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It is a great honour for me to address you in this beautiful church. The Frauenkirche is a symbol of the victory of faith and peace over the brutality and destruction of war. It was rebuilt and reconsecrated after it had been destroyed in one of the most dreadful episodes in a dreadful war. It stands as an indomitable symbol of mankind’s ability to resurrect the best qualities of our civilization from the ruins and ashes of the worst.
Demography, as they say, is destiny.
Much of human history has been driven by the movement of people and the growth of populations.
Just consider the impact of migrations on mankind’s history:
The movement of tribes from central Asia against the ramparts of the Roman Empire;
migrations of the Huns and Mongols across the Eurasian landmass; and
the huge migrations from Europe from the beginning of the 16th century which dramatically changed the history and demography of much of the planet.
Now, once again, in our globalised world, people are on the move.
The dominant image of our time may be the hundreds of thousands of refugees who each year are risking their lives in unseaworthy boats to reach Europe. As I speak there are hundreds of people, huddled together in leaking boats, desperately trying to reach the southern shores of Italy, Spain and Greece.
All of this is happening at a time of the unsustainable growth of the human population and dramatic changes in life expectancy and fertility.
In 1950 global life expectancy was only 47 years - by 2011 it had increased to 70. A Japanese girl child born today can expect to live to 107. An English girl baby will live till 103. At the same time fertility rates in many European countries have plummeted far below the levels required to sustain present populations. At the present fertility rate, the population of the European Union will shrink by 100 million by the end of the century. In some countries it will fall by half.
In the coming years more and more refugees can be expected to seek safety and a better life in the prosperous and secure societies of Europe and North America.
What is already a steady flow of refugees could become a torrent if climate change causes a succession of bad harvests in the developing world. How would Europe react if 10 million refugees a year were to knock on its doors and appeal for refuge?
At what stage would the so-called “lifeboat effect” come into play: that is the point when those in the lifeboat stop doing all they can to save and haul aboard shipwreck victims - to the time when they violently fend them off for fear of being fatally overloaded?
Everywhere populations are becoming more and more heterogeneous. It is predicted that by 2050 a third of Britain’s population will comprise minorities.
The days of the single ethnic group nation state are gone. One of the central challenges in the emerging multicultural world will be the accommodation of diversity.
Globalisation during the past four decades has led to an enormous increase in the interaction between people from different backgrounds, cultures, languages and religions.
The management of the resulting cultural, language and religious diversity will be one of this century’s greatest challenges –
For the international community;
For the European Union; and
For countries like Germany, South Africa and the US.
Throughout the world populations are becoming more cosmopolitan: the world’s 200 countries now include more than 6 000 different cultural communities. More than 130 countries have cultural minorities comprising more than 10% of their populations. Cultural diversity is being augmented by new waves of migrants seeking economic opportunities, freedom and security.
Everywhere people are on the move - and everywhere they are confronting once homogenous societies with new challenges.
Among these is the impact on cultural identity.
We humans are complex social beings with many important concentric relationships. We are individuals. We belong to families. We pursue our economic interests. We belong to clubs and organisations. Many of us have religious affiliations. We often belong to distinct cultural groups. We have gender and sexual orientation. We are citizens of countries and increasingly we belong to the international community.
All of these relationships are important to us - and some are critically important. In many, if not most of them, we are minorities. True freedom consists of our being able to make lawful choices for ourselves and our families in all these spheres. The borders of these freedoms should be defined only by manifest public interest and the point where our freedoms begin to impact negatively and unfairly on the interests of others.
For example, I am an individual. I belong to the De Klerk family. I belong to the Reformed Church. I am a member of a number of private organisations. I am an Afrikaner. I derive my language, my history, and my traditions and much of my identity from all these associations. I am also very proud to be a citizen of the new vibrant and multi-cultural South Africa. Like my ancestors since 1688, I am an African - and I like to think that I am a citizen of the world.
None of these relationships is mutually exclusive. People can be all these things at the same time. Their reasonable rights in all these spheres need to be protected. Neither should they suffer discrimination because of any of these affiliations.
In the same way, my friend and former colleague, Nelson Mandela, also called himself an African and a citizen of the new South Africa. He was, however, also very proud of his identity as a Xhosa - one of the South Africa’s nine indigenous cultures. He was born and raised to be the hereditary adviser to the Paramount Chief of the Tembu, one of the great clans of the Xhosa people. One cannot really understand Nelson Mandela without also understanding his cultural roots and the history and language that helped to form him.
I believe that we South Africans are all richer because of the cultural diversity that we enjoy. We have a collective responsibility to show that diversity does not need to be a source of tension and conflict - but can help to enrich our lives by providing differing perspectives of the world in which we live.
Apart from the 11 black cultural groups; two white language groups and the coloured and Asian communities, South Africa is now host to as many as five million illegal immigrants from countries as far away as Somalia and the Congo. During recent years we have experienced ugly riots against the new arrivals by South Africans who felt threatened by competition from foreigners in the local job market.
