Driving the New Economy

head of Google, Eric Schmidt. That was just breakfast. The place is teeming with business leaders and global thinkers, along with quite a large number of Chinese officials. To stimulate debate, we at Bloomberg Economics produced a book of original research on the global economy, including the Bloomberg Drivers and Disruptors Index, working out which countries are going to succeed in the new era for the global economy. In a minute, you'll hear a lively session I hosted here talking about that

index and the research that went into it. But first a chat with one of the many, many interesting people here, Lord Nicolas Stern, an economist now and many years at the London School of Economics, who was the head of the Government Economic Service in the UK back in two thousand and six, when he chaired what continues to be a landmark review of the economics of climate change, the Stern Review. Lord Nicolas Stern, it's great to see you. I'm struck at this conference and lots of other things

I go to. Now it's a very different debate about climate change than even a few years ago, let alone when you were chairing the Stern Review, which came out in two thousand and six. So and you're sitting here. You've obviously remained involved in this debate. But if you just sort of the perspective between now and then, would you say things have genuinely got better in terms of people's unders realistic understanding of what needs to be done

to combat climate change or is it just louder. Something has got better, some things have got worse. Um, the science has got worse in the sense that it's still more worrying now, partly because things are coming through faster than we thought, more severely than we thought, but also that emissions have gone on rising, temperature has gone on rising, so that's more worrying. The understanding of these issues. I think is genuinely greater than it was before thirteen years

ago when the Stern Review came out. I doubt if climate change was taught very much at schools and now right across Europe, and I guess in many parts United States and India and China it is taught at schools. Greater Tunberg now sixteen say she started learning about climate change at eight? Where from in school? So I'm university professor.

The students coming through have all seen the subject of climate change discussed for several years of their education and their formative years, and they're putting pressure on the rest of us now. And there's some people who were a bit skeptical thirteen years ago who thought it was the best marginal Larry Summers, Bill Gates been. I remember I spoke to Bill Gates in two thousand and six, two thousand and seven, just after it come out, and he thought it was in some sense a diversion from the

really big problem of poverty reduction. And it is absolutely a big problem poverty reduction. But we're seeing that climate change is a great destroyer of livelihoods, and that there are different ways of doing things which are becoming increasingly attractive. Restoring degraded land captures carbon in the soil, increases productivity,

makes you more resilient against difficult weather. So I think that relationship between poverty reduction climate change is seen rather positively now, where perhaps a dozen years or so ago, good people who were interested in reducing poverty thought, oh goodness, this is an environmental diversion from our real task that I think has gone down enormously, and you pushed back. Actually in the session we were just in, that was quite a long session on climate change, and then there

was a conversation with Bill Gates. But in that earlier session you pushed back on the implicit assumption of many of the speakers that there was there continue to be this trade off between economic growth and combating climate change. How is it that people are misunderstanding that, because at

some level there is there can be a tradeoff. If you think of the carbon content of human activity as being in a fixed relation to the outputs of output goes up by ten percent carbon emissions go up by ten percent, then there actually there is a trade off. But of course the whole point of this is to dradic radically drive down the carbon content of what we do now. As you do that, it comes with innovation, discovery, investment,

and growth. It drives down air pollution and water pollution, and that gives you cities where you can move and breathe and be much more productive and much more cheerful actually too. It um protects the natural capital and natural capital, you know, our forests and our oceans and our water, which are key parts of our productivity as human beings,

are health as human beings, happiness as human beings. So if you see that process of driving down carbon in relations into output as being creative and innovative in this way, as bringing all kinds of benefits around health and so on, which are good for productivity, then you see that actually investing strongly in driving emissions down to zero is the

growth story the twenty one century. Well, it's interesting when you talk about growth because we have lots of conversations on this podcast about the state of the global economy and particularly worries about slow down in the global recovery leading to another recession, which policymakers won't have enough tools to confront because we know we've sort of got closer to maxing out MONETROSSI and A constant theme which has also come up at this event is that governments are

going to have to lean more on fiscal policy. It strikes me that a lot of ministers policymakers across Europe who hear the demonstrators out in the streets talking about the environment and can see the need for fiscal stimulus, will now be looking for ways of having fiscal stimulus that's also going to get you closer to that decarbonization. Is that is that going to be Is that too good to be true? Or do you think there are

some genuine win wins there. It's an argument which we have to make, and yes, I do think there's some genuine win wins there. The world is demand deficient, interest rates on the floor, we have wonderful investment possibilities, we have loads of saving. So what we have to do is to have economic policies which draws through the investments. That means good policies in relation to carbon investing in R and D, stable institutions and so on that will

draw through the investment. And we have to organize our finances that we have the right kind of finance in the right place, on the right scale, at the right time. And we can do that, and we can see how to make both things happen, and that will give you an increase in invest men, very good kind of investment, and the savings will come in the finance that investment.

