In this episode of the McKinsey Global Institute’s Forward Thinking podcast, co-host Michael Chui talks with A. Michael Spence, dean emeritus of the Stanford Graduate School of Business, and Mohamed El-Erian, president of Queens’ College Cambridge and chief economic advisor at Allianz. Together with former UK Chancellor of the Exchequer and Prime Minister Gordon Brown, they have leveraged decades of experience to explore the question “Is the world in a state of permacrisis?”

In this podcast, the guests touch on the following:

How the New Zealand central bank came up with 2 percent as an arbitrary inflation target, which was then adopted by the central banks of major economies around the world.
How the Queen of the United Kingdom asked a room full of economists why they hadn’t seen the Great Financial Crisis coming.
How finance hijacked growth strategies, leading to 20 lost years of thinking about how to promote productivity and high, durable, inclusive growth.

[[Audio 1]]

Michael Chui (co-host): Janet, we’ve been very fortunate to have had some great guests on this podcast.

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Janet Bush (co-host): Oh yes, by my count, we’ve had three separate Nobel laureates on various episodes, and obviously lots of other fascinating people who have perspectives on the kind of topics that MGI looks into.

Michael Chui: Today, we have our first return guest, who also happens to be a Nobel laureate: Mike Spence. And this time, he brought along a friend, Mohamed El-Erian, who has also examined the global economy in multiple roles, including years as the CEO and co-chief investment officer of PIMCO. Together with Gordon Brown, the former prime minister of the UK, they’ve co-authored a book entitled Permacrisis, based on discussions they started having during the pandemic.

Janet Bush: I knew Gordon Brown when I was a journalist and he was Chancellor of the Exchequer [finance minister] in the United Kingdom. A very impressive man. Well, this sounds fascinating if scary: permacrisis.

Michael Chui: Mike, Mohamed, welcome to the podcast.

Mohamed El-Erian: Thank you.

A. Michael Spence: It’s great to be with you, Michael.

Michael Chui: One of the reasons we have you on is because you both coauthored a book with Gordon Brown entitled Permacrisis. Gordon couldn’t be with us, which means that everyone on the podcast has a first name that starts with M, which we all appreciate.

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You’re both incredibly accomplished professionals, but I would love to just get a sense for how you ended up where you are today. So, Mike, if you don’t mind, I want to start with you. Where’d you grow up? Where’d you go to school? How’d you end up doing what you ended up doing?

A. Michael Spence: Like Gordon, but somewhat distantly, my family’s sort of Scottish. Came to Canada on the fur trade route. Grew up in Winnipeg and Toronto. And then I discovered liberal arts education in the United States, which we didn’t have in Britain or Canada at the time.

So I shipped off to Princeton. Studied philosophy. Ended up at Oxford with a Rhodes Scholarship and came back to do my PhD in economics at Harvard, and somebody offered me a job. I’m now an American citizen, happily. My professional life has been there. The last 15 years, I’ve spent living in Europe, in northern Italy, with my Italian wife.

Michael Chui: Terrific. Great to have you back on the podcast, by the way.

Michael Chui: Mohamed, it’s your first time. Welcome. How did you get to where you are?

Mohamed El-Erian: Mine is a total random walk. Just a series of lucky events. My father was a diplomat, so we moved from country to country. I got to the point where I couldn’t adjust to new friends, new languages, new curriculum. I asked to be sent to boarding school, without knowing what I was getting myself into.

I was sent to an English boarding school. I then stayed in England. Did my undergraduate at Cambridge in economics, my postgraduate in Oxford in economics. I was going to stay an academic, but my dad died. My mother had never worked, and I had a seven-year-old sister. So the question became, in the mid-’80s, “Who pays PhD economists?”

At that time, it was the IMF and the World Bank. So off I went to the IMF for 15 wonderful years. Loved it, but was turning 40, had never tried the private sector, so thought I would take a two-year leave of absence and have a go at the private sector before my human capital totally eroded. And I joined Salomon Brothers at the time, and then ended up at PIMCO for 15 years, loving it.

And then I decided to do lots of things, including coming back to the place that allowed me to do all this, the really transformational opportunities that I have here at Cambridge. So I’m back at Cambridge now as president of one of the colleges.

Michael Chui: Terrific. I love how you both have invested in your own human capital and have the opportunity, partly through students, to share that as well.

