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Thought Leader: Pankaj Ghemawat

June 14, 2012

Pankaj Ghemawat

As part of the Carnegie Council Centennial Thought Leaders Forum, Carnegie Council's Devin Stewart spoke with Pankaj Ghemawat, the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona.

DEVIN STEWART: How do you see the age in which we live? How is it distinct from a moral perspective?

PANKAJ GHEMAWAT: I think that the age we live in is distinct from a moral perspective from the ones that preceded it, certainly in terms of the awareness or the ability to be aware of what's happening to other people in far-flung parts of the world in a way that really wasn't feasible in terms of reach, richness, timeliness, et cetera, in previous ages.

DEVIN STEWART: And what are the implications of that distinction?

PANKAJ GHEMAWAT: Well I think that one of the clearest implications of that greater awareness is more attention to some of the inequalities that have already existed, that have always existed in terms of income levels, what people can aspire to in terms of standards of living and so on.

So it's not that international inequality is a new thing. Basically the period since the Industrial Revolution has seen, effectively, a divergence in individuals' incomes as some countries leapt ahead of others. But it's rather that for the first time we actually have the potential for awareness of how glaring some of these patterns are. Unfortunately, in terms of how much attention people actually pay to others unlike themselves, the indication is that this potential is far from fully realized.

DEVIN STEWART: And in that regard do you see the world getting worse or better?

PANKAJ GHEMAWAT: Discounting the immediate short-run market fluctuations in the Eurozone, which the world is preoccupied with at the time of this taping, I think that there is certainly going to be some imbalances to work through in the rest of the 2010s, which is a decade that actually two years ago I started referring to as "the terrible teens," just because it was very clear that the adjustment process was going to be difficult.

I think longer run, there's a lot of room for optimism, but optimism conditioned on doing something about the most glaring aspects of global inequality, because otherwise the divide is simply going to get to be unsustainably large. And let me be more specific. The longest run forecast I've seen, actually prior to the Eurozone crisis, of GDP per capitas in 2050 put out by a multilateral financial institution had, in today's dollars, U.S. and European per capita incomes at $100,000, China at about $40,000, India at $20,000–$30,000, and Africa at $2,000–$4,000.

A ratio of 100 to 2 or 4 is significantly worse than the ratio that existed within apartheid-era South Africa and unless something is done to prevent these forecasts or these kinds of forecasts from materializing, the current predications are 2 billion people in Africa expected to live at a very, very small fraction of what the rest of the world is living at. That strikes me as not very politically sustainable.

DEVIN STEWART: Are there other emerging trends that you think about or are concerned with?

PANKAJ GHEMAWAT: I think that there are certainly lots of things to worry about in terms of the long-run. An obvious other one is clearly global warming. It is a global externality of the sort that would seem to require concerted coordinated action but if not—much of that kind of activity is actually already happening, to the point where Shell has shifted the scenarios they put on their website from no global warming versus global warming, to a little global warming versus a lot of global warming.

That said, I remain very optimistic about the potential for technology, even in the sector as massive as energy, where simply shifting 1 percentage point of energy demand from one source to another is a mammoth undertaking.

I'm hopeful that that if the incentives are put into place, we will see the kind of technological improvements that are necessary, because clearly the gap between what the current technology is capable of and what the market prices for carbon, et cetera are is just a little bit too large still to be bridged.

DEVIN STEWART: Aside from technology, the lack of coordinated action has been a reoccurring theme in these interviews. Do you see coordinated action as something that the world is capable of in today's world?

PANKAJ GHEMAWAT: The common wisdom isn't always wrong and the common wisdom is that there is a crisis and global governance is lacking. While generally agreeing with that, I actually prefer to focus on the implications. And the implications are that if we have problems that don't require global coordination, we should avoid making them part of the global agenda. That's why I picked global warming as my example of an area where international coordination was needed but lacking.

If you think about most other forms of pollution—for instance, acid rain did occur mostly on a regional basis and so it can be tackled and was tackled mostly at a regional level. Most water-borne and ground pollution is very, very localized in its effects and so while it's a terrible thing, it's not global coordination that's required to solve the problem.

