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Growing disparity in a world crisis

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Romano Prodi

 

The issue that we are going to tackle today, in this beautiful university seat enhanced by the presence of so many young students, is disparity. To do this it is necessary to immediately understand today's economy, from a global point of view.

How is the economy today?

Overall the rate of development, in the world, is around 3,50%. Compared to the average of recent years the growth rate is slightly lower, but not seriously lower. Therefore the coming year can be defined as not bad and not good at the same time. The crux of the matter, in fact, is that there are huge differences within this level of development. To understand better we must, first of all, consider a part of Asia, with China in the lead and the United States of America, namely countries whose economies are very strong.

In this period, China is developing at a rate of 7%, compared to the 10% of the past. This rate is not low in absolute and, I want to emphasize, that as China is a country of medium development, the data represents, in reality, much more than the 10% of the past. China, therefore continues to be the phenomenon of the world economy and, probably, will continue to be so even in the future.

The United States of America represents the other surprise taking place in the economic panorama. Its striking recovery, has gone beyond expectations thanks to concomitant phenomena. Firstly, the vigorous economic policy put into effect to deal with and overcome the crisis. In contrast to Europe, which has hesitated with so much indecision, the United States continued with "quantitative easing", investing 800 billion of resources.

The United States is experiencing the phenomenon which is literally changing the face of the world and that is emerging as a new ‘energy youth'. I am speaking of ‘shale gas - shale oil': it might seem a marginal fact, namely a phenomenon that refers to a single field but, in fact, tens of thousands of new jobs are connected to it. Furthermore, in the near future that will depend only on political choices, a new system of extraction of oil and gas could make the United States, until now one of the largest importers of energy now self-sufficient, become a country that exports. I would like to mention that the phenomenon is not limited simply to energy, but activates far-reaching consequences: the petrochemical industry is shifting from the Arabian Gulf to the Gulf of Mexico and all the energy industries, even italian producers of tiles and ceramics, are shifting towards the United States. The reason why? The United States sells methane gas, using the unit of measurement called the British Thermal Unit, at 4 dollars, while here it is 12 and in China and Japan it is 16 dollars: this signifies literally, overturning the world.

Another phenomenon to be taken into account on a global level is Africa: in this continent for the last decade there have been decent growth rates, around 4% - 5%. The comparison of rates starts from such low levels that this growth does not allow us to be able to speak of "african renaissance". Probably, it will take 30 years before we can speak of a real renaissance of the african Continent. Although, once again, it is necessary to keep in mind the history of the country: to date, in the world share, the african product is equal to that of 1980. Now however, the african economy, compared to the continuous deterioration of the past, is now doing much better. This is to be considered an element of hope. And this hope has more value when considering the tragedies of inequality that the continent lives. Africa has impressive population development: its inhabitants today are a billion and towards the middle of the century will be at least doubled. Moreover, the birth rate in sub-Saharan Africa is not falling, the population is rising to dizzy heights and this figure is linked to that of infant mortality which is opposite in sign and is dropping. To give you just an outline of the structure of Africa, compared with that of our country, namely a European country: in Italy - where in fact we have 1,3 - 1,4 children per woman, the average age is 45 years; in Niger, or Burkina Faso it is between 17 and 18 years. You can understand how different the society is: half of the nigerians and half of all the inhabitants of the other neighbouring african countries are less than 17 and a half years old and the other half are over 17 and a half. Half of the italians, by contrast, are under 45 years old and the other half are over 45 years old. We can truly say that they are two worlds, completely different from each other. Africa is growing, it's true, but it has an increase in population which is associated with other factors which produce iniquities. One of these is the rush to the cities. The metropolization of Africa is awesome, because it is not even guided, as is the case of China which, over the next 10 years, will "metropolize" 200 million people - about 20 million a year - but it will do so with a politically guided plan. In Africa, on the other hand, we can talk about biblical migration: people that move, driven by hunger and by problems that will become enormously more serious in the future. Recently, the president of Niger wondered where could all these young africans go to look for a possible future and added "perhaps in Europe". I mention it specifically, because these are issues that we must definately reflect on: either there is a much stronger commitment to Africa or, despite the significant figures which I have just reported, immigration from the african continent to Europe will grow in the near future.

