Strained Bedfellows: What We Can Do to Make Open Economies Inclusive


May 30, 2018, 5:30 PM to 6:45 PM EDT
PIIE Webcast, Washington, DC

Tharman Shanmugaratnam (Deputy Prime Minister, Singapore)

Event Summary

The Peterson Institute for International Economics was honored to host Tharman Shanmugaratnam, Singapore’s deputy prime minister and coordinating minister for economic and social policies, for the Institute’s 18th Annual Stavros Niarchos Foundation Lecture on “Strained Bedfellows: What We Can Do to Make Open Economies Inclusive” on May 30, 2018.

Deputy Prime Minister Tharman, one of the most creative, independent-minded, and influential economic policymakers today, offered his analysis of why globalization and social inclusiveness have been increasingly at odds, how they are each indispensable for national well-being and global peace, and how the paths to achieve both require a new ambition for the state.

The Stavros Niarchos Foundation Lecture has been presented at the Institute in previous years by such noted economists turned global policymakers as Agustín Carstens, Alan Greenspan, Mervyn King, Mario Monti, Lawrence Summers, Jean-Claude Trichet, Long Yongtu, and Ernesto Zedillo. Our signature annual event is made possible by the generous ongoing support of the Stavros Niarchos Foundation.

Tharman was appointed Singapore’s deputy prime minister in 2011. He is also chairman of the Monetary Authority of Singapore (MAS), Singapore’s central bank and financial regulator. He chairs the Group of Thirty, an independent global council of leading economic and financial policymakers, as well as the G-20 Eminent Persons Group on Global Financial Governance. Tharman led the International Monetary and Financial Committee (IMFC), the key policy forum of the International Monetary Fund, from 2011 to 2014. He served as Singapore’s minister for finance from 2007 to 2015, as minister for education from 2003 to 2008.



Adam Posen: Distinguished guests, Deputy Prime Minister, Ministers. [Inaudible 0:00:08], Ambassador Mirpuri, other Excellency's, members of Eminent Persons Groups fore and aft previous and current, G20 advisory groups. And of course the most distinguished group of all board members of the Peterson Institute for International Economics. Please allow me to welcome you all back to the Peterson Institute. I'm Adam Posen, the Institute's President and one of my favorite days of the year despite being when my bosses give me my evaluation is our annual combined annual Stavros Niarchos Foundation lecture and the following day our full board meeting.

This is a very special Niarchos lecture for us because we call it—because first, it is our 18th and we are deeply grateful to our colleagues at the Stavros Niarchos Foundation for being such steadfast supporters of discussion with people who are brave, who are thoughtful who are policy oriented and who are globally thinking.

There are so many examples of that from the good work that our former board member Andreas Dracopoulos and the Stavros Niarchos Foundation has done. But there is also so many examples of that from tonight's distinguished speaker. Deputy Prime Minister Tharman Shanmugaratnam. I will be introducing him a little bit more properly in a few minutes. But I would like to ask your indulgence as we talk about a couple other things first.

I mentioned this is our 18th Stavros Niarchos Foundation lecture. This is our now, Fred, 37th year in business. Thank you. And this is actually the first time we will be having a new chair of our board of directors. From the time of our founding Peter G. Peterson cofounded with Fred Bergsten and the late Tony Solomon the Peterson Institute for International Economics. We will be having a proper memorial celebration tomorrow about Pete and his role here at the Institute to which you're all invited if you choose at 8:00 AM tomorrow. All of our staff will of course be here.

But we don't want to distract from the joy, frankly, it gives us every year to hold this lecture and the privilege we have to have Tharman back on our stage. But we do want to note that this is an important generational transition for the Institute, for our board, for the institution as a whole and for all of you, the close stakeholders and members of the team.

We are announcing today not only that Michael A. Peterson will be taking over as chair of the board, that Larry Summers—Lawrence H. Summers will become vice chair and will of course be contributing to our determination of research agenda going forward. And that man has become a very good friend, Stephen Freidheim, will be taking over as the chair of our executive committee which, of course, is the core set of board members who actually get into the budget and the principals of the day to day—well not day to day, hope not, but month to month operations.

This is an emotional moment for many of us, but I think it's a good moment for Pete's memory, for all of us here, for the members of the board to think about that this is such an ongoing living, vital—I think, in both senses, lively and important institution and I don't want to pat myself on the back. That's not what this is about.

This is about all of you, in particular, those who have been such steadfast supporters in every sense of whom we have no greater than the Peter G. Peterson Foundation and Stavros Niarchos Foundation who have been with us throughout the last two decades continuing to make sure that an independent voice, that is fact based, that is intellectually honest and that's committed to good economics of open markets, that's committed to a rules based globalization gets to contribute.

And on that, I'm very grateful to all of you for being part of that and especially those two great foundations both of which are committed to openness, to intellectual pursuits in the common good.

At this point I would like to recognize before turning to the Deputy Prime Minister, our new chairman Michael Peterson. His full bio is available on our website proudly. Let me just say three things about Michael.

First, Michael, as the phrase goes is an incredible workhorse not a show horse. Over the past year, more than a year, but especially the past year Michael has led me, the staff, many members of the board in some extremely important and far sighted planning and strategizing about the future of the Institute for the long term. And I've never quite had the combination of getting 1 AM emails that are friendly and courteous.

I've gotten 1 AM e-mails from people who are—"where is this now". I won't identify those of you in the audience who were the source of some of those, but Michael is doing the work and doing it with a joy in the task, a joy in the work and a joy in the mission that I know his father would be proud of and for which I'm grateful. And so that's wonderful.

Secondly, Michael is, of course, President Chief Executive Officer of the Peter G. Peterson Foundation which is an advocacy foundation, a family foundation committed to issues of fiscal sustainability. He has had the vision over the last five years to lead it on to greater heights including the very notable fiscal summit that many of you attend every year. It's been a forum of extreme quality and it represents, just as the engagement at the Peterson Institute does the commitment that there has to be reasoned public debate. And one of the great things that I've enjoyed in getting to know Michael and that our staff our team enjoys is that he is genuinely interested in hearing from experts. He is genuinely interested in asking good questions and he's genuinely interested in knowing what as best we can tell is the honest reality. That's what we try to do but it's wonderful to have a leader who appreciates that.

