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LSE: Public lectures and events
'Responding to the Global Crisis' and 'Climate Change Mitigation and Development' - Launch Lecture of UNCTAD Trade and Development Report
01:28:03
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- [00:00]
A
Well, hello and welcome to a beautiful Sunday evening at lse. I'll be very brief with my introductory remarks because we have a full table here. I'm Ken Shadlin from Development Studies Institute. It's wonderful to see so many people here and it's a great pleasure to and an honor to host the launch of the UNCTADS Trade and development report for 2009. This is the third or the fourth year that Destin and the LSE has had the pleasure and the honor of of being the host for it. All past events have been very well attended and successful and it looks like tonight is staying and is continuing with the same pattern. This is the report which I believe the copies are around somewhere. The title of it for this year, Responding to the Global Crisis, Climate Change Mitigation Development as you see there. Heiner Flassbach is the chief author of the report from UNCTAD and will be presenting it. He'll talk for about 45 minutes or and then we have two discussants. Directly to his right is Radhika Desai who's a professor at the Department of Political Studies at the University of Manitoba and she's currently a visiting research fellow in Destin. She works on the international political economy, international financial issues and is currently completing a book entitled When Was Globalization Origin and End of the US Strategy. And then directly at the end of the table is Dr. Robert Faulkner who is a senior lecturer here at the LSE in International Relations department who works on IPE and particularly international environmental issues of which he's published a fair amount in the last few years and is recently just in the process of completing a big, big EU funded project on nanotechnology. So I'm going to leave it here and sit down and take my place and turn it over to you, Heiner. And just I would hope everybody would please welcome me or join me in welcoming Heiner to tlic.
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B
Thank you very much. Thank you very much for inviting me. Indeed, it is a good tradition now that we have the launch of the Trade and Development Report at the LSE at the beginning of September this time. One thing is a bit special that we should mention. The people from the press are here. The embargo of the report is only next Monday, so it cannot be published before next Monday. But nevertheless, due to technical arrangement in the UN system, we had to do it like that. Nevertheless, the report will be available. I hope enough cubbies are here so that you can grab a copy at the end of the presentation. What I'm going to do today I Don't know exactly where my PowerPoint is, but don't be afraid, I'm not going through my PowerPoint. I hope it will be somewhere here. Oh yeah, here it is. Okay, I'm not going to my PowerPoint, but I'm just going to show you two or three slides in the course of what I'm going to say. Yeah, I suppose interest for a report like ours is such as it is and is big because we have a major crisis and a major problem in the world economy. And I would start to talk a bit about this because this year's report is the first one that fully deals with the crisis and with the reasons for the crisis and criticizes the traditional approach by politics and by economic theory. So that I have to go a bit back into the history of the crisis and explain a bit to you our position on the crisis. The first thing that strikes me normally is that we have the biggest crisis in 80 years in the world economy. And. But if you ask what is the reason for this crisis, what happened? What went wrong in the world economy? You find very few answers. Very few people have, so to say, put themselves under strain to analyze what has happened. The International Monetary Fund in Washington has brought out its world economic outlook in April this year. So at least half a year after the beginning, the full outbreak of the crisis, which we can date with the collapse of Lehman Brothers, which was in the mid of September last year, and the International Monetary Fund managed not to ask once the question what went wrong in the world economy? If you compare if plane crashes or something else happens in the world economy, everybody would, in the world everybody would ask what went wrong? What was the reason for that? But this time there is a strange silence all around the place and nobody really asked the question, so what went wrong? What went so fundamentally wrong that the world economy could collapse into the deepest recession in 80 years more or less overnight? Because this is what we see, it is a collapse overnight. And then if you listen to our politicians, what they say, and I'm sure it's in the United Kingdom, you know, I'm coming from Germany, our Chancellor used to say, well, there have been some excesses in the banking sector or so some others say, yeah, banks have been a bit too, had too much appetite for risk or were too offensive or were too open to take risky positions. That is not really the truth. It's a very only the margin of the truth. So to say what really has happened is much more than this. What really has happened is that we have a big, big, we have built, so to say, a big, big casino outside the real economy. And not only one casino, but we have built several casinos, several really big casinos where the people have been playing day and night with the expectation that they all would earn, at the end, 25% return over capital. You see, it is very simple to understand. If we all go out tonight to our bank and ask for three times our monthly income, and we tell the bank we go into a casino and we expect to earn 25% return on our investment, then the banks will say, please, there's the door. Please go home quickly or see your. See your analyst, because that is out of the world. That cannot happen. Casinos do not earn anything. Casinos are not productive. Casinos do not produce a return on investment. For some, yes, but not for all. And the more invest in casinos, the less there will be return on investment and the less there will be return on investment for all banks in the world or for all players in a casino of, say, 25% or 20% or whatever they expected. That is impossible. That is absolutely impossible. But this is exactly what happened. What we had were the build up of a lot of casinos where people were gambling, not investing. They were gambling. They were gambling and they were expecting high returns. And then at a certain point of time, obviously, the world cannot, cannot afford that kind of gambling anymore, because the gambling can only go on for some time because the gamblers are able to drive prices. Prices. They're able to drive prices in a certain direction, namely upwards. You see, everybody in the world, Everybody knows that Mr. Madoff is a very bad guy. Mr. Madoff has, well, overall lost some $65 billion. And everybody says, well, this is Ponzi game. This is cheating. This is a thing that has to be punished. But what happened in all the other markets? What have all the other markets done? Well, all the other markets have only survived for a longer time because they were able to drive prices up. So if you are gambling on the stock market, it's obvious you can go on gambling on the stock market as long as the stock prices go up. Once a shock occurs and the stock prices collapse, then the gambling's over, at least for most of the people, for 98%, maybe some short sellers, but for most of the people, the game is over. Then the Ponzi scheme collapses. If you're gambling on oil prices, and indeed, there was a lot of commodity speculation, as we have shown in this report, there is a huge amount of commodity speculation going on all the time, and it's still going on. And this gambling, this Betting has driven up oil prices. So at a certain point of time, everybody realized that oil prices cannot go on further rising, they will not rise to 200, although they were attempted last year, in the summer last year when the price rose to 145, there were a lot of people bringing out studies. And one of the analysts that was coming out with a study that the price would rise to 200 was one of the biggest gamblers, namely Goldman and Sachs. So but at a certain point a shock occurs, be the shock, the rise of interest rates of the central banks or whatever the shock is, at a certain point the shock occurs and then the, the whole thing collapses. And that is exactly what happened last year due to several shocks that hit the several casinos that we had in this world. All the casinos together, all the pyramids of speculation, collapsed at the same time, and they collapsed at the same time, leaving the world in a deep crisis. And why is the world in a deep crisis after the collapse of the casinos? No, it's very simple to understand because most of the people really got the credit from their banks. They got money from the banks and the banks gave money to themselves to go betting. So it was betting and gambling with debt. People were betting in many casinos, not with their own money, which could be afforded by the world, but with other people's money, so to say. And this is the core of the crisis. This is, in our view, the core of the crisis. And because it was such a huge casino, the casino had built up over the last 20, 30 years because so many huge casinos. That is why we are in such a deep trouble. But if you look around in the world and you look out for politicians who would say that very clearly would say there was a part of banking which was called investment banking, by the way, but it was not investment about it. The English word investment is used for both purposes. The one is investment means gambling includes gambling, or means buying something that is already there. And the other, investment, the real investment means to build up something from scratch, to build productive capacity. But investment banking was not about investment in productive capacity. Investment banking was mainly about gambling or moving assets