Is the world facing a state of permacrisis?

Speaker A: From the McKinsey Global Institute, it's forward thinking with Michael Chuey and Janet Bush.

Speaker B: Janet, we've been very fortunate to have had some great guests on this podcast.

Speaker C: Yes. And I think 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.

Speaker B: And 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 Perma Crisis, based on discussions they started having during the pandemic.

Speaker C: Well, I knew Gordon Brown when he was the Chancellor of the Exchequer in the United Kingdom when I was a journalist. Very impressive man. Well, anyway, this sounds fascinating, if scary. Perma Crisis.

Speaker B: Hey, Michael Spence is Dean, uh, emeritus from the Stanford Graduate School of Business, and Mohamed El Erian is President of Queens College Cambridge and Chief Economic Advisor at Allianz. Mike. Mohamed, welcome, uh, to the podcast.

Speaker D: Thank you.

Speaker A: It's great to be with you, Michael.

Speaker B: Well, one of the reasons we have you on is because, uh, you both co authored a book with Gordon Brown entitled Perma Crisis. Gordon couldn't be with us, which means that everyone on the podcast has a first name that starts with M M, which we all appreciate. Well, with that, I would love to just get a sense, I mean, you're both incredibly accomplished, um, professionals, but would love to just get a sense for how you ended up where you are today. So, Mike, if you don't mind, why don't start from with you. Where'd you grow up? Where'd you go to school? How'd you end up doing what you ended up doing?

Speaker A: So, like Gordon, you know, but somewhat distantly, my family's sort of Scottish. Came to Canada on the kind of fur trade route, um, grew up in Winnipeg, in Toronto. And then I discovered liberal arts education in the United States, which we didn't have in Britain or Canada at the time. And so I shipped off to Princeton, studied philosophy, ended up at Oxford with a Rhodes Scholarship, and, uh, came back to do my PhD in economics at Harvard and somebody offered me a job. So now an American citizen, happily. And, uh, uh, my professional life has been there the last 15 years. I've spent living in Europe, in Northern Italy with my Italian wife.

Speaker D: Terrific.

Speaker B: Great to have you back on the podcast. By the way, Mohamed, it's your first time. Uh, welcome. How did you get to where you are?

Speaker D: So mine is a total random walk. Um, 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. And at that time it was the IMF and the World Bank. So off I went to the IMF for 15 wonderful years. Um, 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 it go to private sector before my human capital totally eroded. And I joined Salomon Brothers at the time and then ended up at Timco 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 opportunity that I had here at Cambridge. So I'm back at Cambridge now as president of one of the colleges.

Speaker B: Terrific. Well, I love how you both have invested, earn your own human capital and have the opportunity, partly through students, uh, to, to share that as well. And so as I mentioned, you've written this book, uh, Perma Crisis, A Plan to Fix a Fractured World. Reading through it, uh, 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 that says, don't let the perma prefix fool you. There's nothing permanent about a perma crisis. So what did you mean when you were writing this book with Gordon? What did you mean by perma crisis? And why did you write this book?

Speaker A: Okay, we wrote Michael. We were talking, uh, during the pandemic. We're old friends. I've known Mohammed, you know, 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. Mohammed and Gordon have become good friends and we're talking frequently. I was then included in the conversation and we were doing this virtually because, you know, the world seemed pretty complicated and we Were just clearing our heads and trying to figure out what was going on. At some point, Muhammad said, like, I think it was a year and a half into this. Maybe we should write a book. And, uh, we all thought that was a good idea. And then, then Mohammed piped up and said, yeah, but the problem is nobody took notes. And so we, we, we had. We kind of backpedaled. And, and, um. But. So that was the origin of it. We're 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, um, you've written about so effectively that are underway. 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. So 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 Perma Crisis, I think, because it's the repeated crises that seem to keep us off balance.

Speaker B: Mohammed, we've had Nouriel Roubini on, someone who you are familiar with. I'm sure he had written a book about all of these, uh, risks, I guess, facing the world. How do you think about the crises that confront us or the shocks that confront us?

Speaker D: I read, uh, Nouriel's book, I think it was called Megathreats, and enjoyed it. Um, 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 G20 calls a cascading crisis. And we simply can't get out of it. And I remember Mike warning us a few years ago that they're going to quote, 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. So 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 Perma Crisis. 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, um, 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. So I had this very clear image that you have a rather simplified equation, but that explains quite a bit of, 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.

