 Ladies and gentlemen and guests, students, colleagues, sponsors who made this possible and the university as a whole. So I would like to welcome you all good morning on the part of the Department of Political Economics and Statistics of this university for the second lecture, second lecture in memory of Professor Frank Hahn, who had a position here in Siena for about 10 years and passed away in 2013. We had a first lecture last year, I'll tell you a little bit more about after the welcome address of the university director and we're very glad to have a second speaker, second speaker in the sequence, not in the rank, of course, Professor Eric Muskin, Nobel Laureate in Economics, 2007 and Professor of Economics at Harvard. And the reason why we invited Professor Muskin besides his outstanding profile is that he had a strong connection with Professor Hahn as well and the same happened with last year lecturer, Professor Barkhaus from Birmingham, he didn't have a personal connection but he was coming from Birmingham, as I'll tell you later after the address by the director, he was a member of the university where Professor Hahn took his first position. So that was the connection. And this year the connection is getting stronger and we're very pleased about that. So I think I'm going to give the floor to our rector, Professor Andrei Koboni, for a welcome address on the part of the university and I will reconvene sketching the figure of Professor Hahn afterwards and presenting Professor Muskin before he would give a speech. So thank you very much and Professor Koboni. Good morning everybody. I would like to thank Professor Muskin for being with us today. I'm very pleased on behalf of the University of Siena to welcome him. I'd like to thank Nicola Dimitri for his efforts to have with us today Professor Muskin, the Department of Economics and Statistics for organizing these hard lectures. I'm very pleased that Professor Muskin is here with us today not only for formal reasons but for substantial reasons. As everybody knows, he's very concerned with the issues of inequalities and the role that human capital can give in order to overcome inequalities. And this is something that is very important for this university, for all universities, for the School of Economics and Management for the departments of the Economic and Managerial Area. So I think that his research work is very relevant for us, but also it's very relevant in this point of our society, we see, because unfortunately this is a country where the role of education for economic development is not considered as important as it should be. So I think that his contribution is very important and today he has seen also the interview on one of the major Italian newspaper that you kindly gave yesterday is underscoring the relevance of education for economic development, the role of education to overcome inequalities. But also it's a very timing intervention today because this year, as everybody knows or should know, is a very special year because it's the year where the Sustainable Development Goals were approved only a few weeks ago. I had the honor and the privilege to be at the General Assembly of the United Nations as scientific delegates of an international scientific organization, so I had the privilege to listen to Obama, to the Pope, to Matteo Renzi, to all the heads of government and state to say yes we can make it, we can reduce inequalities, we can have a better environment, a better world for the future. If we don't make the right decisions, our children will criticize or will hate us. 193 heads of state or government said so. So we should do something, we should do something. So that is very important because SDGs are creating a new scenario where at least there are four major principles. The first one is that a traditional way of doing or behaving in the economic scenario was wrong. We need to do something different. The second is that we cannot take separately environmental, social and economic sustainability. So we need to put them together because the poorest are those who suffer more from the environmental crisis. Third, these issues relate to all countries, not only developing countries but also developing countries. That is the message also Professor Maske is giving, I think that especially in this country there is not the awareness that education is important also for this country, not only for third world countries. The fourth principle of SDGs is that any constituency, any stakeholder can give a contribution in order to achieve a better world in order to achieve SDGs. I think that I'm very pleased with the department and with the school for this meeting, for this possibility to listen to Professor Maske because it's really coherent with what we need today. And I just finished my short introduction just to say that we will discuss also these issues in the inauguration of the academic year on October 28th when a hundred rectus and delegates from all over the world will come with us in Siena to inaugurate the seven hundred and seventy-fifth academic year because we were founded in 1240. So the message that we would like to carry on, we would like to deliver is that social, environmental, economic sustainability is important, education is important. So thanks to Professor Maske for being with us today. Thank you. Thank you very much to our rector for being here for this very nice address. Let me just say I'm speaking on behalf of the Chair of the Department who strongly apologizes for not being here today. And I will take his function in some sense. So as anticipated I will now sketch briefly because I don't want to take much of the time, the figure of Professor Han and why we are having this lecture and why Professor Maske accepted to come, it's an homage to Professor Han in some sense. So Professor Han was considered to be one of the finest theoreticians, economists, thinkers overall of the last few decades and we really had the luck to be able to share 10 years of his life while he was here, while he was occupying a position in our department. He was actually born in 25 in Berlin but being a Jewish origin, they had to move, the family had to move to Prague first and then to the U.K. in 38 and then as a young man he actually was immediately loyal to his country and went onto the wall as a young navigator on the air force. Then came back and completed his education, taking a PhD at the London School of Economics where he actually met his beloved wife Dorothy who cannot be here because of mobility problems, he's watching us from Cambridge at the moment, having a supervisor, Nicholas Calder, one of the leading economists at that time. And then he took his first position at Birmingham so that's why it was meaningful for us to have a first lecture last year given by Professor Backhouse and I mean an economic historian, an economic thought in fact. He gave a lecture on general equilibrium which in fact was the main field of interest of Professor Han. So Professor Han stayed from 48 to 1960 in Birmingham then