around, merging assets and moving assets around in a way that in the end proved to be absolutely non productive. So this was, in our view, the core of the crisis. This was the core of the crisis that we allowed this kind of gambling to go on for a very long time. And we expected from the gambling high returns. And as the returns were not there, the world fell into a deep hole. Because what happened, and again, the processes are Very simple to understand. The process has been described very clearly by an American economist 80 years ago, Irving Fisher has called it. What happened then? If all the returns that the people expected are not there, if they do not realize the returns, then we are in a situation that he called debt deflation. Then comes debt deflation. You have a huge amount of debt and you have no returns anymore. So what happens then with your debt? You're bankrupt. Most of the people, or too many people are bankrupt. And if these people are banks or are what is called systemic relevant institutions in the financial sector, then the government comes and bails them out. Then the government comes and bails them out. And once they're bailed out, they go back into the casinos or that is exactly what is happening. And I come to that in a minute. So you have debt deflation and debt deflation in the private sector. So far. The story is then transformed into some reasonable political measures. The debt deflation in the private sector can only be fought by debt inflation in the public sector sector. It cannot be. It does not mean inflation in the normal sense of the term. But debt inflation means the government has to take over much of the debt, because whatever the private over indebted people do, it leads deeper into the crisis. And this is the important lesson that we have to learn. This is, by the way, a Keynesian lesson. It's strictly against the neoclassical theory, because what happens is what can, what can people that are over indebted do? Well, they can sell assets that they still have, that have still some value, but then the price of these assets go down. If many people try to do that at the same time, and then even those people that are not yet in trouble get additionally in trouble. The third thing they can do, the second thing they can do, they can declare bankruptcy. Then someone has to take the burden anyway. The third thing they can do is they can cut spending. And that is what exactly what many people did, what mainly investors all over the world did. They cut spending at the point of time when they realized that the easy return, so to say the expected easy returns from the betting, from the betting activity, did not show up. And then, well, if spending is cut by too many people, then we get into a recession. So who is stopping that recession? Well, only someone who's outside of the game, so to say. If all people are people are in a swamp. The more they move, the deeper they get into it. And this is true for the private economy. The private economy cannot escape the swamp. Once they are in that situation, they need a government to Bail them out, to get them out of the trouble and to get them back on firm ground. This is what has happened. And up to now, up to that point, the story is okay. And the story is quite consistent. Up to that point. One could say, well, the politicians have understood at a certain point of time that all their models, the mainstream model they were adhering to in the last 30 years is dead and gone. And they have to come back to a realistic model of the world economy. And that is the Keynesian model, obviously, well and good. But at that point, exactly the political solution stopped. At that point, exactly the political solution stopped. And what we do not have, what we do not have at all is any attempt, and I'm maybe exaggerating a bit, but I would say it's justified. We have not seen any attempt to settle all the other problems, to settle the systemic problems that we are in. We have not seen any attempt to settle the systemic problem. Namely, it's a systemic problem. To rephrase it again, the systemic problem is to make it very provocative. The systemic problem is that the financial markets do not get the prices right. Financial markets never get the prices right. When I was here at the LSE two years ago, I wonder who was in the audience at that time. I'm sure you were there, but some of you may have been here. We were talking. We have been talking. Robert Wade was one of my partners on the podium. We were Talking about Iceland two years ago, in the end of 2007, I think it was. Yeah, we were talking about Iceland. Why were we talking about Iceland when nobody talked about Iceland? Nobody in the world talked about Iceland, only in praise of their wonderful economic miracle that they have just achieved. We were talking about Iceland. We were saying, Iceland is bound to collapse and nobody would believe it at that time. But Iceland collapsed. And I was in Hungary 1½ years ago and I gave a speech like this, talking about the global casino and the gambling activities and the problems that Hungary are in. And the people were booing at me, saying, woo. That is not true, what he says. He speaks about Hungary. Everything is fine. But I said, Hungary is on the verge to collapse. And Hungary collapsed. So what happened? All the time it's the same thing. The financial markets didn't get the prices right. I talked about commodities already on the stock market, it's obvious. Everybody who ever has engaged in investing in stocks knows it. On all the other markets it's the same. But the worst of all markets is the currency market. The currency market is the worst of all markets. And we have seen in the last years that countries got huge capital inflows like Iceland or Hungary. Their currencies got overvalued dramatically by the markets, and they now collapse. And they are close to a bankruptcy of the whole country. And they have to go to the IMF and ask for loans, and they get the wonderful conditionality that the IMF normally prescribes as the solution to the problem. I come to that in a minute. The financial markets do not get the prices right in the currency market. It's absolutely obvious that whenever you leave the financial markets to determine the most important price that any country has, namely the exchange rate of its currency vis a vis other currencies, you find that the speculation is driving the currencies for years. For years in the wrong direction. For years in the wrong direction. And they're destroying dramatically the allocation of resources. And the efficient allocation of resources is what is promised by. By the mainstream economic theory. Nothing like that comes up. It's exactly the opposite. What the financial markets have done in the last years is a dramatic, dramatic misallocation of resources. Misallocation of resources. Because they were not trying to find the right prices. They were not the pros and cons for rising prices or falling prices at a certain point of time. They were always herding and in a way that they drove the prices up to the point where the whole system had to collapse. And this is nowhere more obvious than in the currency market. But it's true in all the other markets as well. If you look at the oil market, the oil market I mentioned already. But if you look at other commodities like copper or soybeans or rice or wheat, all these prices were driven and are still driven by financial speculation to a very, very large extent, sometimes to something close to 100%. And I'll show you some evidence in a minute. You see, this is the most remarkable thing in the last years, that the financial market do not get the prices right. You know where the phrase comes from, getting the prices right? That was the phrase that described what was called once the Washington Consensus. The Washington Consensus that said mainly developing countries should adopt, so to say, the lessons that the developed countries had learned and had taught them for many years, namely to leave the prices to the market. But what the Washington Consensus never understood is that the financial markets, and I'm emphasizing the financial markets, I'm not against markets, but the financial markets do not get the prices right. And if you do not have massive government intervention into the financial markets, the whole market system cannot function. The whole market System cannot function. And here you see why the politics, politician and the whole body of policy that we have in our countries dramatically fails at this moment of time. Because they are not addressing that problem at all. They're not addressing it at all. They're not talking about how financial markets have been working. They're not talking about what financial markets are doing right now. They just try to put away the waste of the crisis, of the collapse and then go back to business as usual. To go back to business as usual. But this is not enough. If you look at the world economy in the last years, in this year, you see we have the most dramatic collapse of growth that we ever had in history since 2029, 30, 31, 32. And at that time, by the way, it was exactly the same reason why the world collapsed more or less overnight. And this is true all over the place. We all know that. I don't want to go into that. But if you see then what happens, you see what happens in several markets, in several, more or less, one could say independent markets that have to determine certain prices. You see, they're all moving in unison for a long time. They collapse at the same time and they're reviving at the same time. And if you do something funny that we have done several times in unctad, you look at the daily movements, the daily movements of prices in different markets for six months. This is for a six month period ranging up to 25 of August. So up to last week you find that over many, many different prices that have nothing to do with one another one would say under normal circumstances you find extremely high correlation. This is all Australian dollar per Japanese yen. Why Australian dollar per Japanese yen? Because yen and Australian dollar were the typical currencies that were speculated in what was called carry trade. Carry trade. That