Speaker B: Well, let's go into each, you know, double click into each of those, 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.

Speaker D: But

Speaker B: was there a, uh, leader for each of those three? There are three authors and three major topics.

Speaker D: 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, uh, the cause, 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.

Speaker B: M. Let me guess. Mike on growth, Mohammed on management, and Gordon on the global stuff.

Speaker D: Correct. Very well done.

Speaker B: 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.

Speaker A: The simple version of the story, Michael, which probably you've seen in the book, is, ah, that we lived in a very unusual period, uh, for three to four decades where we had massive, you know, amounts of productive capacity introduced into the global economy as a result, you know, at least a powerful deflationary force that, you know, contributed to a period in which inflation wasn't much of a 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. You know, what was really going on was that big, powerful deflationary force with the incremental productive capacity was not gone away, but it was fading. And there were structural, uh, headwinds to growth that were building, like aging, like this declining productivity trend. Like sort of big changes in labor market behavior and kind of retirements. There's a flood of retirements of people who are roughly my age coming on now. And then, uh, the geopolitical tensions and shocks were producing a really historically almost unprecedented pattern of diversification under all kinds of headings, friend shoring, home shoring, near shoring, et cetera. You've heard them all. Um, but it's a very expensive kind of process, m multi year process. And so 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 multi year inability to invest and so on or consume. And so we kind of came out with a demand surge, right? Big policy programs, you know, originally the pandemic, then infrastructure chips and so on, and inflation reduction act and a pent up demand and the supply side just couldn't keep up. So I think the growth story is, you know, we're living in a world that, uh, you know, people who are younger than 40 actually never saw before, right. Which has this world in which, you know, you really are dependent on either labor force growth or productivity growth. And so 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. So that's the short story on the growth side. It's not inevitable, it will stagnate. Uh, and I'm not talking about necessarily stagflation. The final comment is this plays right into what Muhammad was dealing with. And that is you have a generation and a half of people, whether they're in finance or business or policymaking positions or the IMF and the World bank, they've never lived in a supply constrained inflationary environment. So that's what we're after. Uh, I'll leave it to the readers to judge how we did.

Speaker B: Well, 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 whatever very low inflation. But uh, there was a remarkable factoid in the book that I was unaware of, again quoting. There's never been a period of elevated global growth at the levels experienced since 1945 in the early decades of the industrial revolution, there was 2% growth witnessed and was nowhere near the post war developing country and global experience, which averaged 6 to 7% growth. I hadn't realized how much the post war time in economic history was exceptional. Um, but as you said, one of the things that we're transitioning to or you're noting into a more supply constrained economy. Mohammed, tell me what. Okay, a lot of our listeners have, you know, they think of economics. There's an X for supply and demand curves. But what does it mean to be a supply, demand, supply constrained economy? How have things changed?

Speaker D: So 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 global financial crisis. Coming out of global financial crisis, we had insufficient demand. Um, that was a shock to balance sheets. And when you have insufficient demand, the temptation is to put in as much money in the system as you can through fiscal and monetary policy because you don't get inflation. And 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 infrastructure and its people. If you go back 20 years ago, we all fell in love with finance as the next level of capitalism. Agriculture, 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, um, 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 this 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, that it uh, ended up in tears. But 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 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. Um, so hopefully we'll take advantage of that opportunity. But it is 20 last years, we lost 20 years in thinking about how to promote productivity and how to promote high inclusive and durable and sustainable growth.

Speaker B: Let's dive into it a little more. I mean, again, we've used the term sustainable inclusive growth. You write about inclusive, sustainable growth. I suspect they're pretty close. Um, but with that said, uh, Mohammed, if you don't mind, you've actually spent, I guess, if you include imf, all of your working career in finance. And, and so what does it mean that financialization has been a challenge or, you know, as you've, uh, asserted, you know, has. We've lost a couple decades of potential productivity growth partly as the result of, you know, your profession. In what ways has that been suboptimal?