he moved for the first time to Cambridge as a lecturer where he also joined this famous group called The Apostles which witnessed, as I understand, among its members people like Keynes, Wittgerstein, Cleve Maxwell and others, enormous figures, intellectual figures. Then he left again Cambridge and went to LSE for the first time as professor in, where is it? Later on, I'll find the date, 67, sorry, and had a major impact at LSE at the London School of Economics together with Terence Gullman whom he highly admired and Dennis Sagan, renowned econometrician to restructure the department and the PhD program. Then after LSE went to Cambridge in 72, became professor there, stayed there until 92 when he came to Siena for his last 10 years of career. His main interest as most of us know were the general equilibrium, namely the market economy, existence and stability in fact of the economic equilibrium and the role of money in society as well, especially in that kind of theoretical construct, sorry, but despite being a finest theoretician he was also very much alert on policy issues and in fact he was a protagonist of sort of let out against the factorism at that time, who was very much of course a conservative way to, if you want to interpret that, so that was a bit of an interesting thing, general equilibrium is supposed to be in some sense conservative, no very little state should intervene, but he was criticizing that at least the way that was actually conducted there. And then he also took positions on the euro currency, he sort of foresaw the problem instead in fact later on showed up to the eyes of all of us. Then it was, besides being a fantastic researcher, he was a terrific mentor, he mentored an enormous number of eminent economists and I suppose Professor Muskin would consider to be one of those and that's how the connection comes about as a second page. So Professor Muskin crosses the Frank Hans sort of path, so to speak, at the postdoc stage of his career. So now I want to introduce Professor Muskin, our prestigious speaker. Professor Muskin won a Nobel Prize in 2007, but in order to win a Nobel Prize he first had to take an undergraduate degree in Harvard in mathematics and then a PhD in applied mathematics still at Harvard and then he went to Cambridge as a postdoc. And the reason why he went to Cambridge, affiliated to Jesus College was because his PhD supervisor Ken Ara, one of the giants of modern economy, was very close in very close terms with Frank Hans and Frank Hans was very keen in having young and bright and super bright people there. So he went there for the first time to spend a year at Jesus College, then he came back to the US as a faculty member from 77 to 84 MIT, then he moved to Harvard from 85 to 2000, then he moved to the Institute for Advanced Studies in Princeton from 2000 until 2011, coming back to Harvard after that. But during this career path Professor Muskin came back again to Cambridge and in fact to Siena as well. He came to Cambridge back for the first time in 8082 at Churchill College, correct me if I'm wrong, and in 87-88 St. John's College, Cambridge, and it was on that occasion that Professor Muskin came for the first time to Siena to one of our summer schools that we were running every year for about 15 years with tremendous people coming and he was one of those. Now that's in surprise his professional career, but let me just now say that the Nobel Prize was awarded for contributions to the aerial mechanism design which is an area related to game theory jointly with Professor Meijer and Professor Hulvitz, but it was very hard for me to list down the number of contributions in other areas that Professor Muskin gave and it was tremendous even harder to list all the acknowledgments and prizes and honorary degrees. Let me just mention that he received 11 honorary degrees and a new number of prizes and acknowledgments around the world. Of course he wrote a large number of papers, more than 100 which in economics is kind of unusual. Let me just mention that he just to conclude that he gave contributions to contracts theory, options, industrial organization, asymmetric information, soft budget constraint, incentives, innovation, patenting, etc. To reach his most recent interest that I wasn't aware when he gave the title of the lecture that he actually got engaged since four years ago or less four or five years ago with his colleague Michael Kramer from Harvard on globalization and inequality and that's the issue and the content of today's lecture and we're all very much looking forward to your speech. So thank you very much Eric. I'll give you the floor in a second. I just wanted to remind to all of us that there will be a drink afterwards because otherwise I'll forget open to everyone and I needed to point out another issue that all of this was made possible. Frank Khan here and Professor Muskin here by Professor Hugo Pagano who was the main protagonist for having Frank Khan here at that time. So I think I've done is now the floor is to Professor Eric Muskin. Thank you very much Eric. Thank you so much. I can't tell you how pleased I am to be here on this occasion. Not only was Frank Khan a good friend a long time friend but he had a tremendous impact on my career and I vividly remember the very first time I saw him. I was doing my PhD at Harvard with Ken Ara as Nicola mentioned an old friend of Frank's. Ken invited Frank to Harvard to give a few lectures and I wanted to make sure that I heard them all. So I was there at the first lecture. Frank Khan comes out and says good afternoon. I'm Frank Khan from the University of Cambridge where I spent most of my time keeping away from John Robinson and Richard Khan. Well a few days later at Ken's encourage funds I got up a courage to go see Frank in his office to introduce myself and tell him a bit about my work and he listened and when I was finished he said to me you're very badly trained aren't you? Well I suppose that should be expected from someone attending a provincial university. Well this was this was rather off-putting as you as you might expect but then he went on to ask would you like to get a proper education? You must come to the center of civilization by which he meant Cambridge and so I did. He fixed up a postdoctoral research fellowship for me at Jesus College in Cambridge and I spent an unforgettable year there. Actually Frank was quite amused that a good Jewish boy from New Jersey could be a fellow of a place called Jesus College and whenever he whenever he I run across me he'd cross himself and say may Jesus bless you my son. Well during that year I got to be good friends with both Frank and his wife Dorothy that had me over to their house all the time for parties other events and these were always lively occasions Frank was you're probably getting the impression that Frank was quite a charismatic and charming figure but he had the disconcerting habits at these parties of forgetting my name when he would introduce me so so he started introducing me as cabbage say meat