As I mentioned, you’ve written this book, Permacrisis: A Plan to Fix a Fractured World. Reading through it, I reflected on the fact that you’re not necessarily asserting—in fact, there’s a passage here, and I apologize for reading your own book back to you, but there’s a passage here that says, “Don’t let the perma prefix fool you; there’s nothing permanent about a permacrisis.” So what did you mean when you were writing this book with Gordon? What did you mean by permacrisis, and why did you write this book? Mike?

A. Michael Spence: We were talking during the pandemic. We’re old friends. I’ve known Mohamed since before his PIMCO days, or before his second round of PIMCO days. And we’ve talked off and on and worked together and written papers together.

Mohamed and Gordon have become good friends and were talking frequently. I was then included in the conversation, and we were doing this virtually, because the world seemed pretty complicated, and we were just clearing our heads and trying to figure out what was going on.

At some point, Mohamed said—I think it was a year and a half into this—“Maybe we should write a book.” And we all thought that was a good idea. And then Mohamed piped up and said, “Yeah, but the problem is nobody took notes.” And so we kind of backpedaled. But that was the origin of it.

We are good friends. We were trying to figure out a world that had colliding forces. You know, repeated, high-frequency, increasingly severe crises; big, what appeared to us, underlying, structural changes in the way the global economy was put together, including technologically; and then these massive scientific and technological transformations that you’ve written about so effectively that are under way. And we wanted to see, to try to put that together.

But the title came from the shocks and geopolitical tensions and wars and so on that were going on. We wrote it, I think, for two purposes. One, to try to help people, whatever they’re doing in life, to bring into focus a pretty complicated and disorienting environment. And we picked Permacrisis, I think, because it’s the repeated crises that seem to keep us off balance.

Michael Chui: So, Mohamed, we’ve had Nouriel Roubini on, someone who you are familiar with, I’m sure. He had written a book about all of these risks, I guess, facing the world. How do you think about the crises that confront us, or the shocks that confront us?

Mohamed El-Erian: I read Nouriel’s book, I think it was called MegaThreats, and enjoyed it. Look, there’s a reality and a perception that we’re living in a world where we seem to go from one crisis to another. The G-20 called it “cascading crises.” And we simply can’t get out of it. I remember Mike warning us a few years ago that they’re going to become, and I remember that phrase so well, “More frequent and more violent.”

And that’s because the underlying resilience of the system is being eroded. The human resilience, the financial resilience. What we were trying to do is to understand why it is that we seem to be going from one crisis to another, and whether we can correct it. I have to tell you, Michael, that my favorite title wasn’t Permacrisis. My favorite title was Changing the Equation, because at the end of the day, we came down to something very easy.

The dependent variable were the crises, and the three independent variables, the ones that were causing this, were the inability to grow in an inclusive, sustainable, and durable manner. That was number one. Two, repeated policy mistakes in domestic management. And three, the lack of sufficient global coordination.

I had this very clear image that you have a rather simplified equation, but that explains quite a bit of what’s going on. And if only we can address each of these three. And the reason why it’s not permanent is there’s nothing God-given about bad domestic management, about the inability to grow, and about the inability to coordinate. This can be fixed by decisions, by vision, by leadership, and by coordination.

Michael Chui: Well, let’s double click into each of those three topics. I am curious, though, as you were writing the book, was there a lead author for each of those three? I had a hypothesis based on the number of times that people told their own stories, but was there a leader for each of those three? There are three authors and three major topics.

Mohamed El-Erian: There was a leader for each of the three. And then there was a brilliant decision to bring in a fourth author, who hadn’t been part of the calls but who could take the three sections written by three different people and make them sound coherent and as if they came from one. So, yes, someone took the lead, but I can certainly tell you, in the section I was responsible for, I was very heavily influenced by both Mike and Gordon.

Michael Chui: Let me guess: Mike on growth, Mohamed on management, and Gordon on the global stuff?

Mohamed El-Erian: Very well done.

Michael Chui: Just a guess. Well, let’s get into growth, which I know that both of you, and I’m sure Gordon also, is deeply invested in. Mike, how would you describe the challenges around growth and productivity, by the way, which again are topics that we’ve studied extensively at MGI?

A. Michael Spence: The simple version of the story, Michael, which probably you’ve seen in the book, is that we lived in a very unusual period for three to four decades where we had massive amounts of productive capacity and reduced into the global economy as a result, at least a powerful deflationary force that contributed to a period in which inflation wasn’t much of a problem. And an unusual period after the Great Financial Crisis because of the balance sheet damage that we couldn’t fix with policy, both in Europe and America, for slightly different reasons.

