INTRODUCTION
 
Project/discussion
FROM CRISIS TO ECONOMIC DEVELOPMENT AND SOCIAL COHESION?
 

The economic crisis which today shakes the whole world is the greatest challenge facing the globe and each individual state . In mid-October 2007, Rodrigo Rato said that the financial crisis is the biggest problem, more important than terrorism, the danger of weapons of mass destruction and the war in the Middle East. The Financial Stress Index (FSI) shows that of 113 financial stresses over the past 30 years, 43 were generated in the banking sector and 87 affected two or more states. The current financial stress affects almost all countries (1,2). Obviously aware of the economic problems, President of the Federal Republic of Germany Horst Köhler in early November 2007 organized with the Club of Rome a discussion on the challenges of the next phase of globalization (3). Already in 1992 Joseph E. Stiglitz warned of the need of greater government regulation of mortgage securitization (4).
 
Though market economy has achieved significant successes (5), extreme consumer society and unlimited privatization (6) destroy Nature and people; they are not sustainable (7) and violate basic moral laws.  
 
            The world is in a global economic and moral crisis compounded by the destruction of our environment, by scarcity and unreliability of energy supplies, by declining social capital – lack of trust among people, of self-confidence and of leadership. All these crises are interconnected and interdependent. Though the crisis is global, each country – because of its specificities - has to face this crisis in its own specific way. The present world is only partly global, but it is fragmented when it needs to generate, stimulate and anticipate necessary and desirable changes, and when it is necessary to react quickly.
 
            Basic features of the contemporary world are interconnectedness, globalization and rapid changes and they are in large measure generated by science. The solution of the problems of our world demands even more scientific research, so that science, research and knowledge intertwine our life, leading to knowledge-based society. The goal of the European Union is to become knowledge-based sustainable society by 2025. For instance, comparison between economic development measured by human development index (HDI) and consumption of energy measured in tons of oil equivalent (toe) demonstrates that HDI increases until energy consumption reaches 3 toe/person-year. If all countries would reach that level by 2030 (Brazil, India, China and Russia, and several other large countries are approaching that goal in an accelerated way, and that is almost the entire humankind), then the consumption would increase by 2.6 times completely destroying our Earth, if all the energy would come from fossil fuels (8). Obviously, more research in natural, technical and social sciences is needed.
 
            Creators and carriers of knowledge are people and therefore, the people are the greatest wealth of any country. We argue that the overcoming of the present crisis should never threaten people and their creative potential in any country. Moreover, any and all actions should lead to improving environment and improving the quality of life of humans – active, educated and happy people.
 
            Today the demographic picture of the world is rapidly changing: till the end of this century the number of inhabitants of our Earth will reach about 9-10 billions, but in two centuries it will decrease to about 2 billions (e.g. the population of China will start decreasing in 2029 (9)). This is the result of a decreasing fertility rate. At the same time the life expectancy is increasing (it increases 2-3 months each year) so that in 2050 more than 50% of inhabitants of Germany and Croatia will be over 52, and of Japan and Bulgaria over 56. It is incorrect to state that the society is aging since a person 70 years old today is more active and healthier than a person of 50 hundred years ago (10). This demographic transition occurred in less than 50 years! The retirement system: retirement after 65, introduced more than 100 years ago in Europe by Chancellor Bismarck, is not sustainable. The world and scientists have not been prepared for this rapid demographic transition and its consequences. This again emphasises the need for more research.
 
