Since I delivered my Inaugural address, 56 months ago, I have learned an enormous amount -about higher education, about leadership, and also, about myself. Some things look different to me than they did five years ago. And yet the convictions I expressed as I entered Harvard’s presidency I feel with even more urgency these five years later. It is the urgency, and the possibility, of all Harvard can accomplish in the next years that I want to focus on this afternoon.

The world that today’s Harvard’s graduates are entering is a profoundly different one than the world administrators like me, the faculty, and all but the most recent alumni of Harvard entered.

It is a world where opportunities have never been greater for those who know how to teach children to read, or those who know how to distribute financial risk; never greater for those who understand the cell and the pixel; never greater for those who can master, and navigate between, legal codes, faith traditions, computer platforms, political viewpoints.

It is also a world where some are left further and further behind – those who are not educated, those trapped in poverty and violence, those for whom equal opportunity is just a hollow phrase.

Scientific and technological advances are enabling us to comprehend the furthest reaches of the cosmos, the most basic constituents of matter, and the miracle of life. They offer the prospect of liberating people from drudgery on an unprecedented scale and of eliminating dreaded diseases.

At the same time, today, the actions, and inaction, of human beings imperil not only life on the planet, but the very life of the planet.

Globalization is making the world smaller, faster and richer. One-third of human beings now live in places where the standards of living may increase 30 fold in a single human lifespan – a transformation that dwarfs what we call the Industrial Revolution. Still, 9/11, avian flu, Darfur, and Iran remind us that a smaller, faster world is not necessarily a safer world.

Our world is bursting with knowledge – but desperately in need of wisdom. Now, when sound bites are getting shorter, when instant messages crowd out essays, and when individual lives grow more frenzied, college graduates capable of deep reflection are what our world needs.

For all these reasons I believed – and I believe even more strongly today – in the unique and irreplaceable mission of universities.

Universities are where the wisdom we cannot afford to lose is preserved from generation to generation. Among all human institutions, universities can look beyond present norms to future possibilities, can look through current considerations to emergent opportunities.

And among universities, Harvard stands out. With its great tradition, its iconic reputation, its remarkable network of 300,000 alumni, its unmatched capacity to attract brilliant students and faculty, its scope for physical expansion in Allston and its formidable financial resources, Harvard has never had as much potential as it does now. Thanks to your generosity and the endowment’s strong performance, our resources have increased in just the last three years by nearly seven billion dollars. This is more than the total endowment of all but four other universities in the world.

And yet, great and proud institutions, like great and proud nations at their peak, must surmount a very real risk: that the very strength of their traditions will lead to caution, to an inward focus on prerogative and to a complacency that lets the world pass them by.

And so I say to you that our University today is at an inflection point in its history. At such a moment, there is temptation to elevate comfort and consensus over progress and clear direction, but this would be a mistake. The University’s matchless resources – human, physical, financial – demand that we seize this moment with vision and boldness. To do otherwise would be a lost opportunity, not only for Harvard but also for humanity. We can spur great deeds that history will mark decades and even centuries from now. If Harvard can find the courage to change itself, it can change the world.

Opportunity

All over the world, and in every corner of America, Harvard’s prestige, and wealth, inspires awe. For some, the name Harvard is synonymous with privilege.

In fact, Harvard is a place of great and transforming opportunity. This week we read of a Bronx postman’s son whose life was changed by his years of study in this Yard. This man is now to lead one of America’s great financial firms. I know that scores of you from every alumni class gathered here have similar stories. When I became president of Harvard, I resolved that, on my watch, we would have more such stories of opportunity to tell.

Thus, in the last five years we have eliminated the necessity of contribution towards tuition for families earning below $60,000 per year. We have seen an increase by a third in the number of eligible lower- and middle-income students attending Harvard, and even more importantly, we have seen other institutions follow our lead.