It's important to think about which problems actually do require global coordination, if one recognizes that our ability to achieve global coordination is going to be limited for some time to come.

DEVIN STEWART: What does a moral leadership mean to you?

PANKAJ GHEMAWAT: It takes me back to what I think is the fundamental problem with the world today. We're all products of our own experiences. So having grown up in India, it's perhaps to be expected that I regard the fundamental problem as income and equality and the fact that so many people—well over a billion—still live so, so close to the edge, if not actually over it, at a time when others have so much. This is perhaps the biggest moral dilemma or failing of our time and correspondingly the task; that's the challenge that colors how I would think if asked to define moral leadership, what its attributes might be.

DEVIN STEWART: And do you feel that an idea of a global ethic is viable?

PANKAJ GHEMAWAT: This is where we have to be very, very practical and think about where are we and where might it be realistic to get to, more than insisting on abstractions as ends unto themselves.

And let me be very, very specific. There's an old notion that goes back to the Greek philosopher Hierocles that our concern for people close to us is much greater than our concern for people who are very, very far from us. And that's typified when you start actually trying to fit some data up to that basic insight, which is what I attempted to do in my recent book, World 3.0. You find that roughly speaking, governments in rich countries spend about 30,000 times as much on domestic poor people as they do on poor people in these poorest of countries.

Getting to the goals set out in the Rio 1992 summit would require changing that 30,000 to 1 ratio to maybe 15,000 to 1 and I think that that would be a huge achievement. So yes, it would be great if we suddenly became totally cosmopolitan and cared about people that we don't know at all as much as about those we do know well. However I think that psychologically, not to mention for other reasons, that is quite unrealistic.

And what I would like to point out is that the degree of distance sensitivity of affect or sympathy for others is so large that even small reductions in it could, in fact, bring about material improvements in how we live and specifically in the context of aid—how we meet this major challenge that I was referring to earlier.

DEVIN STEWART: So you talk about rooted cosmopolitanism in your book. Is this what you're referring to?

PANKAJ GHEMAWAT: Exactly. I think that the point about rooted cosmopolitanism is the very plausible idea that you are likely to care more for your child, for instance, than you are likely to for a child halfway around the world whom you've never met. There are some things that are closer than others and as David Hume in his paraphrase of Hierocles put it: "One's regard for one's self is generally much greater than for anybody else including those in the inner circle. But those in the inner circle at least get a much higher level of regard than those who are very, very far away."

So the original idea of rooted cosmopolitanism is simply that there is some home bias, as economists would call it, that in fact you do care about people who are members of your family or city or country more than you might about those who are not.

What I try and do to push that idea a little bit farther, is point out not just home bias but distance. So to try and put some numbers on this idea that, "Okay, we might care about foreigners in countries that are very close to each other, say Germany and Austria, much more than we might care about foreigners in countries that are very far away from us."

I actually try and do a little bit of quantification suggesting that not only is there home bias and much more concern for one's co-citizens than for foreigners, but that concern for foreigners also seems to follow predictable patterns. We're more interested in news coverage, if we're Americans, of Europeans, for instance, than we are of Asians, let alone Africans.

That's the situation that we're starting out with, and to me moral leadership in that context means reducing distance sensitivity without going to the, absurd to me, extreme of saying, "Okay we can reach a situation where we care about everybody including ourselves equally." That's utopian. What I have in mind with rooted cosmopolitanism and distance sensitivity is something that's much, much more practical and to my mind more achievable.

DEVIN STEWART: Where do you see conflicts emanating in the future?

PANKAJ GHEMAWAT: One big area of potential conflict has to do with the relationship between China and the United States. And I think that things have actually been smoother than I would have expected over the last few years.

But for a variety of reasons, ranging from the latest trade figures; to the existence of a U.S presidential cycle; to thinking about the longer run, increasing Chinese relative military spending; and, probably most importantly, what many observers referred to as the increasing self-confidence found in the younger generation of Chinese, whether in companies or in the government or in the People's Liberation Army, in terms of how to deal with the U.S., when compared to those currently in power.

