If we are smart to keep that to the level where we make the economy, the world economy, more resilient and not it dragged the world into a place where we will be all poorer and we would be less secure. My fear is that we are sleepwalking into this world. But hey, here is Davos, Wake up, do the right thing.
Hello Stephanomics here and this week we have an action packed episode from the World Economic Forum in Davos, where the Managing Director of the International Monetary Fund, Krystallina Gorgeva, has been imploring the world's movers and shakers to resist the forces of fragmentation, stop sleepwalking to a poorer, more divided world. As a Bulgarian who grew up in the Soviet Block, she also had some sombering words on the West treatment of Russia after the Soviet Union collapse. We'll
get to that later. We will also hear why everyone is excited about India and why businesses can afford to give all of their employees a living wage without running the risk of triggering inflation. While I told you it was action packed, but first a taste of a high powered panel I moderated here naturally on the subject of Fiscal Policy, also known as what Governments Choose to do
with taxes and spending. Panelists, you're going to hear a go give as number two at the i m F. The economist key to GOP enough, the European Commissioner for the Economy Paolo Glory, and the former governor of the Indian Central Bank and celebrated economist who is now a professor at Chicago Raam Rajan and I was introducing the panel, I pointed out that when it came to fiscal policy, governments,
at least until recently, had had two luxuries. First, for many years, they've been able to borrow more while spending less on debt interest. Debt stocks in many developed economy have roughly doubled since the global financial crisis, but thanks to falling interest rates, the total cost of servicing that debt had actually gone down. The second great advantage they've enjoyed was that in responding to crises, there hadn't been a big conflict between fiscal policy and monetary policy, and
the economy had a problem. Both monetary and fiscal policy pointed in the direction of being looser. But in the past year, both of those luxuries have been cruelly snatched away as inflation as Hammond households, but also pushed central banks to raise interest rates. So I started by asking geter gob enough how governments were coping with this difficult new era. You have an inflation problem, you have to
deal with that. You're still hit with shocks like food shocks and energy shocks that require fiscal policies to step up. And that's what's make in the current conjuncture particularly difficult. And what's important to keep in mind though, is inflation has helped a little bit with on the death story.
So if you look at what happened to public sector there globally, in it went up to around of gdp and now it's come down to around GDP, and that's because of a combination of the recovery but also because of the inflation inflating away some of that death Now it's still around eight percentage points higher than it was what it was pre pandemic. So there is still a dead problem that countries have to deal with, but inflation and the recovery has has reduced the size of that
increase in the debt. In terms of what countries need to do to manage this difficult trade off. Right now, I would say fiscal policy has to uh accomplished three things, which is one it should be consistent with bringing inflation down, which means at the minimum it should not be expansionary at the overall level. The second thing that fiscal policies should keep in mind is indeed to make sure that you are protecting the most vulnerable and they need to
do that. And when it comes to food and energy, these are very important fundamental essentials for for households, you need to provide support for that. And the last thing is it's absolutely essential this time to have a sound and communicate a sound medium term fiscal framework, clarity on bringing down debt all the time and building up buffers in the medium term. Commissioner Gentle only, this is going
to be the toughest year for European governments. Uh, well, we had a lot of tough it's always going to be top next year. I think we had a three or four years stress test for our records. On the COVID crisis, it was a love affair between monetary and physical policy. Now, of course the situation is completely different. So the challenge now in my view are mainly two If we want have this good coordination between monetary and
physical policy. First, how we are able to avoid that the expenditure the measures to address the energy crisis remain universal and time unlimited measures. Just to make you an example, we spent at the EU level in twenty two one point three of our budget on energy prices related measures. If you look to the draft budgetary plan for twenty twenty three, this one point three goes down to one percent.