How are we going to ensure that all these communities will be able to co-exist peacefully?
There are a number of facets to this challenge.
In many countries, cultural minorities have arisen through historic processes. They have always lived in the country they inhabit: they often speak their own languages and have their own cultural traditions. Ideally, they should have a right to use their languages; practise their cultures and to have a voice in the processes by which they are governed.
Other societies have become multicultural through immigration. Here it is often argued that as a price of admission to their new societies they should accept the values of their host countries and learn the languages that they use.
From all this one thing is clear: the management of cultural diversity is an increasingly important challenge for countries throughout the world.
Let us look at America. There are now more than 12 million illegal immigrants in the United States. For most of America’s history, the invariable practice was for immigrant communities to coalesce around the existing national identity and to learn to speak English as soon as possible.
On this model the United States was able to develop from 13 Atlantic colonies to a continental power in less than a hundred years. In 1800 its population was only five million. By 1900 it had swelled to 75 million.
The existing cultural base of British settlers, American Indians and Afro-Americans was enormously strengthened by the arrival of widely diverse European immigrants - Germans, Irish, Italians, French, Scandinavians and Poles. However, virtually everyone who arrived in the United States accepted the values articulated in the US Constitution and quickly learned English.
The United States - and may other countries that have opened their arms to immigrants - have benefited enormously from the contributions that immigrants nearly always make to their new countries.
More recently the United States’ cultural diversity has been further enriched by the emergence of over 40 million Hispanic Americans as the largest ethnic minority. They are also the fastest growing minority and will include more than 100 million people - or one in four Americans - by 2050. Already they make up more than a third of the populations of Texas and California and more than 40% of the population of New Mexico.
But should they accept the convention that all migrants should eventually become English-speaking - or will the United States increasingly have to accept bilingualism and multilingualism?
The accommodation of diverse immigrant groups has also become one of the most controversial issues in Europe. It has played a crucial role in recent elections in a number of European countries - and has now become one of the main issues of contention within the EU.
It has led to some of the worst riots that France has experienced since the Second World War - and even in tolerant Britain it is fueling a resurgence of far-right nationalist sentiment.
Where does toleration of diversity begin - and end?
A few years ago the European Union’s Justice Commissioner said that issues of migration should be at the top of the EU’s agenda.
According to the Commissioner, the European Union needed to strike a balance between facilitating immigration of sorely-needed skilled workers and controlling illegal immigration and trafficking. The present work force is expected to decline by 20 million people by 2030 - and the only way of replacing most of them will be through immigration.
All of this is, however, part of the broader challenge of managing cultural and religious diversity in a world in which inter-communal conflict is the greatest threat to peace and stability.
Virtually all of the 14 conflicts that currently afflict the world either have their roots in ethnic and religious differences - or have been seriously exacerbated by these factors.
Too often, minority communities feel that they are not sufficiently accommodated, politically or culturally, in the processes by which they are governed. They feel that their governments are insensitive to their languages and cultures; that they are subject to discrimination, repression and efforts to integrate them forcibly into the majority culture. ~
This sense of alienation often breaks out in conflict, rebellion, demands for secession and sometimes in acts of terrorism. Present or recent conflicts in Bosnia, Kosovo, Chechnya, Sri Lanka, the Philippines, Thailand, Indonesia and Turkey and in many countries in Africa provide more examples of this phenomenon.
Religious diversity also lies at the root of some of the ongoing conflicts in the world. Differences between Hindus, Muslims and Sikhs in India; and Muslims and Christians in Nigeria and Sudan all create volatile situations that can explode into violence and terrorism at almost any time.
One of the great challenges of the new millennium will therefore be to address cultural and religious alienation and to devise norms and approaches that will enable different communities to live together in peace.
The international community will have to pay far greater attention to this question than has thus far been the case. Few states welcome international scrutiny of their relationships with minorities within their borders. On the other hand, almost one billion people throughout the world - one in seven of the human population - belong to ethnic, cultural or religious minorities. Many of them experience alienation and discrimination.
There is an urgent need for more intense and informed debate on how the international community should deal with ethnic, cultural and religious diversity.
The challenge is to devise approaches and to establish norms that will enable different cultural and ethnic communities to coexist within the same states. To achieve this, we must reach broad agreement on the cultural, linguistic and educational rights that such communities should enjoy. However, it is equally important to reach agreement on underlying values that can provide a basis for co-operation and national unity.
The need to promote multicultural approaches in diverse societies is increasingly recognised by the international community. According to the United Nations Development Programme’s 2004 Human Development Survey multiculturalism is the most effective response to the challenge of diversity.
The UNDP identified cultural liberty as a vital part of human development. If handled well, it could lead to greater cultural diversity and enrich people’s lives. However, if it was mismanaged it could “quickly become one of the greatest sources of instability within states and between them.” The answer was to “respect diversity and build unity through common bonds of humanity”.