Inequality between countries, and within countries

Under the theme of different growths that we are facing today there is not only the aspect of inequalities between countries, but also that of inequalities within individual countries, and this is a very important aspect. Inequalities are growing everywhere: I mean to say that they are growing both in capitalist countries and communist countries around the world. From 1980 to today we have a very precise historical period: up to 1980 we can say that inequalities have slightly decreased, thanks to unions and improvements of the working class with a whole series of related factors that I won't classify here. From 1980 onwards, inequalities have hugely increased everywhere: in the United States, in all the european countries, in Russia, in India and in China. The only exception are the nordic countries that have maintained their traditional welfare policy and I'm referring to the scandinavian countries. Let us not forget Brazil though: we'll see if the latter can continue its growth thanks to Lula's great policy, that of the "family purse", which was a very simple policy but which has injected resources into the lower categories, as long as they send their children to school, and have them vaccinated. A political and economic action that was very clear and direct and that, to date, has led to a decrease of injustice.

But in the rest of the world why do inequalities survive? Of course for those who want to know more there is a new manual, the famous book of Piketty, ‘Capital in the 21st century'. it is a good book, which examines these issues really thoroughly, and despite it now being the subject of criticism, the context it offers is important. The author argues that all periods of expansion of the capitalist world have brought even greater injustice, while adjustments have occurred only in times of war or very severe crisis, during which a certain need for a collective policy has rebalanced incomes. The explanation, though here we are not doing academic lessons, but we try to understand complex phenomena, can be summed up in this concept: the free market has a natural tendency towards inequality, because the yield of property and investments is consistently higher than the growth rate. I'd say it's pretty intuitive and simple: if growth is at 2% and the return of property is at 5%, inequality increases and this, projected over the years, becomes a process which leads to enormous inequality. But the question is: why did it explode in the eighties? Because the State's rebalancing tools failed. Starting from Mrs Thatcher's doctrine and the economic principles diffused by President Reagan the whole picture of the world has changed. The watchword was, and you will remember it, "what counts is the individual, not society": these statements have remained impressed and have spread. The new attitude was about taxes, taxes on income in the United States which were very high (more than two-thirds). This doctrine, shared by all, was also supported by those who lost out on it, because it had become the Gospel. I would say that it's an interesting, economic phenomenon, because while up to a generation ago, during election campaigns there was always the comparison between "more services or more taxes", it is since the eighties that the problem has not arisen anymore: anyone who speaks of taxes, actually loses the election and I can assure you that it is also my direct experience. It is a fact that is still in the electoral life. The growing mistrust towards the State was tied to the fiscal redistributive capacity: not only has the rate of the taxes on high incomes been lowered, but inheritance tax has been abolished or brought to a very low level. Where there was a strong tradition, as in France, texts were diffused which instead, confirmed the equilibrating factor, although with limits of widespread evasion. Piketty suggests that if we want to correct this trend, we must make thoroughly unconventional proposals, inheritance tax must be reintroduced or raised, one must go back to the rates of taxation on incomes over 500 thousand dollars the equivalent of 80%. This attitude has led to Pikkety being accused of communism, but Piketty is certainly not marxist.
This however this isn't the only cause of inequality. I'm referring to evasion, a pathological phenomenon, of course in countries such as Italy, but still present throughout the world. The reason is very simple: work is in some way identifiable as fixed, while capital escapes through open markets.

