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The globalisation: where are we coming from? Where are we going to?

The speech of Pacal Lamy, Director-General of the World Trade Organization and Honorary President of Notre Europe – Jacques Delors’ Institute on the occasion of begging of academic year of Sciences Po school on 31 August 2012. Pascal Lamy spoke about major developements of globalisation over past four decades and the future trends.

|   09/10/2012             |   Pascal Lamy             |   Europe in the world
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When preparing my address here, I went back to 40 years
ago, when I found myself in the place you occupy today, and I asked
myself what I would have liked to hear from the person then in this
position.

I now know what I would have liked: an
approach to understanding the world, some keys to comprehending it, and
to learn how to make a start. Also, if possible, how to include some
action that would go in the right direction.

You are of an age at which, I hope, you have started to think about the right path to be followed. I am therefore making some suggestions to you
for an approach, just one among many; no doubt, very different to
that which an American, a Chinese or an African would propose in my
place. My approach is backed up by the professional experience I have
had the privilege of gaining and which involved me in several of the
major events of the past 40 years. This inevitably leads to thinking
about the future, taking into account the decade spent serving the
French Republic, the 15 years I devoted to building Europe or the
eight years at the head of the World Trade Organization.

An approach and some keys, therefore. You
are not here to discover a revealed truth but to learn how to build your
own truth. The truth that will enable you to decide what your
professional commitments will be in the future, and these are not so
much a matter of knowledge but rather of competence.

It is here, during your studies, that you will find the tools needed to enlighten your choices as men and women.

Let us first look together at the past: the
salient events that marked the time when I was in your shoes and the
broad trends over the past four decades. After that, let us consider
the future: what is emerging on the horizon up to, let us say, 2030.

Going back 40 years : 1972. This was the
year when a President of the United States, Richard Nixon, visited the
China of that time, led by Mao Zedong. It was also the year of the
Stockholm Conference, the first international conference on
environmental issues — pollution according to the terminology in vogue
at that time. It was also the year of the peace negotiations that
brought the Viet Nam war to an end and, lastly, it was the year of the
SALT Treaty limiting strategic weapons. I was the same age as you and I
remember that Spain, just over the border, was still under Franco’s
dictatorship.

The previous year, 1971, was marked by the
end of the convertibility of the US dollar to gold and abandonment of
the fixed exchange standard system adopted at Bretton Woods. 1973, the
following year, was the year of the first oil crisis following the Yom
Kippur war.

It is of course never easy to suggest that
one year rather than another was more decisive without bringing down
the wrath of historians. Let us acknowledge, however, that these few
events contained, at least, the beginnings of a considerable amount of
reflection and of developments that were to follow.

2012: the fifth anniversary of the crisis, if
I might say. It is also the year of the geo-economic inversion
accelerated by this crisis: for the first time in history, output in
so-called developing countries overtook that in countries termed
developed.

These few remarks are an indication of the
major phenomenon that has dominated these decades: growth, economic,
financial and human interdependence, which has extremely numerous and
complex ramifications, and is termed globalization. This phenomenon is
both the result of and the catalyst for what Jean Michel Severino
called in a book I recommend that you read — one of the best works on
the contemporary world — “le Grand Basculement”. What this book does
is to emphasize the importance gradually acquired by developed and
developing countries, but also the emergence of economic, and hence
political, powers such as China, India, Brazil, but also Indonesia,
Mexico or South Africa, just to mention a few.

This globalization has had two major
effects. Firstly, substantial economic growth, which was stable in
those years. Roughly +1.5 per cent average per capita growth in GDP.
Then, what is even more important, a notable decrease in absolute
poverty. During this period, the number of poor people in the world
fell by half. From roughly half the world’s population to one quarter.

There has also been progress in gender
equality on every continent. Nevertheless, this period also saw
inequalities in the world on the rise, less between countries but more
within them. We therefore face a dual paradox: progress at the human
and social level that is not translating into lesser inequality. A
paradox which the political family to which I belong sees as an
injustice. I will not at this stage take up the complex philosophical
debate intended to determine whether all types of inequality are the
source of injustice or whether all types of injustice give rise to
inequality. This is an ideological postulate that I take upon myself.

