Good afternoon.
Good afternoon.
Welcome to the MIT's
Compton Lecture.
I'm delighted, truly delighted,
to see so many of you
here with us today,
and we look forward
to a very lively Q&A
session with our speaker,
following her lecture.
Let me begin with some context.
In 1957, MIT established
the Compton Lectures
to honor the memory of MIT's
10th president, Karl Taylor
Compton.
He served MIT as president
from 1930 to 1948, 18 years,
guided the Institute
with a steady hand
through the Great
Depression and World War II.
His presidency was
transformative.
He helped MIT grow
past its beginnings
as an outstanding technical
school for training
hands- on engineers to become
a great global university.
Karl Compton was a
distinguished physicist,
and he brought MIT a new focus
on fundamental scientific
research.
He established the principle
that this community now
takes for granted, that the
most profound and exciting
innovations are born when
science is the equal partner
of engineering.
And during World War
II, he also helped
invent a partnership between
the federal government
and America's research
universities, a partnership
that has helped drive the
nation's economic growth
for almost 70 years.
President Compton was
known for many qualities.
His steady temperament
in the face
of adversity, his vision, his
global outlook, his humanity,
and his commitment to
serving the common good.
So it is fitting that we
honor his legacy today
with a speaker who embodies
these same qualities,
the Managing Director of
International Monetary
Fund, Christine Lagarde.
As leader of the
IMF, Madame Lagarde
is charged with
monitoring and diagnosing
the fiscal and economic health
of its member nations, all 188
of them.
That is a difficult
job on a good day.
And since she took over in
2011, the global economy
has experienced a great
many complicated days.
The struggle over
the Greek debt,
the new landscape in
global oil markets,
the slowdown in the
Chinese economy,
the continuing migrant
crisis in the EU and more.
Through it all, with steady
optimism, candor, and even wit,
she has demonstrated
a remarkable ability
to bring the right
players together,
and to keep the global
economy on track.
As we will hear
today, she also takes
a broad view of
what topics should
concern the head of the IMF.
Not just fiscal policy,
but all the forces
that combine to shape
our human future,
from an aging population to
discrimination, to income
inequality, to climate change.
Madame Lagarde's career is
impressive by any measure.
And I find it even
more remarkable
that while managing minor
assignments, like steering
the global economy, she has
led the way, as a woman,
in professional settings much
too long dominated by men.
Through more than two decades
at the international law
firm, Baker-McKenzie, she
rose to become the first woman
to chair its global strategy
committee, the firm's top job.
In 2005, then President
Sarkozy of France
asked her to join
his government,
and she went on to become the
first woman to serve France
as finance minister, which
incidentally made her
the first woman to hold that
position in any G7 country.
She is the first woman
ever to lead the IMF,
and a few weeks ago she
was re-elected unanimously
to serve a second
five-year term.
I will close with a small story
that Madame Lagarde sometimes
tells herself.
When she was a young lawyer
interviewing for her first job,
one firm told her on the
spot that she would never
make partner.
When she asked why,
they said that it
was because she was a woman.
As she tells the
story, I thanked them,
walked out the door,
and never looked back.
Madame Lagarde, I expect there
has been some former law firm
interviewers looking back
with regret since then.
It is clear that they
did not deserve you.
But it is our great
good fortune that you
felt that the MIT
community deserved
your time this afternoon.
Please join me in welcoming
managing director of the IMF,
Madame Christine Lagarde.
[APPLAUSE]
Merci beaucoup, and thank
you very, very much.
Good afternoon to all of you.
Thank you very much,
President Reif, for your kind
introduction, and
thank you to all
of you, the students and the
faculty members, for being here
on this Friday
afternoon for, I think,
a moment of exchange between us.
But thank you for
your warm welcome.
It's very, very nice.
It's actually a tremendous
honor to have the privilege
to deliver the Compton Lecture.
And to be-- it's one
of my other firsts--
I think the first French
woman to give that lecture.
[LAUGHTER]
Right?
OK.
Quel honneur!
Now in many ways,
this visit is really
a visit to our alma mater.
Why do I say that?
It's just quite remarkable
that our five last chief
economists all received a
doctoral training here at MIT.
Ken Rogoff, Raghuram
Rajan, Simon Johnson,
my dear compatriot,
Olivier Blanchard,
whom I found when I
got my job in 2011.