Those on the Chinese side and, of course, on the U.S. side, in addition to the domestic politics, their just persistent inability to actually make the kinds of budget balancing adjustments needed to avoid relying on continuing Chinese willingness to purchase U.S. governmental securities as the way to keep things going is something that—the imbalances do have to be managed.And I'm not seeing much appetite for that.

Between increased Chinese assertiveness and U.S. resistance to that, but also U.S. resistance to sort of changing its financing needs, one worries about that as one potential area for trouble.

DEVIN STEWART: And what recommendations would you make to businesses or policymakers based on your forecasts?

PANKAJ GHEMAWAT: In specific regard to U.S./Chinese interactions, I think that, first of all, it's important to remind both sides exactly how important the preservation of the open world trading system or the relatively open world trading system is to both parties.

For instance, the Chinese seem, although they've shifted a little bit, they seem not to realize that, as the world's largest trading nation, they have a disproportionate stake in the current system and in making sure that it doesn't suffer some kind of breakdown. I think that it's fairly clear that there are important segments within both countries that could see a very unilateralist approach, where the essence of the point is that this is not a zero sum game to be dealt with on that kind of basis.

This is really something that's a positive sum game, but really requires cooperation if that potential is going to be exploited. I think that there is an awful lot of zero sum framing that is really worth dealing with to some extent.

Second, having said that, it's fairly clear that they do have some different sort of patterns of influence in the world and it might not be wise, as the U.S. has figured out, to, for instance, try and set a Taiwan policy independent of what China thinks about that. And similarly, the Chinese might want to be a bit cautious before they try the equivalent of what Russia attempted by trying to put nuclear missiles in Cuba.

There are different zones of influence. Those zones of influence are shifting and China's has clearly expanded recently.

But, realistically with two large economies and polities towering above the rest, it's probably worth recognizing that they're not equally involved in all parts of the world. And that the Chinese probably do have some interests that, however legitimate or illegitimate, are going to influence Chinese behavior in the South China Sea; and similarly there are areas where the same can be said of the U.S.

DEVIN STEWART: Earlier you spoke of some optimism about the future. Can you describe an optimistic future or would you like to make any predictions?

PANKAJ GHEMAWAT: One thing that's been emphasized in a number of books recently is the notion that the whole set of technologies that have been mastered, or close to it, that still have to work their way through the productive system with massive implications for how we live and what kinds of productivity and other sorts of growth we might be able to achieve. That's probably the biggest single reason for optimism. This is one of the great things about the age that we're living in because the Industrial Revolution onward marked the first time that we actually have the prospect of significant noticeable individual-level technological advance occurring on a systematic basis.

That's spread beyond a few countries. It's accelerated and when one looks at what's waiting in the wings—just take something as apparently old-fashioned now as information technology. If one looks at what's happening with remote diagnostics and some of the wonderful things that are going on, it's a little bit hard to imagine that this is not going to have some repercussions for a healthcare system that is currently out of control on the spending trajectory that it's on.

Technology would be one thing I would point to as, at least, bringing us the potential to do things way better, way more effectively than we have in the past.

A second has to do with the potential for additional integration that I talk about in World 3.0.

The idea is that, while conventional estimates of gains from say something like the Doha round come to just a few tenths, if that, of 1 percentage point of global GDP, if you think broadly about the possible gains from trade; if you think about services as well as merchandise; if you think broadly about policy levers to look beyond tariffs; think about trade facilitation; if you think about non-economic as well as economic gains; and if you think about flows other than trade in products and services, like flows of people or flows of information; you end up with a number that in order of magnitude terms is much closer to 10 percent of global GDP. That's huge. While not all of that may be achievable, it's certainly a way bigger number than many people, including many trade economists, seem to realize.

And third, I think that just the shifting sort of patterns of growth in the world imply the emergence of very large new middle classes in China, in India, in other parts of the world. This clearly raises some resource concerns and that takes me back to some of the things that I worry about.

But, the emergence of so many people from poverty is, in itself, intrinsically not just a huge achievement, but something that tends to have a momentum to it. If we start to think, just for instance, to retreat for a moment to the purely commercial level, what it actually means to have 2 billion new middle class consumers in the world, there is certainly room for optimism there, as well, in terms of what the long-run impact of the emergence of not just the sources of supply, but these new markets are going to be.

