 Hey, may I ask you to take your seats, please? Thank you. So now we are approaching the end of this conference in tribute to Victor Constancio. We have a fabulous panel that will discuss trends in globalization and the future of central banking. Before we go to the panel, I would like to use the privilege of the chair to tell you three stories having to do with Victor Constancio. And I will try to be brief. And I will try to surprise you. The first story that I want to tell is I believe the first contact I had with Victor Constancio. And I'm not sure that Victor remembers it all, but I had just joined the Portuguese Ministry of Finance. I was in charge of coordinating the work associated with the budget. And so I was responsible for economic forecasting and the budget report. That was the first high-profile job that I had. And in the context of preparing the budget, we received instructions from the Prime Minister's office that the growth should be revised upwards and that the budget should not budge. So we thought hard about how to do that. And we thought, well, if we change the net foreign contribution to growth and make this intensive on exports, we were there. So no problem whatsoever. Can't be done. Now, I got a call from Victor who basically said, remember, we did not know each other. He kind of said, OK, I read your report quite attentively. And your forecast is interesting. I don't have any problem with the bottom line, but this business of the net foreign contribution to growth and, in particular, exports look inconsistent to me. Given the predicament I was in, I answered in a very firm institutional voice. I can assure you that all national account identities are fully respected. And he told me, well, that's not exactly what I'm talking about. I look at the empirical relations. The elasticity that you seem to be assuming of Portuguese exports relative to world trade is completely off the distribution. And there, I honestly don't remember what I said, but it must have been things like things off distribution do occur or something like that. And I don't know what Victor thought about it. He never told me. He was incredibly polite. But it made Victor one of my intellectual mentors. And we kept in touch for something like 30 years. And I really appreciated that somebody was actually affiliated to the party that was not in government, was kind enough to notice a technical problem in something that was presented publicly and call up to say, look, do you really want to make a fool of yourself or do you want to? And all of that in the exemplary polite way. So that is something that I really appreciated. And I believe I've never told you so. The second story that I want to tell is one that I'm not completely sure you're aware of. But Victor was a market builder. So Victor actually created markets. And that's a big deal. So when Victor was governor of the Central Bank of Portugal in the 1980s, everything was directly controlled through administrative controls. And so there was a tremendous amount of excess liquidity. There was plenty of monetary financing. There was not a market for public debt instruments. So Victor decided that in Portugal, in order to modernize the country, in order to be ready for European integration, we need to have a market for public debt. And in typical Victor fashion, he started reading everything that had been written about the issue. He looked at experiences of other countries. He hesitated about the best way to implement. He was facing tremendous resistance from the bureaucracy of the Central Bank, who did not want to do the change, but with support from people from the research department and from the operations department, he pushed forward. Now, the resistance, since this process of preparation took a while, believed that they would carry the day. And that's when Victor, in very atypical way, lost patience. And he said, the first operation in the Treasury Bill's market will take place on the 14th of August. Now, you don't realize, being in Frankfurt, what that means in Portugal. Nobody works in Lisbon in August. 14th of August is the day before a holiday. It's a long weekend. So that was a decision of a degree of violence that you cannot guess. But the operation took place on the 14th of August. It was a success. The long weekend came, and everybody spent the second half of August in well-deserved holidays. Third story, Victor was also a very prominent politician in Portugal. He was the leader of the Socialist Party in the late 1980s. And in typical Victor fashion, he was reading very heavily at that time as well. What he was reading about? He was reading about the reform of the electoral system. And he was reading about party financing. And he pushed for deep reforms in both areas. And he failed in getting those reforms through in both areas. But that didn't mean that the fact that he was studying very hard was lost inside the Socialist Party. It was not lost at all. So according to the legend, and now this is complete hearsay, he would go into the headquarters of the Socialist Party with his eyes on a book walking through and not looking at anyone, let alone talking to anyone. He had completely delegated the management of the party on a number of trusted collaborators. Now, as always happens in politics, things started going sour, and there were some disputes inside the Socialist Party. And being a very courageous decision maker, Victor called several Congresses of the party to clarify what is. And in one of these Congresses, he got tremendous amount of support, and he got a majority. But it was clear the things in the Socialist Party were changing. And at that Congress, I read in a Portuguese weekly, so I cannot vouch. I was not told by anybody. I read it. There was an intervention by a dock worker, a strong man, a trade unionist, and he was speaking towards the end of the Congress. So you can imagine the expectation. Is he going to support the leader? Is he going to attack the leader? What did he say? Do you remember? He said, according to the weekly, our leader is an intellectual. He may even be the best intellectual in the country, but he has a very important drawback as a politician. He's not a crook. If he were a crook, he would be a fantastic politician. Now, thank god there are other positions that don't require people to be crooks. And Victor has exercised those in a very distinguished way. So thanks a lot for that, Victor. And now to our panel. It's a tremendous privilege for somebody like me to be able to chair a panel with four of my favorite authors, people with whom I interacted regularly over the years, people that I enjoy reading from, people who cover completely the area of central banking and globalization. The challenge for me is to make sure that after the initial interventions, there will be debate, and hopefully lively debate across the panel. I will not introduce the panel because I believe that they're as well known by you as they are by me. I will indicate the rules of the game. So Ben Friedman will go first, then Elen Rey, then Richard Baldwin, and last but not least, Andres Sapir. They were instructed by the organizers that they have 10 to 15 minutes for the initial remarks. They convert spontaneously to the understanding that that means 12 minutes. So bands can be converted into point values. And so I think that we are ready to start. And Ben, if you don't mind, you go first. Thanks, Vitor. And I thank the organizers of this meeting for giving me the opportunity to be here to pay