Globalization confirmed by the predominance
of an economic system that I would term Ricardo-Schumpeterian, driven
by technology. The major technological revolutions have made
globalization both possible and productive. Over the period reviewed,
these changes have essentially been based on the rapid expansion of
information and telecommunications technology. Forty years ago, there
was not one single mobile telephone in anyone’s pocket. Today, there
are six billion.

The effect of this technological catalyst has
been the striking and unprecedented reduction in the cost of distance
and the cost of trade. The fewer the impediments, the more trade
increases.

Another technological revolution that has
totally overturned the nature of international trade: containerization,
which started in the years 1950-1960. Over the period in question,
this technique halved the cost of transport per tonne! From this point
of view, the inventor of containerization deserves to be placed on
practically the same level as the inventor of the internet, the steam
engine or electricity.

This system leads to incredible efficiency,
increases in productivity and hence growth — the growth of an economy
being essentially the aggregate result of various forms of improved
efficiency. According to Ricardo principles, this system achieves the
collective optimum level when each component specializes in the area in
which it is the most competent. This theory is valid both at the
individual and national levels.

In order to understand how the system works,
Schumpeter’s theory according to which efficiency is produced through
confrontations which redefine each component’s competitive position has
to be taken into account. These confrontations redistribute the cards,
the skills, the advantages, resulting from increased trade, whether
national or international. The past 40 years have, to some extent
validated the theories of Ricardo and Schumpeter, whose portrait hangs
in my office in Geneva. Neither one nor the other could have imagined
to what extent their system was going to develop.

The economic and social consequences of this
efficiency, together with the confrontations that gave birth to it, are
even more marked as we move towards the knowledge economy, to which I
shall return. This type of economy spreads comparative advantages
differently and attaches greater importance to knowledge, talent and
skills.

At the geopolitical level, and here I am less
of an expert, globalization is accompanied by a diminution of global
tension but an increase in local conflict. Today, most cross-border
conflicts have virtually disappeared, while those wars that signify
chaos, terror or death for thousands of people are internal conflicts.

This period has seen global spending on
defence stabilize. This might be seen as good news. It could also be
considered bad news because if there are no longer any tensions of the
type we knew 40 years ago, why still spend US$1,700 billion each year
on weapons?

The decrease in global tension corresponds to
a lowering of ideological tension. As I mentioned above: 1972, the
end of the Viet Nam war, which was the last armed confrontation between a
capitalist-based system and a communist-based one. Of course, the
major geopolitical event of this period was the fall of the Berlin
Wall, the result of erosion, unravelling and then collapse, notably
economic collapse, of the communist system.

We are, however, still not living in the
uniform world referred to by one or the other American geopolitician.
Globalization is indeed an extension of market-led capitalism, the
dominant model. But it is not meeting with the adhesion promised by
its proponents because of the difficulty of achieving growth that can
be transformed into well-being. This is where the difference between
economics and political economy lies.

From a certain point of view, economics can
be considered a science; political economy can certainly not be
considered such, the essential element being, ultimately, the benefits
which men and women can derive from this economic growth.

This 40-year period is ending with the
present crisis and you have seen its unavoidably global nature. It
started in 2007 in the United States in one particular sector of the
financial industry. I am one of those who believe that the origin of
the financial crisis, which then became a global economic and social
crisis, lies in lack of governance, regulation, and control of an
industry that is yet more globalized than others.

It is not by chance that the system collapsed
in a sector that lacked global governance. The issue had, however,
already been raised, for a long time and on several occasions. When I
was a Sherpa of the G-7 and G-8, between 1985 and 1994, heading
Jacques Delors’ office at the European Commission, the question of
adopting global rules to supervise global finance was raised
regularly. Some members of the G-7 G-8, France, Germany, Japan,
Canada, aware of the risks, wanted to tackle the problem. Others, on
the contrary, feared that reform of the financial industry would impede
innovation and bring to a halt the very powerful impetus of
globalization. Why was no decision taken at the G-7 G-8 at
that time? No consensus! The principal problem in a system of
international governance is that consensus is the rule so there are
considerable benefits in taking no decisions.