The UNDP Survey went on to deal with - and dismiss - various myths relating to the management of inter-communal relations and concludes that “policies recognising cultural identities and encouraging diversity to flourish do not result in fragmentation, conflict, weak development and authoritarian rule. Such policies are both viable, and necessary, for it is often the suppression of culturally identified groups that leads to tension.”
As I have pointed out earlier, the key to the maintenance of peace and harmony in our shrinking global community is the management of diversity:
We need to do much more to define and protect the rights of cultural, ethnic and religious minorities throughout the world.
We need to establish an international norm for these rights, just as we have already done for individuals, for women and for children.
We need to promote acceptance of the role that education can and must play in the preservation of religious, cultural and language diversity. We also need to establish the principle that states have a duty to support and finance such education.
We need to measure the behaviour of governments against these norms. If we do so, I am confident that we will soon discover that the societies that are the worst afflicted by inter-communal violence are also those that have the least respect for the rights of their constituent communities.
In the final analysis, managing diversity is about accepting the need for freedom of choice, toleration and common values:
People should be free to be themselves and to maintain the many concentric identities that make them individuals;
Managing diversity is about promoting a culture of toleration and respect for difference;
But it is also about reaching agreement on core values and approaches that bind people together.
We have entered the global village. It is exciting; it is often very confusing; and sometimes a little frightening. Increasingly, people from different cultural backgrounds will be rubbing shoulders in the streets, market places and international companies that make up our global village.
The presence of people from so many different cultures is one of the most enriching aspects of our new world. But it will also require us to observe new codes of behaviour and to acknowledge the multidimensional rights of people - as citizens, as members of organisations and communities, and as individual men and women.
I understand that you have a delightful custom here of promoting the idea of a “wishful world”. You have created this glass globe that you can see here beside the lectern. You have invited students from the winning groups to write personal wishes on origami creations and deposit them in the globe. All these colourful origami pieces are placed inside the globe before the lecture. During the year, the globe is positioned underneath the lantern of the Church, visible for all the visitors of the Church and sending out a message of hope and peace from the next generation.
I hope that the globe this year will include wishes for:
The enrichment of our lives through interaction between people from different cultures and religions;
Toleration and mutual respect;
A compassionate commitment to host and protect people whose lives are being threatened by conflict; and
Determination to build a better world where conflict, injustice and poverty do not force people to flee from their ancestral homes and the countries of their birth.
Rwanda, Finance Minister 1997-2005
President of the African Development Bank 2005-15
Having led Rwanda’s post-war economic reconstruction, Donald Kaberuka then served two terms as President of the African Development Bank. During a time of great historic change in Africa he led the AfDB on a series of reforms to successfully positioned the bank as a leading institution in Africa.
As President of the AfDB, Mr. Kaberuka pushed the bank to approve a ten year strategy focused encouraging private sector activity to absorb the 15 million young people that join the work force every year in Africa and programs that address the nexus of food, water and energy. To achieve these goals, the AfDB focused its strategy on Infrastructure Development, Regional Integration, Policy to Support and Enable Private Enterprise, Improved Governance and Skills and Technology Acquisition, and increased AfDB total public sector operations from $3.02 billion in 2005 to $5.14 billion in 2013 and private sector support from $257.4 million in 2005 to $1.62 billion in 2013. Mr.Kaberuka also launched a new fund called Africa50, which has a $10 billion capital target to mobilize private finance for African infrastructure projects.
A truncated version of this speech was delivered by Dr Villiger to the Association of Economic Representatives in London (AERL), at the Athenaum Hotel, London, on 24 February 2017
The views expressed in this speech are the author’s personal reflections.
We all get the feeling that our world is in a permanent crisis. But if we take a step back and look at the state of the world on the basis of statistics rather than disastrous news in the media, we see that humanity has made enormous progress in recent decades. Potentially, humanity on average was never better off than today. But since the global financial crisis, this positive trend seems to have turned. Conflicts and terror have increased, a flow of refugees has broken loose, the growth of the global economy is stagnating, and both debt levels of the most important states as well as total debt of states, corporations and households combined, have increased since the start of the financial crisis, resulting in even higher risk for new crises. Globalization and the market economy, the drivers of long-term positive performance, have suddenly turned into scapegoats since the financial crisis. Ideologies, populism and nationalism have returned. Many voters in established democracies seem to be increasingly guided by anger and resentment instead of reason. The European Union has entered into an existential crisis.
I currently see a conjuncture of three different crises, which reinforce one another: a crisis of democracy, a crisis of the market economy and a crisis of values.
Let me speak about democracy first: While established democracies suffer from economic stagnation, excessive debt and unemployment, authoritarian systems that work with market economic principles achieve economic success. I want to mention three of the factors that put pressure on democracies.
First: There are some false incentives inherent in democracy. Because politicians put priority on their re-election, they think in electoral periods instead of generations. Because politicians are not accountable for the debt caused by them and because it is more popular to promise new benefits rather than tax increases, there is a strong incentive for debt. Politics and the media tend to define political priorities not according to necessity, but based on the often artificially produced level of public indignation. Governments that try to implement necessary but potentially painful reforms risk not being re-elected. Additionally, artificially low interest rates reduce the pressure on governments to put their budgets in order.