tribute to my friend, your Vitor. In the spirit of Charles Goodhart's comment about being pre-electronic yesterday, I'm going to go him one better. I have no PowerPoint. I have a text. So it's a great pleasure to join in saluting our colleague and dear friend, Vitor, on this lovely occasion in his honor. Vitor has made a strong contribution to the bank during his eight years of service, a period that has tested not only the ECB but central banks more generally. Beginning in 2011, Vitor placed a special emphasis on the linkages connecting financial stability and macroeconomic stability and the consequent link between financial regulation and what we now call macro-prudential policy. In 2013, Vitor took the lead in addressing the need for banking union, including a single supervisory mechanism to accompany Europe's monetary union, forthrightly acknowledging that monetary policy and banking policy cannot be separated. During this post-crisis period, he has consistently directed his attention to a wide array of aspects of the financial market environment and their implications for the efficacy and success of monetary policy. And most importantly, throughout, he has displayed the integrity and the courage that today is too frequently absent in the public life of our nations. The ECB and all Europeans are greatly in your debt, and so are all of us assembled here. But ours is an endeavor in which the work is never done. As the great moralists have told us, we are not required to finish the task, and the kingdom is always but coming. Especially at this time of transition in leadership, not just of the ECB but several other significant central banks as well, it's valuable to look ahead to the challenges remaining. As the title of this marvelous conference in Vitor's honor reminds us, the future of central banking, the challenges will be different from those of the past eight years. The financial crisis is now well over, and our economies have mostly put their post-crisis downturns behind them. Economic growth has resumed, although importantly, this is so in the aggregate, but not yet for all too many of our country's citizens. Free trade among nations is under challenge as not before within our lifetimes. And we cannot be confident that the expended period of price stability that stands as central banks' primary achievement of the past quarter century will remain robust. I believe that our central bank's most significant challenge over the next eight-year period will be to rethink the inflation-targeting strategy that in one form or another now constitutes the central organizing principle of their monetary policymaking. The reasons are fourfold. First, and almost trivially compared to the other three, there is the arbitrariness surrounding the current 2% target. In retrospect, the paucity of serious empirical research underlying the identification of the 2% norm, now quite sometime back, is a professional embarrassment. More significantly, the experience since then is surely informative. If 2% actually were a seriously derived answer to some well-specified research question 10 years ago, it surely would not be today. The standard response to such concerns is that central banks must nonetheless leave the 2% target in place because to change it would unsettle and even confuse the public's expectations and thereby undermine confidence in the central bank's commitment to price stability, however defined. This argument is breathtaking in its thinness. It is also insulting to the mental capacity of the public. Any central banker who offers it should immediately be asked why he or she then thinks it is a good use of bank resources to maintain a DSGE model or, for that matter, any analytical construct based on so-called rational expectations. Second, not because the public is obtuse in such matters but precisely because it is not, central banks are increasingly at a risk of undermining their own credibility by continuing on, year after year, highlighting the importance of specific quantitative targets that they do not meet. In my country, for example, inflation has undershot the Federal Reserve's 2% target for the last nine years in a row with a cumulative shortfall of the price level of five percentage points. My personal view is that this low rate of inflation is not a problem, quite the contrary, but that is not the point. This particular problem for central banks is all the greater because we live in an era in which our governments and their leaders routinely pronounce economic absurdities. Growth, even with no immigration, will average 4%. The tax cut will pay for itself. Mexico will pay for the wall. The net savings from leaving the EU will pay for improvements to the national health services. Three arrows will strike the bullseye and restore economic prosperity. Most central bankers respond to such pronouncements with either winks or groans depending on their political loyalties. But neither the winks nor the groans can prevent the tarnish rubbing off on their own credibility from their inevitable association with the political leaders who appoint them. Third, observed shifts in the relationship between price inflation and real economic activity crudely put the flattening of the Phillips curve that we were discussing at some length yesterday, although the phenomenon is both broader and more subtle than that, seriously undermine the usefulness of the inflation targeting framework. We are all familiar with simple classroom models in which, by the magic of purely expectations-based mechanisms, a central bank's credible commitment to a specific inflation target is sufficient to determine its economy's actual inflation rate. The economies for which our central banks are responsible do not conform well to those models. Real economic activity, by which I mean producing, buying and selling, hiring and firing, is central to the price and wage setting process. One implication of the flatter Phillips curve, one which we have already experienced, is therefore the diminished ability of the central bank to deliver on whatever inflation target it announces. But a further implication is the reduced capacity of the inflation targeting framework itself to subsume whatever objectives the central bank maintains for aspects of real economic activity. For anyone who prefers that the central bank have no such objectives, this, of course, is not a problem. But the record of nearly all country's monetary policies over the past decade makes clear that, in fact, central banks do have and regularly act upon inflation or objectives pertaining to output or employment or other aspects of real activity. We know from the work of Tinbergen, more than half a century ago, that in a well-structured economic system, meaning for this purpose, one in which the Phillips curve is not perfectly flat, any one variable subject to the influence of economic policy is, in principle, capable of representing the entire set of policy objectives. But as a practical matter, how well any such representation works is an empirical question. Part of what a flatter Phillips curve means is that inflation, as one among the central bank's objectives, is less suitable to stand in for the rest. This empirically based conclusion leads to the fourth and final reason central banks now need to rethink their inflation targeting framework. The structure imposed on any decision making process inevitably influences the decisions reached. So does the vocabulary in which decisions are discussed. In recent times, central