cabbage and this this habits unfortunately carried over to other occasions so at one time he was chairing the weekly economic seminar and I was the speaker and so Frank began the seminar by saying and and now we'll hear from cabbage but the the most remarkable thing that Frank did for me that year was to read all my papers and discuss them with me almost line for line even though he plainly didn't care for some of the topics I was working on he'd he'd say game theory I don't think a gentleman would behave strategically but the despite his skepticism he usually was able to treat my papers reasonably seriously and he would give me excellent comments there was one occasion where he just couldn't help himself he said my dear boy my dear boy you must not waste the flower of your youth on this nonsense but I thought of them when deciding what to speak on this morning Frank's own work tended to be quite abstract most of the time he would he was very much a theorist and I'm a theorist but he said that every theorist has an obligation to make contact with reality and to think about some of the big issues of the day and so I know although I know that Frank would disapprove of the theory I'm about to tell you about he'd find much to criticize I I think he would approve of the fact that I will be speaking on the connection between globalization and inequality in developing economies so let me introduce that that theme I don't have to tell you that over the last 20 or 25 years there's been an enormous increase in globalization and by that I mean there has been a remarkable increase in international trade trade of goods and services across countries but I also mean and this is a point that I want to emphasize later on that there has been more international production the production process itself has been internationalized that and it's really the second point that will that will play the largest role in the theory I want to offer today the reasons for this increase in globalization are many there's been a decline in transport costs certainly maybe even more important there's been a decline in communication costs it's it's possible to be in touch and coordinate with people on the other side of the world for practically zero cost and of course there's been a continual removal of trade barriers reduction of tariffs new trade agreements the United States just in the process now of arranging a new trade agreement with Pacific Rim countries globalization has had many proponents and these proponents have made many promises on its behalf one of those promises is that prosperity will be brought to emerging economies to developing economies well in fact I think it's fair to say that this promise has been delivered on to a remarkable extent that there are a great many developing economies and China and India are only the most prominent examples the most spectacular examples that there are great many developing countries whose genie peas have increased very considerably thanks to their to their ability to to exploit international markets to put themselves into to world trade but there's another promise that has been made on behalf of localization and that's to reduce the gap between the rich and the poor the haves and have nots in emerging economies and in this case the record is not so good and in fact inequality within many emerging economies has actually increased and once again China and India are the most prominent examples if you if you look at what happened to the genie coefficients in China and India you see that they are becoming more unequal inequality is a big topic these days you have only to pick up the newspaper see that politicians are talking about it more and more in this part of the world most of the discussion has been about growing inequality in rich countries European countries the US Japan but in fact what I'd like to emphasize today is increased inequality in developing countries and you might ask well why should we care about reducing inequality perhaps I don't have to persuade you that it's an important issue but let me just mention there are I think three important reasons why reducing inequality matters first there's there's a moral argument that there's the idea that we're we're all human beings and it's it's offensive from from an ethical standpoint to have vast discrepancies in the way that we're treated particularly when those discrepancies arise from such arbitrary factors as which country you happen to be born in or who your parents happen to be but even if you don't accept that egalitarian argument there's there's the point that's particularly in developing countries there's a close connection between reducing inequality and reducing poverty if you if you reduce the gap between rich and poor you're probably bringing those poor people out of poverty and even if you don't care about inequality per se you may care about eliminating poverty so that's a second point and the third point is is a more practical one even if you don't care about inequality or poverty you might care about stability but there's a well-known correlation between political and social instability and inequality in income that is countries which have very wide discrepancies in income also tend to have more disruptions socially and politically and so just from the standpoint of keeping the social political fabric together you might want to do something but we we now have to ask and this is a theoretical question should we be surprised that inequality in developing countries has been rising as a result of globalization well there interestingly the answer is yes because it contradicts the theory of comparative advantage which is probably the the most venerated theory we have for understanding international trade international trade patterns a very successful theory goes back over 200 years to David Ricardo and has historically done a great job in helping us understand international trade I'll come back to this point in a few minutes but what I want to emphasize now is that the theory of comparative advantage actually predicts that free trade should reduce inequality in emerging economies which is just the opposite of what has happened recently now now why does it make this prediction it let's take a few minutes to to review what the theory of comparative advantage says according to the theory the important difference between countries when it comes to trade is their differences in the factors of production the inputs into the production process so the reason that countries trade with one another is that they differ in factors of production so some countries have a lot of lands other countries have skilled labor some have a lot of natural resources those are the differences that help explain why trade is so important now because I'm concerned with with income I want to concentrate on labor as the input into the production process let's imagine that there are two kinds of labor there's high-skilled labor workers who have a lot of education and low-skilled labor workers who don't have as much training