was the speculation that drove the Icelandic krona up, that drove the Hungarian for rent up and that drove the Australian dollar up till they collapsed. Now what happens in the last six months? The whole thing turns around. I go to the end of my presentation there. I have some more that I wanted to show to you. Sorry for being so quick, but you shouldn't read it. Some others look at, we have here the print crude, which is oil. If you take oil, it's even more. The correlation is even higher. You see, we're getting close to 100% correlation in the daily movements of these prices, which shows that you have the stock prices. There's a standard and poor index. You have a commodity index and again you have one currency, Brazilian, real per Yen, which is one of the speculative currency relations. And all of these prices move in the same direction. And again they move. This is after the crisis, this is not before the crisis. Before the crisis, you find exactly the same thing in the other direction, downwards. Now it's upwards, but it's exactly the same thing. The phenomenon has not changed a bit. Has not changed a bit. And that shows that something is quite fundamentally wrong. It's not only a bit wrong or a bit excessive or a bit too much risk friendly or a bit too much appetite for risk, or all the nice phrases that people are using for that. No, it's fundamentally wrong. If the oil price moves all the time exactly in the same way as the currency Brazilian real per Japanese yen moves, something must be wrong, because there is no fundamental that would connect them in a way that the daily movements could be exactly the same. And this over six months. And six months is not nothing. One cannot say this is a short time. Six months is important for determining expectations of market participants. It's important for determining the expectation of producers of prices. And we cannot ignore it. But all the traditional mainstream theory of economics ignores exactly that. It is ignored, and it is ignored by politicians. It is ignored by politicians because there is no public outcry. There is no academic outcry. There is no one pushing and asking what is wrong, what can we do about these, these movements of prices. No one is asking that question. And this is why politicians are calm and going back to business as usual. But it is not justified. The next bubbles are inflating, the next bubbles are inflating. And these bubbles will lead back into exactly the same situation that we had before. So what do we have to learn? What do we have to learn in terms of economic policy for the future? Well, what we. Our conclusion in this report, I think very straightforward. We say we need the ability, and we have the ability of governments to intervene in the markets. We need the willingness of governments to intervene in certain markets. And I come to climate change in a minute. And there again, it's the same thing. We need the willingness of governments to intervene in certain markets and to move the prices of those markets where fossil fuels are traded. This is the very simple truth that we have and the simple challenge that we have to face. You cannot defeat the increase in global, the global temperature if you're not willing and you're not able or whatever, or a combination of both. No willingness, no ability to move the price of fossil fuels to a certain extent upwards and to keep it rather steady, because otherwise you will not get the investment that you need to go into in renewable resources, energy, energy supply. So. But coming back to the financial crisis, so what is to be done? Well, the solution is straightforward. For the currency market there, the solution is the most straightforward. What we need is a currency system that is much more neutral than the system that we have seen in the past. And we make a very simple recommendation which is not new. It's based on what was the core of the Bretton woods idea. It's based on what was the core of the European Monetary Mechanism idea, namely that countries, nations should not compete with one another. It should not be nations that compete, but it should be companies that compete. There should be competition of companies in normal goods markets. There should be competition of companies, mainly in respect to the increase of productivity driven by productive investment, but there should not be competition of nations. This is one of the important lessons that we have to learn from the last years, because one of the elements that was driven by these financial markets was that we had what we have called, and we have been talking very long about. We had global imbalances. We had global imbalances which were not driven by policy alone, but which were driven by the currency markets because we had huge overvaluation and undervaluation of certain countries. And this has to be stopped. This is the most simple and the most straightforward conclusion. And what happens? What happens in politics? Have you heard the word currency anywhere in the last month? As part of the problem and as part of the solution? No. Have you looked at the G20 conclusions that came out in April, 2nd of April in London? The word currency. Neither the word currency nor the word commodity appears in the communique of the G20. Do you expect something like that to come in the communique of the Pittsburgh meeting three weeks ahead of us? Nothing like that will come up. Nothing like that. The wonderful thing, the wonderful thing, the best thing that the G20 in London has put in their communique is the following. Namely, they have asked a Financial Stability Forum, I wonder whether you have heard about it, Financial Stability Forum, to deal with the problems of the regulation of the financial markets. And then someone must, in this meeting, must have had quite a good memory and said, oh, Financial Stability Forum. We had already once. And unfortunately that forum did not provide us with the early warning that we expected from it. So they called it now Financial Stability Board. So this Financial Stability Board shall fix the regulative problems of the world economy. You know, I have been as official in the German finance ministry in 98, 99 in the midst of the Asian crisis and the Latin American crisis, which were clearly currency crisis crises of the monetary system at that time. There was only one attempt by the G7 at that time to detract attention away from the real problems and to solve in inverted commas the problems that the world and the Asians and the Latin Americans had at that time. They invented what they called the Financial Stability forum. So in 99, the financial stability Forum was invented with the only target with the only target to detract the attention away from the real problem and to put it all into a procedural and somehow longer lasting academic exercises that would be forgotten by politics after time. And now the G20 in April 2009 in London comes up with exactly the same recommendation. And we do as a Financial Stability Board, which is exactly the same as the forum. Maybe they get three staff members more before. Before they had seven. Now they may have 10 or 15. I don't know, to do what is necessary. And there you see, this is. But this is a very critical thing. And we have to think about it, what we can do. Because it seems, and this is my observation, that politics, and international politics in particular, are unable to deal with complex problems like that. It is not only a question of vested interest, it's not only a question of lobbying of the City of London and the Wall Street. Surely that plays a role. Definitely that plays a role. But it's not only this. It's not only this. We do not have the ability of international fora to deal with complex problems, with analytically complex problems. And because we do not have this ability of these fora to deal with it, we have the tendency to put aside all the relevant questions and focus some irrelevant questions. And one of the irrelevant questions is obviously the whole question of bonuses. What about bonuses? I have no problem with bonuses if the bonuses are for people who have really earned money, if it is real money, if it is productively earned money, I have no problem with bonuses and have no problem with all the incentives. If the business that the people are engaging is really something that has a social benefit and not only a private, temporary benefit at the expense of others. This is the point. Productive investment is helping everybody because it spills through the whole system. It triggers, through it goes, it trickles down. To many people who have not been engaged in the first moment in this kind of investment, it has a social benefit. But most of these investments that we have seen in the financial sector have, per se, a priori, no social benefit, because they cannot have a social benefit, because betting cannot have a social benefit. Betting has no benefit at all. Betting is always a zero sum game. By the logic of its construction, it's a zero sum game. And if the betters are bailed out later on by the government, it's clearly a negative sum game. It's a negative sum game for society. But why do we have no politicians who would, who would say that, would talk about it? Who would ask the question, how can we, as we have asked in this report and in the report before, how can we weed out the speculative activities out of the system? How can we separate speculation from productive investment? Nobody would argue, no reasonable person would argue that there should be no hedging in this world. Surely if someone, a commodity trader or commodity producer and someone who wants to engage in certain kind of hedging activity in this commodity trade, why shouldn't they? They should, they should make a contract and decide that once the 1:1 side takes more risk, once the other side takes more risk, whatever it is, it's not important. But if all the many people with no interest in the commodity at all, with no interest in the commodity at all create a market that is so to say, above the real market, the market where the commodities are really produced and traded and push the prices in a certain direction without knowing anything about the price of wheat