Speaker D: I think of myself as an economist more than anything else that tries to understand finance. You know, 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, um, that really pushed me to join, um, the financial sector. We're talking here 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 life, didn't quite understand how a mutual fund worked. Um, and 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 irrational markets. That's contagion. Don't you know? Chile is so different from Mexico. Chile never defaulted, Chile was well managed, etc. Typical.

Speaker A: You

Speaker D: selling Chile when the problem was Mexico. And the response is, you don't understand how finance work, do you? When my clients. This is the fund manager speaking. 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, uh, quite a high price, but it would be impacted. So selling chili is the rational thing to do. And I remember there was this, oh, 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. So what has happened, I think, to neoclassical economics is that, 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. And 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 economist and said, why didn't you see it coming?

Speaker A: Uh, very smart lady.

Speaker B: What was the response?

Speaker D: There was no response. Um, 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 up all the way up to 9.1% in June of, uh, 2022. It didn't prove to be transitory at all. It hit people hard. Same thing happened, but this time with a better outcome. Um, just at the beginning, at the end of 2022, when lots of economists were proclaiming it's a certainty that the US would go into recession because of higher interest rates, uh, again, didn't understand how financial conditions can decouple from interest rate policy. So it's a repeated tendency, unfortunately, not to make the connections early enough and therefore lose really valuable time.

Speaker B: Mike, maybe I can, uh, if I decided to walk over 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 timescales? Team Transitory was right. It just took longer for the supply stuff or it will take longer for that supply stuff to work itself out. And Mohammed's smiling. Folks who are listening can't see his smile. But it's one where I'm going to

Speaker D: interrupt, Mike, because I feel so strongly about this. Uh, 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% that what they were going through was transitory. So we're 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 say, oh, it just proved to be transitory after all. Okay, back to you, Mike, about the supply side contributions of all this. And sorry, I feel strongly about this.

Speaker B: It comes through in the writing.

Speaker A: No, that's true. Uh, this does come through. I mean, I completely agree with Mohamed. Look, there were transitory screw ups in the supply structure of the domestic and global economies. We shut a lot of stuff down. There were semiconductor shortages because of that. You know, some people ordered early and other people like the auto industry basically didn't. Uh, you know, ocean shipping costs, you know, went to astronomical. You know, container across the Pacific went from 2 to 10,000, maybe 12,000. Then they're back down to 3. The Red Sea, you know, jacking them up again, more shocks. But, and you know, China was not going to stay in zero Covid forever and it didn't. Right. And that's a pretty major event. So in, in the, in the sense, uh, that, you know, in a kind of ordinary, kind of common sense view of the world, you know, there were some things that were going to resolve themselves in a way that had to do with behavioral, you know, things and the way systems function and that, you know, that was. Right. But if you thought that's all there was to it, right, as opposed to sort of big changes in demographics, you know, or long term trends in productivity and so on, which we referred, just for the sake of argument, to be secular and not easily reversed and probably a kind of, you know, semi permanent trend for a while anyway, because that's where I was coming from. And 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 or make it, m sorry, put it differently. It made it easier to clutch or uh, you know, grab onto the branches. That sounded like, you know, this is a temporary problem, you know, in the sense that uh, without policy action it will take care of itself. But the other thing going on behind this, and I thought Mohammed would say it is because of this generation that lived in this unusual world that we talked about before. You know, uh, you have mindsets that I think of as an economist as implicit models in people's heads about how the world works. And those mindsets don't change very fast. And they have parameters that are a little bit like the parameters in a big gen AI model that change only when they're kind of confronted repeatedly with ah, contradictory data. And so part of the problem is that you know, uh, because those mindsets don't adjust very quickly, you know, you have a, you have a period in which you're just prone to making, you know, false assumptions about the way the world's working and then follow on policy mistakes.

Speaker B: Yeah, there's a passage in the book again where you said we're 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, uh, is not a normal bell curve. And so you have all 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% 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.

Speaker A: I'm going to. I mean this is Mohammed's territory.