And then finally the thing about Michael that some of you saw, some of you joined, a few thousand of us for the memorial service for Pete Peterson held at the Riverside Church in New York City. Michael Pearson is the only one I've ever seen who was able to completely steal the stage from Bill Clinton as a public speaker.

Michael—Bill, President Clinton I should not say Bill I don't know him. President Clinton gave a marvelous set of remarks at the memorial for Pete and Michael had the—perhaps most unenviable job in public speaking not only to speak at your beloved father's memorial but to follow Bill Clinton as a speaker and he started off by saying. "President Clinton thank you so much. You know my father really liked you more than you know." I'm paraphrasing. I think I got it basically right. "You gave him something that none of us could. Not even Joan could. You gave them a balanced federal budget."

Michael knocked the room, everyone forgot about Bill Clinton. So now he has the much easier task of following me which is much better. So Michael please.

Michael Peterson: Well thank you, Adam for that very kind introduction I don't know if I can be quite that funny again. But we'll try. I will say in that introduction you did forget the most prestigious title in my resumé, which was that in 1989 I was an intern at the Institute for International Economics. And I made the best coffee in the history of this organization and I'm very honored to receive this promotion. So thank you Adam.

In accepting this chairmanship, people would ask me how did I develop an interest in global trade and economic policy and the answer is pretty simple. My father instilled it in me very young as a child. At bedtime, instead of reading me stories by Dr. Seuss he would read me economic reports by Dr. Birdstone. And they worked quite well. If you know what I mean.

Anyway, in all seriousness, I am very honored to be taking on this role. And before I introduce the next speaker let me just say a few words about my father and this institute. PIIE meant so much to my dad. This institute is the exemplification of what was really important to him. And in general terms, he believed in a fundamental concept which is that ideas matter. And he was a man who cared about ideas. He wanted to come up with ideas. He wanted to hear about your idea. He wanted to talk about somebody else's idea. He was an idea guy because he believed that ideas could help change the world.

And if ideas matter, then institutions matter. Because institutions of research and thought are what generate good ideas. He believed in giving people a place to come together and create better policy. Within an institution, what mattered to him most was quality, excellence, academic standards, integrity, independence. These all mattered to him. These things form your reputation, which is important because credibility is needed to advance your ideas.

So in the most fundamental terms, PIIE represented for my father, a place to carry out the creation and advancement of ideas to improve the world. More specifically, International Economics was a particular passion of his. He was the very first Assistant to the President for International Economic Affairs under President Nixon. And while there he learned about the important connection between America's economic relationships and our national security, foreign policy and our overall strength as a country.

And this job also started an important relationship. The White House is where Pete met Fred Bergsten. They shared a core belief in helping the U.S. meet the challenges and opportunities of a changing global economy. And from there, it was a pretty remarkable story. An amazing example of entrepreneurship really.

In 1981 it was just a concept from two idea guys a think tank dedicated to the Study of International Economics. It didn't exist. So they created one and they included other visionaries like Tony Solomon, Richard Cooper, David Rockefeller, Hank Greenberg and many others.

So fast forward 37 years and here we are. They and all of you have helped produce what is now rated as the number one economic and financial think tank in the world. And in many ways, the growth of globalization coincided with the growth of the institute, a testament to Pete and Fred's presence.

So PIIE is all the things that mattered to my father. A place for ideas with the highest quality and standards, focusing on an unmet need and comparative advantage. So today I think we would all agree that the evidence driven work of this organization has never been more important. Many of our core principles are under assault right now—globalization, integrity, analysis, even good ideas are under assault. In this changing geopolitical landscape there are new threats to institutions like ours.

But we can't go backwards. Now is the time to recommit and redouble our efforts to defend the progress we've made and further our work. Regardless of the environment, PIIE is and will remain an essential beacon of rigorous and fact based research.

It is powered by world class professionals committed to globally beneficial international economic policy. You have my commitment and dedication to the advancement of our work. And PIIE will continue to adapt and grow and evolve to ensure that our research is as targeted, relevant and vital as it has always been.

But I definitely have very, very big shoes to fill. My father had a unique combination of substantive knowledge, reputation and experience and the ability to give. So continuing this legacy can be done but only with the committed help and support of all of you. So we will fill his shoes together.

And I especially want to thank and recognize Adam Posen, who leads this organization every day. Larry Summers, who is becoming our vice chair and Stephen Freidheim is taking over the role as chair of the executive committee. I'm really grateful for all of your involvement and the rest of our committed board members who are here tonight.

So tonight's lecture is a perfect example of dedication and support. I can't believe it's been 18 years. This evening has, of course, made possible through the generosity of the Stavros Niarchos foundation. Andreas Dracopoulos could not be with us tonight. I think for the first time probably. But he and his family have been such great friends to the institute over many years. We are grateful for their work commitment and partnership especially Andreas' service on the board.

I want to thank Deputy Prime Minister Tharman for being here with us tonight to talk about globalization and social inclusiveness. And before we hear from him we're very pleased to be joined by Vasili Tsamis, the COO of the Stavros Niarchos Foundation who will tell us more about their work and ongoing commitment. So thank you all very much for being here tonight.

Vasili Tsamis: Thank you Michael. Thank you Michael for your kind words of introduction. Ladies and gentlemen it is with mixed feelings that I'm standing in front of you today. Obviously it is a great pleasure seeing so many familiar faces, so many new acquaintances and so many wonderful people. But there is a void. There is a void in today's gathering for the first time in the history of the lectures. And emptiness. We miss the ever present smile of Pete Peterson.

He was here for every single lecture over the last 18 years since the establishment of the Stavros Niarchos Foundation, Pete Peterson series. We miss his guidance, his passion, his perseverance, his commitment, his devotion and his conviction to the common cause of making a better world through the use of economics.

Economics, which in Greek simply means putting your house in order. He advanced fiscal responsibility, he feared that we are mortgaging the future, and right he was. On a more positive note, this 10th anniversary of the Stavros Niarchos Foundation Lecture Series is another occasion to underscore the friendship between the Peterson Institute of International Economics and the Stavros Niarchos Foundation.

It is also an opportunity to celebrate Twin Thanksgivings—one for knowing Pete and honoring his legacy and the other for having the opportunity to continue implementing our philanthropic vision, which we are fortunate enough that our late founder Stavros Niarchos gave us.