What was really going on was that big, powerful deflationary force with the incremental productive capacity was not gone away but was fading. And there were structural headwinds to growth that were building, like aging, like this declining productivity trend, like big changes in labor market behavior, and retirement. There’s a flood of retirements of people who are roughly my age coming on now.

And then the geopolitical tensions and shocks were producing a historically almost unprecedented pattern of diversification. You know, under all kinds of headings, “friendshoring,” “homeshoring,” “nearshoring,” et cetera. You’ve heard them all. But it’s a very expensive kind of process and a multiyear process.

The whole structure of the global economy had this fading force and was basically turning into something that was less inclined to accommodate demand surges. But all of that was slightly hidden. Then we had the pandemic and some pretty wise policies designed to protect the household and the corporate sector from destructive, multiyear inability to invest and so on, or consume.

We kind of came out with a demand surge, right? Big policy programs. Originally the pandemic, then infrastructure, CHIPS [Act] and so on, and the Inflation Reduction Act. And the pent-up demand, and the supply side just couldn’t keep up. I think the growth story is, we’re living in a world that people who are younger than 40 actually never saw before, which is this world in which you really are dependent on either labor force growth or productivity growth.

I came out of this thinking, “Well, if you’ve got an aging population and labor shortages everywhere you look, maybe you ought to start focusing on, what are the tools that we’ve been given by the technology community for turning around the productivity trend?”

That’s the short story on the growth side. It’s not inevitable. It will stagnate. And I’m not talking about, necessarily, stagflation. The final comment is—this plays right into what Mohamed was dealing with, and that is you have a generation and a half of people, whether they’re in finance, or business, or policy-making positions, or the IMF and the World Bank, who’ve never lived in a supply-constrained, inflationary environment. So that’s what we’re after. I’ll leave it to the readers to judge how we did.

Michael Chui: Well, you know, and we talked about it, too, it’s actually curious whether or not this younger generation, who grew up with zero-inflation expectations, whether or not that actually moderates the potential for wage-price spirals because they think normal is to have very low inflation.

There was a remarkable factoid in the book that I was unaware of. Again, quoting. “There has never been a period of elevated global growth at the levels experienced since 1945. In the early decades of the industrial revolution, the 2 percent growth witnessed was nowhere near the post-war developing country and global experience, which averaged 6–7 percent growth.”

I hadn’t realized how much the postwar time in economic history was exceptional. But as you said, one of the things that we’re transitioning to, or you’re noting, into is a more supply-constrained economy.

Mohamed, a lot of our listeners, they think of economics, and there’s an X for supply and demand curve. But what does it mean to be a supply-constrained economy? How have things changed?

Mohamed El-Erian: As Mike said, supply is not sufficiently flexible for the demand side. And that’s a massive change from where we were coming out of the global financial crisis. Coming out of the global financial crisis, we had insufficient demand. There was a shock to balance sheets. And when you have insufficient demand, the temptation is to put as much money in the system as you can, through fiscal and monetary policy, because you don’t get inflation. The temptation is to ignore the supply side.

And if you look back, we have been ignoring the supply side for about 20 years. Go back 20 years ago. With the exception of Germany, no advanced economy seriously invested in its infrastructure and its people. If you go back 20 years ago, we all fell in love with finance as the next level of capitalism. Agricultural, industry, manufacturing, services, and if you’re really good, you get to finance.

Countries started competing to be the financial center of the world. If you weren’t big enough, if you were Dubai, if you were Switzerland, if you were Iceland, didn’t matter, you could somehow grow your finance to a multiple of your GDP by borrowing someone else’s finance.

And we lost sight of the reason why it was called financial services, as opposed to finance. It’s not a free standalone. But the result of that is that the whole growth strategy got hijacked by finance. And the perception was finance was so sophisticated, you don’t need to regulate it much. You don’t need to manage it much. And we know that it ended up in tears.

It has taken us a very, very long time to realize that we need to go back to what drives economic growth. We have now a window, a very big opportunity, because of the three changes that you and Mike know well—what’s happening on the technology side, particularly with generative AI, what’s happening in life sciences, and what’s happening in green technology.

So we have an opportunity to regain control of productivity, to think more about labor retooling, labor retraining. Hopefully we’ll take advantage of that opportunity. But it is 20 lost years. We lost 20 years in thinking about how to promote productivity and how to promote high, inclusive, and durable, and sustainable growth.