But this decrease is based on the assumption that you will gradually phase out these measures, limit them, go to more targeted measures. If this doesn't happen, if we continue the measures that we have in place, the overall burden will be two percent. So we will go from one point three twenty two not decrease into one percent, but increasing to two percent. So this is our first issue
and we discussed. We discussed also with finance ministers. It is not easy to phase out these measures, of course from a social point of view, but if you keep them in place for a too long time when you will phase out, you could have a spike again in inflation. So we have to phase out them, make them more targeted, and this is a political challenge. Second challenges that we need to keep a good level of public investments in
strategic areas. And this is what for me is very encouraging looking to the budget that we have for twenty twenty three, is that public investment is not decreasing, it
is increasing. It is exactly the opposite of what happened after the financial crisis, when we had five or six years of continuously decreasing public investments because we need The other component of this difficult situation is that, yes we have inflation, Yes we have to support the vulnerables, but we have also to continue to support our transition investments
programmers just at the most sort of basic level. The inflation has made it a little bit easier to see debt stocks fall in nominal terms, but of course again completely basic cost of borrowing has gone up. How is this? How do you think fiscal policy makers should be thinking about fiscal policy as a tool given these two things. Absolutely, the size of the debt has gone up tremendously over the last few years. And that's actually an interesting issue,
which is why has fiscal discipline broken down? And so one argument is, soh we've had all these extraordinary crisis and that is true. But we've had three once in a lifetime crisis in the last twenty years, right, the global financial crisis, we've had the pandemic, and now, of course the consequences of the war. Part of the problem that's going on is clearly there is a fractured political consensus in many industrial countries. I mean that is part
of the reason the US overspent. Every constituency got a share of the spending simply because they couldn't make choices. So forget targeted spending. It's universal plus in the sense that what you had was banks which should have suffered losses during the pandemic, didn't suffer any losses. Why because you have the paycheck protection program which went to the small and medium firms correctly, but then it went out through the back door directly to the banks to repay
the loans. So in some sense we've built out everybody, right, and that is the problem. Spending today is highly on targeted, including the energy spending, that is, the spending on power that is happening in Europe. How do we bring it back sort of under control? I think Mr Gentle only expressed concern here. Now what does that mean for the longer term. It means that fiscal and monetary will remain
more in conflict rather than coordination going forward. Central banks are clearly did termined to bring inflation down, but with spending still high, plus the prospect of spending not becoming more targeted over time does imply that inflationary expectations inflationary consequences will be higher for longer. Last point I will make you know there's a lot of you know, need for green investment. We heard again that you know, countries need to do more of it. The real question is
who's going to bear the burden of green investment. The more you focus on incentive structures given by the government, subsidies here, subsidies there. Uh, what that does is put the burden on the public sector balance sheet. The more you focus on regulation, you know, carbon tax or or emission controls and so on, the more it comes on the private sector. Right now, it seems certainly in the US the consensus is it's too hard to put it on the private sector. It goes on the public sector
baron sheet. We just saw the Inflation Reduction Act full of incentives of one kind or the other. So I think this is yet another place where fiscal needs to think very hard, given the breakdown in consensus, given the fracture, are we going to take the easy route and not impose some of the costs of the transition on the
private sector? Take it all in the public sector bandsheet, which means the public sector bands has yet more burdens going forward, which means yet more premium in unexpected places. So undelighted now to be here in damoswit Nandandella County, who is a co founder and chairman of the Indian i T giant Emphasis Technologies, and here at damas of the World Economic Forum. There's been so much negativity about
the world for very good reason. But I have to say I've noticed there's a big exception whenever anyone talks about India. Everyone seems to think India is only up, are they? Well, I'm personally very bullish on India, Stephanie and I think there are a number of reasons for that. India is the only young country in an aging world, and therefore it's going to be the source of talent around the world from many many professions and that's going