And he found me.
And he said I didn't choose
you, you didn't choose me,
but let's give it a try.
And of course, now, Maurice
Obstfeld, also known as Maury,
who took the helm of our
research department last year.
Now, these economists are not
only leaders in their fields,
but they also embody
the MIT spirit--
and I have seen that firsthand--
of intellectual honesty,
and openness and
relentless curiosity,
even if that intellectual
honesty actually
comes with its cost.
Now, through their
work at the IMF,
these MIT alumni have
played a crucial role
in promoting the
global public good
of economic and financial
stability, which
is precisely, and has been,
the mission of the IMF
for the last 70 years.
It's been our raison d'etre.
And indeed, if the IMF had
a motto-- we don't have one
actually-- we could
probably borrow the motto
of the MIT, "Mens et Manus,"
the "Mind and the Hands,"
because both institutions are
keenly aware that the best
research, the grandest
ideas, are those that
can change our lives, our
economies, our nations,
for the better.
And both institutions
are keenly aware
that this requires
rolling up one's sleeves
and tackling problems hands on
in the lab, in the start-ups,
in the offices, and whenever we
give advice to policy makers.
In short, both our
institutions are
deeply committed to
serving the world-- serving
the world in the 21st century.
When I look at our 21st
century, demographic change
is one of the first features
that come to my mind.
Think about it.
The population at present is
roughly 7 1/2 billion people.
40 years from now, a little
over one generation away,
it will be an estimated
10 billion inhabitants.
And in some parts of the
world, especially in South Asia
and sub-Saharan
Africa, populations
will continue to grow rapidly.
Other parts of the world,
including most advanced
and emerging market
economies, will
face a momentous
transition towards aging,
and shrinking, populations.
And indeed, by the end of
this century, about 2/3
of all countries are expected
to have declining population.
And this will have
a profound impact
on economics, financial
markets, social stability,
and geopolitics.
Without action, public
pension and health systems
will not be sustainable
over the long term.
Without action,
our grandchildren
would face unsustainable public
debt, and sharp tax increase,
that would stifle growth and
reduce the economy well being.
As Albert Einstein once
said, and I quote him,
"The significant problems
we face cannot be solved
at the same level of thinking we
were at when we created them."
So we need to re-frame the
debate about demographics,
and I believe that this
challenge can be met.
But it will require
the right policies,
the political resolve,
and a strong leadership.
And I will argue that
the fiscal policy
responses, and technological
innovation-- those
are the two directions that
I will explore briefly.
There are many other layers
of investigation analysis
and thinking that we
could apply to that issue.
But I will refrain from that.
I will concentrate on the fiscal
side, and the innovation side.
Because these two are
important, or can be important,
part of the solutions.
So let us start by
looking at what I call
the sunny side of demographics.
Picture yourself now, together
with your grandchildren.
You may be in your 70s, but
you are physically active, not
afraid to impress those
kids with your new Instagram
account, or knowledge
about gravitational waves.
Well, maybe you have a different
vision of those golden years.
But surely we can agree on one
thing, being able to lead long
and healthy lives is a
demographic dream come true.
And by any standard, this is
one of our most astonishing
achievements.
So let's see what
it translates into.
First of all, life
expectancy is up.
Second, fertility is down.
Third, global per
capita income is higher.
John Maynard Keynes, one
of the two founding fathers
of the IMF, coined the
phrase, "In the long run
we are all dead."
Now, happily, the long run is
a lot longer than in his days,
because in his days average
life expectancy around the world
was barely 45.
Actually, to be precise,
it was 47 in 1950.
It has now jumped to 71.
And of course, life expectancy
will vary from one country
to the other, from one
region to the other,
from a low 61 in Africa to
a high, beyond 80 years,
in advanced economies,
particularly
in Northern America, Japan,
and Western European countries.
And few people would
actually be prepared
to swap their life today
with an earlier existence.
In the late 19th
century, for example,
the typical American
household could
expect to see almost one in
four children die in infancy,
and people suffered
from diseases
that are easily cured today,
when they're still around.
The difference
between then and now
lies in a powerful
combination of factors.
Not necessarily the
most exhaustive,
detailed, sophisticated
research, no.