in the next year, nobody knows anything about the price of wheat or olive oil or other things in the next year, and not about crude oil as well. So if we all do not know that, but there are some markets that are fed by studies, as I said, the Goldman Sachs studies and other studies that normally only have one one reason why commodity prices must rise. Because China is there and Chinese are so many people that they eat up everything and they consume everything in the world, this is the only analytical tool that the people have to explain why the prices are driven up forever. And if these markets then produce an information which seems to be valid, but is not valid at all because it's built again on speculative analysis, then these prices in the futures market are driving the spot prices. Because no producer of something, no oil producer, no wheat producer, would ignore that in the futures prices the price is twice as high as he would expect under normal circumstances in his spot market. And then it is just the other way around, as it should be. The futures markets are driving the spot prices and not as traditional economics expect, the spot prices are at least strongly influencing the futures prices. Keynes had one wonderful sentence that is we simply do not know. There are things that we simply do not know and nobody knows. It the future is principally unknown. And as the future is unknown, we have to create institutions that do not pretend to know more than we can know, but we need institutions that really use the knowledge that is available, the knowledge that is available. And that is an atomistic market. That is the idea, by the way, a good idea, of the atomistic market. If you look at the guru of the neoliberal thinking, Friedrich August von Hayek, and how he described why a normal market is always superior to government decisions about price or supply and demand, it is what he describes is an atomistic market where many millions of people come together with their individual independent information, what they need, what they want to have, and what they can offer to the market, what they can supply to the market. And all this independent information is then put together by the market into one price, crystallizes in one price. And this is indeed information that a government can never have on the financial market. It's just the other way around. There are few people all around the world that are hurting behind a certain set of information that everybody has, that all governments can have, that all central banks can have, and where you need a certain judgment or good or bad judgment, whatever it is, to extrapolate it into the future, that has nothing to do, absolutely nothing, with the atomistic market that all the good economic students learn in the first and second semester, that is so superior to any kind of government. That's true. I do not deny that the atomistic goods market, a market that is not dealing with something that lies 10 years ahead, is superior to government decision, but future speculation about the future price. Any government is as able to do that, or any government institution, any academic institution, without vested interest, as able to do that as any market in the world can do it. And this is the lesson that we have to learn. And if we learn that lesson again, then we have to be much bolder and much more open to influence these prices. So let me come to my last point, which is closely related. It is indeed not independent. It sounds to be independent, namely climate change, but it's not. It's not independent of these questions that we are dealing with here. Because as I said again, what is asked for is that we are willing and able, and not only we, we means the international community. The international community must be able and willing to influence, to influence the price of certain commodities. And it's not enough. It is not enough to come together as we do in the UN system everywhere and mainly in the UN system, to discuss what are the commitments that each country would take in the Fight for climate change in the next years. No, it's not enough. What we do have to understand that we are fighting, so to say, against the market again, because what is the market? What is the market? Let me take the market for oil. What is the market for oil doing? The market for oil has only one target, so to say, namely, to clear the market, to give any supply that is produced a demand, to create demand for any supply that is produced. And if we in Europe now replace certain kind of lamps by, I don't know what, saving, saving energy, saving lamps for the traditional ones or so, and if we drive a car that uses less fuel per 100km, and so this is all very nice activities, but it has nothing to do, it has nothing to do with the question of the fight against climate change. Because what it does is just if demand on one part of the earth is falling, the demand on another part of the earth will be rising. Because there is a price mechanism. There is a price mechanism that will reduce the price whenever demand is reduced somewhere. And if it is not distorted by financial speculation that we have to get rid of first, because then we even do not know whether it is going up and down whatever we do. But even in a normal. If the market wouldn't function normally, there is no easy way out. We always need the suppliers of fossil energy. We need the demanders for fossil energy. And we need again the ability and the willingness of the international community to define a certain path of the most important prices for the most important pollutants into the future to define a path, to set a path. It may be with some ban, some movements around a certain target, but there must be a target. We cannot rely on the financial market to find, to find the right price, but we cannot even rely on the normal supply and demand in these markets to find the right price. We must have governments that are willing to do that. And if governments would be willing to do that, then I'm much more optimistic than, and this is part of the message of our report, then we are much more optimistic. We're much more optimistic that developing countries and developed countries together could find a way into the future that is less burdensome for the planet, that reduces greenhouse gas emissions to a very large extent. Because again, the traditional economic discourse is misleading. The traditional economic discourse, led by Mr. Stern here in London and other people, says that we have, we have, if we do that, if we reduce the greenhouse gas emission, we do that at a certain cost. It has a certain cost. So they have calculated, I don't know, 5% of GDP or 2% of GDP in 2050. It's anyway ridiculous. The dimensions are ridiculous. But even this cost. But this cost is indeed what is confusing the brains of our politicians. Because all the politicians refuse to do what is necessary, because they fear the cost of their intervention into the market. But that's not true from an overall economic perspective. There is no cost. Or let me say it the other way around. Who knows what the cost of all of you carrying a mobile phone is? What is the cost of carrying a mobile phone around now? Or having a mobile phone? What is the cost of that? It's huge. The cost of that is huge. Why is it huge? Because if we all would not, nobody would have invented mobile phones. We would all have spent our money for something else. So the producers of that something else disappeared and that's a huge cost or not. If not, then climate change has no cost at all. It's the same. We're producing other things we're not producing. We're producing less mobile phones, maybe, and producing more solar power plants. What is the problem with that? No problem at all. No cost at all. Nobody calculates. Nobody ever in history of mankind has calculated what the cost of a certain development into the future is. If it was invented by private people. Only if the government intervenes. Only if the government says, no, you should not use mobile phones, but you should use something else, you should use your money for power plant energy, produced energy. Then everybody dares and public outcry and everybody says, no, this is not allowed. This is an external effect that is costly and we are not willing to bear the cost. That's not justified at all. All our preferences we do not have. Or the fiction of economics again is that we have natural preferences. So we are born with a preference for a mobile phone. Yeah, that's the idea. That's the idea. You are sovereign consumers and you have a set of preferences. And this set of preferences is given and if you change it, then it's a cost. That's plain nonsense. Because we have been educated that we have a preference for mobile phones by private companies. They have trained us to love video cameras and they have advertised so long certain things that we wanted from the deep of our heart and we love nothing else but the things that they have advertised through our TV screen. It's all plain nonsense. When the society decides that it wants to go into a future with less risk concerning climate change, it can do so anytime. And there's no cost involved because it changes the preferences. And the market system has to serve the preferences of the people and nothing else. And where the preferences come from, whether they are coming from the public relations campaign of a private company or they're coming from the public relations campaign of a government. Advertising. Advertising solar power is no difference at all. There's nothing to discriminate the government activity against the private activity. But that is exactly what we do all the time. That is exactly what we do all the time. And this even leads to huge conflicts in international negotiations because developing countries believe that they have to bear much more cost than the developed countries. Although the developing countries will jump into a new future, they will use technologies that are available and there will be for them as well as for the developed countries, at least no visible and no feel, no cost that could be felt by anybody in the society. And if it cannot be felt, it is not there. Thank you very much.