to have a huge economic impact. India also having showing good growth is probably going to grow faster than most countries in the coming years. And it's also stable politically. It has great entrepreneurs, It has a very thriving startup ecosystem. Now we have ninety startups in India. And of course India's digital record of both exports as well as its own infrastructure has been very good. So yes, I think
the style all aligned for India at the moment. And we also we had this week, we had this news about China's population shrinking. I mean, the flip side of that is it seems very longly that India is now the most populous country in the world. How does that feel? Well, I'm sure, I'm not sure that maybe it is the popular but more than that is about the proportion of young people. You know, I think we all know about
the demographic David. And when there's a lot of young people and less babies and less old people than countries have economic growth. So India that that sweet spot of demographics and therefore if it does everything right, it can grow at five six percent a year for for many years, and you know, compounded growth asiss values. So I think that's why people are Polish in general. I also feel that Indians are more optimistic and confident about the future,
and that adds to the energy in the country. Is it possible that if you will get old before I guess rich, Well, that's always a risk of developing country. But I think I think if I think in the next fifteen twenty years, if if it is able to grow at a sustained pace of five six percent, and then the compounding of that, we need to per capita incomes rising from you know, three dollars to fifteen dollars in the next three five years, and that's that's that's
much more than middle income country. One of the big debates, and we talked about it a lot of stephonomics, is the shift in the global economy, changing nature of globalization. I don't tend to think of it as deglobalization, but certainly businesses around the world thinking about their supply change, thinking about fundamentally about the relationship with China, especially in the I T world. How how are you thinking about that? Well, I think, once again, I think some of the trends
in globalization and geopolitics is favoring India. First. Is the China plus one strategy for many manufacturing companies because the last rendy years they're you know, sort of highly constrated their manufacturing in China and they've seen the implication of that with zero COVID and so on, so they are all actively looking at options in India is now emerging as a country of manufacturing. So that's that's one thing
that's favored in India. And then the good thing is that the ID business is going to grow continue to grow. It's you know, the ID business. Just to us sense of the speed and scale, it took a hundred It took thirty years for the Indian I industry reach hundred million dollars of revenue. It took ten years to go from hundred billion to two hundred billion, and it will take three years to go from two hundred billion to
three undi billion. So there's a sort of a change of space and and increasingly with the PANDAMIC and the realization that digital technology was central to the world. I think a lot of that action will be in India. Do you think India I don't think there's sounds passions, I don't really passionism, But do you think India's ready for the geopolitical implications of being one of the big
fastest growing economy's most important economies in the world. Had India's response to the Russian invasion of Ukraine, which is involved in ports of oil, Russian oil. I think traveling, you know, but from nothing, you know, I think I think we should. The fact of the matter is European import of oil is much much higher and gas much higher in India. They were done, so I think India had hardly been an earlier importer before this, there was
no import of russtionally to India. But I think the point is that India is I think, turning out to be a very strategic country the world. It's growing markets, is going to attract a lot of companies, Its role in digital is going to be huge. Indias this year is the host of the G twenty, so Prime Minister Modi and other ministers are working on making the next twelve months very hospitable environment for the G twenty to
come and visit. So I think, you know, it's it's all about, you know, figuring out how to get there. But I think, by and large, I think it's going well. The other thing I was going to ask you, that's very striking, certainly to all of my colleagues in India. Is the fact that a Darling and embody are buying for much every asset inside in India. Are we Is there a risk that India is going to become a sort of two company country. No. I think India's farmer
has a huge depth of companies. I mean, if you look at the financial sector, you know you have great companies like I c SC and HDFC. If you look at the you have the Cutter Group, you have Enforces sent with pro and many of the tech companies. The India's farmer industries world class. So I think India actually
hear a very diversified business space. And I think, you know, I think the the the investments in things like climate technology which they are doing is going to be very influential because they are really going to bring world class entrepreneurship to bring energy cost slow, make green hydrosion. And also I think everybody's doing their job in their own way.