banks have increasingly imposed on themselves the requirement to structure their monetary policy deliberations in terms of the relationship between actual or forecast inflation and the corresponding target, even when the decision is mostly about something else. And then when the time comes for the important task of conveying to the public what decision they have reached and on what grounds, they again feel the need to frame their expectation or their explanation in terms of reaching a targeted rate of inflation. More than 250 years ago, David Hume, reflecting on the British political debates of his era, observed that, and here I'm quoting, the Tories have been so long obliged to talk in the Republican style that they seem to have made converts of themselves and to have embraced the sentiments as well as the language of their adversaries. Whether intentionally or not the architects of the inflation targeting strategy in the last generation did more than find a way to influence the public's expectations so as to build a bulwark against a return of the rapid and chronically persistent inflation of the 1970s and 1980s, against which they had so valiantly struggled. By confining so much of central bank's discussion of monetary policy within a structure and a vocabulary centered on containing inflation, they captured the thought process of this generation's participants in the policymaking process. Relitigating whether that structure and vocabulary were right to adopt at the time is of little value now other than the historical. What now matters is that the economic environment that central banks will face over the coming generation will be, because it already is, different from that of 50 years ago or even 20 years ago. The task awaiting the next group of central bank leaders will be to put in place a decision-making structure that is right for the economic environment our economies will now be facing, and I hope they make it a high priority. Vitor Aave Akkwewale. Thanks a lot, Ben. You gave us a brilliant presentation with a dry sense of humor, but I'm pretty sure that there are elements that people would like to debate, both in terms of the conclusion, but also the way you argue for it. But we will not be doing that right away. Right away we go to Ellen Ray. Thank you very much. It's an immense pleasure, Vitor, to be here for this colloquium in your honor. And as probably expected from me, I'm gonna focus on financial globalization mostly, and also link it to macro-prudential policies on which you have been such an influential player. I'm gonna start by being a little bit humble about trying to think about the future of globalization and when we try to discuss about the future of central banking or international monetary system and the like. And by saying historically, we know that globalization cannot be taken for granted. And here I quote again, so Keynes who wrote in the 1920s in the economic consequences of the peace. The benefits he saw in globalization at the time, trade globalization but also financial globalization that you can see talks about the fact that he could adventure his wealth in the natural resources and new enterprises of any quarter of the world and share without exertion or even trouble in their prospective fruits and advantages. And yet, so that was talking about the first big wave of globalization before the 1914. And yet after that we had obviously the war, the First World War, and then we also had the Great Depression, which were massive shocks in many, many different ways, but also in terms of being de-globalization shocks. So globalization went down massively during these periods. And on the right photo, I'm sure you recognize it, it's Bretton Woods taken in Bretton Woods and this was after the 1944 that was then again planting the seeds for a new international monetary order, a new order and with multilateral cooperation and really setting the stage for the next wave of globalization which started much later on the financial side. In fact, it started really mostly in the 1980s and 1990s, but we are definitely in it now. And we are in a wave of financial globalization that is maybe relatively unprecedented. So again, just a reminder that this process of globalization, however, is a highly non-monotonic process. It can go forward, it can go backward, as we have seen in history. So our current period is characterized by or has been characterized by a lot of cross-border flows. So we see here in this graph that I took from Opsel and Taylor and in a presentation of Tobias-Adrian that if you look at the amplitude of the financial flows compared to the amplitude of trade flows, and if you look at their volatility compared to trade flows or compared to GDP, you see that this is in a different type of ballpark. So there is a huge amount of volatility in those financial flows. If we look at a little bit of a decomposition of these financial flows during the same period, so this is all expressed as a percentage of world GDP. So we are talking about very large numbers here. And we see that there is some commovements across the type of flows that we can desegregate by different types of assets. So we have portfolio equity, we have foreign direct investment, we have portfolio debt, and we have bank flows. So they tend to go up and down in terms of the various categories relatively in a synchronized fashion. However, the bank flows are extremely, have been in the period leading to the crisis, extraordinary volatile. I think they show, you know, we can see that also portfolio debt, but banks have been playing a big role in this cross-border flows. So if you look at the data more closely, a lot more closely than these graphs, what you find out is that fluctuations in financial activity on a global scale as measured by various measures of restaking, credit creation, asset prices, capital flows, spreads, leverage tend to move together. And this is what a few years back I described as the global financial cycle. And I think we now have more research on these global financial cycles, which is with a lot of interesting findings. So there's more research based on macroeconomic data. So for example, extracting global factor from very large cross-section and asset prices, and finding that one global factor in asset prices explained about a quarter of the variance of the data. So it should take a big panel of stock prices, of corporate bonds, of commodity indices around the world. So not only the US and Europe, but around the world, you find that a quarter of that reflects a movement of one global factor. There's also a lot more now microeconomic data which has been analyzed in particular from central banks and credit registry data. And there are some interesting papers in the Turkish case, for example, showing that a large amount of local credit growth can be explained by capital flows using these very detailed credit registry data. So I think there's a lot of further research to be done on that, so I'm showing you here the global factor in risky asset prices that I was describing, which is a common component of this large panel of risky asset prices. So we see here, let's focus on the dark line, which is the factor which has been estimated on a very broad panel. We see the run-up of the tech bubble. We see also the run-up of the crisis before 2008 when risk aversion was very low across markets and has been reflected in this common component going up. Now, so if we, so again, describe these global financial cycles as some kind of movements