New technologies and inequality
The new technologies are another cause of inequality and this is a consideration that bothers me a lot. I say this especially to young people. The technological revolution to date is different to what we have seen or studied about in schoolbooks. Let's think about the past, when the car substituted the horse-drawn carriage: carriage makers were certainly not enthusiastic! However, car factories, refineries, petrol stations, roads immediately sprang up. A whole economic system was set in motion, that overwhelmed the previous situation and more than offsetting the sectors in crisis. The same thing happened If we take into account innovations such as the railway, the spread of electricity, or the telephone...Instead, so far, this computer technology revolution is drammatically more effective in destroying more jobs than it is in reabsorbing them. For the time being in Italy the biggest revolution was the disappearance of the secretaries, thousands of people, or rather jobs, that have disappeared. Now in business, accounting is produced with the help of the new electronic and computer systems. Young people may not have the exact perception of this great change, but anyone my age has seen and can remember rooms filled with thousands of drafters. Now there are four boys with computers, that do everything. Obviously there are also the creatives, but in terms of quantity, for the time being, the jobs created by the advent of new technologies are far fewer than those lost. Let me clarify, I have to say that I'm not a luddite, but in this area we are not at the forefront and in addition to damage we also accept mockery: I think of what we pay when we read newspapers on the i-pad, of what we pay to large American firms that control these new sectors. To return to the consequences on jobs lost as a result of the technological revolution: when I ask managers of various sectors about the future, when I ask if in 2024 the employees of banks will be more or less half of today's, they all reply that they will be less than half of today's. These are impressive figures that will change the frame of reference in the world. We are therefore faced with a process that continues, that will bring a high level of wealth only for a single part of society. To remain consistent with today's theme it would be better then to ask ourselves what is the real contribution of new technologies for a more equitable distribution of income.

Acceptance of inequality by the public opinion
It strikes me a lot and I consider the acceptance of inequality by the public opinion a fact of worrying interest. Thirty-five years ago when I was a promising young man and my job was that of industrial economist, I wrote an article published in the Corriere della Sera. It was an analysis conducted within certain companies with which I underlined that the difference in salary between Director and line worker was from 1 to 30. I received many letters, saying I was right, but admitting that this was an injustice. Today the difference is from 1 to 300 and more, but it is a difference that is totally accepted. It is necessary to pay attention to this acceptance, because philosophical and political beliefs change the soul of society, to the point that today we don't realize the extent of this enormous difference. Now some jobs are highly paid and very many are badly paid: consequently, also all the talk on precarity and a middle class that is increasingly dwindling assumes different tones. This translates into political slogans that we calmly accept, because we have interiorized them. Let's think about what Chancellor Merkel says about the european welfare system: that Europe cannot go ahead because we cannot live in a Continent that today has only 7% of the world's population, produces about 25% of global GDP and has to finance 50% of global social spending. But the problem is that welfare resources follow a different perspective of redistribution with different consequences that nobody considers today. Even in China, where for six years I have taught at the Business School of Shanghai, the speeches that are made on health care are almost incredible. Let me explain: for the chinese even healthcare must be absorbed, like other sectors, by the market. I always get criticism on this issue, such as "you spend too much on welfare". My objection is common sense: I belong to a country - Italy - that certainly does not represent the leadership of the world, where from 7% to 8% of the GDP is spent in health care but, the country to which you refer with so much hatred and love here in China, namely the United States, spends between 17% and 18%. But there's a complication: we, in Italy, live 4 years longer than the americans! So there must be some good in this welfare system, both in the context of expenditure and in results. We know that China is making impressive progress and even I myself, each time, tend to be more and more amazed. However in China there are enormous disparities: the disparity between city and countryside, the health problem, the problem of regional diversity and large inequalities persist despite the achievements made. In the last five-year plan we find the lines and projects for change with the goal of increasing domestic consumption and, of course, salaries (steps towards consumerism). But the difference in the income per capita of the regions is from 1 to 5 - 1 to 6, much more higher than in Italy between northern and southern Italy which for our country creates a gap of great and drammatic importance. If we accept these principles, if we interiorize that in Europe we spend too much on welfare and do not analyse expenditure data with the results achieved thanks to the type of commitment of resources, if we allow certain claims to become a Gospel, we will continue to accept inequalities without amazement. Inequality also contributes to exclusion. Exclusion from the labour market first of all. Today not only is the unemployment rate very high, and the juvenile rate is especially worrying, but the number is increasing of those that, considering the situation, don't even try to look for a job. In this way, some sort of exclusion from hope is configured. The social elevator works less and less, while the power of "dinero" as the Pope says, is spreading. The democratic system is increasingly unable to represent the excluded due to the spreading and entrenchment of those economic doctrines that I described and this becomes a decidedly important political issue.
Certainly pathological aspects such as corruption and tax evasion, that I can't deal with in detail now for reasons of time, are no strangers to the problem of disparity. It's enough to remember that they have a huge weight even in countries such as China that has started a very incisive fight against corruption, under the guidance of the new presidency. In China the matter was so widespread that, in recent months, as a result of anti-corruption initiatives, there was a 30% drop in the market for luxury goods, although the country's economy had grown strongly. This means that there was a strange turnover in luxury goods that was beyond imagination, confirmed by macro economic data. I would add that the current fight against corruption is arriving at an extremely high amount of data, that confirm a hardness and rigor with respect to choices made to contrast evasion and corruption that I wouldn't have imagined.