- [49:20]
A
Thank you very, very much, Heinrich, for sweeping and fascinating and I passionately delivered and I think also very provocative presentation. I'll turn it now to Radhika.
- [49:38]
C
Heine's very passionate discussion at the end about cost. Reminded me of a joke. It's an old Punch cartoon and it has these two accountants sitting at a bar looking very morose and the one is saying to the other, the cost of living has gone up again, but it's still worth it, isn't it? So I think it's some kind of miscalculation like that that's working and I think Hyena is quite right to point it out. However, I'm not going to talk about climate change. I want to focus my few minutes on what I believe the report says, which is very important, relating to financialization and in particular the future of the world's financial system and the cost actually of not changing it, the cost we have already paid over the last many decades of not having a more sensible world financial system. But first of all, let me say that UNCTAD must be congratulated. It has always been a fairly consistent critic of the neoliberal order. But now, this time around, I would say that not only has it done it again, but in many ways it has outdone itself. It's produced a report that has fearlessly pointed to the real causes of the crisis, including when it involves pointing the finger at powerful countries and institutions. And it has also made a link which is very all too rarely made even by critics in the midst of capitalism's greatest crisis. And that is the link between the dollar centered financial system that we have and the present crisis. And it makes it very clearly because it can clearly and easily see what is necessary to make the world economy more productive and, in fact, more open, because for all the talk about free trades and free market, in fact, we can have a much more productive and beneficial trading system than what we have right now. And it has pointed the finger, particularly at financialization, the dominance of finance over trade and production, and the freedom of financial flows, which is contrary to various neoliberal nostrums, antithetical to productivity and prosperity even. And that is why it calls for the dollar to be replaced with a global reserve currency. I must say, by the way, that I've recently been writing on the same theme, which is partly why, of course, I focus on it, but also because I've been writing about it because. Because I think it's very important. This is a profoundly Keynesian report. It begins. It only mentions Keynes once at the beginning, and I did just an automatic search, and does not mention Keynes again, but inside and out, it's profoundly Keynesian. And I bring this up because what it recommends is something that Keynes, who was the head of the British delegation at Bretton woods in 1944 and throughout, in fact, in the preceding years, negotiated with the Americans regarding the future of the world's economic and monetary system, put forward a very similar set of proposals back then. And this is also the sort of proposals that are being recommended now by the. In the report of the Commission of Experts appointed by the President of the United Nations General assembly on Reform of the International Monetary and Financial System. And I think Heine is also very clear that, in fact, it had to come from such a relatively marginal place in the sort of international system, partly because our mainstream politicians are simply unable to comprehend the need for it. They're unable to grasp it, discuss it, and certainly seem to be unable to promise to do anything about it. However, people from a variety of critical backgrounds, and you don't need to be any more critical than Keynes was, have been proposing this at the LSE itself. Not too long ago, we had Prabhat Patnaik, who was instrumental, in fact, in advising the President of the General assembly in setting up his Stiglitz commission, this commission of experts that I just mentioned, and he was at the LSE making precisely this plea and again exploring a variety of options, as the UNCTAD report does, of how it might happen.
- [53:53]
D
So.