Still, when the gap between the life prospects of the children of wealthy parents and those of middle class and poor parents is widening, we have only made a beginning. I look forward to the day when Harvard sets a standard by eliminating any financial burden for lower and middle class families and when students from these backgrounds are fully represented in every Harvard class.

There is more to equal opportunity. Should not every young person have the opportunity to choose a career that, while it may not be lucrative, serves our world – whether it is performing basic research, counseling the troubled, teaching in urban schools, struggling to bring peace to nations, preserving the public health? A university like ours cannot change the distribution of financial rewards in our society. But we can press on to find more financial aid, more ways to support those who commit themselves to service.

We have, in the last years, begun to treat financial aid as a university-wide responsibility, creating new fellowships and increasing the resources available for students who pursue public service. But there is much more to do. I look forward to the day when Harvard sets a standard by insuring that every student with the ability and the drive to study here can pursue a career of service to society without fearing the debt that they will incur.

Science

Ponder this. Within the next 25 years, it is more likely than not that genomics will have led us towards a cure for many cancers; that stem cell research will transform treatment of diabetes, that basic research will make possible a vaccine for Alzheimer’s, and that we will have means to control AIDS and malaria.

Draw a circle with a five-mile radius from this point and you encompass the greatest concentration of biomedical talent on earth, and, almost as remarkable, the undeveloped urban real estate capable of making Harvard the world’s epicenter of biomedical progress.

Recognizing the potential, we have in the last five years created a Stem Cell Institute to fill the gap left by federal policy and so ensure that this research area – with its promise for diabetes, Parkinson’s and much else – is fully explored.

We have launched the Broad Institute for Genomics in collaboration with MIT, and embarked on planning and construction of more than 20 football fields’ worth of laboratory space to be devoted to interdisciplinary science in Cambridge and Allston. We have expressed our commitment to scientific education in new undergraduate courses that cut across scientific disciplines, and that focus, too, on the economic, social, and ethical aspects of scientific discovery. And we are on the verge of creating, at last, a new school for engineering and applied science.

All this represents a significant, and rapid, expansion of Harvard’s prior investment in science. But there is much, more for Harvard to do. We owe to the next generation, and to our own, every effort we can make.

I look forward to the time when because of Harvard’s bold investments and its magnetic power, Boston is to this century what Florence was to the 15th – not the richest or most powerful, but the city that through its contribution to human thought shone the brightest light into posterity.

I look forward to the lives we will save.

The World

America today misunderstands the world and is misunderstood in the world in ways without precedent since World War II. A great university like ours has a profoundly important role to play in promoting international understanding.

I know that my own professional path was set by the summer during graduate school I spent in Indonesia. There is no substitute for living abroad if one is to understand another country or even, I dare say, one’s own. The number of Harvard College students studying or working abroad has sharply increased over the past few years: now nearly two-thirds of a Harvard class – 1,100 students – will work or study abroad this year.

I look forward to the day when Harvard sets a standard for future leaders of our country by assuring that all students have meaningful international experiences before they graduate.

There is much more to be done, too, in truly integrating Harvard with the world. Students from abroad coming here to study return home changed people, and those they meet here are changed by them. Remember a few years ago the rescue of a doomed Russian submarine crew? This rescue was only made possible by a contact between a Russian admiral and an American admiral – two who never would have communicated if they had not met in a Kennedy School joint military program.

New research offices in major cities on every continent, our agreement with Google for the potential digitization of our entire library collection, our ongoing experiments in distance education – these demonstrate thºÚÁÏרÇø can educate far beyond the boundaries of its campus. A century ago, our Extension School opened these gates to the greater Boston community. I look forward to the day when Harvard fully uses information technology to extend its reach into the entire world.

The College

At the very center of the University lies Harvard College, where, every year, 1,650 of the most impressive students on earth begin their undergraduate educations. In my Inaugural address I called for a comprehensive review and reform of the Harvard College curriculum, for the curriculum had not been addressed in over a generation.