of growth and credit and leverage across main financial areas as reflected in some risky asset prices in some capital flows. So I think there are very many different ways of measuring that, but there's these very striking measures which is taken from the Global Financial Stability Report, the last one of the IMF, and which measures, so their own measure of global financial condition and look at the correlation of this measure with country-specific domestic financial conditions and show the increase in the correlations of the country-specific financial conditions with the Global Financial Condition Index of the Fund. And as you see, and maybe as you would expect, the correlation going up strongly after the 1990s, which has been the big period of financial integration and which is reflected also if you look at data on capital flows, you see there that's really the cross-border flows are really picking up during that period. So then I guess when one starts to look at the data that way, it becomes important to understand better what the drivers of these Global Financial Conditions, of these Global Financial Cycles could be. And I think there's still a lot of research to be done on that, but I think one can say that US Monetary Policy is one of them as a driver of global risk appetite. And again, that doesn't mean that US Monetary itself is not reacting to movements in the real rate, which might be driven by other more fundamental and structural factor. But when you do the usual identification of Monetary Policy shocks, using instruments, have frequency instruments or narrative instruments, so you do find that US Monetary Policy is one of the driver of some global risk appetite index of leverage, not only of US banks, which would be expected, but also of main banks outside the US, in particular, U-area banks and UK banks. And there is also some interesting research being done in a network of central banks, which does meta-analysis of the effects of foreign monetary policy on domestic lending. So this is a network of people running the same regression on their own data, proprietary data at different central banks. And I quote here one of their findings in which they say most teams identified significant effects of US Monetary Policy, and some teams also found effects from U-area, UK, and Japanese policy, which broadens the perspective. It's not only the US, though as we find out more and more in terms of international financial data, the US does play a very significant role, obviously, with the dollar in very many different markets, very disproportionate, in invoicing, in financial markets, et cetera, et cetera. So now if we are in a world where financial booms and global financial booms are important, and in which I think we have more and more evidence that a lot of our deep crises, our big crises, our booms really gone bust, I think it becomes extraordinarily important to understand better so what Vitor here, I'm gonna cite him, said in a speech in the future of finance in Rome in 2017, he said, so history illustrates that there is a spontaneous tendency for finance to increase leverage and maturity transformation without considering the potential social costs of an overall excess of credit and debt and the crashes that may follow. So this is exactly this emphasis on crisis, our booms gone bust and very this idea of excess of credit. And I think this is a very important point and I think most of the actually existing macro finance models do not put enough emphasis on this are actually not quite adequate to model this boom phase of this credit boom phase of a crisis. Most of the models we deal with are quite good at amplifying shocks. If there is a shock, there is a capital market imperfection and this simplifies the shock and we see the effects in the real economy. However, these models won't have much to say if anything at all about what Vitor talks about here, which is this overall excess of credit and the fact that when in this credit boom period you have really risk not being priced very much. All the spreads tend to be low, et cetera. The models don't give that. And I think that's a very, very important theoretical issues that we have to work on in macro. So what's the plan of actions? Well, again, let's ask Vitor what the plan of action is. So Vitor takes a strong stand there. Macro potential policy is now available and is the most effective tool for safeguarding financial stability. This is because policy instruments directly address excessive leverage behavior, which is what we are worried about and do not have the same cost or negative spillovers of a leaning against the wind policy. And that was a speech in Frankfurt. So I think this is very wise advice indeed and so the issue is what's the work ahead of us in order to actually try to implement these wise words and we have a lot of work. So thank you, Vitor, but we have to work on it quite in a quite intense way. So in particular, if one does macro potential policy, one quickly realize that in order to put in practice these wise words and taming these booms, one has to be first of all, reasonably tooled up in terms of early warning indicators. So in the same way that central banks have models trying to predict inflation and then act upon it, macro potential authorities should have or have to work with early warning tools able to identify early enough the bad booms. So those dangerous booms, not all booms are bad, but it turns out that a lot of the crisis come after booms. So we have to be able to have early warning indicators identifying those bad booms. And the current models that we have are usually pretty unstable because macro variables that we put in these models tend to come move a lot, as is clear from what I said before, and models are not that robust. So they tend to over predict crisis, miss some. So what are possible solutions? I think we have to use a lot more micro level data in particular on intermediaries balance sheets. Look at risk concentration, so distribution of leverage and how this changes over time a lot more. And we also have to go for more robust techniques in the estimations, such as learning algorithm. I also think that a lot more of a discussion has to be about the interaction between fiscal instruments and macro potential policy. And there should be a lot more open debate on the impact, for example, of mortgage subsidies in various disguise on financial stability. So a lot to be done there. That's for the booms phase. Now we also have a bust to deal with. And again, so what should we say about these global financial cycles in bad times? Well, I think we have just lived through one. And the one we have lived through has extraordinary similarities with the ones we have lived through in the 1930s. And in particular, one can I think interpret in both cases the current low real rates episodes that we have been living through and that have put some constraint on monetary policy. That's going to be a point of juncture with Ben here. So these constraints due to low equilibrium real rates, in my view, are really due to these long run financial cycles and the deleveraging period in the 30s and post the 2008 crisis. Now during those bust periods, macro potential policies can help. Also, reinforced expansionary monetary policy. How do we do that? But well, if we have put up counter cyclical buffer, we can put them down, right? Provided they had been put up. So obviously, if they have a counter cyclical, we had to be up at some point. And there's also obviously an important