- [53:54]
C
So I want to basically make four main points. One is, I think UNCTAD is absolutely right in criticizing neoliberalism. And in any case, neoliberalism per se has been upended by the crisis We've got Financial Times, the Economist, the Queen, everybody questioning the validity of free market economics. And I think that if the Queen gets it, then probably we should all try and get it. And only last week Adair Turner hit the headlines. The chairman of the Financial Statement Services Authority by calling the City bloated and up to nothing socially useful. And what he said seemed to be could be boiled down to saying the following. Free markets are not good. Financial sectors do not, as Heine has emphasized, allocate capital efficiency but encourage speculation that is very large financial sectors. Will Hutton says. Sorry, I'll quote him later. And thirdly, that highly developed financial sectors are not good for any economy. And this is particularly relevant for Britain. So that's the first point I wanted to make. Secondly, the Trade and Development Report underlines it in a variety of different ways. Critics of neoliberalism have seen this crisis coming. When the Queen said why didn't you see it coming? It was because she was talking to a bunch of people who have not habituated to criticizing neoliberal ideas. But there were lots of predictions out there. The TDR was only one of them. The TDR also emphasizes very importantly this is not a financial crisis that is affecting the real economy. Underlying the financial crisis is a crisis in the real economy which itself has triggered the financial crisis. And the financialization itself is a way is basically the result of governments not dealing over a period of decades with the underlying economic problems. The TDR also points out that while the crisis may be global, the effects are highly differentiated with the most financialized economies and those dependent on them being hit the hardest. It emphasizes that countries with greater domestic market depth are likely to weather it better. It warns against seeing the results of an inventory cycle, just the. The ups and downs of people stocking and destocking as evidence of green shoots and recovery. And I think it has a fantastic discussion of how in a sense the backwash of the present financial crisis has actually created a huge mayhem really in commodities markets. And remember, commodity markets going up may apparently benefit third world countries, but third world producers are also purchasers of and high food prices affect them adversely. They are both producers as well as consumers and they often don't get the benefit of high prices anyway as producers. So that's the second point I want to make is simply the TDR has underlined in a variety of different ways I think the problems with neoliberalism. It has also thirdly produced a very powerful critique of the policy response so far. There's a brilliant table in There, please take a look about the proportion of the money spent by each government that has gone in bailing out the banks versus the money that has actually gone into stimulating the economy. These stimuli are nowhere near enough. And what's more, their general orientation is inappropriate. It's no good giving rich people tax cuts. That's not going to help the economy. Very importantly, it has criticized the International Monetary Fund, which despite paying lip service to the kind of surface Keynesianism that has now become accepted lingo, in fact continues to impose austerity measures, that is measures which reduce the level of economic activity. That too in a context of a recession, a worldwide recession, and it continues to do that. It underlines that deflation and not inflation is the danger. When the financial interests, which remain all astonishingly powerful right now, considering what they've just done to all of us, we continue as a society, as a system, give them more power than they should have. And they are the ones who are sitting there worrying that if the government spent money increasing economic activity, that this is going to affect the value of money. Well, you know what? That's not the thing we're concerned about right now. What we are concerned about right now is, is increasing the level of economic activity. And somebody ought to tell them that. But obviously our Prime Minister is not willing to do that. Finally, it points out that financial regulation which has been proposed, and this is what Adair Turner was on about last week, is actually too weak. We need something much stronger to control the financial sector for the future. But lastly, and most importantly, importantly, I think what the TDR does is as I say, it argues that the dollar's world role has made its own independent contribution to financialization, to the crisis, and therefore it's important to do away with it. We need a global monetary system which, unlike what we've had over the last many decades, is not subject to what is generally known as a deflationary problem bias. That is, it does not tend to depress economic activity. It should actually tend to lift economic activity. We need a system that does not give us one country, the reserve currency country, in this case the United States, the right to run unlimited trade deficit, which is basically a right to collect tribute from the rest of the world. The rest of us produce. America can get all the goods and effectively pay nothing for it. Okay? We need a system which does not force debtor and deficit countries only to adjust that. It imposes the burden of adjustment on surplus countries as well. If I'm exporting, if my country is exporting too much and Your country is exporting too little. The problem is not just with your country, it's with my country too. We have to balance it out. So that's why we need a new system which does not encourage that. It would also control the movements of capital and therefore speculation. It would permit anti cyclical management of the world's money, injecting liquidity when the world and particular parts of the world need it and not when it is not needed. We need to have a system which does not distort trade. I don't know what the latest figures are, but they have, throughout the last several decades of neoliberalism been mounting astronomical figures about the relationship between the actual money that crosses borders and the goods that crosses borders. It was like one, 2000s of times. I'm sure Haina will give you the latest figures. That is to say, if you imagine that money crosses borders in order to pay for goods that cross borders, you'd just be horribly wrong. That's not why it crosses borders. And that relationship should be brought more into some sensible. Or rather those two things should be brought into a more sensible relationship. And finally, the present system imposes upon particularly emerging economies, but a whole range of economies, if they could afford it, the cost, a huge cost of holding reserves which are in fact, which they ought not to have to hold at all in order to protect themselves from the possibility of outflow of speculative capital of the sort that occurred under the Asian financial crisis. So for all these reasons, we need a new currency. We need the dollar to be replaced. This idea has been pooh poohed in a variety of ways. And indeed all discussion over the last, many last couple of decades anyway of the dollar's role has revolved around the idea that America is a hegemonic country. That's why its currency is the world's currency. And only if there were a challenger hegemon, a new hegemon, can the dollar be replaced. And if the dollar is then replaced, it will be replaced by the currency of that hegemonic new hegemonic country. This is all hogwash. That is to say, to assume that just because there is no contender country that is going to allow its currency to replace the dollar, that we do not have an alternative. We do have an alternative. We can have an alternative. And in any case, we do not want to have another world currency which is the currency of a particular country. In fact, let me just end by quoting to you. Oh dear, I printed only two or three pages. But anyway, there is a very fine little Quote that I found in a 1980s book about the American America's world role and so on. At which point this historian, David Kaleo, was recording how it was declining. And he basically pointed out that a monetary system with special rules for one power reflects a group of states dominated by that one power. The system will last as long as that hegemony. A system characterized by equal rules, equally obeyed reflects, by contrast, an integrated group of states with a plural difference. And I guess I won't take much more time, but basically Keynes had proposed precisely such a system back in 1944 during the Bretton woods negotiations. The Bretton woods system that eventually was agreed upon is not a Keynesian system except for capital controls. All his proposals were rejected. They were rejected by a country that was so powerful at that time, the United States accounted for half a world GDP by itself and 70% of its gold reserves. It's used its economic and financial power to simply veto Keynes proposals and institute the dollar backed by gold as the world's currency. Eventually, of course, it was no longer backed by gold either. My point is simply that Keynes assumed, or Keynes was perhaps assuming the existence of a plurality of states of roughly equal power. That historical circumstance did not exist. That is why he was defeated. We now live in a time where something closer to that configuration of power exists. That is, we at least live in a world economy in which no single power has such overwhelming dominance as the Americans had back then. Then. And so I think that the possibility of creating such a system is more propitious today than it ever was. Thank you.
- [64:44]
A
Thanks, Radhika.