Second: Since in our interconnected world no country can solve all problems on its own, a network of close institutional and contractual ties for international cooperation has formed. These are created by governments and bureaucracies and thus suffer from a democratic deficit, which at the same time reduces the overall political substance that can be influenced using democratic instruments. Citizens increasingly get the impression of losing their ability to determine their own destiny.
Third: The export of democracy to countries whose corrupt and authoritarian governments have rightly been overthrown by their citizens, has failed miserably in most cases. Democracy has therefore lost its function as a role model. Some Chinese professors teach their students in all earnestness that democracy is the worst of all forms of government, because it inevitably leads to chaos.
All of this has damaged faith in democracy. The frustration about not fulfilled campaign promises, the sense of helplessness with respect to the complexity of problems and the fear for their own economic future drives many voters into the arms of populists, who promise simple solutions and punishment for the supposed culprits. In one prominent case involving an old and established democracy, voters have elected a President who stages politics like a soap opera, who has neither the relevant political knowledge nor a coherent political vision and who reduces complex matters to 140 characters. Another President in an important Islamic country abolishes, in the name of democracy, the rule of law and civil liberties. In a couple of East European countries the rule of law is equally under pressure. Even in two West European countries those political forces enjoy a tailwind right now which have little understanding for democracy, the rule of law and the market economy.
Despite being empirically tried and tested, the market economy is undergoing a crisis no less dramatic. I will outline just three aspects of this:
First: Because the economy creates value that politicians want to distribute, and because the political appetite is insatiable, the economy gets increasingly burdened. Mistrust in markets and a know-it-all attitude from politicians on how companies should be managed lead to a rampant jungle of regulations. Overregulation, flawed regulation and market freedoms compressed by increasing government shares suffocate the market economy. Regulation itself is developing an underestimated crisis potential.
Second: Despite the fact that free trade led to a thriving global economy, many politicians claim that protectionism would preserve and protect current levels of welfare and prosperity. The insight that rapid de-globalization had been a major cause for the First World War has vanished. A new risk potential that endangers prosperity is building up. I do not have to list the examples. You know them.
Third: In order to avoid the complete drying-out of global financial markets immediately after the onset of the financial crisis, it was the right and necessary thing for central banks to do to heavily expand monetary policy. But this policy of flooding markets with money has long begun to build up additional potential for the next crisis and, apart from that, this approach is not even effective any longer. The market economy loses its compass because artificially low interest rates do not reflect risks any more. Unsustainable structures remain alive and hinder reforms. New bubbles build up, which differ depending on the country. States no longer feel pressure to do their homework with regard to fiscal policy. Pension funds get destabilized, and savers get punished while speculators get the rewards. This is a perversion of the market economy, carried out by omnipotent central bankers without any democratic legitimacy. Politicians have tolerated this, because it allegedly relieves them of the need for painful reforms. I fear that we massively underestimate the price we will pay for this kind of policy in the long run.
Furthermore, the crisis of values in the broader sense – democratic values, civil rights and liberties, rule of law and human rights – is likely to change the world. At the turn of the millennium, these values seemed to be of close to universal validity. For example, more than 190 states signed the UN Charter to commit themselves to defend human rights. But you all know the reality! A substantial majority of states violates these rights more or less openly. And what’s worse: the significance of the states that ignore those values and feel they are foreign to their cultures is growing rapidly, both in terms of economic power and population size. This will negatively influence the climate in international organizations with regard to these values.
Institutional economics provide interesting insights into the question of prosperity. Development economist Paul Collier, who teaches at Oxford, calls the complex network of institutions, rules, beliefs, standards and organizations, which constitute a nation the “social model”. Daron Acemoglu of the MIT shows that the structure of institutions is the decisive factor for a social model to enable prosperity. Factors such as ethnicity, religion, climate or geographical location are negligible. This is plausible, as shown by examples like South and North Korea or Germany and the GDR: Despite ethnic identity, they developed completely differently because of their institutions. Good social models are usually the result of solid work over generations.
So why are institutions so important? People, and this is also shown by modern behavioral economics, respond to incentives. Incentives make people seek or avoid things, incentives make people do things or omit doing them. Incentives essentially come from two sources: On the one hand, institutions produce incentives, whether by rules, instructions or guaranteed freedoms; on the other hand it is culture in a broader sense, which can cause people to do or not do something. Economic institutions, according to Acemoglu, create the incentives for people to educate themselves, to save, invest, innovate, or to refrain from doing these things.
Politicians often overlook the fact that sometimes people react differently to institutional incentives than politicians would like them to. The German economist Horst Siebert called this the ‘Cobra Effect’. An English Viceroy, who wanted to free India of a mounting cobra population by paying a reward for any severed cobra heads, achieved the exact opposite. Why? Because the cobra population grew even more rapidly, because the people began to breed cobras because of the premium. So in my experience, about half of all laws have a different effect than what was intended. Rigid employment protection and high minimum wages produce more unemployment; pension promises that are legally made but not financed let social systems collapse; high taxes produce tax evasion, undeclared work and even a refusal to perform; low interest rates to facilitate debt enforcement for insolvent countries let their debt levels rise even further.