Europe's role

Could the European Union have curbed this drift towards inequality in the distribution of wealth? The choice of enlarging the number of member states is something that, in terms of redistribution, is interesting because it allows us to say that the European Union played a rebalancing action: unlike what happens in all the major economic regions, where the more advanced grow faster than peripheral areas, in Europe it happened the other way round. After enlargement, in fact, Poland, the Czech Republic, Slovakia, Bulgaria, Romania have grown much more. All these countries have grown more than other economically stronger countries. However the redistributive capacity of governments at a national level is different depending on the pervasiveness of the role of the State: we find it very high in scandanavian countries, we find it extremely high in Scandanavian countries, while in France and Italy it varies from 30% to 60% of the wealth. The EU budget, is 1% of the european gross national product but, to be honest, it has never touched 1%, therefore the capacity of redistribution in Europe is decisively less. Europe is not a federal state, there is no centre for wealth to pass through and in that 1% there is the agricultural policy that takes 40% of this 1%, the regional development policy which takes another 10% - 20%, then there is bureaucracy, research and development. To date though, all the policies made, many also in a positive direction, are not sufficient to carry out a better redistribution.
Another legitimate question is that related to the role of the UN and the numerous G8 compared to underdeveloped countries. They have certainly produced something, but only to a minimal extent and above all, below expectations. I attended ten G8, 5 as italian Prime Minister, 5 as President of the European Commission and, I admit we have never kept a promise: we started off with 1% of GDP in aid to poor countries, then it went to 0,70%, then again 0,40%. Each year there was an increase in the emotivity of the words and a reduction in payments made. Of course, this minimum contributed to an improvement of the poorest countries, but they are interventions of a marginal level. However it is obvious that if there isn't a greater european budget and a central administration, you will not be able to expect from Europe what people ask, during election campaigns. Europe's policy needs to change because it is practicing a suicidal policy. It is true that many steps foreward have been made from a political point of view, in order to prepare the way for greater equality, with the widening of the poorest areas, and a strengthening of the role of the Commission, but the real problem is that Europe "is only half cooked". Europe remains truly the best political design in the history of mankind, but we must put an end to national self-interest, and instead create a structure above nations which is also the objective force of Europe itself. Europe is an important economic force and contributes to 20% of the gross world product. This means that we are still number one, along with the United States. We are number one in manufacturing, number one in income, number one in industrial production, number one in export. However until there is a unified policy we cannot hope to maintain this position in the future. Look how Europe reacted to the crisis and how instead, as I have already mentioned, the United States and China reacted, and who are now out of the crisis thanks to their economic policies. The United States and China immediately poured new resources into their economies to overcome the severe economic contingency. The United States, as I've already said, have invested 800 billion dollars, and China has paid 4 trillion Renminbi, 595 billion dollars, that is a huge sum in order to produce, as an immediate consequence, a leap forward in the economy. In Europe, however, the exit from the crisis is much more difficult because no decision has been taken on the subject of inequality and States, and, for the presence of doctrines and enormous changes of power within Europe itself. to disparities between States, and for the presence of doctrines and huge changes of power within Europe itself. Almost nobody has described this with the necessary emphasis and analysis. Ten years ago, while it was still President of the European Commission, the presence of Great Britain which was very strong in the institutions, in spite of not entering into the Euro, in a sense, controlled european burocracy. I had entered the Commission thinking I was going to end up in the hands of french german bureaucrats and instead I found the english, more refined and more capable, even for their deep sense of national unity. Regarding my colleagues, for example, if they were french, italians, germans, after just two days I knew if they were socialists or christian democrats. Regarding my english coworkers I don't even know today if they were labour or conservative, I knew they were british: in this case the national interest was being guarded by their ambassador.