But improved sanitation,
the introduction
of antibiotics and
vaccines, expanded
education, better
infrastructure and health care,
to name just a few.
So that's for life expectancy,
and you see the link
with innovation already.
Now, that increase
in life expectancy
and economic welfare, that came
with the Industrial Revolution,
brought with it the seeds
of demographic change.
In what we call today,
the advanced economies, it
started with a pronounced
drop in fertility rate
in the second half
of the 19th century,
and that has continued today.
At the risk of
oversimplifying somebody
who's not from here-- the
University of Chicago,
I'm afraid, Gary Becker--
the decline in fertility rate
was related to changes
in economic circumstances
that increased the financial
returns to education.
To put it simply,
it became rational
for families to invest in
their children's education,
and families increasingly
opted for raising
fewer, better educated children,
instead of a larger, lesser
educated number of children.
There is also ample
evidence that children
of better educated
mothers do better
in terms of health
and education.
And there is also ample evidence
that educated women tend
to have fewer children, and
devote more time to each child,
while they enjoy
broader opportunities
with their own life.
This virtuous
circle that started
in Europe and the United
States more than 100 years ago
is now widely seen
across the world.
Not in all countries
yet, regrettably, but it
is spreading.
Fertility rates have come down.
In 1950, the average
woman bore five children.
Now she raises 2 1/2.
When I say a woman,
it's because she's
associated with fertility.
But luckily, the
raising of children
is not just a woman's job.
Sorry, gentlemen.
Over the same period,
the global literacy rate
jumped from 36% to 83% today.
So life expectancy longer,
fertility rate lower,
now we come to the global
per capita income, which
has been up.
It has had a large positive
effect on economic well-being.
Average incomes in
emerging market economies,
such as China and India,
have risen much faster
than those in the
richest countries.
Since the 1990s,
the growth momentum
has spread to more than
70 developing countries.
And as a result, global
inequality-- two words matter,
global inequality-- that
is, income inequality
between countries,
not within country,
has fallen steadily
over the past decades.
And global income
per capita has nearly
quadrupled since the end
of the Second World War.
Global poverty has come
down as well, sharply.
People living at or below the
poverty line of $1.90 per day
account for 13% of the
world's population,
down from 40% in 1981.
China alone has lifted more
than 750 million people out
of poverty in the
last three decades.
The bottom line, emerging
and developing countries
have been catching up
with advanced economies
in facilitating longer
and more prosperous
lives for their citizens.
Although that rate, that
speed and pace of convergence,
has been slowing down lately.
Now, I mentioned
global inequality,
and I repeated
global inequality,
because this is the
inequality between countries.
On the other hand,
inequality within countries,
in most cases, has worsened
in the recent times, less so,
but starting from a much
lower base, in Latin America.
So that was the sunny
side of demographics.
What's the darker side?
Well, with declining
fertility rates,
populations in some
advanced economies
did not just grow more
slowly, they stagnated.
They stagnated, or
began to shrink.
And the same will
eventually happen as well
with some of the large
emerging market economies.
Japan and Germany's
population, for example,
started to decline
some time ago.
And even the world's most
populous country, China,
has been facing a
declining working age
population since 2012 now.
And in most cases, shrinking
and aging go hand in hand.
And it's a demographic
double whammy
that will have major
implications for economy
growth, financial stability,
and the public purse.
And that's what I would
like to have a look at now.
First, the impact on growth.
For obvious reasons, older
workers participate less
in the labor market,
and a country
with an aging and
shrinking population
will therefore see lower
growth over the medium term.
Fewer workers also
means less need
to equip them with
capital, and countries
may become reluctant to
upgrade their capital stock.
Why would I build
more infrastructure
if there are fewer people?
That's one of the
debates we're having
at the moment, as to the need
to invest in infrastructure.
Our research suggests
that the combination
of aging and shrinking will
reduce potential growth
in advanced economies
by about 0.2 percentage
points in the medium
term, and by twice as much
in the emerging economies.
Now, you'll say, 0.2%,
you know, what is this?
Well, it's actually a lot.
In those parts of the world,
such as the European Union,
for instance, the Euro area,
more specifically, where
growth is roughly, on
average, at the moment 1.5%.
And that is
particularly the case
for those countries that
are facing very high debts.
So what's the impact on
the financial markets?