And the one thing that someone said to me is straight after the Russian invasion of Ukraine, and of course there's the lots of debate about whether that has accelerated the transition to zero carbon globally or actually retarded it because everyone has been immediately reopening their power they coal fired power plants and other things. But one expert in this field said to me that he had hoped that India's a lot of India's coal might stay in the ground,
and now he thought that was not going to happen. Well, no, I think we said we should distinguish the shotgun From the long term. I think the Ukraine crisis and the whole Russian gas thing has demonstrated the dependence of Europe, for example, on Russian gas, and many countries are going in Europe are going back to coal and nuclear and song. So that I think in the short term reaction to energy security. But I definitely see that the fundamental shift
to renewables is now reaching scale. I mean, you know, the other day I was in Abu Dhabi and they were talking about building hundred gigabards of solar or so they want to prepare for the future. I was talked to some people from Denmark and they were talking about the fact that's going to be having fritrigugar awards of offshore wind in the next seven years. In India, we have you know, a large entrepreneurs talking about going to
very low cost green hydrogen. So I do believe. Now I see actually scale investments in renewable and definitely some of them have been triggered by the crisis. But India has a cop on elsewhere. India has insisted on its right to use its call to fire its economic development. It has that right, But do you think it should exercise right? I think. I mean it has made a huge commitment to solar. Solar is going to be huge, and the solar mission in Indias is a massive mission.
Indians making a huge commitment to green hydrogen. Indians making a huge kind of commitment to evis. I don't know what they mean. But the fastest going cast today in India evs or two wheelers, and the transie even much faster than we think. So I think it's doing all that by at the same time, you know, you have to deliver developed people. Is that the same thing? Why? Why are there we really starting called plants in Europe? The same reason? Right? I'm delighted I managed to grab
in the hallways. Dr Nila Richardson, who's chief economist of the Payroll and Human Capital Management Company a d p UM. I think that ADP. You also produced the main Street macro blog. Is that right? That's right, that's right right up as street. Um, so you're hearing Davos and I saw you were speaking on a panel here about the living wage and you have some access at ADP to some fantastic data. We love big data on stephanomics. So have you done some research on on the living wage?
And what were you what were you saying on the panel? Well, we track wages very closely at ADP, and I do as an economist, because we know that inflation has morphed over its lifespan over the last three years. It's started in the good sector, it's now very present in the service sector in the form of wages and all of that. People get lost in it because there's the sense that since waged growth has been so robust that wages workers
are actually in the driver's seat. They're not. That is a myth that unravels when you look at real wages, which globally has declined by UH many global researchers viewpoints for the first time in decades. It's a real problem. But this problem of living wages started before the pandemic. There is a sense that market wages. The wages that companies pay and even governments pay, don't always keep track
with necessities housing, food, transportation costs, clothing, education. For many workers, they're not making the bare minimum to have a decent standard of living and enter the living wage panel. It's always important because it's a perpetual problem for the world, but it's even worse in a context of high inflation.
And I think that is something we forget when we see these high numbers that looking through looking through the nominal um to see the real governments all around the world of facing this trade off, right that they, in theory do want to help households potential voages, but they don't want to set off a wage price spiral. So how do you see the living wage as part of
that argument. First of all, it's demystifying the fact that if you raise wages for a small portion of your workforce that you are going to set out a spiral. I think that is a myth that we need to
test um. Secondly, and you say a small portion, you mean those at the lower end, right, So if you look at ADP data, we pay over twenty five million workers in the United States, only three point four percent of those workers make at or below the minimum wage, So there is room too, and states are doing the cities are doing this, Some companies are doing this to increase the minimum bar for pay without stoking an increase in overall UH wage gains. And so we can't throw
the baby out with the bath water. But also there's there is a benefit to companies to providing fair living wages, and that is productivity. Workers that are paid fairly or more productive. And if you look at globally at labor force protect productivity, it's been on the decline over the past decade. So here here's the great thing about raising wages.
Not only do you fit provide a fair and living wage, you can also help your company's bottom line by having a more productive workforce when you think about the cost of living and food insecurity. Is the living wage debate different when you think about low income countries where there will be a higher number of workers in that vulnerable category.
It is. It is more felt in developing countries. But we're here at DAVAS and the point of this planel is to elicit discussion from global decision makers who actually can impact from their perch. Maybe it's in an advanced country in New York City or in Munich, but from their perch they can affect the lives of workers around the world. Um. And so that's what I hope that we draw out in the panel, the benefits to multi national countries of paying a living wage everywhere they do business.