Now the British premier has announced a referendum to decide whether to stay in Europe or not. As a result all the countries which supported Great Britain, or retained an equilibrium between France, Great Britain and Germany, driven also by the french crisis, leaned on Germany for the simple fact that they are not able to know whether Great Britain, in three years time, will still be a country of the Union. In addition France has become considerably weaker, after the latest government shuffle, it is now aligned with Germany, in economic matters. Even the design that I thought possible a year ago, i.e. to have an economic policy aimed at growth, the relaunch of the lower categories uniting Italy, France and Spain - who have the same interest - no longer has any chance of being carried out. Even Spain is moving towards Germany. In conclusion, what is happening is, that there remains only one point of reference in Europe, Germany. Its chancellor now has the red pencil and gives the votes. As an economist I can say that Spain is much worse off than Italy: it is true that it has passed some further reforms, but nothing decisive. Yet the spread favours Spain, a country which I love intensely because it is very similar to ours, but the difference between us and them stems from the attitude of the european arbitrator. Mind you, Germany has become the referee in Europe because of its virtues, not for its vices. Germany has an income redistribution that is better than all the others, it has an industrial and political system that works, and the dialogue between the social forces works much better than in other countries. I am not making a speech against Germany. I have always studied the german industry as a positive parameter for comparison. I am simply describing a situation that has come into being. This opens up a very interesting and important political discussion that has consequences on the future of the redistribution of income, because Germany has a single point of reference: the battle against inflation. And therefore absolute rigor, putting balancing the budget in the constitution. Italy quickly followed in a rush, I was one of the few to say that we had lost our common sense, because the budget must vary from year to year: there are years in which it'll be in credit and years in which it will remain in deficit. If the economy is going badly we have all learned that you have to inject purchasing power, as the americans did with quantitative easing. In this way, with public intervention, president Obama saved the automotive business and Obama is certainly not a ferocious communist.

Leadership and Responsibility

I have tried to help you understand how intellectual ties and economic and financial ties are so close to each other.
In Italy, however, we have unanimously absorbed the concept of rigor within our politics, and I have a strong concern about growth, young people and the future. The great countries in the history of mankind have always grouped together leadership and responsibility. For example when the United States won the second world war they proposed the Marshall plan. In Germany, however, it is not possible to speak of leadership because this invokes past concepts, because it brings attention to rearmament, it brings attention to many delicate, political problems. From the internal debates of the Bundestag you have the impression of severity, rigor, connected to the unwillingness of taking on the responsibility that comes from leadership, because it is this same leadership that is denied by everyone. It is a deeply rooted conviction, daughter of the dramas of history. The result however is that we are trapped in a policy of paralysis, while the rest of the world goes ahead. Of course there are some complications that also effect the economy today, such as tensions with Russia, the Ukraine. The whole, contributes in lowering the rate of development.