But the social model does not rely completely on economic incentives, because prosperity is not the only condition for people living together in dignity. We humans have our own particular dual nature: We are at the same time individuals and part of a collective. As much as we feel as individuals, we depend heavily on the collective, without which we could not survive as individuals for long.
Adam Smith has demonstrated with the famous example of a baker that his selfish quest for profit by making bread is also useful for society, because there will be quality food available. From this insight, the idea of the Homo Oeconomicus was derived, who as a rational, selfish maximizer of benefit keeps the economy going, with the result that everyone is better off. As practitioners we always knew that this model doesn’t exist in reality. People are not only rational, but also emotional. We suffer from cognitive distortions that make things seem different from what they are. And we also feel compassion with other fellow human beings, as already described by the same Adam Smith. Science calls this a fairness preference. We also know that cooperative groups perform better than non-cooperative ones. Incentive structures of institutions and culture must therefore influence human behaviour in a particular way to unblock the creative forces of individuals and at the same time also take into account the legitimate collective needs of society.
So, what is a good social model? For me it is a community characterized by the three attributes of freedom, prosperity and stability. What does that mean more concretely?
In general I see five conditions a social model must fulfil to enable people to build prosperity:
First: Only a market economy allows for sufficient prosperity. It is the only concept to guarantee that the correct number of goods and services are available at the right time, in the right quality, at the right price, in the right place. The state must therefore leave necessary freedoms for the market economy. A successful market economy, however, is not possible without a strong state. Otherwise, no doubt mafia-like conditions would quickly evolve. Examples observed in failed states speak volumes. I want to list just a few of the crucial state functions with respect to economic policy: prevention of violence and fraud, protection of ownership, keeping of a land register, provision of infrastructure, securing competition, standardization of measures and weights, enforcement of private contracts, establishing a stable monetary framework and so on.
Second: People must be able to keep the fruits of their labour, otherwise they lose the motivation to perform above-average, take risks, break new ground and to permanently educate themselves further. We all know that in many problematic countries, these basic requirements are massively violated: taxes and social contributions are too high, there is too much redistribution, theft of savings through inflation, negative interest rates or expropriation, continuous erosion of the right of ownership, lack of law enforcement because of corruption and so on.
Third: Because in a competitive market economy economic achievements are always at risk, the total economic prosperity of a nation can only be secured through constant renewal. What’s obsolete must disappear to let flourish what’s new. The obstacles to renewal must be removed systematically, such as excessive employment protection and other rigid structures in the labour markets, cartels, monopolies, distorting subsidies or bloated bureaucracies. Those who stand to lose from change organize themselves politically and fight tooth and nail to resist it. That is why the hardships of change must be mitigated in society, for example by way of a solid unemployment insurance, retraining programmes, adjustment help and the like.
Fourth: A modern economy needs the talent pool of the entire population, not just of a well-off or oligarchic caste. This has consequences for education systems, which must constantly adapt to new requirements. For developing talent, it is also crucially important to create equal opportunities.
Conforming to these four conditions, which are all related with achievement-oriented incentives to individuals, is not enough to ensure prosperity. There is another necessary social condition. Because of the aforementioned inherent fairness preference, a society needs a certain social balance so that people consider the situation as reasonably fair. However, a free market economy creates inequality. An affluent society cannot persist without social systems and some redistribution, for example by progressive taxation, negative income taxes or social security systems which are funded on the principle of solidarity. This is one of the pillars of a market economy: social security renders the market economy politically acceptable. People who know that they won’t be faced with disaster in the event of failure are more prepared to take risks, and that’s good for growth. Moreover, it’s easier to implement structural reforms.
But there’s a fragile balance: too little redistribution slims political acceptance of the market economy, while too much redistribution destroys the will to perform both with those who pay and usually also those who receive. The art of politics is to find the right balance here. It has been shown that the willingness of those who pay for redistribution is greater if a large majority of people feel part of a solidarity-based community. This sense has always been natural in families; to develop it within a nation is possible over the course of generations. But to develop the same sense globally or even just across Europe is, in my opinion, utopian. Such a community feeling can only grow within manageable boundaries, and it is at the same time the basis of a democracy. This is why the nation-state will remain the foundation of functioning social communities and social models; even though many political scientists believe the nation-state is antiquated.