To summarize, globalization came up against our collective incapacity to control the risks.

Let us now look to the future, your future,
and try briefly and schematically to identify probable future
developments and the challenges to be met.

In the projections for the world in 2030,
China’s GDP will be US$24 trillion, that of the United States US$17
trillion. In Europe, it will be US$14 trillion and in India US$10
trillion. China’s per capita GDP will, however, only represent one
third of the per capita GDP in the United States. Despite enormous
growth, global inequality, as indicated by per capita income, will
remain.

The demographic trends — population growth
and aging or urbanization — are well known: in 2030, the world’s
population will be around 8.5 billion, of whom 7 billion will be living
in what we today call developing countries. The average age of the
population will increase by five years. The median age of Africans
will be around 18 years, that of the Chinese 34 years and that of the
population in South-East Asia 25 years.

Still looking towards 2030, urbanization will
continue and 70 per cent of the world’s population will be living in
cities. This phenomenon will have a marked impact on economic, social
and political systems; on growth that will occur through connections,
the “cluster” effect according to experts. Urbanization will
therefore be an additional motor for technological efficiency, but also
a factor of political and social tension because of the disparity of
living standards and, in urban areas, the difficulty of achieving
social integration, unlike rural areas. History tells us that cities
act as seed beds for political upheavals and revolutions.

One remark concerning the African continent,
which deserves more interest and attention from European leaders;
today, there are 900 million Africans, but there will most likely be
1.5 billion in 2030.

What will be the economic impact of these
developments? A global middle class of around 2 billion will emerge.
The special features of this middle class will be the standard and mode
of living, education, a critical mind, the ambition to continue with
the progress responsible for its promotion, and it represents a
gigantic potential for consumption in the decades to come. At present,
60 per cent of the world’s middle classes live in North America,
Europe or Japan. By 2030-2040, only 30 per cent of them will be in
Europe or North America, the rest will be elsewhere in the world. The
Great Inversion is not yet over, far from it.

The promise of exponential growth thanks to
this consumption potential. But also, most likely, the harbinger of
political problems because of divergent ambitions. Political
experience tends to show that when countries develop and populations
emerge from poverty, contrary to popular belief, they aspire to become
even richer. This is a fundamental phenomenon of market-led
capitalism, well known to those selling consumer goods, marketing firms
and all those who study the interaction between the economic behaviour
of consumers and their personal satisfaction.

Nevertheless, and this is a problem to which I
shall return and which so far remains without any solution, the trends
in this growth will continue to generate inequalities.

Another trend which it is expected will
continue to dominate the forces that structure economic, political and
social systems: technology, innovation, but above all scientific
progress, whose development promises to be immense with biotechnology
and nanotechnology.

This knowledge economy, which will be the
result of the widespread dissemination of information and culture, will
lead to a critical economy. The progress in knowledge stems from
critical capacity and in the world towards which we are moving peoples
will be governed in a more diffuse and disseminated way. We shall
therefore see continued globalization, with an abundance of production
systems over the world’s geographical areas, and accentuated
geographical separation of producer and consumer.

We are leaving behind a world in which most
of the goods consumed in a particular place were produced in that
place. We are moving towards a world in which most of the goods
produced in a particular place will be consumed somewhere else and vice
versa. The volume of exports imported in the world on average has
risen from 20 per cent 20 years ago to 40 per cent today, and will
probably be 60 per cent in 20 years’ time. This is a totally different
economic model to that which prevailed for centuries and the
anthropological consequences are as yet unknown. The emergence of
industrial capitalism saw the birth of the economic being and the
political being — namely, producers and consumers — and the tensions
inherent in this homo oeconomicus. The interests of a worker and
those of the same worker as a consumer are not necessarily the same
according to the rules of market-led capitalism and this dichotomy of
homo oeconomicus will only increase.

Without seeking to be exhaustive, here are some of the major challenges to be met in my view. We know that the current growth model,
market-led capitalism as it has developed, is not “sustainable” — in
the absence of a better word — neither at the social nor at the
environment level.

Although the environmental impact is the most
important, the most visible and the best recognized at the collective
level, we are slow in drawing the necessary consequences.