Since Stavros Niarchos' passing 22 years ago, we supported some 5000 good causes in some 125 countries around the world that cover good works, I hope, in advancing culture, art, education, social welfare, health medicine and sports. Yet, we are in no position to forecast an inversion of the yield curve, the percentage impact of inflation or deflation or real GDP.

We cannot tell you if correlations established causations, if there is a reporting bias in selective sampling. If the supply and demand curves will meet to dictate pricing or in the future, the prices will be dictated by mega data. Who knows?

By the collective knowledge in this room, certainly, and the wisdom of all the occupants can address these questions as well as others and navigate the treacherous waters of global economy. But we, at the Stavros Niarchos Foundation can tell you with certainty that no matter how insurmountable any problem is, and regardless of how big the gaps of any differences may appear, civic engagement and civil discourse can bridge any dichotomies. This is a belief that the world is missing today and has allowed to corrode the very essence of our democracy.

We feel that people, like-minded people, cluster in ideas in their cocoons and they don't talk to each other. They take opposite corners of the room. Sometimes they're not even in the same room. Recognizing the urgent need, the SNF recently established the Stavros Niarchos Foundation Agora Institute at the Johns Hopkins University.

Similarly, understanding the very need of constructive dialogue, the Stavros Niarchos Foundation supported for the last 18 years and hopefully this will continue in the future, this lecture series. The privilege of having with us today, His Excellency Tharman Shanmugaratnam is great. Thank you very much, Adam.


Adam Posen: This is the point, Vasili is a good friend, but we also in a much smaller way, are missing our mutual friend Andreas Dracopoulos tonight. This is the point every year where I remind people that in large part, thanks to Andreas' vision with his colleagues from the Stavros Niarchos Foundation, they've created something in Athens right now that all of you should appreciate and wonder at, which is a cultural center that was built in the teeth of the worst depression that Greece has ever suffered or at least in the last 150 years. That not only provided jobs in the building, but provided inspiration much as Rockefeller Center provided something to look to the future during the Depression in New York City.

That in the spirit of the Agora that you just gave to the Johns Hopkins and your continued support of us critically includes not only public spaces for cultural performances and lectures, but Greece's first National Library. And the Niarchos Foundation turned this over to the Greek government and said, we don't want to be on the board. We don't want to do this this is for the Greek people.

This is an extraordinary organization. The people who work for it, Andreas Dracopoulos, are extraordinary people. We were hoping today to present a small token that Andreas has completed 10 years of very active service not only on our board but on the Executive Committee of the Board of the Institute. And so Vasili, I hope you will just take this to him with our thanks and our recognition

And now with all the choked up parts having been gotten through. We can turn to our distinguished guest as well. It is my deep honor to introduce Deputy Prime Minister Tharman Shanmugaratnam of Singapore. He is, of course, the Deputy Prime Minister and Cording Minister for Economic and Social Policies in the Singapore Cabinet. I interact with him also where he is Chairman of the Monetary Authority of Singapore, Singapore Central Bank and financial regulator. But he is more than that.

He is, of course, as some of you work with him know perhaps the leading international financial statesperson at least on the global stage today. He chairs the Group of 30 where our friend and board member Jacob Frenkel plays such a role. Having succeeded Jean-Claude Trichet, he also chairs the G20 Eminent Persons Group on Global Financial Governance, which was appointed in April 2017 to recommend reforms to the system of multilateral financial institutions. And he earlier led the IMFC, the International Monetary and Financial Committee which is the key policy forum of the IMF from 2011 to 2014. He was the first Asian chair.

Tharman, and he is one of those larger than life people who goes by one name, has spent his working life in public service. He's always been concerned with education as well as economic policies. He was Minister of Finance for eight years. He was Minister of Education for five years prior to that. He is a board member of the GIC. He is an elected politician and he graciously presented twice under our agencies in the last couple years.

Once in a joint forum we did with the Lee Kuan Yew School at the National University of Singapore in which he gave a marvelous dinner talk rattling off both economic and political science academic citations while making a sophisticated point that in many ways depressingly forecast some of the things that would happen the last couple of years.

And he, of course, was here as part of the conference said Larry Summers and Olivier Blanchard organized on rethinking macroeconomic policies we held here last October, which was spectacular and no more spectacular than Tharman's comments on inequality.

This is a leader who thinks and cares deeply about social inclusion not as a buzz word but as part of the purpose of his life in his government. And we are very grateful to have his input on this occasion of the 18th Stavros Niarchos Foundation Lecture. Sir, thank you very much.


Tharman Shanmugaratnam: Well thank you, Adam, for inviting me. Thank you, Mr. Peterson. And I join in the gratitude to the Stavros Niarchos Foundation for making all this possible. It's really a privilege for me to be here. To borrow your words to give a friendly and courteous lecture at 5:45 in the morning in Singapore.

I think to get straight into the matter, I wanted to talk about, I think the central problem we face is a loss of confidence in the ability of markets, meritocracy and openness to the world to deliver broad based prosperity. We saw it in the first few decades after the war. I think the French called it the glorious treble, can't remember how it's said in French, but the glorious treble. The three decades when everyone moved up together.

But since the 1970s, we've seen a slow-down in wages. In fact, stagnation in wages in many advanced countries. We've seen a slowdown in social mobility. And most importantly, we've seen the ebbing of hope and optimism.

The Pew Global Research does some of the best surveys on how people feel about the future and they do a regular survey around the world that asks people about the chances that children will do as well or better than their parents. In economic terms better lives than their parents.

And in the latest survey, in the advanced world, about 30 percent of people believe that children will do better than their parents and about 60 percent felt that they would do worse. That's an epochal shift. It's not recent. In fact, it's been drifting in that direction for many years now. But it's an epochal shift if you compare it to expectations after the war, expectations even in the 60s when the belief was that we had found a new formula, markets, meritocracy and openness to the world was seen to deliver prosperity for the vast majority in all the advanced societies.

And then Japan came on the scene. Korea, Taiwan, Singapore, Hong Kong came on the scene. Eventually coastal China came on the scene. But I think we've lost that sense of confidence across the more advanced world.