in education and I want to do I want to compare with a developing country an emerging country now the rich country is rich because it has a higher proportion of high-skilled workers that ultimately that's why countries are rich because of the human capital of their of their workers because the the rich country has a higher proportion of high-skilled workers it has comparative advantage in producing goods that require a lot of high-skilled workers so computer software as an example of something that a rich country might have a comparative advantage in producing an emerging economy a comparative advantage in producing goods where skill doesn't matter so much and agriculture agricultural goods often fall into this category rice might be an example so to understand how globalization affects production and how it affects inequality let's let's do a thought experiment let's look at production before globalization that is before the rich country and the poor country can trade with one another and we'll look at production after globalization after the two countries can trade and we'll compare any any difference between the two must be attributable to the two globalization so before globalization before the two countries can trade if consumers in the rich country want to have both software and rice and the rich country have to produce both software and rice and the same is true in the in the developing country there will have to be both software production and rice production in the poor country in order for consumers to have both software and rice but there's a sense in which producing software in the emerging economy is inefficient it's it's making inefficient use of that country's labor force the labor force is better suited to producing rice and so there's a sense in which low-skill workers in the developing country are actually hurt by a diversion from rice to software production why because these workers are not needed much by software they are needed a lot for rice and so the extent to which the country is producing software rather than rice means a reduction in demand for low-skill labor and that means there's a downward pressure on those skill wages just the opposite is true for high-skill workers what happened once the door to trade between the rich country and the emerging economy opens up well now the rich country doesn't need to produce so much rice it can shift production away from rice to software and import most of its rice from the emerging economy and the emerging economy can do just the opposite it can shift production away from software to rice and imported software from the rich country so the emerging economy is now producing more rice less software than before and this is good for low-skill workers because it raises the demand for low-skill workers they are needed greatly for rice not so much for software this increased demand for low-skill workers raises the low-skill workers wages it also reduces the demand for high-skill workers they're not needed for rice production and so we see their wages fall low-skill wages are rising high-skill wages are falling and inequality is reduced so what I've just given you now is the standard argument given by proponents of globalization for why globalization will reduce inequality in developing countries and in fact exactly this prediction has worked remarkably well historically you should remember that this is not the first period of globalization that the world has seen there have been other great periods of globalization for example there was a globalization in the second half of the 19th century involving Europe which at that time had a relative abundance of low-skill labor and the United States which had a relative abundance of high-skill labor well what happened in the late 19th century there was a dramatic increase in trade between the US and Europe which was made possible by a decline in shipping costs that it became possible to ship goods across the Atlantic much more cheaply than before so there was a dramatic increase in trade and just as the theory predicted the theory of comparative advantage predicted inequality fell in Europe so so the the theory worked very well for this previous globalization and it worked well for other localizations it has not worked so well for the reason and that suggests that there's something about the reason globalization which is different by the way the prediction that inequality should fall and developing countries is not the only prediction that comparative advantage got wrong it also predicts that the more different two countries are from one another that is the bigger the difference in their labor forces the more trade there should be because the more gains from trade there will be between those two countries well that that is plainly not true in the current globalization you will only be looked at a very poor country like Malawi in Africa and the fact that there that Malawi does not trade very much with the US or with Europe to see that that prediction does not hold up but the prediction that I'm most interested in is this prediction about inequality so because the theory of comparative advantage doesn't work so well I was led in collaboration with Michael Kramer who was a colleague of mine development economist at Harvard to develop an alternative theory and this shouldn't be thought so much as a substitute for theory of comparative advantage we're not saying that the comparative advantage has to be replaced but it has to be supplemented for the reasons globalization and let me spend the rest of my time on this alternative theory the idea that we'd like to emphasize is that the current globalization has tended to create an internationalization of production as well as consumption so so what do I mean by international production well we've only to look at what's what's happening with computers so to see what what I mean by that computers might be designed in the US programmed in Europe and then assembled in China so so the production process itself takes place across international boundaries and and the reason why this is possible of course is that it's now very easy to coordinate with your production plans in China communication costs so so I'd like to put the emphasis on international production for the purposes of this alternative theory it's no longer enough to consider just two different skill levels we have to consider many different skill levels for my from my talk this morning I feel it'll suffice to look at four skill levels so I want to do a similar kind of thought experiment that up to the one that I did when talking about the theory of comparative advantage that is I want to imagine that there's a rich country and poor country the rich country is rich once again because it has workers a labor force with high skills the the skill levels that I'm going to be talking about are now going to be labeled a b c and d so there are four levels a is the highest level then b then c then d the rich country has mostly workers of skill level a and d the poor country