The impact of market-led capitalism at the
social level is more difficult to perceive. Global warming is an
objective phenomenon and is widely recognized as attributable to
humans. The acceptable level of social inequality is more a subjective
and cultural question. We realize that we cannot continue to consume
limited natural resources at the same rate as today. We also know
that the Ricardo-Schumpeterian system exhausts people as well as natural
resources with the risk of generating frustration and conflict, which
are fertile ground for violence.

The demographic trends I mentioned above will
lead to 30 per cent growth in energy consumption, a 50 per cent
increase in the consumption of water, and increased problems in
providing food for the population between 2030 and 2040. It is not that
people emerging from poverty eat more, but they eat differently. With
US$1 a day, a person will eat rice. With US$10 a day, he will eat
chicken. But the energy yield of rice is ten times that of chicken.
Eating chicken is equivalent to eating the rice consumed by the
chicken. This nutritional trend, whose protein yield is poor, is
nevertheless considered by most, quite rightly, to be progress. We know that within 30 or 40 years, the
global temperature will have risen by 1 to 1.5 degrees and the effects
of this global warming have already been described at length.

It is my belief that we cannot continue with
this growth model. What remains is to agree on the analysis and, above
all, on the consequences to be drawn from it.

To schematize, there are two major series of responses: that of the liberals and that of the interventionists.

The liberals acknowledge that these problems
exist but contend that the market, technology and minimum regulation
will resolve them. It is a question of cost. To reduce the energy
consumption that is threatening the climate, it suffices to raise
energy prices in order to change consumers’ behaviour. Rationality
through the market.

The same reasoning applies to another major
problem caused by these demographic trends: employment. Even though,
at first sight, globalization has produced a large number of jobs so
far, they are very unevenly spread, and it is by no means certain that,
despite progress in education and technology, higher levels of skills
and knowledge, the world will be able to generate a sufficient number
of skilled jobs. The liberals are in favour of leaving the cost of
labour to adjust itself on the “labour market”.

The interventionist school, on the other
hand, denounces the markets’ inability to take into account a number of
aspects that are ignored, starting with the way in which GDP is
measured. Naturally, this point of view leads to quite different
conclusions regarding governance and government policies, whose
priority should be to ensure social integration.

Whatever the merits attributed to it by
advocates of the market economy model in creating efficiency, in my
view, collective intervention is essential to develop a system of
regulation that minimizes the risk of tension, conflict or war, whether
economic, social or political.

In passing, I would mention a third school of
thinking that has been in existence since the Club of Rome: that of
degrowth, in which the concept of “sustainable development” is an
oxymoron, an empty concept, because, according to its proponents, it is
impossible to achieve growth sustainably.

The goal of economic systems being to produce
social results, the major challenge for the decades to come will be
how to transform growth into well-being. We know that this is not the
case today, at least not to a sufficient extent. We possess the
indicators to measure growth and the deficiencies in the current
system, but we do not know how to measure well-being. There is a long
route ahead to achieve convergence between what different civilizations
and different cultures consider to be good or bad. We are still far
from a system, a scale of values, common to all mankind.

What would therefore be the right economic
and social model capable of producing the right model for growth? The
liberal model? The interventionist model? The in-between model? The
decades to come will see “competition-coexistence” between an
essentially liberal model, that of North America, and an
intervention-based model, fairly represented by today’s China; between
the two, a mixed system that resembles the European system inasmuch as
it combines the “market” vision of North America and the “integration”
or social solidarity vision which is also based on oriental
philosophies. As a reminder, Europe is the continent in the world that
spends over 50 per cent on social security. It stands out among the
range of possible future models of civilization because of the extent
and sophistication of its social security schemes and its
responsiveness to environmental issues.

Which of these models will be taken up by Latin America, Africa or India? I believe that this question remains open.

Another question that arises out of the previous ones: towards what geopolitical system are we moving?

In all likelihood towards a multipolar G-20
type schema provided that the United Nations Security Council manages
to reform itself. Another example of the rigidity and dichotomy of
governance systems: there has been no change in the membership of the
United Nations Security Council, an instrument for global governance,
since 1945.