And it's a wonderful story of investment for growth, investment for increasing demand, a Schumpeterian story, the rate economic his story, and of innovation and discovery. It is a story which increases demand, accelerates the rate of technical progress, and is sustainable because it's a structure that doesn't turn in on itself and destroy its environment like a high carbon growth story would. So this is actually in our hands, and it would be overwhelmingly negligent if we didn't take that

opportunity now. And I think that's increasingly seen And okay, so what if I put another layer on this. You're a policymaker who thinks, yes, I want to have more spending, I want to do it in a way that helps de carbonize. Oh and by the way, there's also a lot of concern around rising inequality. So I have to make sure that those investments have a progressive effect as well, that they don't damage the poor the way lots relatively speaking, the way lots of innovation and lots of other forms

of economic growth have in the last few years. Can you give them that as well? Can you give them a progressive, a pro poor way of supporting the environment. We absolutely can, but it means we have to run out of policies much better than they've been done in the past. But we can see how to do that. Part of the story. Suppose you have a carbon price. In other words, you stop letting people to do very damaging things for nothing, so you abolish the subsidy associated

with that, another way of looking at it. But you have the carbon price and you have revenues. So what do you do with those revenues. Well, one thing that you should do is make sure that the poorer people in the population are protected, and you can actually make them better off. So if you return some of that money to the population, but make sure more goes to the poorer population and they are actually better off as a result. But you have to do it, and you

have to do it consciously. Secondly, we're talking about a restructuring of our industries. We're going driving down to zero carbon everywhere in the next thirty or forty years, and that means that you do things very differently. Some things you stop doing, you stop coal mining, and these are the people who are specialized in making pistons for cars. The car makers might employ the same people, but the people who supply them with bistons would be having to

switch to other things. These are dislocations. This is radical change and we've been really bad in the past. If you think of the northern towns in the UK applies to other countries too. But if you think of the northern towns in the UK, movement from manufacturing to services, that's what happens as people's incomes go up and they go out to eat and they go on holidays. If you look at labor saving technical progress, that's been fast and it's going to be fast in the future with

a I and robotics and so on. If you think of globalization and the changing international division of labor, three trends which they'll have their ups and downs, but they'll continue. And then you whack them with a global financial crisis on top of all that, and you get dislocation which is very geographically focused. And we have to take that on directly. And it's not just from climate policies. It's actually probably bigger from other kinds of things are there

happening as well. I am fascinated by what you think when you look at the US presidential campaign as as a serious economist who has also done all this serious thinking around climate change. On the one hand, you have almost a familiar site, although surprising in some ways, but you have an administration that's kind of in denial about

climate change. But on the other side, you now have a Democratic Party in Democratic candidates who are gathering behind really very dramatic efforts to combat climate change that could involve of destroying eliminating a large chunk of the U S energy business almost overnight in the case of Elizabeth Warren.

When you see that, on the one hand, you've got more serious proposals by leading presidential candidates than ever before, certainly more radical ones, but um possibly a worry that they are not realistic in what you can actually achieve in a five year or ten year time frame. What do you think. I think you can put in place strong policies, and if you have strong policies that people

believe will continue, then investment comes behind those policies. So I think good policies which people find credible over the medium term, would inly would lead to important investment booms, and that would lead to rising demand and stronger growth, and it would be highly productive growth because a lot of that sufficiency. But it would also, and this is what we're discussing just now, it was also carry with

it dislocation. So your policies have to be not simply bringing through this very attractive, highly productive, cleaner investment, but at the same time they would have to be explicitly oriented of our managing dislocation. And if you have one without the other, well then you risk having neither. Well, that's so, and that presumably is your concern when you look at some of these more extreme proposals, if they're