- [64:45]
D
Robert, thank you very much. Great pleasure to be here and I very much enjoyed your presentation, but also the report. I'm still struggling to work out your argument about mobile phones not costing much if we drop them. I invite you to explain that to my 12 year old daughter and if you succeed there, I'll buy your argument. I'm going to focus narrowly on climate change. This is the end part of the report and I'll keep my remarks quite brief so that we have a bit of time for discussion. I think it's a very interesting chapter of the report and in fact it's the first major report I've seen that actually puts the global financial crisis and climate change together under one roof and discusses both global crises in one go. So I think for that reason alone you should read that. And please persevere, read through the report and get to the climate change chapters because they are very thoughtful analyses of the economic policies and the economic costs that are involved in dealing with climate change. It's interesting that we're beginning to think about global crises in both financial and climate terms. This is a bit of a trend, but nobody's really done it systematically. And so I think for that reason we're on the right track here and there. I think good reasons why we should think of both crises as part of a bigger crisis, a global crisis. Let me give you two reasons for that. The first and obvious argument, and Heiner made that earlier, that the financial crisis as much as the climate crisis crisis, are rooted in some kind of global market failure. If we think about global finance, we realize that the failure here was to price risk appropriately and to use the price mechanism in risk management to guide behavior in a direction that would respect certain safeguards, certain barriers. The financial system became rudderless when it began to price down risk, disperse it through the global economic system, and thereby ignore those warning signs that normally come up when you take on excessive risk. In a similar way, the global economy has not managed to price natural resources appropriately and has therefore overstepped certain boundaries that the ecological system puts up and that have been ignored. So when it comes to overuse of resources such as fishing or forests, and now the global atmosphere, we have not used the price mechanism effectively to tell us when to stop. And in that sense, both crises are about a failure of the global market system to work properly to send us the kind of signals that we need. But we also face a dual crisis of governance. And again, those themes come clearly out of the report. In both the financial and the climate area, we fail to produce the kind of policies, governance, global governance as we call it, that tames market forces when they become, when they go out of bounds, when they become excessive. In the financial crisis, we have seen a number of cases where governments have not only not tamed excessive behavior, but have in fact spelling it on, have encouraged the kind of risk taking that has driven us into the consumer credit led consumer spending that has sustained economic growth in the West. And so in that sense we find a similar form of governance failure in the climate area, where governments have not managed to set boundaries for economic activity, using, for example, the pricing of resources to reduce demand for certain scarce resources. It's interesting that previous speakers mentioned the oturner's warning that we need to think about taxing financial flows the way Tobin proposed it back in the 1970s. And it's interesting to note what reaction that caused. When it comes to fixing global flow economics, we see an outcry of the various vested interests over the kind of policies that we need. And a similar reaction can be found when people start talking about carbon taxes, about putting a price on energy use. This was tried in the European Union in the 1990s, in the early 90s in America under Clinton. This was tried in the mid-1990s. And you've seen some of the most ferocious lobbying companies, campaigns against those taxes that would put just a small increase on the price of oil. So I think we are, in that sense, in two similarly structured crises. But there are some important differences, and that's where I want to come into the politics of both crises. And we need to recognize that they have different politics underlying the solutions that we are talking about. The first difference, the key difference obviously, is timescale. The financial crisis plays itself out in a matter of months, years. Well, in terms of financial markets, in a matter of days, if you look at the collapse of Lehman Brothers, it will take years to correct, perhaps a decade. The global economic repercussions are indeed going to play out over at least a decade. But in climate change, we know that the crisis started in, roughly speaking, the middle 18th century, when fossil fuels became used in industrial production, first in England, then in Europe, then in North America. It became a much larger globalized crisis when the free movement of goods and investment after the Second World War produced an expansion of industrialized production around the world. But this is a crisis that's playing itself out in terms of decades and centuries, and it will take us a good 50 to 100 years to resolve the crisis. So we therefore should not kid ourselves in terms of thinking of policies that will produce fixes within a matter of years. In that sense, the report is good because it highlights the kind of long term investment and technological change that is needed for that. But there's a different difference between the crises, which is about who's involved in setting the terms of the debate and who's likely to find solutions. Because on the financial crisis, we have a fairly small set of actors that are important that set the rules. The United States, the European Union, to some extent Japan, but not many other players in that field. But on climate change, we find that we deal with a much wider set of actors. In fact, not just the financial sector, but all productive industries, all productive sectors that use fossil fuels. It's not just producers of goods, it's also consumers of goods. It's the people in this room, everywhere in London, who use energy, who consume goods, that are implicated. Whether we can do anything by switching to low emission products, that is a matter for debate. But we need to recognize that there is, to use a political system, science, jargontown, there are a lot of veto players in the room, many more so perhaps, than in the financial crisis, and they are very powerful indeed. That's where I come to the last point about the role of developing countries, which is at the heart of the UNCTAD report that we are debating here today. Because the report makes some important points about developing countries playing an important role, partly because they've always been seen as veto players. China, India, willing to grow at exponential rates, not wanting the kind of policies that Kyoto and other international governance structures have produced. But the report makes the point that these countries need to engage, but also they have the means to benefit from climate policies because of their ability, following appropriate investment strategies, to perhaps develop niche markets in green products, in abatement technology, in perhaps export of alternative energy resources. These are good points, but I think the report, and this is the one criticism I'd like to add, perhaps therefore underestimates the costs involved. This brings me back to the initial question about are there not costs? After all, when we switch from doing one thing to the other? I think there are. The costs are very much coming into focus as we approach Copenhagen, the conference in December that we'll decide about a success agreement to Kyoto. And the costs here are evident in the reaction that countries like China, India, Brazil, Indonesia and others have shown to proposals that we should move towards a drastic increase in global efforts to cut back on emissions because those costs are real for these countries. The costs will become even more pronounced when we recognize that the financial crisis and recent shifts in the global economy and in geopolitics have actually made the policy environment for engaging developing countries in climate change even more difficult. And I would highlight three shifts in the global structure that have produced what I would call a shrinking of the policy space for developing countries in climate change. The first is that as the United States is engaging in post Kyoto politics, it is putting up a much tougher fight for the inclusion of developing countries in mitigation targets, in emission reduction targets. The calls for countries like India and China to commit to emission reductions, those calls are becoming much stronger, and they have changed the relationship between the north and south in climate politics. They have shifted the focus within the principle of common but differentiated response responsibilities much more towards the common responsibilities. And that, I think, has changed the terms of the debate. Secondly, the financial crisis itself is having an impact on climate change politics in a situation where most of the leading climate change countries that are acting on the need to reduce greenhouse gas emissions are now burdened with a tremendous fiscal burden due to the bailouts. The European Union, the United States and others will face tremendous constraints in their aid budgets to help developing countries to reduce greenhouse gas emissions. We will find a much more hostile environment in which we negotiate a kind of global deal in which the north helps the south to reduce its own emissions. And thirdly, just as we're entering into the serious negotiations to find a deal, countries like the EU and the United States are beginning to think about climate policy through the terms of trade policy and are using trade policy increasingly as a tool to get other countries to act on global climate deals. And again we find this may end up constraining the policy space for developing countries in this area. So I think with a rather less optimistic outlook, I conclude the report highlights and this it does well where there are opportunities for developing countries. I just fear that the current confluence of two crises will reduce those opportunities for a few years to go. Thank you very much.
- [76:10]
E
Great.
- [76:10]
A
Thank you, Robert. We have some time for questions and answers, so why don't there's some microphones floating around. I think what we'll do is take three questions and then turn it back.
- [76:20]
D
Over to the speakers.
- [76:26]
E
I vividly remember the event two years ago with you and Robert. You were talking about global imbalances and you were blaming the global imbalances on floating exchange rate mechanism. You know the Iceland is have a current account deficit but it has the appreciation of exchange rate. Basically the argument was that the currency markets don't get the price right and you favored government intervention. But I had a serious problem with your argument then and I still have it today.
- [76:55]
B
Right. I think if you look at the.
- [76:58]
E
Data right, actually the global imbalances was created by the country who had the fixed exchange rate mechanism, China and East Asia. China has the largest current account surplus. And how do you think that contributed to the crisis? The whole thing is that my argument is that, you know, it's easy to bash free marketeers and everything, but we also need to bear in mind that governments interventions also played a huge part in accumulation of all these global imbalances.