And the second phenomenon that's now very apparent to us is we've also lost a sense of togetherness in almost every advanced society. Again after the war, there was this overwhelming spirit of we. We Americans, we French and we Japanese.

It's now overwhelmingly of them and us proposition. Economists can't put their finger on it very neatly but we can see and there are again surveys that show this up. Surveys that show a sharp decline in trust in others, in fellow citizens in a whole range of societies.

So those are both to do with confidence to do with hopes and fears. But they are both rooted in a growing reality. They are both rooted in facts and they're not due to specific policy errors by specific governments or administrations. This has been part of the undertow for many years now.

The best studies off income mobility are done in the United States in the last few years especially. We know the work of Raj Chetty and his collaborators. Another recent study looked at lifetime incomes from age 25 to 55. Adding up your lifetime income and comparing it across age cohorts. And it found that if you look at the cohort that was age 25 in the late 60s and you compare it to the cohorts that were age 25 around the mid-80s. In other words, they're turning 60 very soon. Lifetime incomes have come down. In other words, between the late 60s and the 80s. We all get ready saw, for young people entering the workforce, we already saw the prospect not knowing then but we now know it—of declining lifetime incomes for the median person. And for about three-quarters of people they've had flat or declining real incomes compared to previous cohorts.

That's a very important reality. That was for males. For females, the decline started later because women were joining the workforce and started off with much lower incomes. So for women the decline started sometime around the late 70s rather than the late 60s. That's in the United States. And we don't have similar studies around the world, but we've got simpler detail. We've got median wage data, we've got median household income. And it tells us a consistent story.

Some advanced economies like Sweden and Finland are doing a little better in median wage growth. Some like Singapore doing better, but by and large it's a story of wage stagnation. And with that decline in absolute mobility of incomes, absolute growth of incomes comes a greater sensitivity to relativities and that's natural. That's a stylized sociological fact. When incomes are slowing, when your own incomes are growing more slowly you get more sensitive to how incomes are growing around you. And that's not just about the incomes of the chaps or the top of the totem pole and everyone enjoys watching them slip down.

It's also incomes of people below you, when they catch up with you. It's not so it's not a happy occasion. Social mobility in the relative sense becomes more of an issue when absolute mobility slows down and it does mean that the central focus of public policy has to be to get broad based prosperity back. Get a broad based increase in incomes back as the normal functioning of our society and our economies because otherwise we'll keep finding one trap after another that involves comparisons between people.

Comparisons not just between socio economic class but comparisons geographically—rural versus urban, superstar cities versus the rest. A whole set of comparisons. So that's now part of the reality that we're grappling with.

Slowdown in absolute mobility, greater sense of discomfort with relativities and a loss of trust and a sense of togetherness. And when you think about that in the context of multi-ethnic societies, the complications multiply most especially when you look at what's happening in Europe, in France and other multi-ethnic European societies. Even in the societies with very few migrants or people of different ethnicity such as Eastern European societies. You see an upsurge of ethno nationalistic beliefs and behavior. It's a new complication that we have to grapple with.

What about the developing world? I spoke earlier about the fact that there was that initial spurt. And I would say sustained success on the part of a group of East Asian countries followed by coastal China. Now quite possibly more than coastal China, but a whole set off western provinces and the central provinces in China. But that story has by and large not been replicated across the developing world.

We expected it. It was almost an axiom in development economics that with open markets, with the globalization applying to capital and not just trade in goods, technologies would be transferred, best practices would be transferred. And as long as you get your basic institutions right you'd be able to catch up.

Those who start from a lower place will catch up faster. It happened in East Asia but it hasn't happened in many other places. And despite a spurt in the last couple of decades in Latin America, in Africa a very encouraging split. If you look at the position today compared to where we were in 1980, Latin America is today further away from the United States in levels of productivity than it was in 1980.

Sub-Saharan Africa likewise is further away from the United States today than it was in 1980. And in fact, I should say many of these countries are further away than they were in the 1960s. India has caught up some moving from—in 1980 it was about 4 percent of the level of productivity and per capita income of the United States. It's now about 12 percent. But that pales compared to what China achieved over the same period where China started off with barely 1-1/2 percent of the level of productivity of the United States and it's now 30 percent.

So by and large, we've been disappointed. The basic axioms of development economics haven't played up. And our greatest worry now is that whilst we always thought that countries that don't quite get institutions right and governance right and don't catch up early will be able to catch up later on. We're not so sure now because we now are increasingly aware of the fact that there is a closing window of opportunity. The window of opportunity or benefiting from global value chains in manufacturing especially in benefiting from the transfer of technologies from countries where wages are going up to countries where wages are still low.

That window is closing and I'll come back to this later on. So we have a real question in our minds as to whether we are going to succeed in uplifting a large part of the developing world and I'll have to say that this is the largest problem that we have globally because if you look at the demographics of Africa and South Asia, in particular, if you look at that large bulge of humanity that is now in their early teens to late teens we really have to worry because if we don't provide them meaningful jobs and jobs which provide some notion of a ladder over the course of your life, we have problems that are going to be far more than economic.

We have a problem coming. Are these problems due to globalization? I'm talking to the converted, but I will and you know we've all cited Autor. Dorn and Hanson or should I say I say more glue Darren, Autor, Dorn and Hanson. And these are impressive studies that tried to tease apart or disentangle the role of globalization versus technology in accounting for job losses in manufacturing.

Very impressive empirical efforts. And by and large, even if you don't look at the full rigor of the studies, just looking around the world the fact that almost all advanced countries have seen a decline in manufacturing employment both in absolute terms as well as especially as a share of total employment does suggest that what's happening has less to do with globalization than to do with productivity and the remarkable advancements in technology that we've seen.

But I would add two words of caution. First, even with that observation, that a whole range of countries are seeing a decline in the share of employment going into manufacturing. It is—when you look at it at a micro level—it is very hard to disentangle the effects of globalization and technology. If a company, fierce competition from China or any other low cost supplier and it hasn't yet even materialized and imports in your own country but it may be competition in a third market or it may be competition that's coming. A well-run company prepares itself. It automates, it upgrades or it might offshore some of its activities.