I'm sure that you're doing
some research on that.
I hope so.
But many see population
aging as a significant drag
on asset prices.
Some even hypothesize
that retiring baby boomers
may trigger stock market
disruptions, because they
may very well liquidate
the equity in order
to finance their retirement.
Now, this may or
may not be true,
but what we definitely
know is that governments,
pension funds, and
individuals, actually
seriously underestimate the
prospect of people living
much longer than anticipated.
IMF analysis suggests that,
if everyone lived only three
years longer than expected,
pension related costs
could increase by 50% in
both advanced and emerging
economies.
And this would heavily affect
private and public sector
balance sheets, and could also
undermine financial stability.
Third, what is the
impact on fiscal health?
Again, our research shows
that, in advanced economies
alone, age related
spending is projected
to jump from 16.5%
of GDP today to 25%
by the end of the century,
unless action is taken.
So how can these
challenges be met?
There are not
many, many options.
You can try to meet those
challenges through borrowing.
And if governments were to
finance the entire increase
in age related expenditure
that I have just mentioned,
public debt would explode from
an average, at the moment,
of about 100 on a
global basis to 400.
400% of GDP by the
end of the century.
So that's one option.
Doesn't seem
particularly appealing.
Another option is
through tax, higher tax.
Well, in my
hypothetical, this would
mean lifting VAT tax by
roughly 20 percentage points,
or increasing social security
charges by about 25 percentage
points.
Not very appealing either.
OK.
Through drastic
entitlement reforms.
Well, by our
calculations, that would
mean slashing
pensions and health
benefits by an average of 1/3.
Not very appealing either.
Now, there is a wide variety
of country experiences,
but broadly speaking, emerging
markets and advanced economies
face similar challenges.
And without action, China's
spending on pension and health
care is projected to increase
by 13 percentage points of GDP
by the end of the
century, compared
with an increase of 15
percentage points in the United
States.
So if those three options,
traditional options,
are not working, what do policy
makers have in their toolbox?
What can they think of in order
to address those challenges?
And at this point in
the lecture, that's
where Groucho Marx would jump
up and ask, "Why should I
care about future generations?
What have they
ever done for us?"
[LAUGHTER]
Now, of course, we don't
need Groucho to remind us
that politicians
generally don't look way
beyond the next election,
let alone the next 85 years,
assuming they have common sense.
[LAUGHTER]
Now, the real question
that is addressed
to the silver generation, that
we all are or will be one day,
is, is there a silver bullet?
And the answer to that is very
much like my darling Normandy,
which is where I come from,
p'tet ben qu'oui, p'tet ben
qu'non, which is, "maybe
yes, but maybe not."
Very much like the economist,
you know, on the one hand,
on the other hand.
[LAUGHTER]
So common sense, first, tells
us that simply increasing
the fertility rate could help.
So what's in the toolbox
of the policy makers?
Well, many countries
have actually tried.
Baby bonuses, family allowances,
tax incentives, parental leave,
subsidized childcare, flexible
work schedules, you name it.
And what is the result?
While these measures, in the
main, have actually helped
women go back to work, which
is great news in and of itself,
but they seem to have
very little effect
on the number of births.
So bribing people
to have children
doesn't work, at least
in the aggregate.
And that is why we need
a multi-pronged approach.
In other words, it's
not enough to focus
on just one aspect, such as
pushing through a pension
reform.
We need game changers.
So first game changer
is entitlement reform.
And on that front,
we have to start
with what costs the most
to the public purse,
and that is health
care, by a long way.
A few options.
Increasing competition amongst
insurers and service providers
will certainly help.
But it also requires
more targeted
spending, paying more attention
to primary and preventive
health care, promoting
healthier lifestyles,
and making more effective use
of information technology,
and innovation.
For instance, costs
can be reduced
by making greater use
of health data history,
or using unique health
identifiers for individuals.
And that's where, again,
we touch on innovation.
If these efforts
could be sustained,
both on the competition front,
on the targeted and better use
of public spending, and on
the use of innovation, well,
it would certainly
help the government
to bend the cost curve.
Another priority is
lifting retirement age
to match longevity gains.
This would bolster
the pension scheme,
and extend the productive
life of individuals.