Speaker D: So it came from New Zealand in the early 1990s when um, they were experimenting with inflation targeting and they picked 2% 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 and 2% was viewed as a sensible number. It was high enough from zero so that you don't get stuck in what's called the lower bound. But it wasn't high enough to de anchor inflation expectation. So it's totally arbitrary. They picked it and next thing we know it get picked by other central bank, including the bank of England, the ECB and the Fed at different times. And it's a very curious aspect because it's as if all of us decide to have the same weight limit regardless of Our uh, 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. And the problem became not above 2% was how can you get to 2% 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% wasn't a binding constraint. But when you shift from a world of uh, insufficient aggregate demand to a world of inflexible supply, suddenly you have to ask yourself, is 2% 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 2% is not the right target. But what you're going to see is that there's going to be some toleration for the two something inflation for a while and then take advantage of what Jason Furman says of opportunistic disinflation.

Speaker B: And so you actually uh, uh, 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 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%?

Speaker D: Is it 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 almost there, we're almost there. It just takes a little bit longer. The credibility of central bank is really important. You know, I have this affinity to central bank. 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. So the issue of credibility becomes very important. There was analysis problems with calling inflation transitory and sticking to it, forecasting errors consistently in the same direction. There was problems with actions, there were problems with communication, there was a lack of accountability. So it is really important for the major central banks to re establish their standing. Uh, 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.

Speaker B: One of the things that you have in the book is a WTO 2.0. I mean I think a lot of people have uh, points of view as to lots of progress historically through GATT as well as wto, but now we're in a different time. What's the positive potential for this institution?

Speaker A: Well, first of all, I don't know who said it, but you know, if you're digging a hole youself into a hole, the first thing to do is to stop digging. Um, and I think that's part of what we're saying. M 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 kind of efficiency, rate of return, comparative advantage, all things economic. And it was, you know, it had wonderful effects. I mean uh, that 7%, 8% growth that you can find for 25 years in 13 countries in the post war period, you know, was enabled by that in part. The underlying story for that is, of course it's the catch up effect. They didn't have to, 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 sort of national security overlays, resilience higher on the uh, 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 Mohammed 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, uh, 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, you know, economic mass of the participants. You know, a, uh, China at uh, the second largest economy in the world and still growing, et cetera. And so I think, I mean, I'm going to turn it over to Mohammed here. So 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 kind of 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. Uh,

Speaker B: Mohammed, do you have things to add?

Speaker D: So you mentioned earlier in normal distribution. So 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 tale of isolation, complete fragmentation, that is really problematic. So the hope is you can get to a world that we call in the book, globalization light. You're still globalizing, but it's in a like fashion. And that needs a governance system. And the reason why goes back to something Mike told me about 15 years ago. I mean, the great thing of having a Nobel Prize winner as an economist, 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 Mohammed, 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're starting 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.

Speaker A: But M. I just want to add, Mohamed often says, you know, the only time we really do a pretty good job of cooperation is in a crisis, a really serious crisis, as in the, uh, when Gordon kind of pulled the G20 together, you know, Finance minister, central banks, leaders. That was a pretty impressive performance. But Mohammed also adds, you know, in sort of peace time, we kind of lose the threat. Or he puts it slightly differently, but I think it's an important point. We need it there all the time.

Speaker B: I think you quote Christine Lagarde saying, the time to fix your roof is when the sun's shining. Correct.

Speaker D: Uh, what I did not know that came from Kennedy. Uh, yes, as we say in the book.

Speaker B: Yeah, it's great to see the wisdom passed on. I do want to pull out one of these threads again. We've done a bunch of research on sustainable inclusive growth. One of the things, because 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. And there are institutions, multilateral institutions, who are focused on reducing poverty and all the human suffering and some of the things the World bank does, for instance, maybe start with you, Mike. How do you think about the inclusivity that we want when sometimes growth doesn't feel inclusive? And again, uh, 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.

Speaker A: It's a really important question, Michael, and, uh, I don't think there's a kind of 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% to poverty and what those poverty conditions really look like, you know, with Nobel prizes going along with them. So I think in terms of our state of knowledge, we're just way farther 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, um, this Indian visit. So let me give you two sides of the same coin. So they have deployed the digital technology in the financial sector with an architecture that I think is about as good as you can get. Right. It doesn't have monopolies in it. There's data portability, individuals controlling the data. You know, it has, everybody can join, kind of, it's optional, it has kind of real time instantaneous transaction processing. Uh, the government sends, you know, money to the poorer parts of the population. And there's still a lot of people in that category that used to go through intermediaries and half of it, or, you know, 40% would disappear, but 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, uh, 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 4 billion tons. It's the third largest emitter 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 income, um, you know, high middle income country like China. You know, I don't believe this, to be honest with you. I mean, if they're still growing at 7% when they peak, the carbon intensity of that economy is going to be declining at 7% by definition. And we've never seen an economy whose carbon intensity declined at 7%. So maybe it's a whole new world and, uh, 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, um, track that everybody hopes we eventually get to. Now, there are various versions of that. What I just described to you is two things. One, you can make a lot of progress by making money on inclusive growth patterns. The other one is there's some pretty big challenges on the same front and