not well thought. Through the Green New Deal, which has a very short time frame on it, is there a risk of a backlash if you try and do too fast. Suppose you tried to go zero carbon by twenty ten years from now. Would all the internal combustion cars be off the road? Ten years from now, would all the gas fired boilers be out? I think about eight million of them in the UK. I don't know how many there are in the US. Would all those be out in ten years. I think it's hard, and thank you

very much, very good. Well, I'm delighted to have found another eminent person in the corridors here at the New Economy Forum. Ju Min, former Deputy Managing Director of the IMF and former Deputy governor of the Chinese Central Bank, now running a Sinkhwai University's National Institute of Financial Research. I should say, we're hoping that this is going to be quiet. That we've just found a corner of this conference room, so it might not be quite the same

broadcast quality that we used to doctors. You you have been and I have known you over the years observing the international system, both from the I m F and before that at the People's Bank of China. I spoke to the chief economist of the World Bank a few a couple of months ago, Penny Goldberg, who was a great trade economist. She says she's changed her view recently. She thought that this move away from globalization was temporary. Now she's not so sure. Maybe we will we have

seen the peak period for global integration. What do you think the globalization will continue? This is driven by the human nature, driven by the product productivity and growth and

efficiency on the Yes. Currently, we saw so many things in the sort of on the globalizations, particularly from some major economies, and but I don't think they were stop the tram if you're looking for the the statistics, he was in the past eighteen months after US trying to trade fractions the US inport from trying to drop ten percents and trying to import from US drop ten percents. That's that's the results. But both countries doing quite quite okay.

China still have a sweep percent of trade growth, US still really more. That's the same US trade deficity even wider from two point nine percent of GDP to sweep on two percent GDP today on So it's just say,

I mean the whole water still in the course. Trade slowing down, have its own course now because the technology movements, because the service trading become more important than it then the goods trading, right, And obviously the current populism has an active impact on the globalition, but fundamentally I don't think they would change because you know, sweet quart of people living in the emerging market and income countries looking for the better good life, and the people in the

rich country looking for a good quality and low prices products as well, and the product surprise chair and become longer with the technology, and I will see you will see more labor divisions and in all these sections, um So in their sense, I think that that's the the bit tranpitway for the whole war, and we're just in

this very short term periods for the bumping periors. I guess one of the ways, and I've heard do you say that on one of the panels yesterday, is very interesting to point out that traders continue to grow and actually we know that the the other economic policies in the US at the moment, that the stimulus that came from tax cuts and other things, we're naturally going to increase the amount of US even as the administration was trying to cut it. Yeah, that's s and I basic economics.

But the one thing that I think could change the game. And I think it's interesting, especially from your perspective understanding the banking side as you do. Um people do worry about the trade war spilling into the international financial markets, and we've seen, in fact, we had one of the bloomberg scoops of the last few months has been the news that in the administration people were talking about wanting to put limits on US investors investing in China as

part of the trade war. Is that something that you Is that something people are worried about here officials here in China, And do you think it could spill into that? Right? Well, we were observed the US government proposed some sort of restruction on US financial in siting investing Chinese company in the Chinese market, right for that, But in the real world, in the past twelve months, US capital actually moved in more than ever before in Chinese financial market and particularly

in the tex sector. It's a very interesting The Chinese money moved to the US tech sector slowed down dramatically, incurse specific, but US money moving into the China tax actor increased quite a bit. And the US not the only US that global capital moving into the Chinese financial market in terms of acting market and financial market double the market shares in the past turn month. Do you finally, I know that you were sitting in the IMF for much of the response to the global financial crisis and

see in how people were able to coordinate. Policymakers were able to come together, For example, at the G twenty meeting in two thousand and nine in London in favor

of fiscal stimulus at that time. Do you think there's been there has really been a change in the capacity for international cooperation or you know when you walk around events like this, do you think actually all the same people are still talking together even with some of the noises coming from the US, and there's a big structure change. I mean the first issues in twos age what are

the high risk of sector is a banking sector. It's a household death sector, right because the market you know, sub ground things and the banking sector there's a bat after ten years the banking sectors and which is stronger than the saver and the household is okay, but risk shift to wear to non bank informational situes. The s S Manu companies ST. Manu Company in the yet in ideas it today it's almost the same size of a

banking section now is absolutely amazing. There was only only thirty percent of banking secuting in tools on the old age. So you see how fires and that the company is investing in shares for people's questions and so the exposures are huge, right, so non benefits, the risk is a much higher higher land tools are not for sure sector.