But the problem is not just that. The real problem is a different perception of the future and of the duties of the State. This is an element that makes economic recovery even more complicated and therefore the problem of an increase in employment, because at this stage we need to resume development in order to increase employment. Italy, moreover, has a dual problem that is its working class, the middle class, which in a country with a low level of research and development and innovation - like ours now - regards in particular the younger classes that have an extremely high level of education, but who are forced to emigrate. We have become one of the largest exporters of qualified workforce: only in the last year there were around 60 thousand people who emigrated from our country. A third of these had graduated and the other two thirds were highly skilled: they are chefs, organizers of restaurants, fashion designers. Italy has invested in their education (the most prudent estimates tell us that from 2008 to 2014 a group of italians, whose education has cost the State billions of euros, has emigrated) our country has dedicated resources for their formation and they have gone away exporting elsewhere their skills and their ambitions. The countries to which they have emigrated will also benefit from their presence, while we record a loss of professional and human values. Italy is a small part of the world, however I wanted to include a cross-section of our country's problems to frame them in a global discourse, because even our reality, like all the others, is susceptible to changes in relation to what is happening in the world.

The last question is, at the end of this rather varied overview, if there is or whether it is possible to establish an authority able to put things straight in such a complex world? One wonders if the UN, for example, can exercise this role. I had the experience of working for the United Nations in Africa, but even if the Organization of the United Nations has the capacity to intervene in minor cases and, despite doing very important things such as targeted interventions to contrast african genocides, the great powers do not allow it to act in major political and economic decisions. The International Monetary Fund applies, essentially, a doctrine of severity and identical principles throughout the world and also the World Bank follows a similar doctrine, with rules esentially shared with the Director of the International Monetary Fund. This state of things that progressed without discussion for some time, was shaken by a fact that up to now, hasn't been studied very much. The Brics, namely Brazil, Russia, India, China and South Africa, are forming with the World Bank, a bank for development. It is a very complex project because it involves countries such as Russia that, right now, has a fragile economic situation and faces very serious problems because of the decrease in oil prices and sanctions. However, this bank is starting up and the activity of these countries in international markets is becoming extremely strong. And once again we can't help asking ourselves what Europe is doing. When the Euro was born China showed an enormous interest, which was not only economic. The Chinese President said to me, at a meeting - and I was greatly impressed -: "we want the Euro because if next to the dollar there is the Euro then there is also room for China". The Euro meant the possibility of a more equal world. What is said, indeed, about the single currency and that its advent is identifiable with the Europe of bankers, does not correspond to the truth. The heart of the modern State consists of two pillars: the army and currency. In 1954, when there was an attempt to create a common army France was against it because it didn't want to give up its nuclear force. But we have been successful with currency and we have achieved one of the two pillars that support our Europe. But unless Europe returns to being a protagonist in the world...in ten years time the Renminbi could take the place that our currency occupies today.
What I would like to reiterate, in drawing the conclusions, is that we must reconquer the political meaning of solidarity, a sense of equality, a sense of participation. We must be proud of the welfare state because, if well managed, it is an instrument for development, not recession. If we make these beliefs deeply ours then we can go back to talking to people and convincing them. Otherwise populism will continue: it is very easy indeed to blame immigrants and shout ‘Let's get out of the Euro' and we know that in times of trouble these slogans have an irrestibile attraction. A word of caution though, you don't face up to the risk of populism by denying the difficulties that we have today. It is with the proposal of concrete objectives and possible political choices that difficulties are overcome. To do this we need strong european unity and a relaunch of Europe's role starting with Germany taking on responsability for european leadership.
It is still a very long way to go, I just hope that we'll start walking soon, because on this depends the possibility of seeing in our continent and in our country the realization of greater and real equality.

 

 


 
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