But while doing that, policy
makers have also to be very
careful to put in place a social
safety net that will protect,
actually, those that cannot,
for physical or mental reasons,
actually work longer.
Pension systems need
to be flexible enough
to respond to those
demographic shifts.
There are existing
systems in place.
The Japanese system,
for instance,
automatically slows
the growth of benefits
to offset increases
of life expectancy,
and changes in the labor force.
Other countries, such as
Germany, Finland, Portugal,
also link benefits
to life expectancy.
And again, the
sooner the reform,
the fairer the adjustment.
More broadly, in the
current environment
of already depressed
aggregate demand,
we need very savvy,
very targeted, and very
sophisticated fiscal policies,
one that supports demand,
while ensuring sufficient
savings in pensions and health
care.
So that's my first proposed game
changer, using all the tools,
all the angles, from
which to actually work
on those entitlements, keep them
at their most efficient level.
But efficiency is the key,
and competition is actually
helpful, because there
are, in that sector,
quite a few ransackers,
as we all know.
The second game changer is
better tax systems, and more
efficient public expenditure.
On the tax side,
this means broadening
the base for value added taxes.
Less holes in the cheese.
Improving taxations of
multilateral corporations,
and strengthening
tax compliance,
to ensure that
everybody participates
in financing that public purse.
Now, there is a lot
going on at the moment.
For those of you who are
really interested in tax,
what is happening on the
front of automatic exchange
of information, BEPS, which
is Base Erosion and Profit
Shifting, all of that is
aiming to actually better
define and assess the base
on which taxation is levied.
On the spending side, there
must be better management
of public investment.
Our research shows that the
most efficient public investors
get twice the growth
bang for their buck
than the least efficient.
And you can wonder what happens
in between the most efficient
and the least efficient.
A lot of leakages.
And of course, in that
context, energy pricing
is key, not only for the public
purse, but for the planet.
And this means more
emphasis on energy taxation,
less reliance, if at all, on
energy subsidies, particularly
the fossil fuel
energy subsidies.
Our estimates-- and there may
be a difference in this room,
because I know that some
research work has been
conducted-- but our estimate
is that global energy subsidies
amounted to $5.3
trillion last year.
$5.3 trillion last year,
which is 6.5% of global GDP.
That's a huge amount.
It's not just direct subsidies.
It's all the spillover and
consequential derivatives,
if you will, of the
use of those subsidies.
And this staggering
number, we believe--
I believe very strongly--
needs to come down,
because instead of subsidizing
the use of fossil fuel energy,
in particular, it might be a lot
better for those countries that
currently spend that
money to actually spend it
on health and education.
And it's the very perfect moment
to remove those subsidies,
and to put in place
taxation on energy,
because prices are so low.
So that was my
second game changer.
My third game changer
is a broad based
push to lift potential
growth, to increase
the size of the pie.
Because in the end,
there is only so much
that tax measures can do,
only so much that competition
can remove, and only
so much that innovation
can improve as well.
One way to grow the pie is, of
course, to add more workers.
But with shrinking
and aging populations,
it's a bit difficult. Yet,
there are reservoirs of workers.
And I would mention
one, in particular,
and that obvious group is women.
Scandinavian countries,
and more recently, Japan,
have sought to raise
female labor participation
with some success by offering
affordable childcare,
making tax and legal
systems fairer for women,
and promoting equal pay
for equal work, as well as,
of course, having
maternity leave available.
Our research indicates
that raising female labor
participation rates
to those of men
could increase GDP by 5% where?
In the United States of America.
And the numbers are
obviously much higher
in other corners of the world.
Another source of
additional labor,
in addition to women,
is immigration.
Now, of course, and
particularly in view
of what is happening in
Europe at the moment,
the associated political
and social issues
are not to be underestimated.
And they can be daunting.
But from a purely
economic perspective,
immigration can boost a
country's labor force,
encourage investment, and
lift growth, in the short,
and in the longer term.
And that is so only
provided that these workers,
those migrant workers, are
well integrated into the labor
force, and that's
a big, big caveat.
Now, you might ask, why is
growing the pie so important?
Well, because there
is more to share now.
But also because higher growth
means a fuller public purse,
and a more potent
fiscal policy response
to this demographic challenge.
Now, there is, of course,
an essential ingredient
for growth, and
that is the residual
of it all, which is raising
labor productivity by using
even smarter technology.