Michael Chui: Let’s dive into it a little more. Again, we’ve used the term “sustainable inclusive growth.” You write about inclusive sustainable growth. I suspect they’re pretty close. But with that said, Mohamed, if you don’t mind, you’ve actually spent, I guess if you include IMF, all of your working career in finance. What does it mean that financialization has been a challenge or, as you’ve asserted, we’ve lost a couple of decades of potential productivity growth partly as the result of your profession? In what ways has that been suboptimal?

Mohamed El-Erian: I think of myself as an economist, more than anything else, who tried to understand finance. The IMF was all about economics, all about macroeconomics. And I realized that I didn’t understand finance enough.

There was one moment in particular that really pushed me to join the financial sector. We’re talking here a long, long time ago, when the IMF decided, in a very revolutionary move at the time, to send a team to New York to try to understand what happened during the Latin American crisis. And I remember this meeting where we were meeting with the portfolio managers of a Latin American fund. And on the other side were five economists who have never traded a bond in their lives, didn’t quite understand how a mutual fund worked.

We asked the question: “What was the first thing you did in 1982, in August 1982, when you heard that Mexico would default?” And the response was, “I sold Chile.” We as economists replied, “That’s typical in irrational markets. That’s contagion. Don’t you know Chile is so different from Mexico? And Chile never defaulted. Chile was well managed,” et cetera. “Typical you, selling Chile when the problem was Mexico.”

And the response is, “You don’t understand how finance works, do you? When my clients woke up and read about Mexico, their inclination would be to withdraw funds from my Latin American fund. I would have to come up with liquidity. Mexico was not trading. Chile was still at quite a high price, but it would be impacted. So selling Chile is the rational thing to do.”

I remember there was this—oh, I don’t want to say the word—moment when I realized that we don’t understand the technicals, that there’s a reason why the tail of finance wags the whole dog.

In the global financial crisis, there wasn’t an understanding of what happens when counterparty risk is so high that banks won’t deal with each other anymore. What has happened, I think, to neoclassical economics, and to policy economics until very recently, is that we’ve simplified the financial sectors to such an extent that there are episodes when the financial sector doesn’t just influence and inform economic management, but it actually takes control of economic management. And we missed that completely.

There was this wonderful moment in November of 2008 when they gathered the economists in the UK at the London School of Economics to brief Her Majesty the Queen. And Her Majesty the Queen was briefed on the crisis and the sudden stop of 2008 and the unemployment and the Great Recession. And she looked up to the economists and said, “Why didn’t you see it coming?”

A. Michael Spence: Very smart lady, she was.

Michael Chui: What was the response?

Mohamed El-Erian: There was no response. You know, the same mistake was repeated in 2021 when inflation started going up and central banks rushed without enough analysis to dismiss it as transitory. And we lost eight months, and inflation in the United States went all the way up to 9.1 percent in June of 2022. It didn’t prove to be transitory at all. It hit people hard.

Same thing happened, but this time with a better outcome, just at the end of 2022, when lots of economists were proclaiming it’s a certainty that the US would go into recession because of high interest rates. Again, didn’t understand how financial conditions can decouple from interest-rate policies. It’s a repeated tendency, unfortunately, not to make the connections early enough. And therefore lose really valuable time.

Michael Chui: Well, Mike, maybe if I decided to walk over to the dugout of Team Transitory, is it possible you would say, “Look, if you believe we’re a supply-constrained economy, and it’s the supply stuff which caused inflation”—there’s demand stuff, too, if you say there’s too much stimulus, but anyway, let’s say it’s just demand stuff. Isn’t it just a question of time scales? Team Transitory was right, it just took longer for the supply stuff, or it will take longer for the supply stuff to work itself out?” And Mohamed’s smiling. Folks who are listening can’t see his smile.

Mohamed El-Erian: I’m going to interrupt Mike because I feel so strongly about this.

Michael Chui: All right.

Mohamed El-Erian: Very strongly. Transitory isn’t a time concept. Transitory is a behavioral concept. When we say something is transitory, we are telling people, “Look through it. Ignore it. Don’t change your behavior because of it, because it’s going to go away.” That’s the whole point of transitory.

The message is you don’t need to change your behavior. Well, look back compared to 2021. Behaviors have changed in a radical way. Price-setting behavior has changed. Wage behavior has changed. Interest rates behavior has changed. So to say, “Oh, it is transitory, but it simply took a lot longer” simply ignores that.