Speaker B: on the sunny side of history. To be clear, with all the challenges our growth models have had, uh, literally billions of people have been brought out of poverty partly through growth. So, um, 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, uh, I'd love to wrap up with a, uh, lightning round of quick questions, questions, quick answers, uh, from both of you. So if, you know, if you're all ready, let's start. Okay, Mike, what is your favorite source of information about the global economy?

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

Speaker B: Mohammed.

Speaker D: Mike. Actually, I find on a daily, on a high frequency basis, because I don't get to talk to Mike every day. I find the Financial Times actually very helpful.

Speaker B: Very good. Mohammed, what crisis worries you most from a combination of likelihood and severity.

Speaker D: The climate crisis, Mike.

Speaker A: Same climate crisis.

Speaker B: Mike, what gives you the most optimism about the global economy?

Speaker A: 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.

Speaker B: Mohammed, what gives you the most optimism?

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

Speaker B: Mohammed, what is your favorite technology?

Speaker D: Uh, that's a really good one. I must tell you that I have been using more and more gen AI and, um, um, my eyes have been open in terms of application, especially in education. M. So I would put that otherwise. It's streaming NFL games.

Speaker B: Mike, what is your favorite technology?

Speaker A: Uh, it's again, AI, But I just find it fascinating. But I'm particularly interested to watch, um, this powerful interaction of artificial, uh, intelligence in the biomedical and life sciences. I think this is going to be transformational.

Speaker B: Mike, who is one person, living or past, with whom you would like to spend an hour?

Speaker A: Uh, Geoff Hinton, the godfather of AI by the way. 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.

Speaker B: Believe you can find it on YouTube.

Speaker D: Um, Mohammed, 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. All the tension in the general theory

Speaker B: and that working less, I think, might be one of the things people really like. Muhammad, what would you be doing today if you weren't doing what you are? Uh, professionally speaking?

Speaker D: Not literally this hour, I'd be sitting on a couch watching sports.

Speaker A: Mike, I have no idea. I mean, you know, I never had a game plan for life. I 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.

Speaker B: I like that. As a philosophy grad, uh, Mike, what would you recommend someone who's graduating from secondary school today? Study.

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

Speaker B: Mohammed, I know that you're president of a college, so it's a little troubling.

Speaker D: 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.

Speaker B: And finally, Mohammed, what is one piece of advice you'd have for listeners of this podcast?

Speaker D: 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 that 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?

Speaker A: Mike it's sort of much the same. I mean, you know, 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, you know, I, uh, don't. What, what's AI, you know, is it kind of, you know, trivial or kind of imitating humans? On the other hand, and, or you can sort of dive in with both feet. And what I think I find fascinating is that you got to find a balance in the middle. It's really what Muhammad said is to be kind of curious, you know, in a period where there isn't an obvious set of decisions to make. But, but, but the one recommendation is, uh, I would for the kind of people who listen to this, and I'm sure they're doing this, this is no time to sort of just spectate from a distance. You have to engage with this stuff.

Speaker B: Mohamed El Erin, Mike Spence, thanks for joining us.

Speaker A: Thank.

Speaker D: You.

Speaker C: Forward Thinking is a production of the McKinsey Global Institute. Find us online at, uh, McKinsey.com mgi or mckinseymgi on Twitter. Forward Thinking is hosted by Michael Chewie and me, Janet Bush. Our audio engineer is Colin Warren. If you haven't already, please subscribe, rate or review us wherever you get your podcasts.

Speaker A: The opinions expressed by podcast guests are their, um, own and do not reflect the views or opinions of the McKinsey M Global Institute. References to specific products, services or organizations do not constitute any endorsement or recommendation by mgi.