            Employment in many European countries is rather low – below 70%, and it is particularly low for persons younger than 30 and older than 50. The aim of the EU is to achieve over 70% (as Denmark did emphasizing flexicurity: flexibility + security (11). Today the population of some countries is decreasing and of some countries is still increasing, and there is difference in job demands stimulating migrations. Migrations represent opportunities and problems (12). In spite of unemployment some countries need migration of workers (13). It seems to me that we still do not completely understand the nature of the present crisis, and this is at least partly caused by inadequate socio-economic indicators (14, 15). In a global world of rapid changes economic development will be based on the restructured economic system (16). Since we do not fully understand this crisis it seems to me that it is crucial to approach the crisis starting from basic assumptions acceptable to everyone. Therefore, we stressed in the INVITATION the assumptions that can be summarized as follows: all actions and measures to overcome this crisis have to enable and moreover have to facilitate the realisation of our strategic goal (17) – development of the sustainable society based on social cohesion (18) and knowledge. Such an approach will allow us to avoid short-term inadequate solutions, political compromises and attempts to substitute the real issue (and that is now this crisis) with a pseudo problem that would distract our attention and consume our energy. Most “old” tools designed for a system that was not interdependent and it was slowly changing cannot be useful. Typical 'old tools' are: 1) concentrating on actions which secure the governing structures to remain in power and defer problem solving for some time in the future in the hope that 'miracles will happen', 2) supporting existing economic structures in various forms, 3) lowering workers' wages, 4) reducing working hours, which quickly leads to lowering of wages, New ideas and new policies are needed, we haven’t seen many promising proposals so far, and therefore must conclude that there is a possibility that the solution was not yet invented.  However, we must not forestall action, because the price of doing nothing is certainly in the thousands of millions of Euros. We cannot permit actions which will worsen already difficult situation, and therefore make the crisis even harder to resolve and diminish a chance for a more positive future.                                  
It is possible to develop various scenaria, but future is always full of surprises (19). Each country has to find its own successful solution. We believe that solutions depend on developing new tools.
 
Explanation
 
1) World Economic Outlook - October 2008: Financial Stress, Downturns and recoveries, the International Monetary Fund (WEO, p.133-138); K. Rybinski et al, Gordian knots of the 21st century, Ministry of Regional Development, Warsaw, 2008. This economic crisis actualises the question of how capitalism will evolve. Is the state capitalism of the People’s Republic of China actually market capitalism? What does nationalising the banks and huge interventions in private industry such as the automobile industry mean? Is this the end of capitalism, which wanted to make everything into a commodity, and now is not in a position to estimate the price (Lester Brown, www.earthpolicy.org/Books, Dec 17, 2008 asserts that the real price of oil is five times that which the consumer pays at the pumps, when the costs of finding sources of oil, production and delivery to the pumps, including the huge cost of climate change, pollution costs, and military costs of securing energy sources, are added) The price of a barrel of oil in the summer of 2008 was $150 and projections (WEO, p. 119) to August 2009 foresaw that the price would be around $100, with a 50% chance that it would be between $70 and $115. As we know, the price of a barrel is now around $35. Are we at the beginning of Cognitive Capitalism (see Carlo Vercellone «Work, information and knowledge in the new capitalism: hypotheses on cognitive capitalism», lecture at a conference at McGill University, Montreal, May 2006)? A knowledge-based society is certainly not the capitalism of the 19th century, nor is it the unregulated capitalism of the end of the 20th century. A. Greenspan has admitted his mistakes. The unregulated capitalism is not sufficiently resistant to be able to survive a collapse even of a single «hedge» fund, as was the case with the 1998 collapse of LTCM (see the New York Times column of Nobel Prize winner P. Krugman). Though this is a very important question, I believe it is at present beyond our existing task, and it is enough that we realize that today's economic system has to solve three problems: economic crisis, energy insecurity, and the climate crisis (iNS/news/net, 2008-11-12). These questions need solving simultaneously, and not consecutively. Al Gore and David Blood in the Wall Street Journal also stress the need for 'sustainable capitalism'.  Harvard Business School Centennial Global Business Summit held in November 2008 was aimed to evaluate the values of market capitalism. Knowledge-based society is not a society using available knowledge, since always societies used available knowledge. Neither the knowledge-based society is a society where science and research are exclusively in the service of economic development, a servant to economy and politics. Knowledge-based society is a society  generating and anticipating changes, capable of progressing with changes without destroying either humans or nature. It is a society where knowledge is the basic resource and people – generators and keepers of knowledge – are the true value. Today's economic crisis reveals the sins of the structure. W. Buffet has called the contemporary economic crisis the Pearl Harbour of today's America and has sought prompt action. Buffet has proposed tax rises for the rich, commenting “I am paying the lowest tax rate that I have ever paid in my life and that is not correct.”
 