And I feel particularly strongly because of the long lines at food banks. Go tell people who could not afford food inflation that went up to 20 percent that what they were going through was transitory. Looking back, most inflations are by definition transitory, because at some point, we come back down to low inflation.

So we have to be careful not to misuse this term. I say this, Michael, because I heard it again this morning, just as I was being interviewed. Someone saying, “Oh, it’s just supposed to be transitory after all.” OK, back to you, Mike, about the supply-side contributions of all this. And sorry, I feel strongly about this.

Michael Chui: It comes through in the writing.

A. Michael Spence: That’s true. This does come through. I mean, I completely agree with Mohamed. Look, there were transitory screwups in the supply structure of the domestic and global economies. We shut a lot of stuff down. There were semiconductor shortages because of that. Some people ordered early, and other people, like the auto industry, basically didn’t.

Ocean shipping costs went astronomical. Container across the Pacific went from 2,000 to 10,000, maybe 12,000. Then they’re back down to 3,000. The Red Sea’s, you know, jacking them up again. More shocks. China was not going to stay in zero COVID forever, and it didn’t, right? That’s a pretty major event. In a kind of ordinary, kind of commonsense view of the world, there were some things that were going to resolve themselves in a way that had to do with behavioral things and the way systems function.

That was right. But if you thought that’s all there was to it, as opposed to big changes in demographics or long-term trends in productivity and so on, which we refer just for the sake of argument to be secular—and not easily reversed, and probably a semipermanent trend, for a while, anyway—that’s where I was coming from.

The fact was that the history and the pandemic shock, and now all the things that went with it that we’ve already talked about, managed to keep it hidden from view. Sorry, put it differently: it made it easier to clutch or grab onto the branches that sounded like this is a temporary problem, in the sense that without policy action, it will take care of itself.

But the other thing going on behind this, and I thought Mohamed would say it, is because of this generation that lived in this unusual world that we talked about before, you know what, you have mindsets that I think of as an economist as implicit models in people’s heads about how the world works.

Those mindsets don’t change very fast. And they have parameters. They’re a little bit like the parameters in a big gen AI model, that change only when they’re confronted repeatedly with contradictory data. So part of the problem is that, because those mindsets don’t adjust very quickly, you have a period in which you’re just prone to making false assumptions about the way the world’s working, and then following policy mistakes.

Michael Chui: Now, there’s a passage in the book again: “We are not living in a cyclical, mean-reverting world where the bad is temporary and the effects reversible. The distribution of our potential economic and financial outcomes is not a normal bell curve.”

And so you have all of these different potential maxima or minima, depending on which way you put the sign, of the way that the world could evolve. Again, one of the parameters is a 2 percent target for inflation. Maybe I’ll start with Mike. Mike, where did that come from? That was obviously the result of a lot of Monte Carlo simulations that optimize our inflation targeting.

A. Michael Spence: This is Mohamed’s territory, so Mohamed—

Michael Chui: Mohamed, go ahead.

A. Michael Spence: Where did 2 percent come from?

Mohamed El-Erian: It came from New Zealand in the early 1990s, when they were experimenting with inflation targeting. And they picked 2 percent out of the air. In fact, if you talk to the New Zealand people in the central bank, they were shocked by what has happened.

Two percent was viewed as a sensible number. It was high enough from zero so that you don’t get stuck in what’s called a lower bound, but it wasn’t high enough to de-anchor inflation expectation. So it was totally arbitrary. They picked it. And next thing we know, it gets picked by other central banks, including the Bank of England, the ECB, and the Fed, at different times.

It’s a very curious aspect, because it’s as if all of us decide to have the same weight limit, regardless of our initial conditions. Now, it didn’t matter for a very long time because the world, as Mike said earlier, was subject to a whole series of positive supply shocks, one supply shock after the other.

The problem became not above 2 percent, it was how can you get to 2 percent from below? And we started flirting with zero, with deflation, outright deflation in Japan, with negative interest rates, nominal interest rates in Europe. So 2 percent wasn’t a binding constraint.

But when you shift from a world of insufficient aggregate demand to a world of inflexible supply, suddenly you have to ask yourself, “Is 2 percent the right target?” And the trouble with that question is that you cannot pose it and answer it convincingly when you’ve missed your inflation target for a long time.

So there is no question of a central bank coming out right now and saying, “Two percent is not the right target.” But what you’re going to see is that there’s going to be some toleration for the 2-something inflation for a while. And then take advantage of what Jason Furman says of opportunistic inflation.