has mostly workers of skill level c and d and it's it's these skills which make the country is rich and poor now we should think of the production process as consisting of different tasks so what does a company do it's hires workers to fill certain jobs for certain tasks within the company and to make matters simple I'm going to suppose that there are two tasks there's a managerial task which is relatively sensitive to skill so it matters a lot what the skill level of the person taking the managerial job has and then there's a subordinate task which is less sensitive to skill the person taking that job well his skill doesn't matter so much and outputs is produced by matching managers and subordinates together in a company by finding a manager finding a subordinate to work together and the amount of outputs that is produced will depend on the skill levels of the workers occupying those jobs so this is this is actually the only little mathematical formula in the paper it's a pretty simple one the idea is that output is going to equal the square of the managerial skill level times the skill level of the subordinate now why why is the manager skill level square but that's it doesn't actually have to be square it could be a cube it could be something else but the point is that this the the power of two emphasizes that the output is particularly sensitive to the manager skill that that's the point that this formula is is getting across that that as we vary em we're going to vary output more than as we vary s so if m equals 4 s equals 3 output will be 4 squared 4 times 4 times 3 of 48 there are different ways that workers could be matched let's look at a simple example so suppose that there were there was a labor force consisting of two three workers a three worker as a worker of skill level three and two four workers workers of skill level four one one way they could be matched is this way and what one of the four workers could be matched with one of the three workers the other four worker could be matched with the other three worker this is what we call cross matching because we have workers of different skill levels in the same firm if you do the computation you'll see that this leads to a total output of 96 another way that workers could be matched is four worker with the other four worker the three worker with the other three worker this is what we might call homogeneous matching because within within a firm within a company the two workers have the same skill level but this leads to an output total output of only 91 for this example we're going to tend to see cross matching not homogeneous matching because we get a higher output with cross matching with homogeneous matching but that answer depends critically on the particular labor force that we have if this labor force consists of two four workers two three workers if we change that labor force so that we now have two four workers and two two workers the answer changes now it turns out that we get more outputs with homogeneous matching we'll tend to see homogeneous matching in equilibrium so so what what am I what point am I trying to get across for these two examples there are there are two forces at work in deciding what kind of matches you get because the two tasks the managerial tasks of the subordinate tasks are differentially sensitive to skill that's been the tenant's push you toward cross matching you want to have higher skill workers and the managerial tasks lower skill workers and the subordinate tasks so that pushes you toward cross matching but there's another force of work if the skill levels are too different if the if a very highly skilled manager is matched with a very low skill subordinate that's a waste of the high skill managers skill and so you don't want skill levels which are too different within a firm that's when that force is going to push you toward homogeneous matching and the balance between cross matching and homogeneous matching will be determined by the composition of the labor force but those two forces will be exactly balanced in equilibrium so what does this imply about our foreign experiments in globalization well let's go back to our two countries the rich country and poor country and I want to compare matching patterns before globalization and after globalization so this is the pattern that we're going to tend to get before international production becomes possible so but before globalization all matching must be domestic so in the rich country we have to have matches which have all just workers in that country and in the poor country we have matches which at all just workers in that country we're going to tend to see see workers in the in the poor country match with the workers and in the rich country we're going to tend to see a workers matched with be workers cross-patching in in in both countries now what happens when the door to globalization opens and so it becomes possible to have international production well the matching pattern shifts and we now see that the see workers from the poor country are matched with be workers in the rich country and the be workers are now left to their own devices they match with other be workers well what effect does this change in international production have on inequality and on wages and I should emphasize that the reason why the d workers are not matched with a or b workers is that the gap between their skill and the be workers and a workers skill is too big for it to be for there to be for it to be efficient for them to match a or b workers so they are so they're left to their own devices so so what happens to to wages as a result of this shift in production well before globalization when the when the d workers were matched with the c workers they had the benefits the c workers higher skill level you probably know from your own experience that if you're working with someone who is more skilled than you that enhances your own productivity it makes you work better than you would if you were left to your own devices so pre globalization d workers had the benefit of working with c workers post globalization they no longer have this benefit so so d workers wages are likely to either fall or at least not rise as a result of globalization by contrast the c workers now have this nice new job opportunity they can they can work with the workers via the international company that is now employing them so c workers have rising wages and we see not a full and inequality but a rise in inequality in the in the development country which is just what has happened in countries like China and India inequality in the in the emerging economy in the emerging economy is made worse as a result of globalization well what can we do about this well one thing that we might try to do is to stop globalization this theory doesn't doesn't suggest that that's going to be a very good idea for one thing it's pretty hard to stop globalization even if you wanted to but in any case globalization is not the developing country in total it's very much helping the c workers it's