2) Warning the participants at the G-20 Washington Summit, Nov 15-16, 2008 Hazel Henderson  stressed the importance of urgent reforms of the unregulated economic system, where daily some 2.000 billion US dollar (global annual GDP is only 60.000 billion USD) is 'traded', of which 90% is pure speculation. In 1970s James Tobin recommended the introduction of tax on speculation, following an even earlier suggestion of J.M. Keynes. In 1989 L. Summers supported that proposal. (iNS/news/net 2008-11-20, H. Henderson «Ethical markets»). Money is a source of many speculations. However, though we use money for less than 5000 years, it is a very useful invention. In a knowledge-based society it will be necessary to introduce significant modification, more than just improving the Bretton Woods agreement of the mid 1940-ties of the last century.
At the General Assembly of the World Academy in Hyderabad in October 2008. G. Jacobs in his invited lecture "Towards a World Currency" lays out the initiative of Nobel Prize winner R. Mundella for introducing a world currency (see Cooper, Richard. (1987) The International Monetary System: Essays in World Economics, MIT Press, p.259. Stiglitz, Joseph. (2006) Making Globalization Work. W.W. Norton & Co, Inc, Mundell, Robert. (2000) Exchange Rates, Currency Areas and the InternationalFinancial Architecture [Internet], Remarks delivered at an IMF panel, 22 September  2000, Prague, Czech Republic. Available from:  http://www.usagold.com/gildedopinion/mundellprague.html. Mundell, Robert. (2002) Currency areas, volatility and Intervention [it], Columbia University, Discussion Paper #: 0102-09, January 2002. Available from: http://www.columbia.edu/cu/economics/discpapr/DP0102-09.pdf, p.11.
 
3) Before being elected President of Federal Republic of Germany H. Koehler was the managing director of IMF, i.e. R. Rato’s predecessor.
 
4) Joseph E. Stiglitz in his article "It does not take Nostradamus" Economists' Voice, Nov. 2008 http://www.bepress.com/ev refers to an article of his from 1992, quoting from it thus: "The evidence of incompetence of banks is, by now, bountiful: a series of disasters - real estate loans, oil and gas loans" and he continues "I warned two decades ago of the need of greater government regulation of mortgage securitization."
 
5) All the socio-economic indicators show that quality of life (with some oscillations) has grown continuously over the last two centuries. Perhaps the clearest indicator of improved nutrition is the average value for the entire world which has grown from 1960 to 1997 from 2250 kcal per person per day to 2750 kcal per person per day and, even more meaningfully: for developing countries from 2100 to 2600 kcal per person per day. Life expectancy has increased everywhere. Increased quality of life is certainly a result of scientific and technological advancements, but also of the market economy, which ensures a high degree of individual freedom. The free market, entrepreneurship and competitiveness are not in conflict with our fundamental morals today. It is useful to keep in mind that Adam Smith was a Professor of Moral Philosophy. The relationship between free markets, democracy and scientific research deserves a separate analysis, but that is beyond our scope here.
 
6) The Member of the German Parliament E.U. von Weizsäcker, held a lecture in Zagreb during the General Conference of the World Academy in November 2005 entitled
"Are we destroying the European dream?", in which he criticized the tendency to privatize everything. The Republic of Croatia from 1990 onwards sold "the family silver", with the income received not directed towards production and exports. We sold - we lost what we had, and created nothing, not even a basis for productive activities.
 
7) By 23 September 2008, humanity used up all the resources that our Earth has and was able to provide for the whole year. It means that the Ecological footprint reached 1.27/person, or that humankind in 2008 consumed 27% more than the Earth provides, thus depriving our descendants. The goal is to reduce the ecological footprint print to 1 by 2030, but if we continue this consumption, waste and pollution that will not be possible. This is, as suggested by the Nobel Prize winner Paul Crutzen, the Anthropocene epoch – the epoch in which man has a disproportionately large, often negative impact on nature and on himself (see also: Conclusions InterAcademy Panel, Academies of sciences, Tokyo, May 21, 2000 " Transition to Sustainability ". See also Proceedings of the General Assembly of the World Academy of Art and Science, Hyderabad, India, Oct 2008).
Nicholas Stern in «The Economics of Climate Change» asserts that the cost of stabilising climate change between now and 2030 could be around 1.6% of GDP, while the cost of non doing anything will require ater      5-20% of our GDP.
 