So in practice. It's very hard to disentangle the contribution of automation and productivity enhancements from the contribution of competition from around the world. And I see that as a first caution that if you take a micro economic perspective of what's going on we have to realize that this is a complex matter and the real issue, to my mind, is not about what percentage is attributable to globalization and what percentage to productivity. But the fact that we've left problems for too long.

The fact that we've let places that are depressed to stay depressed and we've left people who lose their jobs and are displaced, to stay displaced. We've left it for too long. And I'll come back to that in a minute.

A second point, and I should say by the way, that it is striking and this again, very good work done in the United States on this on urban centers. There's something like 300 places as classified as urban centers. Four out of five of them have seen a reduction in median incomes since the turn of this century, since the start of the 21st century an absolute reduction. And many of these communities have seen reductions exceeding 15 percent.

So the geographical distribution of what we call median income and I spoke earlier about the overall slowdown and close to stagnation in median incomes. The geographical distribution is not just a statistical artifact. It involves a different cycle of culture that develops in our societies because people are not shaped by national statistics, they're shaped by the realities around them.

And in a town or city where people stay unemployed for long. Where factories are empty and even residential estates go into disrepair. It's easy to see how you get into a negative spiral that is more than economic. You get into some sort of social hysteresis. And unlike financial markets, which have a habit of reverting to the mean, there's always an equilibration.

When you get into a social culture of decline, there's no reversion to the mean. Conditions perpetuate themselves in this. Without an intervention in the workings of the market, depressed areas stay depressed. And I'll come back to that in a minute as well.

What do we have to worry about. I think we have to worry about both the productivity pessimists' and the productivity optimists' futures. The status quo will be a terrible future. If today's world of productivity and wages is tomorrow's world. That's a terrible future. In fact, I don't see it as an economically and socially sustainable future. To have a prolonged period of wage stagnation for the large middle in a society. And to have geographical regions staying depressed is not a sustainable future and it will alter the quality of our democracy. In almost all mature democracies but neither is the future of the productivity optimists an attractive one.

In other words, you get us resurgence of productivity. The late effects of new technologies finally showing up in the statistics. But on the current workings of the market, that will involve winners taking most, many more people losing their jobs. Productivity will look all right because the numerator is growing and the denominators or jobs is getting smaller. But that's not a sustainable future either. It's not socially or politically sustainable. The only sustainable alternative is one where we spur a lot more disruption in innovation but we intervene actively.

To regenerate people in towns so that new jobs are created and old ones are lost and towns that go down can, at least in part, recover. That's the only sustainable future. We cannot live with low productivity growth and the low spread of innovations that we're seeing around the world. And we've got to find ways of speeding up learning, speeding up the diffusion of new knowledge and practices. But it will be disruptive and firms and people will be displaced. And we have to intervene more actively and not leave it to the market. To enable people to regenerate themselves. And to get into new jobs and to find new product concentrations in cities and towns.

And I think there's more than ample scope from what we see so far at a micro level to augment human abilities with machines software and technology. We're all familiar with how chess champions now lose to the supercomputers.

But what is not so familiar and McAfee and Brynjolfsson have pointed this out is the fact that an average chess player with an average chess program can beat the supercomputer and I say that just illustratively. But that combination of software intelligent machines and other technologies with human abilities, human abilities that we reinvest it is one that we are badly beginning to exploit. And there's tremendous scope in it.

The traditional approaches of both the right and left are not going to get us there. You believe things to the market, we'll see more of the same depressed areas remaining depressed, individuals who start off with a disadvantage living with a disadvantage. By and large for much of their lives. Starting disadvantages tend to multiply themselves and if we leave things to the market we'll continue to see a concentration of winners and a large lagging community of firms in each industry. It's part of the natural workings of today's market, but neither have all strategies of the left worked. They worked for a while but they've exhausted themselves.

Collective ownership failed a few decades ago and redistribution then took over and it appeals to many of our best instincts to want to help fellow citizens. But is a defeatist game. And importantly redistributionists has not only reached the limits of financial sustainability, but it doesn't inspire hope and optimism. And that's one of the reasons why despite a calamitous financial crisis, which was widely interpreted as a failure of markets, the major social democratic parties in Europe have not been able to capitalize on it.

In fact, by and large they've lost hope because the old strategies no longer inspire hope and optimism. So we've got to look past the strategies of the second half of the 20th century. If you want strategies for the 21st century, then these strategies have to be more positive more progressive in the deeper sense and they have to be strategies that improve the workings of markets. Not substituting the markets but improving the workings of markets. That's the only way we're going to be able to bring back or at least increase the chances of mass prosperity for the vast majority.

The only way we're going to be able to restart social mobility and the only way we're going to be able to deal with the medical and social care needs of increasingly aging populations without either imposing an unsustainable burden on the next generation. Or engaging in disastrous cuts and benefits for those who need it the most.

It requires a new ambition for the state. One that involves investing in the social foundations of economic dynamism. One that involves improving the workings of the markets to spread learning and innovation more effectively. And I'm going to give four examples of how this might manifest itself and these are examples that draw from lessons that we already see around the world.

The first has to do with social mobility. And I'd say that's the starting objective of any 21st century government that wants to advance the majority in society. We've got to restart social mobility. And this applies across the advanced world and the developing world.

In the advanced world, the problems we face are in part a result of the success of meritocracy and the fact that it led to waves of people moving well pass the station in life that their parents had through education and through market opportunities. But it was that very success that has now made social mobility much more difficult to advance because the children of the 50s and 60s who had poor parents or parents with a very limited education and who did well have subsequently had children who are now children of parents who are successful and better educated, not just grandparents who are poor and had little education, but parents who are well-educated.

And it's hard to keep pushing get social mobility once you've achieved that major wave of mobility in the first few generations. But is complicated greatly by two other sociological phenomenon, first assortative mating—must have been the economists who invented these words—assortative mating, which is now phenomenon across the advanced world phenomenon in places like Singapore as well. Better educated people marrying their own type not just people with the same social backgrounds but often people who think the same way.

And you see it in the U.S. You see it even in Germany. Even in the relatively egalitarian countries. Even in the Scandinavian countries you see that—assortative mating. Plus, the fact that educated parents today are spending far more time with their children than they used to. Not just kicking football in the park and so on but far more time trying to stimulate those neural networks when the kids are below the age of two. Far more time finding every way of exposing them to experiences that they feel will give them advantage in meritocracy.