While a significant part of the growth and employment problems of Western democracies could be solved by way of appropriate structural reforms, deregulation, more trust in markets and more openness towards global markets, the future of work and employment is increasingly uncertain given the accelerated technological change. Some authors predict mass unemployment and huge social inequality due to the replacement of human labour by robots and artificial intelligence. No one can make a final judgment yet, but there are plausible conclusions to be made. First it should be noted that the technological development of the last two centuries, which was no less dramatic, has not made human labour redundant, although machines did permanently replace manpower in some areas. However, the types of work fundamentally changed. Two effects largely prevented the extinction of human work: First, new technologies created new jobs and new professions, which replaced parts of the jobs lost in other areas. Second, thanks to automation, lower product prices freed up purchasing power, which was used for purchasing other products, more of the same products or for affording reductions in working hours. This also led to new jobs. In the future, this will not be any different. I do not share the concerns about mass unemployment. The more likely challenge is a different one: new automation processes are expected to affect the median salaries in particular, while at the same time creating more jobs in the higher and lower salary areas, and a more pronounced polarization of labour markets may thus arise. This can lead to an increase in inequality and therefore difficult questions regarding redistribution even in countries that are currently successful. Interventions into the labour markets achieve the opposite of what they aim for, and additional redistribution may reduce growth potential. Therefore the overwhelming burden to absorb the needs for adjustment will lie with permanent efforts in education and appropriate measures in the labour market.
Freedom is therefore an important condition for a good social model, because people can only thrive and fully develop their talents and interests in freedom. The freedoms we enjoy thanks to the privilege of living in an economically successful democracy today would have been unimaginable a hundred years ago. We can say and write what we want; we can meet with whoever we want; we can choose an education and a profession based on our own interests; we decide who should be in our government; the rule of law protects us from arbitrary acts by our elected rulers; and we can move freely over a significant part of the planet.
It is important to remind the old insight that freedom needs to be tamed and channeled in order not to negatively impact the freedom of others. There are various ways to achieve this. The most powerful instruments are government rules that sanction non-compliance. Applied in excess, though, this method constitutes a direct path into repression. The second method is a combination of competence and liability: I am free to do what I want, but I am responsible for the consequences. This principle prompts me to assess the risks of my actions in more detail. The third, most gentle, method is responsibility: I consider whether what I intend to do will have unintended consequences for society, even if it is not prohibited. These three methods are interdependent.
If too many players behave in a way that is not prohibited but has negative impact on the community, politicians invariably tend to demand regulations or bans. This is why ethically correct behaviour by companies is so crucial. Companies are obviously not supposed to be moral or welfare-oriented institutions, and Milton Friedman is certainly right in identifying profit-making as the main entrepreneurial duty. But incorrect behaviour of managers destroys trust not only in the concerned companies, but in the market economy as a whole. This triggers political activities that harm the economic system. Every liberal system must be able to bear a certain degree of misuse. But when the moral foundation starts to crumble and misuses exceed the level of social acceptability, freedom destroys itself. This is why responsibility is the price of freedom.
Stability in a society means that a minimum of tolerance and mutual respect exists and that conflicts are resolved in a non-violent way. Of course, stability can also be created by means of government coercion, such as during the Soviet era or in Tito's Yugoslavia. But this is always at the expense of freedom. Empirical policy research has shown that the tendency for conflict in a society depends on the nature and extent of cultural and ethnic diversity of the society in question. There are two types of societies that have a low tendency for conflict: on the one hand, ethnically and culturally homogenous societies and, on the other, societies fragmented into many small ethnic groups. Societies split up into only a few different ethnic groups of similar size have the highest risk of conflict. Examples of this are the Hutus and the Tutsis in Rwanda, the Protestants and Catholics in Northern Ireland and the Sunnis and Shiites in Iraq.
But the risk of conflict can be significantly reduced by educational and economic policies. I would like to discuss this briefly: The greatest enemy of internal peace is poverty. Economic development is therefore of crucial importance. Moreover, economic interdependence between ethnic groups is also important. While democracy is the best way to prevent international wars, depending on its structures, it may even fuel internal conflicts. A simple mechanism is at work: The easier it is after an election for the winners to distribute national resources to their own voters – such as to the tribe or the region of origin of the leader –according to the famous principle of ‘winner takes all’, the more the losers will be incentivized not to recognize the election result and to reverse it by force.
All institutional measures that reduce the influence of elections on the fate of the citizens will reduce incentives to revert to armed violence after lost elections. I will list a few such measures: Proportional representation instead of majority or first-past-the-post systems gives minorities a share in power, which reduces their incentive to break with the state. Federalism gives important competences and own tax income to the regions, so that they will be less affected by perceived negative political decisions taken by the central government. Grand coalitions may reduce the importance of individual parties’ success in elections. Parliamentary systems with two houses and direct democracy make it difficult to introduce extreme policies to the detriment of minorities. The rule of law and the separation of powers protect citizens against arbitrariness by governments and reduce the cost of an unwanted government. Fiscal transfers absorb the desire of losers to build resistance against the state. Of course it is also crucially important that national security forces are politically controlled and bound by democratically legitimized rules. I have already mentioned earlier the importance of a more or less acceptable distribution of income for the stability of a society. The USA is now experiencing the political consequences of a wealth and income distribution that has fallen out of balance.
Allow me to finally make some comments on the situation of the European Union. Because Switzerland is part of three major European cultural areas and both our economic and cultural ties with the EU are very close, I’m sure you won’t deny me the legitimacy to speak about this.