8) C. Llewellyn Smith and D. Ward, Fusion Power, European review 13 (July 2005) 337-359
 
9) R. Jackson and N. Howe, The Greying of the Great Powers – Demography and Geopolitics in the 21st Century, European Papers on the New Welfare, No.11, January 2009, p. 123-137
 
10) Prof. O. Giarini established in Trieste a journal “European Papers on the New Welfare”, devoted to researching demographic transition and retirement systems. Instead of an erroneous concept of “aging society” we have argued for “svecchiamento” – active, healthy and happy persons older than 70.
 
11) The Indian Congress Party won the last elections setting a goal of full employment. Federal Republic of Germany President Köhler in his speech in Berlin in October 2007 also highlighted the importance of full employment.
 
12) The German Marshall Fund of the US Study, Dec 2008 shows that 50% of Americans and 47% of Europeans believe that immigration is more a problem than an opportunity.
 
13) Croatian Chamber of economy organized at the end of the last year a discussion on the relationship between the need for workforce and migration.
 
14) The first Nobel Prize winning economist J. Tinberger already criticized the use of GDP, and RF Kennedy said "We cannot measure national achievements by GDP, since GDP includes air pollution, destruction of redwoods, the production of napalm and nuclear warheads. It does not include the health of our families, the quality of their education; it is indifferent to the safety of our streets." GDP has many advantages, but it is important to analyze whether it is a dangerously deficient indicator during this economic crisis. In addition to GDP, there are a range of indicators which have been introduced in order to compensate for the shortcomings of GDP, e.g. HDI (the Human Development Index), ISEW (Index of sustainable economic welfare) and GPI (Genuine Progress Indicator). While GDP per capita for the United States has grown more than threefold since 1950, GPI per capita has not even doubled.
 
15) J.M. Barroso, the European Parliament and the Club of Rome in mid-November 2007 organized a meeting dedicated to finding better indicators than the gross domestic product (GDP).
 
16) An illustrative example as to how an economy can rapidly and successfully restructure is the USA during World War II, when the entire automobile industry stopped producing cars and switched direction towards military production. Roosevelt at the time banned car production. When the war finished the automobile industry again turned to car production (L. Brown, in Plan B 3.0, e-version, forthcoming).
 
17)  As stated by J. M. Barroso presenting the European Commission Plan „The Plan must be big and bold enough to work in a short-term, yet strategic and sustainable enough to turn the crisis into an opportunity.»
 