role for fiscal policy. I'm almost done, Vito. I see you are nervous. So conclusions. Again, so here I think we should remember what Vito said in this Rome speech. We should not allow the memory of a financial crisis we went through to be dissipated in the fog of vested interests. There's a lot to do at this juncture. The current situation where we are clearly seeing that global risk appetite is about to decrease. So until recently, we had the Fed titaning was probably partly offset by the other central banks and some dollar weakness. But the dollar is going up now. So it's time to think about all these wide words that we discussed before. And we are in a situation in which we have little fiscal space and little macro financial space if risk materialize. So we really have to try to think creatively once more, I think, potentially. Now to conclude, to go back to my initial point where we are talking about global financial cycles and financial globalizations. However, it is true that it is so extraordinary difficult to predict what the international monetary system, the international financial system will look like if we take a long horizons. At this point in time, China has a lot more trading partner than the US, for example. And we know there is an inertia. There is a little bit of a time lag before currencies become important, after a country becomes important in the world economy if history is of any kind. But China is clearly rising on the horizon. And who knows? Not only we don't know exactly which currencies will be main currencies if we will be in a multiple world, but we don't even know exactly what shape the financial system of currencies will turn out to be in the next 20 years. History has shown that people have been extraordinarily creative in these matters, and there's no reason to expect anything less for the coming future. Thank you very much. Thanks, Helene. Again, a very impressive presentation and many things to discuss. But at this point in time, again, we move on. And Richard, please go ahead. Thank you. Well, let me start by thanking Victor in two ways. First, I want to talk as president of the Center for Economic Policy Research. I think the research community has a, this is the advertisement for my book, so if you get bored, just look at that. Thank you. The research community in Europe really owes a debt to the ECB in general, but Victor's been extremely important into it. Over the last eight years has been a really great time for policy-relevant economists. As things get bad for the world, it gets good for policy-relevant economists. But I have to say that the attitude of the ECB during this time, and it has not always been this way with the ECB, has been very open to research and not just the research that gets the right answer. And I think this has created a two-way street in which the ECB is open to people thinking about things, including in the wrong way, and the interest of the ECB has drawn more people into actually doing policy-relevant work. So at CPR, I've always found that the central banks were important inputs into our research process as well as beneficiaries of it, going both ways. And I think this sort of exemplary attitude towards research from the ECB has in some sense triggered in arms ranks among central banks. And the role of policy-relevant research has just risen in many, many of the central banks, not just in Europe, but also around. And I think that leadership has changed the role of economic policy research in Europe and beyond. And so this is a little bit out of order, but on the part of the research community, I'd like to give a big hand to Victor to what you have done for economic policy research, please. And then very quickly, I'd just like to thank you as a person, Victor and I are sort of intellectual brothers in a certain way sharing ideas and whatnot, and I'm looking forward to you sharing your ideas much more honestly and more directly in the future. So please, we will be seeing a lot of Victor on Vox, I'm quite sure. Okay, let me start with the presentation. I'm gonna talk about the future of globalization, and I'm glad that Helene talked about financial globalization, because I'll completely skip that. This is gonna be the real side. So I'd like to start with pointing out that globalization has changed radically twice. And there's a tendency to think that globalization is a thing, and we know what it is, it's been going on for 170 years. But here, if you go back to the year 1000, you see we had this 18th centuries of what you could call the great stagnation where countries share of world GDP was their share of population, because there was no growth. Starting in 1820, which is when modern globalization got going, according to Williamson and O'Rourke, the G7 share of world GDP soared from about 20% up to about two thirds, and this is exactly when we started thinking about globalization. Just at the beginning, Ricardo gave us comparative advantage, and all of our thought paradigms are about this type of globalization. But as you can see, something radically changed around 1990, and the G7 share of world GDP has fallen from about two thirds to under a half, right now it's back to where it was in 1900s. So when I look at this, I can see globalization can change radically, our thinking hasn't changed very radically about it, but it can change radically. And what I'd like to do today is to argue that it will change radically going forward and relatively quickly. So that's the argument I wanna make. The way I'm gonna do that is ask you to think more broadly about globalization. That arbitrage drives globalization. And what we're traditionally thinking about in trade, what we teach to our students, is if there's different relative prices of goods in different countries, those goods cross borders, creating trade according to the principle of comparative advantage. So really it's just arbitrage and goods. And it was set up in a world where it was hard to move something other than goods across borders. So we stylized the world as globalization as only arbitrage and goods. But there is also arbitrage and know-how. The ratios of know-how to labor among countries is extremely uneven. And arbitrage is possible, increasingly possible. And in my mind, that falling from 1990 is because know-how became possible to move with the ICT revolution. And perhaps the greatest arbitrage potential is between labor or labor services because if you look at the wage rates, the relative wage rates around the world, they're incredibly different. And yet up till now, there's no technological way of trading that, but that's changing with digital technology. So that's what I wanna talk about. So arbitrage is constrained by three costs, trade costs for goods, communication costs for ideas, and face-to-face costs for labor services. And I'd like you to associate goods arbitrage with the old globalization, say up to 1990. Know-how with the new globalization, which is global value chains and supply chains, where in essence, G7 firms took the knowledge that they own and combined it with low-wage labor abroad. And this isn't exactly the same arbitrage because it's a non-rival service, but what really changed was this emergence of high-tech low-wage changing manufacturing. And that did not exist before the ICT revolution. And what I'd like to argue is that labor services going forward will start to be arbitraged because of digital technology. And I'm gonna talk about those. So this is, in a nutshell, how I think things