Michael Chui: And so you actually, you view the credibility of central banks as being incredibly important. And you actually describe a way in which you could potentially change the target over time. You say, “We’re still at 2,” and then, you know, if it somehow gets to 3, then you announce it afterwards, or something along those lines. Is that the sort of evolution where you could potentially raise it by 100 basis points, or by 50 percent?

Mohamed El-Erian: It’s a little bit like when you’re driving somewhere and you’re being asked, “Are we there yet?” And you say, “We’re almost there. We’re almost there. We’re almost there.” It just takes a little bit longer. The credibility of central banks is really important.

You know, I have this affinity to central banks. I have a lot of loyalty and a lot of admiration for central banks. And the IMF was one big central bank, after all. And I’ve never seen the Fed, in particular, commit six policy errors in such a short span of time.

The issue of credibility becomes very important. There were analysis problems with calling inflation transitory and sticking to it, forecasting errors consistently in the same direction. There were problems with actions. There were problems with communication. There was a lack of accountability.

It is really important for the major central banks to reestablish their standing. Otherwise, their forward guidance that does a lot of the heavy lifting, and that allows for such smooth adjustments, becomes problematic. And we’ve seen that for the whole of 2023, for example, the market did not believe the Fed on a policy tool that the Fed completely controls. So it was a very peculiar world that you keep on doubting something that I totally control.

Michael Chui: One of the things you have in the book is a WTO 2.0. A lot of people have points of view as to lots of progress historically through GATT [General Agreement on Tariffs and Trade] as well as WTO. But now we are in a different time. What’s the positive potential for this institution?

A. Michael Spence: I don’t know who said it, but if you’re digging yourself into a hole, the first thing to do is to stop digging. And I think that’s part of what we’re saying. I don’t think anybody wants to suggest that we can go back to the world we lived in, where global trade, global finance was driven largely by efficiency and rate of return, comparative advantage, all things economic.

It had wonderful effects. I mean, that 7 percent, 8 percent growth that you can find for 25 years in 13 countries in the postwar period was enabled by that, in part. The underlying story for that is, of course, it’s the catch-up effect. Basically, they could import technology, so their potential growth was just higher than anything we’d ever seen.

So our conclusion is, we’re going to live in a more complicated world with national security overlays, resilience higher on the agenda, both policy and business, at least for multinationals. We’re going to live in a world where they have to learn to navigate, with regulatory systems that are different and sometimes flat-out contradictory. We accept all that.

But that didn’t, for Gordon and Mohamed and me, suggest that the multilateral institutions don’t have a job to do. It’s just a different job, right? If we give up on them, we’ve kind of given up on global coordination, and in an organized fashion, completely. So, yes, there’s a need for creative, top-flight, experienced people to focus on WTO 2.0. There’s a need to reform the multilateral institutions to reflect the different economic mass of the participants. You know, China, the second-largest economy in the world, and still growing, et cetera.

I’m going to turn it over to Mohamed here. The challenge here is to get a version of global cooperation and interdependence that’s both practical and realistic on the one hand, but that works, and certainly works better than nationalism and unilateralism run amok.

So that’s what we’re after. We didn’t pretend to have a blueprint that solved that whole problem. But that’s the directionality of the recommendation.

Michael Chui: Mohamed, you have things to add?

Mohamed El-Erian: You mentioned, earlier, a normal distribution. If you think of the tails of a distribution, the ultra-globalization period where everybody thought it was all about ever-closer financial and economic integration, that’s over. The other tail, of isolation, complete fragmentation, that is really problematic.

The hope is you can get to a world that we call in the book ”globalization-lite.” You’re still globalizing, but it’s in a light fashion. And that needs a governance system. And the reason why goes back to something Mike told me about 15 years ago. The great thing of having a Nobel Prize winner as a friend and an economist is they tell you things that stick with you for decades.

And I remember a discussion and Mike saying, “But Mohamed, the problem is that you cannot solve a cooperative game uncooperatively.” And trade is a cooperative game. And unless you have some mechanism to ensure that people play cooperatively at some level, that game breaks down really badly. And that’s where the institutions come in.

Are they perfect? No, they’re not. All three of us have been critical of things that the WTO, the IMF, and the World Bank have done, and have felt that reforms haven’t gone fast enough. But do you need them? Yes, absolutely, you need them. We started to see recognition and reforms that I think will help those three key institutions to play the important role that they should be playing on the global stage.