And the gap therefore, between the children of better off and better educated parents and the rest who are also trying hard, but that gap is widening. And that's what we're up against. And it means we have to intervene much earlier in a child's life to level off the disadvantages that come from the lottery or both and it will not happen through the workings of the market.

It requires the workings of the state together with community players, together with trained professionals, together with parents. And it's a very different game from running school systems and university systems because you can't over institutionalize it and you can't be overly intrusive in what goes on at home.

But we've got to do something and treat that as a rule, treat that as part of collective responsibility. Level off those disadvantages as early as possible. Because the science tells us how critical that is. The science tells us how critical the first two years are and the first three years are before you even get to preschool. And all leaders in this game, but they are already very useful experiments. All over the world and it's not just in places like the United States where we've had endless citations of the [inaudible 0:52:24] project. In fact, I'm told more citations and research than the number of students who were originally in that project.

But places like Jamaica, places like Madhya Pradesh in India, randomized control trials, which have shown remarkable results amongst children who are stunted or children whose backgrounds would mean a very high proclivity of being stunted. Remarkable results from early interventions. And this is now being replicated in more countries—Bangladesh, Columbia, a whole range of countries.

It is not greatly expensive, but more importantly the returns on this social investment are significant and must be the responsibility of every government.

Second school systems, if not providing for the development of basic schools in a young population was a crime, I must say this is the largest crime of the century. The fact that a large part—a very large part of the young populations in the developing world are not getting what they deserve.

Gordon Brown heads the International Commission on the financing of education and he's put out some estimates. Sobering figures showing that half of the 1.6 billion kids that we have today are not going to get the basic secondary school skills that they need to have a meaningful job in today's world where jobs require numeracy, literacy and some element of problem solving skills.

Half of that 1.6 billion are not going to get it. And I referred earlier to the demographic bulge and its non-economic consequences. It has to occupy our minds. The solutions for that problem are not complex. Selecting teachers right, training them right, incentivizing them right and just making sure that teachers are there in the classroom and in the school and are doing the jobs that they're meant to do. The World Bank and others have pointed this out.

If we just reduce absenteeism amongst teachers and get them to do what they are meant to do. If we reward them well, we'll be able to solve a large part of this problem. But there's another problem in the advanced world, and we should not be complacent about this. I don't need to tell you about the problems in the United States but you know France has a very interesting case and one of the most important Macron reforms is actually the reform to education. The school system and university system.

The French epitomize the egalitarian school systems of continental Europe. Everyone studies the same curriculum at the same pace throughout their first 12 years of education. And if you look at the PISA results which I studied quite carefully. France does okay on average. They've got something like the OECD average. They're not outperforming but they are around the OECD average for their PISA results. But they also have one of the highest rates of social economic determination of students results.

In other words, how well you do depends, to a greater extent, on your social background in France than most other countries despite a very egalitarian system. But I would say it is because of the overly egalitarian system and the failure to cater to differences in starting points, in learning styles, and all the things that good teachers will tell you that France now has this problem. Twenty percent of kids from a lower socioeconomic background drop out of school after 12 years without a certificate and what has happened is an egalitarian system has led to in-egalitarian outcomes.

And we have to confront that very difficult issue in all societies. How much do you differentiate curricula, pace of learning, content of learning so as to maximize the learning of every child. And how do you do it in a way that is not divisive. That doesn't give people a sense of stigma that they're different from the rest is the art and science of educational policy.

But we've got to be willing to confront that and not pretend that the most egalitarian systems would produce egalitarian outcomes. And finally, and I'm going on about education a bit because it's the most central economic and social policy. College education really requires rethinking and rejigging. We've moved into an overly academic bias in college education that doesn't match the needs of a modern economy, doesn't match the strengths and talents of any distribution of population that we have and is not only highly inefficient but also inequitable. In the United States and here I'll be happy to throw a few figures from the U.S. edu because they need to be known and they represent something that you see in many other advanced societies.

Forty percent of those who enroll in college education in the United States do not complete within six years. And of those who do complete, 45 percent of them end up doing jobs that don't require a college education. And the result of this is that this so-called college premium that is much vaunted—you know you read about it endlessly that there's a college premium and people should go to college because they'll earn a higher pay than they otherwise will, has been an exercise in averages that obscures the very important distribution of earnings across the college population.

The fact is the low quartile of college graduates in the US has always earned something that is very close to the median of high school graduates. And in fact, the lowest quartile of college graduates today earns about 5 percent less than he or she earned 30 years ago. We just haven't moved. The college premium at that level has widened a little bit because high school grads have done even worse since the crisis, but it's not a pretty picture. And it's given the amount of resources, public and family resources that are going into college education.

If this was any other industry, it would have been bankrupted a long time ago. Consumers would have revolted. But in this industry the alternatives are not present. And what we have to do is to address realistically the needs of the job market which is still the main motivation of most students for going to college. And it means a better blend of applied in academic skills, a better blend of doing and thinking at the same time. And never thinking that that we we're losing out on soft skills or horizontal skills or the skills of being a civilized adult.

Never underestimate what you learn in teamwork, in critical thinking, in creative thinking, in applied learning. So we've got to take this very seriously and again some very good experiments in the United States both among some universities and especially the community colleges. We are working hard at it in Singapore. The Northern European model is the most advanced in providing this dual education. But we've got to treat this very seriously as a matter of public policy.

The next issue and I really better speed up on my remaining three points we've got to find a way to regenerate cities and people when they're down. Creative destruction is like that. It involves creation in one area and destruction in another. And we've got to find some way of helping those that have been displaced and are going down because they've either lost competitiveness or the products they were making have become obsolete to regenerate themselves. And it can be done. And again the examples from around the world.

Examples in most advanced countries that we need to pay more attention to. Even the United States if you look at the rust belt, there are really two rust belts. There's a former rust belt that is now thriving—Milwaukee, Minneapolis, Pittsburgh Kalamazoo thriving. They went down. They had tough times. And they came back up. And they came back up typically because of local leadership, because of partnerships. And that compact of a leading firm with colleges, local leadership and parents and young people getting enthused.