I would first like to state clearly that the EU is an impressive success story. It has provided a continent with a history of bloody conflict a hopefully everlasting phase of peace. It has brought democracy to Spain, Portugal and Greece, and secured democratic development for Central and Eastern European member states. The prospect of joining the EU has made previously unthinkable reforms possible in many countries. The single market has strengthened economic freedom and laid the basis for a level of prosperity that is still above average in international comparison. These are brilliant political achievements. I also think that the appropriate significance of Europe in a polycentric world can only be secured by means of an economically and politically strong EU. Moreover, I believe that a successful EU is important for the future of a liberal and democratic world. I have no sympathy for the contemptuous comments the new American President has made about the EU. I also regret that the Brexit vote happened, because without the economic power, the liberal spirit and the excellent army of Britain, the EU will lose an important political and military power. To be honest, and I may be deviating from the mainstream opinion, I actually think Brexit will be more harmful for the EU than for Britain. It would in fact be a hugely foolish if the EU was to make market access extra hard for Britain in order to punish this ‘disobedient student’.
The success story of the EU has, however, clearly started to stagnate. The push for liberalization seems to be wearing down, while on the other hand centralization and harmonization stifle the competition of systems. Factors such as high taxes and social security contributions, inflexible labour markets, bureaucratic structures impeding innovation, interest rates that are not adequate with respect to risks and growing resistance against free trade, all violate the conditions for prosperity I mentioned before and further exacerbate a scandalously persistent level of unemployment. The horrendous debt levels in many countries haven’t gone away, despite oral commitments to austerity. The Euro, which was supposed to be the crown of integration, now becomes a dividing wedge. The stream of refugees undermines national and international cohesion. Populist movements, which apply nationalist, protectionist and anti-democratic recipes, make governance substantially harder.
In such circumstances, there is a need for action. There are many ideas. Brussels insists on the Maastricht Treaty idea of 1992 of a continuous path toward an "ever closer union of peoples of Europe“. I’m afraid this will no longer work. Others think the crisis could be resolved by addressing individual problems one by one: better budgetary rules, some structural reforms, perhaps the exit of a particularly weak state from the Eurozone and so on. Even others envision a flexible Europe, with a core similar to a federal state of nations gradually grown together, and two to three outer rings, consisting of associated countries with a step-wise approach to commonalities. The dismantling of the EU to a pure free trade area is also debated, as well as the gradual departure from the nation-state as the dominant concept. Each of these models contain ideas worth considering that have to be discussed.
I, however, believe that the EU should address the issue even more fundamentally. I will try to outline a simple framework with five basic guidelines for an EU which unleashes more freedom, more personal responsibility, and more competition between governmental systems to increase its self-healing force and growth potential, while at the same time enhancing the effectiveness of representing the member states’ common interests.
First guideline: The nation-state must be the central cornerstone of the EU. Important tasks must remain national and be protected from increasing centralization in Brussels. This means consequent enforcement of the subsidiarity principle by pulling out tasks delegated to Brussels and clearing competing responsibilities, one of the largest evils of government systems. That way, the expansionary pressure from the centre is slowed, weak politicians can no longer constantly shift away responsibility to Brussels, and the competition of systems, a major source of the most important historical European achievements, will be revived.
Second guideline: The competences of the EU should be limited to the most important areas of common interest, while at the same time strengthening enforcement. I consider these to be the single market, free trade, protection of the external borders, foreign policy, security policy and the handling of refugees, and of course also the protection of constitutional and democratic values.
Third guideline: At all levels the principle of direct responsibility is to be implemented, particularly in the context of competence and responsibility. The President of the German Bundesbank recently made an important statement saying that good decisions are only to be expected if the ones who take the decisions must bear the consequences of their actions. Those who use state benefits must finance them according to the principle of fiscal equivalence, and they must be aware that in the case of failure no one will help. There are no emergency parachutes. This is why we need regular insolvency proceedings for states, as proposed several times by the Council of Economic Experts of the German government. In Switzerland, the municipality of Leukerbad has gone bankrupt. No one helped them. So this will not happen to another municipality anytime soon.
Fourth guideline: The market economy must remain the central prosperity engine. If this demand is taken seriously, as a consequence one would have to preserve the single market, reduce market distorting interventions, reduce regulation density, promote flexibility of labour markets, reduce and stabilize government debt and permit interest rates that correspond to the respective risks. Of course, some countries with overleveraged balance sheets would immediately turn insolvent at normal interest rates, which understandably leads to opposition to such monetary policy. However, the German Council of Economic Experts proposed a reasonable solution, the debt amortization pact. Normalized interest rates would not only discipline fiscal policy and render the unloved fiscal rules from Brussels unnecessary, but it would increase the pressure for structural reform. Allow me one more heretical comment on the single market: more and more economists doubt whether a completely uncontrolled free movement of persons is really an essential element of the single market. I believe that the EU must reconsider this issue as well.