changed around around 1990. So the global value chains opened a pipeline for globalization of knowledge arbitrage. So you have the headquarter economies and the factory economies. And in the headquarter economies, you had a high know-how-to-labor ratio and therefore high wages. And in the factory economies, you had low know-how-to-labor ratio and therefore low wages. And what this ICT did was allow firms to take their knowledge, say Bombardier taking their knowledge of how to make business jets to Mexico, making the tails in Mexico and bringing it back up to Quebec and thereby arbitraging some of the differences. That was not physically possible before the ICT revolution. So we got this high-tech low-wage revolution. That triggered rapid industrialization in a handful of countries. Their growth triggered a commodity supercycle which led to a bunch of other emerging markets to come along. So this big shift was really triggered by a change in the nature of globalization in my view of the world. Now, I want to talk about the future and I put this slide up, the future's unknowable but also inevitable but will be something that resonates with the central bankers in this room because I just want, from now on, I'm making it up. The future, you have to make it up. So this is what I think is going to happen. Digital technology will open a pipeline for direct international wage competition where this low-cost labor in the factory economies will be providing services in rich country offices. So, wow. Does that mean I'm done? Yeah. Okay. You have to account for the lag. Yeah, I see the lag. Okay, so this is what I'd like to think. I think future globalization would be dominated by telemigration where people sitting in one nation and working in offices in another nation. So the idea is that the economics will make it profitable and digital technology will make it possible. So economics making it possible. Let's suppose we went way to the Star Trek world and we had all that great communication things and teleportation. Would you see a lot of movement of service sector and professionals around the world? The answer is obviously yes because the price difference is often 20 to one and even though there might not be perfect substitution between accountants in Poland and in New York, there would be a lot more than we see now. And the reason we don't see it now is not because it's not profitable but because it's technically not possible. You can't put medical services into a container and sell them in Japan, for example. But that's changing and I'd like to focus on four ways that are changing it. So in some sense, you could think about it. Trade and services has faced something just to pick a number, 1,000% tariff on trading services and digital technology is extremely rapidly lowering that tariff down and the flows will start. So the first is domestic telecommuting. That is we and our companies are arranging things to allow remote work. Now most of this goes on domestically but it doesn't take a lot of imagination to think that this could also include foreign freelancers as well. And the second is online freelancing platforms. So you may ask how can we all find these low-cost foreign suppliers? Well, this is the answer. If you haven't looked at these websites, they are unicorns or whatever. Matchmaking websites like eBay for services, the largest one is Upwork where you go online and you can find somebody, there's millions of freelancers on that site from over 100 different countries. You can find copy editors, whatever you want, you can hire them, fire them, management, all online, it's all extremely well organized. Then there's Amazon Mechanical Turk, Fiverr, there's a Chinese entrance, this is a booming market now. Upwork's supposed to go public this year but it's growing extremely fast, something like 25% per year in the building that's going on. So this international telecommuting is happening and it's growing incredibly fast just most people don't know about it. The third is machine translation. So if you haven't checked up on machine translation in the last six months, you should because it has gone through an incredible breakthrough. Instant free machine translation, spoken and written is a reality right now on your cell phone, your laptop. There's an option in Outlook for example where you can translate emails into and out of French or whatever language you want. If you talk to Siri, she will speak, you say, how do you say I want the fish in Chinese? And she will instantly repeat it back for free. So when you think about how languages have been such an enormous barrier to all sorts of international, this is melting. And in particular, so it's no longer Star Trek, it's going to lead to a global talent tsunami. So many of you have read how there's eight million Chinese university graduates a year and most of them are unemployed. Up till now they haven't been able to compete for service jobs in the rich countries because they didn't have good language skills, now they do. It was a complete revolution in 2017 because of big data that was put up and it's continuing on. So millions of low cost, highly talented freelancers will be showing up at these websites to compete for jobs. The last is advanced telecommunication. And you don't even really have to go much beyond Skype to see how useful this can be, but it is getting even more advanced than that. Let me just see how much time I have. Oh, an hour and a half, good. So this is a telepresence room, many of you will have used this and it's in essence a Star Trek-like thing where everybody in this room feels like they're kind of in the same room, although they're not quite. And in essence what's happening here is telecommunity. So when this stuff gets cheaper and more mobile, we will all be able to have assistance to help us with anything instantly coming up. Here's another one called telepresence robots. So these are like Skype on wheels and they're already quite widely used now, especially in hospitals. So the left one, that's a made-up advertisement. In the middle, that's actually in a hospital. So doctors visit, let's say they did a surgery in a remote hospital, they visit the patient through these things and people say that the physicality of the robot changes the nature of the communication enormously, especially in terms of asserting authority. And the one on the right there, that's a field manager, the woman on the Skype screen, talking to somebody in the, so she leaves the telepresence robots in the field office and whenever she wants, she fires it up and she can drive around the office and look to see whether you're playing solitaire or working on that project. And that this is something that exists and they're not very expensive. There's about 3,000, 3,000 pounds. So there's holograms, there's augmented reality, there's virtual reality, all these things are coming, but it's basically lowering the barrier face to face. So one of the key things about services is you often have to get the service provider and the service buyer in the same place at the same time and this digital technology is creating that possibility. And we're a long way from Star Wars, but this is growing at exponential pace and it's just incredible how fast this stuff has changed. By the way, this is a lot of the themes of the new book, my new book which will come out in January 2019, I didn't dare put up and advertise that one as well, but anyways, that's what I was writing about. Now in case you think this is all crazy that this not