And if there is one place
where that is obvious,
it's here at MIT.
You know a few things
about innovation.
And indeed, I believe that it's
largely the business of MIT
to promote technological
innovation, which
is essential to raising living
standards over the long term,
as we can all live
long and prosper.
[LAUGHTER]
Artificial intelligence,
robotics, genetic engineering,
3D printing, quantum
computing, those are only a few
of the technologies
that could potentially
affect our economic well-being
in the 21st century,
in and of themselves,
but even more so
if they are combined together.
Could these innovations
revolutionize the allocation
of labor and capital?
Yes, say some-- the optimists.
And I'm thinking here of Erik
Brynjolfsson, of Andrew McAfee,
from the Sloan
School, here at MIT,
who argue that technical
advances will have
transformational
consequences, leading
to accelerating productivity
and increasing prosperity.
In other words, the pie
grow a good deal by itself,
and everybody
enjoys more leisure.
You can sign me up on that one.
Well, maybe not so
fast, because there are
few pessimists out there, too.
First among these is,
perhaps, Robert Gordon,
who also got his Ph.D. from MIT,
under the supervision of Robert
Solow, almost 50 years ago.
According to Professor
Gordon, the century
between 1870 and 1970 was unique
in inventing electricity, gas,
the internal combu, combust,
combust, combust, combustion
engine-- the engine [LAUGHTER]
--running water, sewers,
telephone, antibiotics, I
would add the washing machine,
and much else.
In his view, the technical
progress achieved since then--
since then, 1970, as admirable
as it was, and it is--
is simply not visible
in productivity growth.
Now, which of these
two views is correct,
the optimists or the pessimists?
Nobody knows.
By the way, do you
know the difference
between the pessimist
and the optimist?
None.
They both get it wrong.
But the optimist is happier.
[LAUGHTER]
So you know where I stand.
One thing for sure,
though, is that we
don't need less innovation.
We need more of it
Power houses, like
MIT, have been
leading the way for decades,
including through partnerships
with major
corporations, as I was
told earlier this afternoon,
when I visited the Media Lab.
But governments also
need to play their part
by removing barriers to
competition, cutting red tape,
and investing more in education,
and research and development.
This would unleash
entrepreneurial energy,
and help attract
private investment
in ideas that are new,
surprising, and useful.
And this is particularly true as
far as fundamental research is
concerned, where the
output is not guaranteed,
and the long term is necessary.
In addition to supporting
universities and research
networks, governments
typically provide
subsidy for private
sector R&D as well
by way of tax
incentives, or otherwise.
More investment in R&D
means bigger benefits
for the wider economy.
New IMF research shows that,
if advanced economies were
able to ramp up R&D
by the private sector,
through those incentives,
through those tax credits,
by 40% on average, they
could increase their GDP
by 5% in the long run.
Innovation is also critical
outside the advanced economies.
For example, China
is today number one
in the world in terms
of patent applications.
And more and more
multinationals outsource
part of their research
and development
to countries like
Brazil and India.
Now, to be fair--
a bit, actually,
like Japan 40 years ago,
which is certainly not
doing that anymore-- but many
of the developing countries
still rely considerably on
imitation and absorption
of technologies from
others, including
in advanced technologies.
And one might
wonder at that point
whether it is in our
collective global interest
to actually stand on our
intellectual property rights
to protect and defend against
these imitation and copying
trends that we observe in
many developing countries,
or whether it would not be
more beneficial to organize
the sharing of those inventions,
and those technologies,
including through foreign direct
investment, trade reforms,
investment in education,
and a more subtle, better
targeted enforcement of
intellectual property rights.
And if this were to happen, it
would be also a game changer.
So let me conclude on
this idea of sharing.
The life motto of Karl Taylor
Compton, MIT's ninth president,
was "Leave every campground
better than you found it."
We all know that we must address
a huge demographic challenge,
so we can leave our
economies and societies
better than we found them.
We owe this to
those grandchildren
that I asked you to
imagine yourself with,
for their own sake,
for their own destiny.
And I'm confident that, if
you will use all these game
changers, and if we
continue to focus
on good use of public spending
through good innovations,
we can do it.
We all have a stake in this.
Thank you.
[APPLAUSE]