A. Michael Spence: I just want to add, Mohamed often says, “The only time we really do a pretty good job of cooperation is in a crisis, a really serious crisis,” as in when Gordon kind of pulled the G-20 together, finance ministers, central banks, leaders. That was a pretty impressive performance.

But Mohamed also adds, “In peacetime, we kind of lose the thread,” or, he puts it slightly differently, but I think it’s an important point. We need it there all the time.

Michael Chui: I think you quote Christine Lagarde saying, “The time to fix a roof is when the sun’s shining.”

Mohamed El-Erian: Correct.

A. Michael Spence: Yeah, exactly.

Mohamed El-Erian: What I did not know is that came from [John F.] Kennedy.

Michael Chui: It’s great to see the wisdom passed on. I did want to pull out one of these threads. We have done a bunch of research on sustainable inclusive growth. There are some people who say, “Well, we should just stop growing,” but you have to pay for the inclusivity. You have to pay for the sustainability. And that’s one of the things that growth can enable.

At the same time, there are institutions, multilateral institutions, who are focused on reducing poverty and all the human suffering and some of the things that the World Bank does, for instance.

Maybe I’ll start with you, Mike. How do you think about the inclusivity that we want, when sometimes growth doesn’t feel inclusive? And again, we’re doing some research, too, about how we can actually—because there are segments of our world population who seem to be left behind in some ways.

A. Michael Spence: It’s a really important question, Michael, and I don’t think there’s a complete answer. Producing inclusive growth patterns is a really big challenge.

Now, one of the pieces of good news is that while we kind of ignored the distributional aspects of growth patterns for a long time, we’re not doing that anymore. You’re not doing it. There’s enormously talented and influential academics who are studying it, documenting it, all the way from overall, to the top 20 percent, to poverty, and what those poverty conditions really look like, with Nobel Prizes going along with them.

I think in terms of our state of knowledge, we’re just way further down the road than we were, say, 20 years ago, which is at least a starting point. But I would say the best—I’m influenced by a visit to India.

Let me give you two sides of the same coin. They have deployed the digital technology in the financial sector, with an architecture that I think is about as good as you can get. It doesn’t have monopolies in it. It has data portability. It has individuals controlling the data. Everybody can join, but it’s optional. It has real-time, instantaneous transaction processing.

The government sends money to the poorer parts of the population, and there’re still a lot of people in that category. That used to go through intermediaries, and half of it, or 40 percent, would disappear. It now goes with no intermediary, instantaneously, into their wallet or their bank account or their mobile phone.

And so I think there are in multiple dimensions across sectors like health, like education, like so on, where if we’re creative about it—and there’s a lot of entrepreneurs who are very creative—we can align really profitable investment strategies with inclusive growth patterns, is the way I would say it. And the inclusive growth pattern is the business model, or a big chunk of it.

On the flip side, India is projected by multiple studies, including one done at McKinsey, to have a current plan with respect to climate change which peaks somewhere around the mid-’30s, and at a level under four billion tons. It’s the third-largest country emitter of CO₂ now, even though its per capita emissions are low and it’s in a way early stage of development, as compared with a high-middle-income country like China.

I don’t believe this, to be honest with you. I mean, if they’re still growing at 7 percent when they peak, the carbon intensity of that economy is going to be declining at 7 percent by definition. And we’ve never seen an economy whose carbon intensity declined at 7 percent.

So maybe it’s a whole new world, it’s all going to be magically there, but I think we are at some kind of fairly basic level not really taking seriously the magnitude of the commitment of resources and the potential cost in terms of something—growth, consumption, something—that we’re going to have to pay for to get to the sustainability track that everybody hopes we eventually get to.

Now, there are various versions of that, but what I just described to you is two things. One, you could make a lot of progress by making money on inclusive growth patterns. The other one is, there’re some pretty big challenges on the same terms.

Michael Chui: And on the sunny side of history, to be clear, with all the challenges our growth models have had, literally billions of people have been brought out of poverty, partly through growth. So, in some ways, there has been success.

Well, we could go on for hours, and I would love to do so. But if you don’t mind, I’d love to wrap up with a lightning round of quick questions, quick answers from both of you. If you’re all ready, let’s start. OK, Mike. What is your favorite source of information about the global economy?

A. Michael Spence: Well, one of them is McKinsey Global Institute.

Michael Chui: Mohamed?

Mohamed El-Erian: Mike. Actually, on a high-frequency basis—because I don’t get to talk to Mike every day—I find The Financial Times actually very helpful.