- [77:32]
D
Thank you. Or you have your hand up to some extent. My question is related to that. So you've recommended effectively a system of fixed adjustable pegs for exchange rates.
- [77:52]
B
But obviously if you're doing that, you.
- [77:54]
D
Have to choose to some extent between cross border capital flows, your ability to use interest rates to manage the domestic economy and currency management. And my question is basically if you have to sacrifice one of those, which one do you think is least important? Very quickly, does the report support carbon pricing, given your somewhat skeptical view of markets?
- [78:30]
B
Yeah, let me maybe move from here so that I see the people who have asked the question. Yeah. On the first question, indeed, the fixed mechanism or the fixed rate mechanism that, as you said, or the kind of fixing, unilateral fixing that we have seen, seen in China has been blamed for the global imbalances. But you have to see the history of that. The history of that is that many countries after they had financial crisis, and China had a financial Crisis too, in 93, 94, after they had financial crisis and they had devalued their currencies, that's true for some countries in Asia. For most countries in Latin America, they have fixed their currencies at a very low level. Why at a low level? At an undervalued level, obviously. At an undervalued level. Why at an undervalued level? Because that's the only way, the only way you can control the whole system. Because an undervalued currency is always only under the threat to appreciate. But appreciation can be controlled because you're intervening with the money that you own, your printed money, you have your own money. The other way around, devaluation, you never can defend devaluation pressure because you're intervening with reserves. And all reserves are limited because they're international money. So that is why it was justified in our view, and we have advocated that point long time ago, that developing countries, as long as they are not offered a multilateral system that would allow them to have the maximum room of maneuver that you can have in an interdependent, interdependent world with trade flows going across the borders, as long as they are not offered a multilateral system, they indeed have to defend this kind of undervaluation regime, which was sometimes called the Bretton Woods II regime, which I think is the wrong word, because Bretton woods at least was an attempt to create a multilateral solution. After that, we never had a multilateral. So the floating has clearly failed. That is absolutely clear. In my view. Floating has failed because exchange rates were driven over periods of five, six years in the wrong direction. Clearly in the wrong direction, countries with high inflations were appreciated and the other way around. So the only way out is to go back to capital controls, to massive and very restrictive capital controls to control very short term capital flows, which is possible, as my colleague said. It is possible because most of these capital flows are unproductive too. If you get capital from the international market for three days, or for three hours, or for three weeks. You cannot use it, forget about it. There is nothing to do with that. The only thing that the developing country then does is pays the interest on these capital. But there is no use. It cannot be used for investment for nothing. And so far, much of the hype that we have seen again now in the last month, if you look around, the Washington institutions were euphoric about the new return of capital flows into developing countries. It was just this phenomenon that some of the developing countries were rediscovered, so to say, as a place where you could speculate short term on the basis of this carry trade. And so far I agree it is not a perfect. There is no perfect solution. But it was for many developing countries unavoidable just to go for this unilateral solution, because otherwise there is no unilateral solution. The exchange rate is a multilateral phenomenon. And you cannot determine it just unilaterally without affecting all the other countries. So the logic is that you need a multilateral solution. And this, the only multilateral solution that is, in my opinion, feasible and that could be accepted is one that was on the basis, so to say, underlying the idea, the original idea of Bretton woods underlying the European Monetary mechanism, namely, as she said, you must have symmetric obligations of surplus and of deficit countries. And that brings you, as we have done now, to a rule that we call the constant real exchange rate rule, which means that the competitive positions are equaled out, which has the advantage of taking out carry trade, the speculation more or less totally out of the system, because interest rate differentials disappear as an incentive for speculative flows, because the interest rate differentials are compensated by depreciation or appreciation of the currency so that they do not last in the terms of the calculation of the speculator. But it is clear you have to. You're not fully free with your interest rate policy. You can adjust your interest rate to the inflation rate to a certain extent, but you're not fully free. You're never fully free in a system with open borders. Then to get more room of maneuver, to get more policy space, you have to restrict at least the short term flows. There is no way out, because otherwise, even in our system, you can adjust the interest rate to the inflation rate in a reasonable way. But if you say we need 10% more short term interest rate, that will attract flows again and again and you will not be independent. There is no autonomy in an interdependent world. This is the simple rule. There is no autonomy in an interdependent world. And that is why you need fair international rules, a fair international governance, otherwise the system cannot work. In the trading system, everybody acknowledges that principle only in a financial system. Again, everybody, so to say, sticks to the idea that, that the markets can settle this, the market cannot settle it. And that is why we need other adjustments on the carbon pricing. Yeah, you need, that is what I wanted to say. You need either carbon tax or you need cap and trade, whatever you do. But you need the political willingness to steer that price, the most important prices. If you don't do that, the whole mechanism will not work. And you can commit to whatever you want. If you're not. If the international community does not find mechanism and ways to, to, to influence the price and to keep it on a steady path, on a steady rising path, for example, over the next 10, 20 years, then all our, all our attempts to, to fight greenhouse gas emissions will be in vain. Definitely. Because this is very clear that if you do not tackle this question, then you will not get the investment or you get rid of the whole system. But as long as you have a market system, you need that price signal. But nobody's talking about it at this moment. Nobody's talking about. They talk about commitments, but nobody is talking about what is the interaction, as I tried to mention, the interaction between suppliers and demanders of, of that crucial, crucial stuff that you have, oil, coal and things like that that are carrying the greenhouse gases. You cannot escape that question. But that question is not discussed. We talk about commitments, but even the question how to integrate or to build a framework where the suppliers. The fossil energy is traded every day in the market, you see it, it is traded every day. So if you talk about influencing the price lastingly and sustainably, you have to talk about those people that are trading it first, the financial speculators and, but the real suppliers of that stuff too. And you cannot keep them out. And you cannot discuss only on the side of the consumers of fossil energy how they reduce their consumption. If they reduce their consumption and the suppliers go on supplying the same amount as before, the price will fall and more will be consumed whatever you do in terms of concrete measures. That is why most of the measures are so ridiculous that are taken now in the developed world as they are just show measures and not really seriously tackling the problem.
- [87:13]
A
Well, I'm afraid we've reached the end of our time. In 2006, the Trade and Development Report elicited a very strong and sharp reaction from one government, the US Government, who's through the embassy in Geneva representative to the United nations in Geneva published a two page rebuttal of the report as a press release as soon as it came out. And I'm very anxious, curious to see how the US and other governments react to the 2009 report, which might have more provocative elements in it even than the previous ones have.
- [87:44]
D
But we'll see.
- [87:46]
A
Enjoyed the event very much. I hope you did as well. I want to thank Heiner for coming to share it with us, and I'd also like to thank Radhika and Robert for coming and reading and commenting on the reports as well. Thank you.