gonna happen that, I would like to convince you that it will creep up on you and it's what I like to call the iPhone infiltration. So we're so used to the old fashioned goods driven globalization that we think of globalization as factory closures or big disruptions, but that's not how this one will come. This one will come like the iPhone infiltration. So if you think about this thing five years ago, it was a really good music player, a pretty bad phone with a very short battery life. It was a web browser which wasn't much good because there wasn't much wifi and what it was was very slow. Progressively though, it has become our travel agent, our ticket agent, our email, our social medias become everything and here's the point. It's invaded our communities. We've all had to create rules at our family dinner on table or in the business meetings for these things. And here's my point, nobody decided to do that. It was an infiltration. Nobody decided now we are going to, see it's also my timer, so. We're not going to say now we're gonna let the iPhone or the smartphones really change the way we interact. It just happened, one convenience at a time, one cost savings at a time and these telemigrants will come into our life in the same way. After five years, I think we'll look back and just say how did we get along without them? So, mismatch, I'll skip this bit. The policy response I think is actually boring because it's essentially a lot of people are gonna have to change jobs. But this, unlike the global value chain revolution which changed the nature of globalization, this is old fashioned Riccardian trade. It's just in services, not goods. And as a consequence, the idea that it's good for the countries as a whole, but will lead to winners and losers and therefore we need more adjustment. I just think we're gonna need a lot more of that and it's just probably worthwhile to raise your anxiety a little bit. This globalization will happen exactly at the same time and to exactly the same jobs that the software automation is gonna affect. And this is all being driven by exponential stuff. So in the next few years, I think we'll see a lot of upheaval in the service sector hitting people who have never seen automation and they've never really seen globalization. So I think we're in for some exciting times on the globalization front. So I will start there. But in the long term, more local, more human and we'll all be richer. So my publisher made me have a happy ending at the end. So thanks a lot, Richard. Let me call your attention to the few sentences that Richard put right at the end. I actually read Richard's book very carefully a few months ago. It's called The Great Convergence Information Technology and the New Globalization. And I love his book because it helps one to think about globalization on the bay and it identifies in a way that I think is better than any alternative that I've read. The main drivers of globalization of this exponential trend that he was talking about. I do think, however, that what he said at the end that there is nothing much to discuss. This is old stuff that we've learned from Ricardo. Abstracts from the political difficulties associated with getting the job done. And I believe that André Sapir is likely to be talking a bit about that. Great transition. Thanks, Victor. Let me first thank Victor for the pleasure and the honor to be here. We have known each other from well before. You were in the ECB when you were governor of the bank. I remember 2003 when you invited me. We did a lecture together and that was a start of a very enjoyable relationship. And then when I was a member of the board and chair of the advisory scientific committee of the ESRB, we had lots of very interesting and fruitful interaction for which I really want to thank you. So indeed, I think one of the themes in a sense of this conference has been about optimism versus pessimism, right? And that's natural because we have come out of a crisis and of a very deep crisis. And this crisis has learned us to be a bit more careful about some of the forecasts that we are making and try to see the dark sides of some of the developments. Now, I will follow Richard in discussing the real side of globalization. And indeed, as Victor said, in a sense, I'm going to talk about the political economy of globalization. And I'm going to ask myself before we fast forward to the kind of issues that Richard Baldwin was very interesting discussing, I'm going to talk about the current situation. And it's clear that the world economy indeed has been for the last 25, 30 years undergoing a great transformation. And this great transformation has been accompanied by what I will call a great divide, a great divide between countries and within countries. And I think this is indeed posing a challenge, a challenge of political economy, maybe a challenge of viability of globalization. Now, I think that it's fair to say that in some sense, there is nothing new to the current phase of globalization, the great transformation and the great divide. And Elaine reminded us of Keynes's book, The Economic of Peace, and the words that he put forward there of what had been the challenges to the world economy and to the UK coming from the first phase of globalization, typically a view to have started around 1870 and to have finished abruptly with the First World War. And if you look at the components of the first phase of globalization, 1870 to the First World War and the current phase, the drivers are pretty much similar. It is also about the technological revolution. And it is also about economic liberalization. And it's true as well that that phase of globalization, like today's, did produce a lot of important economic benefits, but at the same time, it did then, as it does today, create, as I already indicated, what I call a great divide. So there's just not a great transformation. There's also a great divide. And the divide is the fact that there are some countries that seem to be taking advantage of this phase much better than others, some on the rise, some on the decline. And within our society, since we are talking about the advanced economies, there are those who feel themselves to be the losers and the winners of that. And my contention is that this great divide, or those two great divides, this is the stuff of the political economy of globalization. And to evaluate whether indeed globalization will survive the tensions that come from those divides. And as I said, until recently, I was rather optimistic. I was rather optimistic that we can avoid the replay of what happened at the end of the first phase of globalization. And I'm not talking of necessarily another war, but I'm talking of tensions that do lead to very, very difficult times for the system itself to survive. And the reason why I was and still am to some extent optimistic is that I thought we had learned the lessons. And it took, indeed, First World War, the Great Depression, the Second World War to learn the lesson and to put in place domestic and international institutions that were really trying to cope with the problems, with those tensions. In a sense, the welfare state that is put in place in most of our countries during or after World War II is precisely to deal with domestic conflicts and the global institutions, of which the WTO, but the IMF, the World Bank, and others are important examples. They were put in place, indeed, to ensure that the economy and the social transformation and the growth and the tension that