The risk exposure is higher ensures on the old age, you know, they have a higher desk solvent deaths risk is much higher the government the condess, right, I mean in tolson A, the government test is rather level, right, I mean, but today that everyone at a roughly death level, right GDP. So, so you're right, and we do have a very different risk structure compared to the age. The policy spaces rare limitings and most importantly in Tolson A,

the global political corporation us alms apart. So I think that would be very, very difficult to the others. Let's say he doesn't shoo me in. Thank you very much, thank you the tap. I mentioned earlier that Bloomberg's economist did some original research for the New Economy Forum, including a new global Drivers and Disruptors Index, which we put in a report for the delegates and published online this week. Or we just had a panel session about that research,

featuring our own economists and outside experts. I've just got time to give you a taste of it here. You're gonna hear first from Bloomberg's chief economist, Tom Orlick often on the podcast. He's going to be explaining the thinking behind the Drivers and Disruptors index, and we then have a response from the author and former chief economist of HSBC, Stephen King. The main takeaway from our search is that the path to development is getting narrower and harder to follow.

In general, low and middle income countries are less well positioned to deal with the disruptive forces which are reshaping the global economy. Let's just think about why that is for a second um. In general, low and middle income countries try and develop by exporting in a world moving towards protectionism. That's getting harder to do. In general, low and middle income countries either have a big factory sector

or they want to have a big factory sector. In a world where the range of tasks that can be performed cheaply and efficiently by machines is ever expanding, Having a big cheap workforce isn't the advantage that it used to be. In general, low and middle income countries don't have very good communication infrastructure and don't have a very strong services sector. So low and middle income countries are not well positioned to seize the opportunity of the digital economy.

Many low and middle income countries are already quite hot and have a large agricultural workforce, which means that they face some significant risks from climate change. And many low and middle income countries have high inequality, low social mobility, ineffective institutions for government, and high crime rates, which in various configurations mean that they will find it more difficult

to ignore the siren song of populism. So across automation, digitization, protectionism, climate change, and populism, low and middle income countries are less robust to the challenges and less well positioned to seize the opportunities. And we think that means the path to development is going to get harder to follow. There will be less countries moving from low to middle income and from middle to high income. Let me illustrate that by spending a couple of minutes speaking about the case

of China. Um So, China scores extremely well on our drivers Index. If we think about the traditional drivers of development, there aren't many countries that have done it better than China. China has a modern infrastructure, China hasn't a can do government. China spends a huge amount of money on research and development. On our Driver's Index, China ranks as the fourth best economy and the best emerging market by a wide margin. But when we think about those disruptive forces that are

reshaping the global economy, China faces some significant challenges. China is significantly exposed to the risk of protect action is um. China faces risks from climate change. China's relatively high degree of inequality and low social mobility could pose a medium term challenge to social stability. Does that mean China's development story is over? Absolutely not. China's policymakers in the past have proved to be extremely smart in finding solutions to

difficult development challenges. What it does mean is that for China and other lower middle income countries, the path ahead is going to be harder than the path which they've just traveled. But I thought I just focused a little bit on the on the populism part of the story, because Tom, you were saying that one of the big areas of vulnerability was the popular isn't beginning to come through in lower middle income countries, And of course you can.

It depends on your definition of populism. P P looked at, say, I know, Brazil or Argentina, or Mexico, maybe Turkey, maybe the Philippines. There are a whole range of countries where you might say that there are populous leaders in place who are pursuing policies, that it was a little bit different from what's happened in the past. But I think it's also striking is that some of the countries who identify as being in a stronger position overall also I

think are beginning to experience feelings of populism. Um. In the case of the UK, admitally the political parties are just as strong as they always were, but the nature of those parties is different, I think from how it has been in the past, that both the Conservative Party and the Labor Party going into this coming general election both I think much more populous than was the case

maybe ten twenty years ago. The same is true in parts of the rest of Europe, and you think look at the politics in Italy or France over the course of the last few years. Maybe the incumbents have remained non populous, but there's certainly underneath the sort of surface bubbling away a sense of populism beginning to come through.