18) EU pays considerable attention to social cohesion within each member state and amongst all the member states and has established funds to strengthen social cohesion. Economic inequalities, particularly inequalities in personal income threaten social cohesion.  Plato estimated that a harmonised society needed the ratio between the highest and lowest incomes to be no more than 5:1, and even J P Morgan argues for a ratio of less than 20:1. Today these ratios are over 100:1. In the USA the ratio between the income of senior managers/chief executive officers – CEOs and the average income of workers was 369:1 in 2003 and by 2007 had grown to 521:1 (World of Work Report 2008, Income Inequalities in the Age of Financial Globalization, ILO and Intl Institute for Labour Studies), while in 2007 in Hong Kong it was 160:1, in Germany 148:1 and in Holland 103:1 (pp. 17,19). Between 2003 and 2007 in Holland the incomes of CEOs rose by 30.7% a year, compared to average worker's incomes which rose by 0.6% a year (p 19). This means that the economic elite is no longer elite, and is more like a parasite. (It is important to recognise the true champions of economic growth such as John D. Rockefeller and Andrew Carnegie – despite all their human failings and mistakes, just as today the same applies to Bill Gates). Economic inequalities within states have risen since 1990 (pp. 1-8), even before this economic crisis, question remains whether that would have happened if manager wages were tied to general economic success. In the period from 1990 to 2005 two thirds of all countries exhibited growing inequalities (growth of GINI coefficients and the ratio of the top decile to the bottom decile in terms of income) For example the GINI from 1990 to 2000 rose from 0.28 to 0.41 in Estonia; from 0.27 to 0.35 in Macedonia; falling only in Slovenia from 0.28 to 0.26. In the USA it has risen from 0.42 to 0.45 and in Finland from 0.20 to 0.28. It has fallen in Switzerland, Denmark, Germany and France but only by 2-3% (p. 11). If it is based on innovation and successful production, rising inequality can be a driver of economic growth and a creator of wealth, but this is not the case in this context, and especially when the rise in inequality is considerable, then it is a threat to social stability and an inhibitor of economic efficiency. High inequality results in an increase in the crime rate.  Quantitative indicators suggest that reducing inequality is one of the most effective measures in reducing the crime rate (p. 22). For example, when inequality in Columbia was reduced to the rate of that in the UK, crime fell by 50%. High rates of inequality also result in higher levels of corruption (p. 24), increased macro-economic instability (p. 28) and reduced life expectancy. Life expectancy in 2006 in the 10% of countries with the lowest inequalities was 77.4 years, and in the 10% with the highest inequality only 60 years (pp 2 and 23). Sweden's GINI is 0.25 and the decile ratio is 3.6%: 21.7%. The same indicators for the Czech Republic are 0.254, and 4.3%:22.4%, for Slovenia 0-284 and 3.6%:21.4% and for Croatia 0.29, and 3.4%:24.4%. It is often argued that inequality is a product of the poor labour of workers. Data from 1990-2006 show (p 7) that productivity in most countries rose faster than wages. It is important to analyse the real sources of inequalities and how inequality is perceived. Research in 23 countries between 1989 and 2004 (www.worldvaluesurvey.org) show that inequality is ever less acceptable. For incisive analysis of inequality and its economic consequences see X. Sala-and-Martin «The World Distribution of Income - Falling Poverty and Convergence Period», Quarterly Journal of Economics, May 2006 and B. Milanovic « Worlds Apart: Measuring International and Global Inequality», Princeton Univ. Press, Princeton, 2005, «Where in the world are you» World Bank Working Paper NoXX, Dec 2007 «An even higher global inequality than previously thought» , Dec 2007. See also D. Nestić «Income distribution in Croatia: what do the household budget survey data tell us», Occasional paper No.26 (2005). UNDP: “Kvaliteta života u Hrvatskoj, Regionalne nejednakosti”, 2007. These data show the rise in inequality between 1998 and 2002. 
 
    19) The European Commission's autumn projections (IP/08/1617) predict varying  economic growth from +4% for Slovakia, Bulgaria, Romania, and Poland, to a fall of 2.7% for Latvia,         and similar for the UK, Ireland, Spain and Estonia. The EC forecasts in 2009 a state deficit of 7% for Ireland and more than 3.6% for Finland, and 5.6% for the UK, 3.5% for France, 3%      for Italy and Spain and 0.2% for the Netherlands. In some EU member states there is deflation, while in Estonia, Bulgaria, Latvia and Lithuania inflation is around 10%. The extent of  the changes is visible through the fact that Island had the highest HDI (0.968, USA 0.951 and Germany 0.935), and the economic crisis has almost destroyed it.
US National Intelligence Council at the end of November 2008 published its forecast «Global Trends 2025: A Transformed World» www.dni.gov/NIC_2025_project.html
Surprises always characterise the future and one can only include so many in scenarios. The NIC offer four scenarios «A world without the West», «October surprise» (impact of climate change), «BRIC Bust-up» (a conflict between India and China about water and food. 70% of water use goes on agriculture) and «»Politics is not always local» (non state networks become dominant). This forecast like the one five years ago concentrates on the dominance of globalisation, but unlike its predecessor emphasizes the necessity of prompt system reform.