the main problem is that it's leaving the d workers out of the picture so so what we should try to do if we can is to give d workers some international matching opportunities to and the way that we could do that is to raise their skill levels through education or job training to the point where they are part of the international labor force to the problem of course is that such education and job training are expensive who is going to pay for it the workers themselves are not going to be able to do so they are they're too poor the whole problem is that these are some of the most destitutes workers in the world they can't afford the education or job training needed so to elevate their skill level but the interesting point that I want to make is that we can't expect producers to have the incentive to do the all of the job training needed either and and here's why if you're if you're an employer and I'm a d worker and I come to you you could train me of course but if you did train me some of your investments would be lost to the fact that you now have to pay me a higher wage furthermore once you've trained me I can go I can leave your company and go to work for your competitor in which case you've lost your investment in me altogether so this suggests that the market itself is not likely to solve the problem of any quality because workers can't afford to upgrade their skills and employers don't have enough incentive to make that investment on their own if we're going to do something about inequality there has to be some investment by third parties these third parties could be domestic governments or international agencies foreign aid even private foundation but someone has to get into the act and provide the funding for education they don't necessarily have to provide the education themselves they can do so indirectly by for example giving employers tax breaks if they're if if these employers are willing to train de workers so the right course of action at least according to theory is not to try to stop globalization but to try to ensure that the benefits of globalization shared more widely to allow the low-skill workers the de workers to get something out of globalization and with with that wall let me stop thank you thank you for your attention thank you very much that's a mask came for this very elegant on the connection between globalization and the increase of inequalities in the developing countries so the point is that there was too much of a gap so that a fringe of workers would actually what was actually left around by globalization it was better for them to match locally since big low-skill with low-skill rather than being linked to the bee workers the bee workers would like very much to be linked with the bee workers but it's inefficient because the skill gap is too big right so so the the way to address that problem is to raise the bee workers up to the point where official matching the workers or even a workers because that's a that's a terrific point now there is of course time for questions that's a masking would very much like to have questions from the audience students are strongly invited to to make questions and we start with Professor Peter Clampton whose University University is at the moment by his from yours of Maryland in general okay so thank you thank you very much for your lecture and I just wanted oh the mic closer like this on the your example that you started with rang very true to me and my experience is in when I want to today hire programmers to build an auction platform for example I could go to Silicon Valley and spend 150,000 for ace programmers in Silicon Valley or I can go to Shanghai and spend 40,000 for ace programmers that have you know they're definitely in the a category and they're just much less expensive so I go to Shanghai and so it's just a perfect illustration of the software and rice you know now in fact the software is getting developed in China and Russia and India just for this reason so if you could perhaps just I just want to say much of rank true yes I have one of the interesting features so we think of India as a developing country if you look at its average income it's still very low but it's had this remarkable growth rates over the last 15 20 years why precisely because it has a good education system and they've been able to develop a spectacular biotech and IT industry by matching with educated highly trained people abroad you go to to Bangalore you see startup generic drug companies all over the place that has been the the driving force in in Indian development and the country has prospered as a result but there are millions upon millions of people who have been left out of the picture all together people who don't can't work for a biotech startup if something is to be done about them if they're not simply to continue to languish they they have to get at least some level of education and training to allow for greater opportunities in their work yes so I have a clarifying question but in the second example there is still the question on who's producing rice so if if the demand for rice is unsatisfied there seems to be an incentive for the be people in the rich country to go in the poor country and make efficient price production so maybe one problem is that there are barriers in the poor country to to workers from the rich countries to go there and open rice producing firms maybe okay I wonder whether it be possible to put the slides back again well it's it's not a second I in in the in the second model that the model that I've been developing with with with Michael Kramer we don't actually distinguish between rice and computers any any longer because the emphasis is on the matching process what is being produced through the matching process is is no longer the focus of the theory in the theory of comparative advantage every all the focuses on what is being produced that and and the shift in developing countries from soft to rice for the new theory the group that's being produced well it doesn't really matter so much in fact everything I said could apply even if there was only a single would be produced because all we care about is who is doing the producing how well who are the managers who are the subordinates so the the new theory remains fun that's why I say that this is a in addition to comparative advantage very not a substitute for you can now bring in the theory of comparative advantage to say who will be doing the production the two theories work together to give you the total yeah yeah no just okay no just a related very related question because you know you look at knowledge and it's the same technology all over the place is but actually in order to represent differences in countries maybe you could figure out the technology which is unskilled by us and see what happens if we I mean having a terogeneity yes technology that's right what complicates a lot but yes well in fact so so it in this alternative theory the assumption is that the technology is the same everywhere this m squared times s technology