Michael Chui: OK. Mohamed, what crisis worries you most from a combination of likelihood and severity?

Mohamed El-Erian: The climate crisis.

Michael Chui: Mike?

A. Michael Spence: Same. The climate crisis.

Michael Chui: Mike, what gives you the most optimism about the global economy?

A. Michael Spence: To me, it’s the economic and related—meaning other dimensions of well-being—potential of these huge scientific and technological breakthroughs we have. Mainly because they’re not only breakthroughs, but they’re powerful tools whose costs are declining, and accessible to a wide range of people.

Michael Chui: Mohamed, what gives you the most optimism?

Mohamed El-Erian: Same. I tell my daughters, we’re leaving you with a world with a climate crisis, a debt crisis, a growth crisis, political crises. That’s the bad news. The good news is you have tools that we never had, and they’re really powerful.

Michael Chui: Mohamed, what is your favorite technology?

Mohamed El-Erian: That’s a really good one. I must tell you that I have been using more and more gen AI. My eyes have been opened in terms of application, especially in education. So I would put that. Otherwise, it’s streaming NFL games.

Michael Chui: Mike, what is your favorite technology?

A. Michael Spence: It’s again AI. I just find it fascinating. I’m particularly interested to watch this powerful interaction of artificial intelligence in the biomedical and life sciences. I think this is going to be transformational.

Michael Chui: Mike, who is one person, living or passed, with whom you would like to spend an hour?

A. Michael Spence: Geoff Hinton, “the godfather of AI.” Can I add a sentence? I thought the lecture he gave at Oxford, 35 minutes long, was one of the best illuminating lectures I’ve ever heard.

Michael Chui: Believe you can find it on YouTube, Mohamed?

Mohamed El-Erian: I will look it up on YouTube. Actually, I would like to spend an hour with Keynes. He’s influenced me so much. And try to understand all the tension in the general theory.

Michael Chui: And the working less I think might be one of the things people really like.

A. Michael Spence: Right.

Michael Chui: Mohamed, what would you be doing today if you weren’t doing what you are—professionally speaking, not literally this hour?

Mohamed El-Erian: I’d be sitting on a couch watching sports.

Michael Chui: Mike?

A. Michael Spence: I’ve no idea. I never had a game plan for life. It was more like bumper cars until I bumped into something that somebody thought I might be able to do. So I don’t have an answer for that.

Michael Chui: I like that, as a philosophy grad. Mike, what would you recommend someone who’s graduating from secondary school today study?

A. Michael Spence: I’ve always said the same thing, Michael. And Mohamed’s heard me say it in his neck of the woods, in Cambridge. The most important thing is to find something that you love to do and gets you up every morning. And because I think there’s just a huge range of things where you can make a dramatic contribution, I tend not to hand out recommendations that aren’t guided by that principle that focus on subject matter.

Michael Chui: Mohamed? I know that you’re president of a college, so it’s a little troubling.

Mohamed El-Erian: I tell students, something that you’re passionate about. It can be in STEM, it can be in humanities. Something that you’re really passionate about.

Michael Chui: And finally, Mohamed, what is one piece of advice you’d have for listeners of this podcast?

Mohamed El-Erian: It comes from when I was 13 years old. We were living in Paris, and we got four newspapers that covered the whole political spectrum from left to right. And my father would ask me to read all four.

As a 13-year-old, I had no interest in reading one newspaper, let alone four. And I remember trying to make a deal with him that I would read one because, after all, the news is the news. And he got back to me and said, “No. You’ve got to understand that different people can interpret things differently. And unless you see their point of view, you’re going to be missing a lot in life.”

So I always say, “Be cognitively curious, be open-minded, and always ask the question, ‘Why are people telling me something?’ before just thinking that they’re wrong.”

Michael Chui: Mike?

A. Michael Spence: It’s sort of much the same. I think it’s very easy to do one of two things in this kind of environment. One is to say, “I don’t get it” or “What’s AI? Is it trivial or imitating humans?”

On the other hand, you can dive in with both feet. What I find fascinating is that you’ve got to find a balance in the middle. It’s really what Mohamed said. It’s to be curious in a period where there isn’t an obvious set of decisions to make. But the one recommendation is, for the kind of people who listen to this, and I’m sure they’re doing this—this is no time to just spectate from a distance. You have to engage with this stuff.

Michael Chui: Mohamed El-Erian, Mike Spence, thanks for joining us.

A. Michael Spence: Thank you, Michael.

Mohamed El-Erian: Thank you.