it brings along can be managed at the international level. Now, certainly, recent developments make me a little bit less optimistic. And I'm talking of developments both, again, at the domestic and the international level. The welfare states that were put into place after World War II and allowed this fantastic golden age that we had from the end of World War II to the late 70s, early 1980s. The welfare state, for a number of reasons, is under threat if only because of issues of demography, of aging of population in our advanced economies. And as we hear every day in the newspapers, the WTO is under threat. So both the domestic and the international institutions that we had created in order to deal with those tensions being weakened precisely under the pressure from those tensions. And though my fear is that if you combine this great divide or those great divides, domestic and international, with the great recession that we just had, I think it did create certainly demand for and supply of populism. And we know that with populism comes nationalism and which nationalism comes protectionism. So therefore, I think, indeed, threats to globalization. Now, I've just put here one of the many charts that we can look at and has already been discussing about, this is about trade and how you had this first phase of globalization. This is world merchandise exports as a share of world GDP in percent during the period from 1870 to 1930 in a very fast rise from a little below 10% to 15%, 17%. And then the collapse, the de-globalization between the two world wars. And it would take roughly up to 1980 for the level of globalization measured by trade to come back to the level where it had been in 1930. And then, indeed, the second phase of globalization starts in 1980 and rises very, very quickly. Now, I think the drivers, they are obviously partly connected to liberalization. And trade liberalization has been tremendous. I just show here, both in the advanced economies and in the developing countries, the fact that trade protection measured here by tariffs has gone down very, very rapidly. First, in the advanced economies. After all, after World War II, level of tariffs in the advanced economies were around 20%, not there around 3%, 4%. And in the developing countries, up to the beginning of the 1980s or mid-1980s, protection level were at that level, and then also came down very, very rapidly. I think the second big driver of globalization is what Charles Goodhart spoke about yesterday, is the great doubling, as Richard Freeman from Harvard has called it, is the fact that in the late 1980s, early 1990s, due to political changes, China, India, India, which had been part of the global economy but was very much also a closed economy, and the Soviet Union and the ex-Soviet Union countries, they became part of the global economy. Up to then, the global economy was really essentially Europe, the United States, Japan, and a few offshoots. From then, we did have this great doubling, essentially coming from China and India. And I think that, together with the technological transformation, has made huge effect. Now, big difference between the first phase of globalization and the second phase is the role and the relative importance of Europe, the United States, and China. In blue here, you have Europe. In red, the United States. And in green, China. And this is share of global GDP. And yes, Europe was dominating during the first phase of globalization. The United States was on the rise. And China, together with India and a number of other countries, were on the decline. The difference this time is that the advanced economies are on the decline very rapidly. This is numbers from 1980 to 2023. I took 23, like, 1913, hoping that it would not be the same kind of consequences. But nonetheless, the rise of China has been tremendous. And the decline of Europe and the United States has been tremendous. And understandably, that you get some of the populists saying, America first. This is where this is coming from. Now, at the same time, there's been a divide within our countries. And here, I'm putting numbers discharged from the World Inequality Report. And I'm just looking at Western Europe on the right and the United States on the left. And this is looking at income distribution. And you have there, in red, the share of the top 1% in the US or in Europe. And in blue, the share of the bottom 50%. And you see that in the US, in particular, the worsening of the income distribution has been very, very important. We have avoided that, essentially, in Western Europe. Although, obviously, there are differences across countries. Those differences across countries in Western Europe, I won't get into all the details of this. But this comes from the Europe Barometer. And one of the questions which is asked periodically is about the perception that citizens in the EU countries have towards globalization. Whether they feel that globalization is a force for good, it's opportunities, or it's a threat. The blue part is the opportunity. The red part is those respondent that indicate that it is a threat. Now, I'm not going to get into the details, but you see that countries are all over the place. And in some countries, indeed globalization is viewed as an opportunity. But in some countries, it's viewed as a great threat. So there is politics. It's not just Western Europe and doing well, but within Western Europe, there is political views and there is threat. Now, let me come to my conclusion. I do believe that the great transformation, then the great transformation being the fact that the half of the world that was excluded from the process and that has been participating to this process of liberalization and taking advantages of what the global process can offer, this process will continue. This great transformation, the role of China, the role of India, and the technological development that Richard was talking about, I think this great transformation is bound to continue. But at the same time, I think they will continue to bring along this great divide, this divide between countries and the divide within societies. And I think that means therefore that the risk of backlash against globalization is also bound to continue, especially in the advanced economies. And therefore, I think there are real challenges. Before we decide whether we should be optimistic or pessimistic, I think we need to be pessimistic but act upon this to prevent the worst scenario to manifest itself. And I think we need to go back to those domestic institutions that I talked about and the global institutions. The domestic institution is indeed about our social models. That indeed, we do need to have social models that recognize that the world is in flux. And therefore, we need the flexibility, but we need also greater security. And I think so we need models with greater fairness, greater equity. And at the same time globally, I think it's clear that the WTO, the global institutions to deal with those tensions, the WTO needs to be reformed. I think just one point to conclude, I think the great, great challenge that I see intellectually in this is how we can have a global system of rules with countries that have such different economic, political, social system as China, the United States, and Europe on that side. I think this is really a great challenge and we need to really think about what kind of changes of rules are needed there to make the system survive and globalization survive. Thank you very much. Thanks a lot.