applies in every country of course as you say that technology transfer is not complete and in fact one problem in developing countries is that they might be using less efficient technology in which case the conclusions of the theory are even stronger because if you've got the workers who are producing according to a an outmoded technology and you've got see workers who get these international matching opportunities the gap between their wages is likely to be even bigger when the D workers are not using up-to-date technology hello what is your opinion about the international trade between Mexico and the United States I mean about the factor price right so there was a treaty developed 15 20 years ago the North American free trade agreement which which actually considerably increased trade involving those three countries and I think the evidence suggests that average GDP average income in Mexico went up quite a quite a lot as a result of that trade agreement so on average it was a good thing for Mexico but then if you look at who got the benefits of that additional income you see that they mainly went to white color workers so so NAFTA is actually a pretty good example of what has happened in recent times with localization it impressive improvements and developing countries overall but unequal benefits and with the benefits going mainly to higher-skill workers I think we could all acknowledge that you know as a species we have the resources and the knowledge to solve this problem but we just don't you know what was it that made you change your professional attention to to this huge problem well it's possible every economist is told about the theory of comparative advantage it's one it's one of the most secure one of the most interesting secure and successful theories we have if you if you if you learn anything at all about international trade you learn about trade trade between Portugal and England that was how Ricardo described it and you you begin to believe that's comparative advantage theory can explain everything but then you run up against reality and you see that at least for this current localization the theory doesn't work very well and that that conflict between reality and theory is it is is a challenge and it and it's it's fun to try to step up to a challenge and propose some kind of reconciliation so it was mostly the the intellectual challenge of trying to improve on this famous theory that got us going Michael is a development economist he was already directly involved in the question of why inequality was going on in developing countries but he he wrote me into it because I'm a theorist and theorists should be able to say something about important questions going going back to francon strongly believe that theory is not just a game that you play for your own amusement but that it it should be able to tell you something important about the world when you speak about abcd classes and you say that in the development countries there are only cnd classes while with the globalization c workers joined with be the workers in the developed countries you are speaking about the simple translation from the lower classes the middle classes of the c workers why the d workers remain in the lower classes so globalization is augmenting the speed of creation of a middle class and the developed countries and the d workers workers suffer because they are no more matched with the c workers which could help them very temporarily but in a long time the workers ought to grow better because of the development of the middle classes in the American so globalization are augmenting the speed of growing of a middle class because of this abcd and this transfer of c to we imagine we see with the workers instead of be workers instead of be workers right I agree with with your analysis that's right globalization is a matter of fact it's a good one thing because it means the speed of creation of middle class oh absolutely I'm certainly not suggesting that we would want to stop globalization because of the because of this very quite the opposite if you compute the overall gains to the developing country as a result of international production they are positive that the emerging country benefits overall from globalization no doubt it just that the 4d workers don't get much of the much of that and so the question is how to get the d workers into the game too so I just want to ask you if you could develop a bit further in your model that what happens so once the d workers and the c workers start to work together your productivity increases what does impede that group to fall back into a deep position or what are the influences of of the speed through which technology can influence that segmentation of skills so in some respect it is that a steady solution or do you have it's a elaborated something that goes further into the continuum of time and so you raise some some good points what I what I showed you today is an extremely simple model you might say that it's it's simplistic it's it's it's oversimplified and and that's and that's true that there are two important features of a real economy down here first I've left out if if showing a more realistic model skills ABC and the skill levels would not be determined once and for all they would be changing over time and through and the process of elevating yourself from a d worker to a c worker would be part of the model itself what what we would want to see in a dynamic model are the incentives for providing education and training to d workers or c workers that hit that's not in this model where skills are given exogenous like the other thing that is left out is technology there's only one this one technology output equals m squared times s that technology is assumed to be fixed and unchanging but of course one important reality of modern life is that technology is always improving with always changing that too needs to be incorporated for a model like this to to to get closer to reality but the reason I presented this version of the model rather than the more realistic one is because it's instructive I think to see how we can understand we can begin to understand why inequality in developing countries has been has been rising if we elaborate the model to make it more realistic that's fine but that's not going to offer the other message further questions on the floor yes I think that is one actor one player missing your picture the role of institutions at the beginning of industrial revolution the condition of English workers was not so different from a condition of working in Bangladesh now the English workers improve their conditions thanks to international trade but also thanks to some political changes some institutional changes let's say union minimum wages the right to strike something like that so there was an important role of institution in you know ruling the institutional conflict in my opinion one of the main reason for the effect of globalization of inequality both in developed and in emerging countries is the fact that globalization