Another possible scenario: the “chimerican”
system, no longer of the G-20 type but G2 in which China and the United
States would be interlinked at the economic, technological and
financial levels to such an extent that they become inseparable. This
would be the ultimate stage in globalization that hesitates between
cooperation and confrontation depending on moods and opinions whose
volatility will increase with broader access to information, whether
good or bad.

We now come to the crucial issue of
governance. Traditional governance, that of the democratic model that
has progressed constantly for decades and to which we are accustomed,
has not been called into question by the transformations in the
information society, the emergence of social networks, increased
knowledge, communications and critical thinking. But it will be
affected by them. This trend is good news for individuals but bad
news for established organizations. The development of knowledge and
human capacity to carry out their own projects are both challenges to
the authority of all systems with power, parties, churches, the State,
monopolies.

At the international level, as I have already
mentioned, today we do not have governance systems that correspond to
the extent and importance of the global challenges we must face. As
Director-General of the WTO, I have taken part in meetings of the G-20
since it was created and each time I have noted how difficult it is, if
not impossible, to achieve convergence on what might be a form of
international or even supranational authority.

This is less true of its form but rather of the basic values that would constitute its foundation.

As regards the environment, organization of
the international monetary system, cyber security, fiscal competition,
migration, just to mention five examples — I can think of another ten —
we know that we need more cooperation, more authority and
international governance. Recent experience has shown us how much
these are lacking. Essentially, it is not so much a question of the
institutional machinery, but rather one of political dynamism,
consequently of legitimacy in the first place.

As long as the area of political legitimacy
remains the Nation State, and this is the case today, political
leaders, whose legitimate and natural ambition is to be re-elected,
will behave in the first instance as national leaders, responsible for
the national choices of their national populations because it is not
their neighbours who vote in elections but their own populations. For
the time being, this problem, which will be a major one in the future,
remains without a solution.

The conclusion will hardly come as a
surprise: “And Europe in all this?” This is a question that I know is
of concern to Jean Claude Casanova, and to many of us. Without
claiming to be exhaustive and without inflicting on you a declaration
of faith in Europe, I should like to mention certain elements which, in
my view, are important: in the world as it has become today, I see no
future for Europe as a civilization, what it represents in terms of
values, without further integration. I see no place for what makes
Europe special — a judicious combination of security, social concern,
the market, efficiency — without political union. It is in the interest
of Europeans. What is still missing is awareness of this commonality
and the desire to promote its values without imposing them on others —
the time for this is over — in order to organize reasonable coexistence
with other systems.

I believe that this is also in the interests
of the rest of the world. It suffices to look at the extent to which
the Euro crisis set off panic on the other continents, even if they do
not always say so publicly. For the past two years, whenever I travel
to China, India, the United States or Brazil, the first questions
asked by those I encounter in private meetings concern the crisis of
the Euro: “Are we moving towards a breakdown? Because, you must know
this, the impact would be disastrous for us.” I cite this recent
example to show that Europe’s experience is still the only attempt in
the world to build a supranational authority whose implications are
shared jointly.

I do not suggest that the European
experience, with its very specific historical parameters, can be
reproduced. I explain this to African, Asian and Latin American
leaders. In order to invent a political system with sufficient
legitimacy, Europeans must continue with the unprecedented construction
of a political area that goes beyond the traditional, Westphalian band
of Nation States. I am convinced that this attempt is vital for the
future. For the Europeans, but also for the others. It is one of the
elements that will determine whether the world, your world, will be
better or worse in 2030 than it is today.

All these questions lie within your hands.
It is up to your generation to find the responses. To return to the
route you will take in this institute, I hope that you, or at least one
of you, will find themselves in my shoes in 40 years. Even at the
express invitation of the Science Po authorities in those far-off days, I
doubt that I will be able to be here. But I hope that one of you, in
my place, will undertake the same exercise as I am today and will draw
a broad picture of the world as it will be then. Thanks to the tools
you will have during your years of study, thanks to the understanding
of the world you will have gained, it will be up to one of you who is
given the opportunity to show whether mankind’s capacity to lessen
unhappiness and injustice has made progress.

I am one of those who believes that this
human effort is possible and I hope that you will embark on the task
energetically and without delay.