At the same as broadly true of the US. So I thought what I could talk about was was the idea that it's not just lower middle income countries that have suffered from populism, but it is countries whereby there are parts which have been left behind, where there's regional imbalances that have emerged that have led to this beginning

of populism. And if you imagine the map of Europe and break Europe down into tiny little subregions and not looking at country by country comparisons, but tiny little subregion comparisons, and then think about those parts of Europe that have seen the biggest increases in living standards relative to everybody else, with the biggest increases in the League table of living standards, and those parts of Europe which have seen the biggest

relative declines in living standards, you get a quite interesting map. The first part of the map, the biggest increases. Most of it is a kind of central spine right in the middle of Europe, like a kind of re built

Holy Roman Empire or something like that. Of course, it's partly associated with the fall of the Berlin Wall, the removal of the Iron Curtain, and the creation of almost like new economic synapses in the middle of Europe, new markets being created which have led to tremendous gains over the course of the last twenty or thirty years. But

also in Europe. It's a kind of geographical periphery um, a sort of literal geographical periphery of parts which have been left behind Greece most obviously for all sorts of sovereign reasons, big chunks of Italy, and interestingly quite big chunks of the UK. UM. So I come from Greater London. London has done incredibly well over the last twenty or thirty years. We became from the northeast of England, or

from West Wales, you came from Cornwall or Devon. You haven't just fallen back relative to the rest of the UK, you've fallen back relative to the rest of Europe by quite a dramatic degree. So one example here is that twenty years ago West Wales in capita incomes was significantly richer than say, Bratislava, whereas today Bratislava is signal a frequently richer than West Wales and just dwelling on the

UK for a few seconds more. And when you look at the patterns of voting in twenties sixteen for Brexit, it was largely those geographical regions that have been left behind voted to leave the EU, not because necessarily we're anti Europe, because they wanted to feel they wanted to have some sense of change, some sense of of shift.

Other countries. France another good example, interesting example France, because French incomes overall are above the European average, as you'd probably expect, but if you actually break France down into its subregions, um, you find that of about thirty regions or so, only two have incomes above the European average. The Elder France, of course, dominated by Paris and ron Alp, which is dominated by Leon Courcheval other lovely ski resorts, which has done also very very well. But every other

region of France has incomes below the European average. And you sort of think about the DJO, and you think about support for the PEN in parts of France, you think, well, that there's a reason for that in one sense, which

is the sense of being left behind. Thanks Stephen, and I think you've highlighted some of the things that um, you know, we thought about and doing the report, but I think we would also revisit if we were thinking about how to develop this index, because the things that have been sort of lessons of the last ten or

twenty years. Certainly, when I think of what we focused on when I was first learning economics, there was a lot of concern around the flow of goods and to some extent about the opening up of the capital, and we underestimated what the flow of even up till now, what the flow of labor was going to do in terms of its political impacts. If you look across Europe, if you look at the US, how that how immigration and flows of people have now unexpectedly been driving political dynamics.

But I think the other the other two things that have kind of come back to bite us is the importance of the good and the bad bads of having agglomeration benefits, the fact that city these have become places that were successful have become more and more successful and as you suggest, leaving behind other parts of countries and regions. And I guess related to that just that there has been a really strong geographical dimension to growth and to

the political impact of of growth. And if you look at as you said, if you look at Europe, you know it was one of the things that the British used to sort of say, gosh, the Eurozone such a bad idea. How can you have these different countries with

the same currency with such large gaps of income? Of course, the gaps of income between the poorest and the richest region in the UK there is actually a larger gap than between or as large as any gap between other different parts of the Eurozone, and at least to the Eurozone had and albeit very painful mechanism for trying to

narrow those gaps. In the UK, those gaps were never really addressed successfully and festered and worsened um and one of the consequences, as you suggest, was at least a significant chunk of the votes for Brexit, which which made the difference in that In the end, thanks for listening to Stephanomics. We'll be back next week with more on the ground insights into the global economy. In the meantime, you can find us on the Bloomberg Terminal, website, app

or wherever you get your podcast. We'd love it if you took the time to rate and review the show so it can reach more listeners. And for more news and analysis from Bloomberg Economics during the week, follow at Economics on Twitter. You can also find me on at my Stephanomics. This episode was written and reported by b Stephanie Flanders. It was produced by Magnus Hendrickson and edited by Scott Lamman, who is also the executive producer of Stephanomics.

Special thanks this week to Lord Nicholas Stern, Tom Marlick, Chang Hu, Stephen King, mar Jun, Kelly Bell Nap, Pete Chan, and everyone involved with the Bloomberg New Economy Forum. Francesca Lee is the head of Bloomberg Podcast. Mm hmmm.