is destroying or reducing the role of these institutional mechanisms do you agree with the with the European I agree in part I I don't want to I don't want to deny the the importance of institutions to the inequality story and as I've developed it this is a an institution-free model that they're they're young well the only institutions in this in this model are the firms themselves but there's no there's no government there are no unions that can either be thought of as a weakness and you're suggesting that we've left out part of the story or a strength we with in answer to the previous question I acknowledge that one thing that's left out of this story is is capital with this model as I've developed it has only labor as an input what what what happened to capital what happened to land what happened to oil all of these omissions are important in the sense that in reality these things make a difference nevertheless I think there's some strength to a simple model which abstracts from the complexities of reality and still gets the story more or less right perhaps it would be even more accurate if we brought these other factors back in but when we can use four skill two-job model to go a remarkable way toward explaining modern inequality I think that's that's a pretty good accomplishment already question from a student the right vision of the point within the quality in that look let's say that the cave none of each and I let's say that the case is that global equality is decreasing I don't know if that's actually the truth let's say Milano Beach and others are right where the keys up your model relate to this phenomena is it possible to have both rising equalities within countries and decline globally reported the answer is yes in this month even in this month so so here here's a stylized fact that Tony Atkinson and others have emphasized we have growing any inequality in developing countries as I've been talking about in this talk we have growing inequality in rich countries as we've been reading about in the newspaper that that was that was the the big contribution of the caddy's work they to publicize how how income has become in in in rich countries and at the same time we have a full in global inequality that is the gap between average income in rich countries and average income in poor countries has been reduced that more that's already here in in this model we have the gap between the A's and B's growing the gap between the C's and B's growing but the gap between the A's and B's on average and the and the C's and average is falling so so once again even a simple model we're able to capture some of the major inequality trends of our time questions not that we didn't have questions so far if there are more from the floor yes I have a question about unemployment and possible to introduce unemployment in this model because I think it's very important especially because several developing countries have invested a lot in education but then they have a new generation younger generations without a job so we have a job not mad because even if they have invested in human capital and in education has your model tried to suggest it actually we have no I think that quality and more ability have not more right so so so why is it that so many young people have got some form of education and unemployed well again if you would if you accept a theory like this it's because there isn't a good match between what they've learned and what skills are in demand just just because you've been well educated doesn't necessarily mean you can offer very much to the to the global labor force it may no longer be true that general education is enough that what is really needed for employment is the acquisition of specific skills that that global employers are demanding but I I should confess that I'm not I'm not a labor market specialist I'm interested in the labor market because of this model but I I'm not the one to turn to for unemployment policy reforms more questions from the floor maybe the rector may have a question I may also have another best thank you for your elegant and very fascinating theory what about the application of the theory to rich countries I mean because to a certain degree it can be applied why are you stressing that it's for emerging countries or are you think of extending to well we've actually done both and and in fact this kind of theory does apply to rich countries too but the important difference is that developing countries like China and India have developed mainly because of globalization if it weren't for global markets the miracle in China would have been impossible that that that's a development process which has relied critically on globalization growth in the in rich countries has not depended so crucially on globalization the United States trades a fair amount but most of its growth comes not from trade which is on the order of 12% but from from domestic consumption and production so yes the theory can be adapted to apply to rich countries and we have a separate paper that does that but it's one that relies primarily on what's going on domestically rather than globally if you allow me to I can make a final remark or remark slash question so it seems like that in order to catch up to need to push the deep people off okay that's where education should focus its attention to but it is it seems also like that you know dynamic perspective the eight people paradoxically now should not move out also because otherwise the relative distances would stay insane so in order to avoid shifting the average so speak but not the variance there must be something there so there's a kind of convergence between the bottom and the top so I'm not saying that another policy recommendation would be to just make people less skillful at the top but there is it they could it could it may not be enough if people go out at the bottom and the top goes as up as the bottom and the relative distances would remain the same and that's yeah well you so that's that's right and that gets back to a previous question about a dynamic model we've taken the skills as given but in a richer model the skill skills would evolve over time through investments and what you're suggesting is that it's not going to be very good for the deep workers if their skills go up if the other workers skills go up even faster so yes it's in order is it part of the frame this kind of consideration feelings dynamic perspective so in a dynamic setting you have to you have to be sure that not only do the workers get more training but they get sufficiently more training so that they're able to keep up with the with the other skill and then I had another question I can avoid making it I think it's it's it's enough now we would like to thank so much for having here with us and it's been a terrific opportunity for the whole community in San Francisco for the whole University and I would say for the whole town to have you here so on behalf of everyone thank you so much and we would like to see you back soon thank you Eric