Fifth guideline: Troublesome wealth differences, which are politically unacceptable in a union of states, must be absorbed by transfer payments. These have to be paid as free and uncommitted funds on the basis of an index for financial power which cannot be manipulated. Only in this way can they become their own funds, which can be used efficiently in accordance with the equivalence principle. They must also be structured in a way that incentivizes, both for donors and receivers, to become more productive.
I am aware that resistance against such a paradigm shift would be enormous. However, the case of Switzerland as a kind of political laboratory suggests that successful coexistence of different systems is possible on the basis of such liberal principles.
World politics and the global economy are extremely complex systems, with countless confusing feedback loops. Growing global connectivity permanently increases complexity. In such systems, sudden, unexpected shocks can release unpredictable violent reaction. For this reason – and science proves it –forecasts by experts are mostly wrong. Politics is constantly driven by the unforeseen and unexpected. This means that we must not believe in forecasts, but scenarios. For this reason, I do not want to dare making a forecast, but will instead outline some trends.
On average, growth of the global economy will remain insufficient for some time to come. The Americans, with their entrepreneurial spirit, their consistent restoration of the banking sector, their demographically relatively young population and their higher trust in markets, will be the engine. Tax cuts and investments in defence and infrastructure, as well as the deregulation in the energy and financial sector as proposed by President Trump, will likely result in a limited phase of lower unemployment and higher salaries. However, they will pay the price of higher inflation and bear the risk of increasing already huge government debt. And the Americans will harm themselves most in the longer-term, if President Trump really implements his protectionist ideas. The Asian economies, with their appetite for economic success, their mindset for performance and their growing understanding of the importance of free trade, are expected to grow respectably on average. Europe on the other hand will languish with rather weak growth due to its self-doubts, distrust in markets and entrepreneurship, heavy burden of social expenditure and its population, which increasingly seems to prefer state pampering to personal responsibility.
The political risks are considerable both in the US and Europe. The unpredictability of the American President and the deep divisions in the American population produce huge uncertainty. It is important for the rest of the world whether and how the old and established American democracy, with its legendary system of checks and balances, will survive this challenge. Will the Americans continue to be prepared, for example, to globally defend democracy and freedom? This will be crucially important for the future of freedom and democracy in the world. This question remains open.
Europe would have the opportunity to become a beacon of democracy and freedom, but it remains questionable whether it would find the necessary strength to push through necessary reforms. The condition of the banking system and issues of the Euro have the potential to trigger further crises. If both right and leftwing populists continue to succeed – who by the way issue remarkably similar protectionist and interventionist policies – Europe's future looks rather grim both economically and politically.
All these risks and many more I haven’t mentioned -- such as global warming, terrorism, the vulnerability of the digitized world and so on, combined with daily horror news in the media -- raise the question whether our planet is to be saved at all. I’m reminded of the effect we all know if we read about diseases on the internet: We’re surprised anyone is even reasonably healthy, while in reality, most people around us are very well. So there are four reasons which allow me to be optimistic.
First, during the world wars, the great depression or in risky moments of the Cold War, people had a much bleaker outlook. Nevertheless, humanity has made enormous progress since then.
Second, the enormous flow of refugees shows that the desire of humans for freedom and democracy is unbroken. This is why people will try again and again to strive for it and, in the long term, they won’t let themselves be fooled by those who disregard those values.
Third, technological progress always also creates new and unprecedented opportunities. Of course, there are risks as well. But experience shows that the opportunities outweigh the risks. Ben Bernanke recently told students that never before on this planet have so many well-educated people done research, worked on innovating and developing new ideas and producing new solutions. I have no doubt that this sizzling madhouse of working, thinking and researching people will further advance the planet in the future.
Fourth, in difficult situations doubts have always arisen as to whether democracy would stand up to the challenges. That was in no way different during the Third Reich or the Cold War. But democracy has always proven to be stronger in the end. Daron Acemoglu has shown that democracies have better long-term growth prospects, despite the successes of some authoritarian market economies, and Douglass North showed that democracies that allow conflict of opinions are faster at finding solutions for emerging problems. It is therefore worth it to tenaciously stand for democracy, the rule of law and freedom, even in adverse circumstances.
The Chairman, CEO and Lucinda Groves represented the GLF at the Philanthropreneurship Forum 2017, held in Vienna on 15-16 January. The Forum, organised by His Excellency Amr Al-Dabbagh, included key figures from governments, business, charities and academia, addressing important issues in the development of an entrepreneurial approach to philanthropy including the engagement of the millennial generation, the alignment of business with the Sustainable Development Goals, the measurement of impact, the improvement of accountability and transparency and the role of governments in encouraging entrepreneurial philanthropy. In concluding the event HE Amr Al-Dabbagh announced the award of the Philanthropreneurship Prize 2017 to our Chairman for his lifetime’s work to resolve conflicts, build peace, spread understanding and share his experience for the benefit of humanity.
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Foreign Minister, Algeria 1991-93
UN Special Adviser to the Secretary-General 2004-05