And finally, I mean there's a lot of talk care and certainly and we on Ephonomics have talked about how some of the main drivers of globalization, of of global capitalism over the last few decades seem to be going into reverse, particularly the sort of consistent period of low energy costs, transportation costs, calm geopolitics, and of course low wage peace was a big element of that. Do you think that wages, that that labor is going to be a more more expensive input for businesses in the years
to come? And where does that leave workers? Is it a great new time for workers? Coming down the track in terms of the US and Europe, labor shortages will persist, especially here in the US. The expectation is that the next decade of employment growth will be half of the previous decade. And uh, the mirror or the image of that is your So labor shortages will continue. That means wage pressures will still be there, and wages I don't think will fall uh in terms of growth low enough
to be consistent with two percent target inflation. So there is going to be a new world of higher inflation and more robust wages. Where does that leave the worker? It's really a race against time. Will inflation moderate enough and wages stay solid enough that they that workers actually benefit from lower inflation. We don't know the yet. Globally they haven't, and are many low income workers they haven't.
Their wages haven't kept up with inflation. So the hope for the worker is the same for the hope for the global growth. You need to see inflation moderate. At the same time, we need that productivity, investment in human
capital that keeps wages growing for the right reasons. So I had wrote a piece for Business Week looking through the beginning of the year, and I was that was my end point, that you know, if getting if inflation is under control, in the next year and a half, everything gets easier, everything we might have wanted to achieve. Nila Richardson, thank you so much. It was a pleasure. Thank you, I promised you. A last word from Kristina Gorgeva,
Managing Director of the IMF. What you heard at the very start of the show with some of her opening comment on a panel I didn't moderate entitled keeping the Lights on amid Geopolitical Fracture. That's a van typical title for a panel around here, and there was some interesting discussion. What really stuck with me was the final word, which the MD insisted on contributing right at the end, a message based on her personal history. It seemed right from
the heart. If you look at twenty two, the biggest, single, biggest factor affecting the world economy was this senseless war. What I know about Russia is that one of the pitfalls of the last decades was the fact that there wasn't more concerted effort to integrate the Russian society, the Russian people within the world community. I was country directed for Russia based in Moscow in the best days, when Russia was reforming and there was g a to remember
these days, yea. And at that time, when you ask the Russian people who they are, how they define themselves, the majority would say Europeans, even the Russians that live in the Asian part of Russia. When you ask the Russian people today, they say we are different, We are a different civilization, were different from from the rest of
the world. So if I draw one lesson is to remember that, yes, policies are defined in the high corridors of power, but when a population of a country subscribes to policies that are the treatmental to their own interests, there is something for the world to reflect on and perhaps think about ways in which we can do more people to people exchange. In this horrible thing Russia has done, there is a bit of kind of vilifying all Russians. We roll the moll in that pot, and we have
to be careful about it. There are so many wonderful, smart Russian people that don't agree with these policies. Are these Russian speakers in the audience anybody? There is a very famous Russian song and when the war started it spiked into my my mind. That is about Russia not wanting the Second World War And the song is usk by night? Do the Russians want a war? And the whole notion of the of the song is not they don't. What happened, why did it happen, and how we can
put an end to it. I want to leave us with this uh notion that that even the hundred years war and it where at the negotiating table the sooner we defined space, as everybody here said, for this horrible war to end, the better for everyone and of course great news for the world economy. Well, thank you, m right, your roof need what you should not see, you perty buddy you video. That is it for this action packed devils compendion. We'll be back for our final episode of
the season next week. Who In the meantime, please rate us wherever you get this podcast and check out the Bloomberg News website for more economic news and views on the global economy. This episode was produced by Yang Yang, Samma Sadi and Magnus Hendrickson, with special thanks to the World Economic Forum. Is a copy as rag Ram Rajan, Paolo gen Aloni, Nan Daniela Khani, Nila Richardson, and Kristina Nagorgieva.
Mike Sasso is the executive producer of Stephanomics. Kakat e rufski kakat e rufskie hutcha ruf kiel by me