DEVIN STEWART: Andrew Carnegie's vision was one of both changing the educational system but also promoting world peace. Do you think world peace is possible?

PANKAJ GHEMAWAT: We've already seen, and I have a chart to this effect in World 3.0, pointing out that the areas that saw U.S. military interventions over a period, formed virtually a mutual exclusion zone with countries that were involved in disputes at the World Trade Organization over that period. A number of people have remarked that it tends to be a little bit harder, when your supply chains are inter-related, to go to war with each other.

But I think that it's far too easy to sell oneself fully rational predictions of human behavior. Human history would be a lot less convoluted and interesting if full rationality prevailed at all times. One thinks back to Norman Angell talking about the impossibility of a great war back in 1910 because of how intimately inter-bound with each other the various empires were.

A lot is really endogenous to what we choose to do. My sense is that ultimately the most sustainable basis for moving in the right direction is to work directly on some of the sympathy discounts, some of these very limited awarenesses of, let alone sympathy for, that we have of people unlike ourselves, because until globalization is accepted at that level, it's going to remain a somewhat fragile construct in a political sense.

DEVIN STEWART: How do we do that? How do we raise sympathy for others?

PANKAJ GHEMAWAT: There's no one simple lever to pull but there's certainly lots of different mechanisms that people have talked about. In general, education tends to lower the degree to which people are xenophobic, although, of course, that's clearly contingent on the content falling within certain norms.

We certainly have evidence that student exchange programs—I think of the Erasmus Programme in the European Union, for instance, which has things that really are helping create a new generation of people who, at least at some level, have a European identity as well as a national identity.

We have evidence from some very interesting field experiments that societies that have economic interactions with each other tend over time to develop greater degrees of trust of strangers and that, in fact, the level to which societies trust people who are not from those traditional societies varies directly with the extent to which those societies have economic dealings with the rest of the world.

So further economic integration may have its own kind of virtuous cycle effect in this context. I think that in the short run the trick is, at least in Europe where I live, to prevent high levels of unemployment and cloudy growth prospects from movements in reverse rather than forward movement in this direction. So there has been a nasty resurgence of anti-immigrant sentiment in a number of European countries.

I think in the short run if we can, we can do it through avoiding treating immigrants as one group, by actually pointing out that Europeans' intuitions about how many immigrants there are in their countries are typically overblown by a factor of 2 to 3, so forth, and so on. In the short run we have to do what we can to calm the troubled waters around immigration, around trade. I think the educational and cultural change programs are more a medium-term to longer-term effort.

DEVIN STEWART: And a final question, Professor. Who is ultimately accountable for the problems that we discussed today?

PANKAJ GHEMAWAT: Nobody is ultimately currently accountable for all these problems that we've discussed today and I think that these are problems that span group boundaries. And we haven't yet quite figured out we're better than we used to be, maybe 2,000 years ago, at dealing with those kinds of issues.

But there still is no mechanism that sits above the nation-state that automatically deals with problems that have cross-border implications, i.e. can't be decentralized purely down to the national level and national decision-making. That's where I think innovation and creativity in thinking about new governance models is called for. Again, one can think of a bunch of specific do's and don't's that people have been propounding in that regard.

But rather than get bogged down in the detail of that on the last question, I would point out to the fact that this has precisely been the situation confronting our species for most of the time since we were hunter-gatherers. Since a few thousand years ago, we've had gradually expanding circles of cooperation. It's not been easy to overcome the barriers of mistrust, let alone the existence of political structures, for bridging those different groups.We've sort of invented those structures as we've gone along. The last few years, as Robert Wright emphasized in his book Nonzero, has been a time of basically increasing the group size over which interactions take place in a meaningful sense.

If one can point to clear gains from further global coordination and if one's willing to think hard about possibilities and alternatives, including ones that are not necessarily rooted in a 1914 rather than 2014 world view in terms of distribution of power, I am optimistic that ultimately the politics, the political arrangements are likely to follow the potential; although again, there's always the possibility of snatching defeat from the jaws of victory.

DEVIN STEWART: Fantastic comments, Professor. Thank you so much.

PANKAJ GHEMAWAT: Thank you.