrained by
geographical borders. The wide-ranging integration of the global economy has brought a
corresponding integration of global problems. It would be short-sighted - actually
counterproductive - to think that effective solutions can be found exclusively within one's
own territory, following "me first" national strategies. But this is the reality we face.
By the same token, an effective solution to these problems requires a longer-term view,
a political agenda that is not enslaved by short-termism, since the needed reforms and
policies have effects that are not immediate, but are distributed over a long-time horizon.
We need to prepare the polity for this kind of intervention, which is now opposed by so
many. To shape public opinion, education and information are key. We need to
communicate in clear, accessible terms the long-term benefits of openness to trade, to new
ideas and to managed migration, while addressing the needs and fears of the most
vulnerable parts of the population in advanced economies and in the world at large.