You see it in France, you see it [inaudible 1:01:50], you see it in Leipzig, which you have to remember was ground zero after the reunification of Germany. Bob Zoellick is somewhere here. He knows this very well Leipzig had a remarkable decline in employment because it was a manufacturing center. It went through really tough times and it's now thriving.

And I've been told that it doesn't matter whether it's SPD or CDU who's governing Leipzig, it's the same system. It's a compact, it's a relationship between employers, colleges and the local political leadership. And Leipzig is now a leader in several fields and a global leader. Part of the old East Germany that got decimated after their manufacturing was decimated after reunification.

We've got to take lessons from all these examples. And one of the lessons is markets on their own won't salt the salt. We have to think hard about the role of intermediaries. In Germany, you've got the Fraunhofer Institutes that take existing technologies, existing best practices and help SMEs to adopt them.

There's the Steinweiss Foundation, 6000 experts that they send into individual SMEs. in a chaotic way, very un-Germanic way, but it works. And you've got to think hard about the role of lead firms because many of these stories are the stories of lead firms.

I recently met in Tokyo with the president of Mitsubishi Heavy Industries Mr. Shunichi Miyanaga and he was telling me about a very interesting project that started last year. They spent about two years planning it and it started last year where they brought together their longstanding suppliers in the aircraft industry for Mitsubishi Heavy Industry and created a shared factory. A shared factory where all their suppliers were going to be co-located with no boundaries, API completely open, IP being shared and a quality assessment firm employed to make sure that everyone was basically keeping up with best practices.

They shared their intellectual property with each other. Too early to say whether it is a model which is economically more competitive than just going purely by the market. But each time I need to sell something I look around the world for the most competitive supplier and I get rid of the old contract and get into a new contract.

But when I asked Mr. Miyanaga why he had done this. Apart from him feeling that it was economically sustainable. His answer to me was simple. It is my social responsibility. They're doing it in Mie Prefecture in Japan, not Tokyo, not one of the leading centers. Gathering together suppliers, longstanding suppliers from around Japan and they felt it was their social responsibility as a leading firm to do this. To spread knowledge, spread knowhow and help their suppliers to keep up with best practices. So that role of intermediaries, that role of lead firms in a different industrial culture is really worth thinking about. T

he second element of it is that we've really got to put new thinking into a whole system of lifelong learning because that's what it's going to take in a world of continuous innovation and disruption. The only way we're going to be able to regenerate individuals is to invest in them at regular stages throughout their lives.

Bouts of learning, job related, skill related throughout their lives. And then all the leaders in this, they're trying hard in Singapore. We've started something called schools future. It's our most important economic and social strategy. But then all leaders in this—learning as an adult is quite different from learning when you're in your teens. Learning in a way that involves short cycles is quite different from learning history and philosophy but we've got to do this and we've got to do it in a way that involves social partnerships because the models that are succeeding so far are ones that involve social partnerships.

It involves businesses, colleges, local government and the unions where there are unions. And in Singapore, we take that very seriously. That partnership of unions, business and government as part of schools future with the unions not being junior partners, but they formed a Training Council to try to marshal this process.

The future of collective bargaining which has hitherto been about wages and protection of jobs has to increasingly be collective bargaining or the commitments by employers to invest in workers in the jobs of the future. Denmark has started this last year for the first time as part of its national collective bargaining exercise. There was a clear commitment by employers in training but that's really going to be what future collective bargaining is about. It's about putting some pressure on employers to play their part and lead firms have to set the tone and have to set the culture.

Next topic very important extremely important as well is where we live. Neighborhoods. Neighborhoods and social urban planning are a greatly neglected area of public policy and frankly that's the secret sauce of Singapore.

That's the secret sauce of Singapore. It's the fact that all our neighborhoods for the majority of our population are mixed neighborhoods. Mixed by ethnicity and mixed by socio economic class. The advantage is that we acquired property, state property early in our national development journey.

Hong Kong did the same but Hong Kong subsequently sold property to private developers. We kept it in public hands to develop public housing and 85 percent of our population lives in public housing. But you won't recognize it as social housing as you might call it in the U.S. it's really like your private condominium housing except that it's public housing that people purchase. And common property is for everyone to use. No fences no gates. The estate belongs to everyone.

And in my own estate, in my own constituency. Between the poorest homes and the best off in incomes in this housing estate the distance is about 100 meters. But you're using the same hawker centers the same bus stops the same subway stations or MRT stations as we call them. You're interacting all the time and critically it involved ethnic mixing in every single public housing block in every single public housing precinct and neighborhood.

As a rule, the stock reaction of any good editorialists will say, oh that's Singapore. It was intrusive, it is intrusive. But remember two things, you either do this upstream or you end up doing messy things downstream. We don't have a Baltimore in Singapore. We don't have a Ferguson. We've got disadvantaged people. People who start off with a disadvantage, some people who are disadvantaged for a good part of their life. What we don't have is single disadvantaged neighborhood because we've mixed everyone up.

And the second advantage is—as a result of everyone being in a mixed neighborhood, everyone enjoys the same rate of home equity appreciation through the workings of the market. And in fact that's been the story in Singapore in the last 30 or 40 years that home price appreciation has gone up at the same rates for everyone not because the government is fixing it and not because of any budgetary outlays. In fact, we've got it for free we get equal home equity appreciation or wealth appreciation in homes for free through intelligent social planning or socially minded urban planning. That's what we get for free.

But we have to think very hard about this. It's much tougher in societies that now have a legacy of segregated neighborhoods, more severe in the case of Paris and its bond deals. But most western societies have this legacy now and we got to think hard about how we erode that legacy. And find ways in which you rejuvenate neighborhoods that are down, mix people more and create the interactions that are necessary for trust to build because it only comes from interactions. It doesn't come from ideas.

And finally, to end up, globalization of course, remains a very important strategy and it's important not just because of the old arguments about access to markets and it allows you to build up a certain scale and therefore specialize. All that is important of course. But it's critically important and this really has been the East Asian story because it's the fastest form of learning.

It's a supply side advantage of globalization that is most critical. It's the fastest way to learn. Learn from buyer specifications that are more advanced and sophisticated than what you were previously doing. Learn from your competitors who've gotten up onto you with using a technology that you haven't yet used.

It's just that discipline of constant learning, that discipline of dynamism that's that open economies bring. And we have to think about how this can be replicated in Africa and other regions where the wholesale strategy of export oriented manufacturing is not available on the same scale. I still believe there's that window, by the way, for Africa to get into export oriented manufacturing. And if you think about it in simple arithmetic terms even if global trade isn't growing very quickly, you can grow your exports and grow your imports for any given level of global trade.

X minus M remains the same but it is better to have X growing quickly and M growing quickly than to have X and M low and not growing because the supply side dynamic is entirely different when exports and imports are growing. And in Africa there's a real possibility of developing an agro processing industry that will not only feed Africa but feed a lot more of the world. And agro processing has the upstream and downstream advantages that a lot of traditional manufacturing had. But I'm not going to go into the details as much as you say that we've got to find a way of replicating that learning led development model.

It wasn't actually about semiconductors and various other components that we are producing. It was just about learning by competing with someone who is better than you or a buyer who has something more sophisticated than what you were previously producing.

So those are those have to constitute the new ambition of the state. We've got to invest in the social foundations of economic dynamism. We've got to help markets work better so that learning and the spread of innovations takes place more quickly. And we've got to find ways in which people, no matter where they start off in life, feel that there's really a fair chance for them to advance through market opportunities, through meritocracy and because they're not just on their own.

But there is such a thing as collective responsibility. there is to borrow a British lady's words. There is such a thing as society, not just individual men and women getting on their bikes. There is such a thing as society and if we do this right, if we exercise collective responsibility the right to we engender a sense of individual responsibility and these things are not at odds with each other. They're not at odds with each other.

You have a society where everyone is contributing and where the dominant theme of any progressive government is not compensating the losers because no one wants to be treated like a loser. The dominant theme is about constant investment in people's abilities and skills so that they can contribute to the larger good. And I think that new ambition and that new spirit has to inspire the politics of the center as well. It's frankly our only chance. Thank you very much.


Adam Posen: We have such a distinguished audience. So I'm asking politicians used to standing [inaudible 1:15:40] and let me open it up for questions [inaudible 1:15:45]. For efficiency's sake, no matter how distinguished you are, please identify yourself. And I'm going to collect two or three questions [inaudible 1:15:58]. We have two roving mics up front, we have a mic in the back, who would like to go first.

Anna Gelpern: Anna Gelpern here at the Institute, also at Georgetown. Thank you very much for your remarks. You didn't mention climate and I'm curious what your thoughts are about that and inequality in globalization. Thank you.

Bill Cline: I'm Bill Cline here at the Institute. I think the stylized fact which was cited both by Bernie Sanders and Donald Trump in the campaign that there's been stagnation of middle incomes for decades is wrong and it is the consequence of the fact that the most cited data on this are the Census Bureau's Current Population Survey which they continue to deflate by an erroneous deflater. It's basically it's a problem of the Consumer Price Index which has a problem. The sparse first period weighted index doesn't capture the benefits of shifting product composition.

Basically, if you use those numbers you get that from the late 60s to 2016. There was an increase of real median family income of only 20 percent. If you do it the right way with the personal consumption expenditure deflator if you adjust for household size as the Congressional Budget Office does. It's a 60 percent increase so I'll stop there.

Antoine van Agtmael: Antoine van Agtmael. I wonder I mean to hear this speech, to me came as extremely refreshing. Frankly, it's something that I haven't heard in a long time. So my question is, do you believe that to take an example the United States is actually turning away from these ideas rather than moving toward these ideas.

Tharman Shanmugaratnam: So on the first question. It is a serious issue and particularly since I spoke about agro processing as a major opportunity for Africa. It's clear that climate change does have implications for agricultural productivity, negative implications. And that has to be a global priority as well. I agree with you.

Bill Cline's observation. I'm familiar with that literature. There is by the way, I'm not going to get into details, there's a very recent NBR study that looks at this and makes the necessary corrections and still finds on a lifetime basis at the very least a very significant slowdown in income growth.

But the other point I'll make is a point from a non-economist perspective which is that we should take seriously the best professional surveys of what people think. And my sense is, people are reacting the way they do not just out of social biases or other idiosyncrasies, but it reflects some underlying reality in their lives. And only 30 percent of people in advanced countries feel that children are going to do better than their parents even if it's an exaggeration and there's some subjectivity that sort of is skewed in one direction more than the other. It still means something.

It is different from the way it was in the 60s. It's very different from before. There has been an epochal shift. So it is not denying your point which is an important technical one. But something has changed and with it is a loss of confidence in the way markets, meritocracy, and open economies are functioning. And we have to listen to what a broad mass of ordinary people feel about this.

On Antoine's point and again, Antoine, what is the point you're making?

Antoine: My point is that yeah—you are just moving in the other direction.

Tharman Shanmugaratnam: So you know this. I'm still officeholder in the Singapore Government and I'm very careful about what I say about any other country. But I would say that there's enough to point to in the United States that is about lessons for the future.

I have visited, by the way, something like 15 community colleges and of course many universities. I visited lots of preschools in the United States including what are called Roland Fryer preschools to see exactly what they are doing and what they are getting right that other preschools aren't.

There are lessons even in the United States that I take back with me and that my colleagues, when we travel, take back with us, their lessons even the United States. And I just hope that your system which is designed to have checks and balances is such that over time, there is some way in which the basic wisdom of the US which is about innovation, experimentation, not being hobbled by too much by tradition. That basic wisdom shows through.

Adam Posen: That's a beautiful note for us to end on. I'm afraid, in part because of our internal declarations we ran a little long. I will invite all of you to join us for a reception out back. I will remind all of you and ask you to spread the word that the Deputy Prime Minister's remarks both a transcript and a video are now available. The transcript will take a day. The video please. Available on the Peterson Institute Web site for all of you to distribute the cite. And let me add my personal thanks as well as those on behalf of the Institute. Tharman, you remain an inspiration and we're grateful to you for being here today.

Thank you.


About This Series

The Stavros Niarchos Foundation Lecture has been presented at the Institute in previous years by such noted economists turned global policymakers as Agustín Carstens, Alan Greenspan, Mervyn King, Mario Monti, Lawrence Summers, Jean-Claude Trichet, Long Yongtu, and Ernesto Zedillo. Our signature annual event is made possible by the generous ongoing support of the Stavros Niarchos Foundation.