We can take satisfaction that now we do offer freshman seminars for all, and that there now exist faculty-led seminars in many concentrations. We have increased student choice and flexibility within general education and within concentrations, we have begun a much-needed overhaul of our advising system, and we have begun to bring practice in the arts – the creation of music, of visual art, of film and of writing – fully into the Harvard curriculum. I was honored to approve the appointments that have allowed the faculty to grow so rapidly in recent years, and I was especially excited to promote to tenure from within some of the College’s most superb teachers.

And yet, we are still short of realizing the truly great curriculum our students are waiting for.

I believe that to realize this curriculum, the Faculty of the College will need to put individual prerogatives behind larger priorities and to embrace new structures and norms of teaching and learning. To provide the closer student-faculty contact our students deserve, faculty will need to take a greater role in leading discussions, in responding to student writing, in advising student concentrators.

They will need to provide the broad introductions to large bodies of knowledge the students are right to demand. They will need to think with vision, and with generosity, across disciplinary borders and their particular purviews to craft a compelling description of just what, in the 21st century, it means to be an educated person. I look forward to the day when Harvard is not just the greatest research university in the world, but is also recognized for providing the best undergraduate education in the world – the day when once again what we do here in this Yard defines the ideal of liberal education.

Conclusion

Yes, I have these last years been a man in hurry. My urgency boils down to this:
For an institution like ours to make the great contributions the world rightly expects of us, we cannot rest complacent on this, the more comfortable side of innovation; on this, the more familiar side of the lectern; or, even, on this, the reassuringly red brick side of the river.

Harvard must – we must – cross over: 
Cross over from old disciplines to new;
Cross over from old structures of governance to new;
Cross over from outdated lectures to new active modes of learning,
Cross over from the confines of Harvard Square and put down new, ambitious stakes, in Allston and beyond.

We owe it to those who come after us to become for this city, this region, this nation and this world a center of human improvement.

Our long preeminence must become a spur, not a bar, to our constant transformation.

I am honored to have served as your president during the early days of what I hope – and believe – will be Harvard’s greatest epoch. I have loved my work here, and I am sad to leave it. There was much more I wanted, felt inspired, to do. I know, as you do, that there are many within this community who have the wisdom, the love of Harvard, the spirit of service, and the energy that will be necessary to mount the collective efforts that this moment in history demands.

I bid you farewell with faith that even after 370 years, with the courage to change, Harvard’s greatest contributions lie in its future.

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Let me, on behalf of all of us, thank the young officers we are going to commission today – Second Lieutenant Brooks, Ensign Cohn, Ensign Craig, Second Lieutenant Dowell, Ensign Payne, Ensign Salamon, Second Lieutenant Sarvis, Ensign Schellhorn, Second Lieutenant Trama – for their service these past four years and their service to our country going forward.

I remember very well one of the most moving, and perhaps the most moving and important, moment in my professional life. The moment was when I took the oath of office to be the Secretary of the Treasury of the United States and swore an oath, very much like the one you are going to take, to uphold our Constitution. And I thought there was not anything more important that someone could do than to try and serve their country. I so much admire what you are going to undertake. I admire especially your courage, your devotion as citizens in joining our armed forces at this crucial moment in our country’s history.

In some ways, five years is a long time and in other ways five years is a short time, but it’s long enough that I have had an opportunity to hear some of these stories of the physical courage and of the moral courage of those who we have commissioned in past years’ ceremonies have displayed in their service in Iraq and around the world. It is a remarkable group of people that you are joining and we are all very grateful to you and wish you all the very, very best.

I want also to thank your families for their devotion to you, for their support for you, that has enabled you to come to this point in your service and for what they are making it possible for you to do.

I want to thank all of the many members of the Harvard community and the Harvard alumni community who work so hard to support the ROTC program. I hope and I believe that the ROTC program and the University have drawn more closely into connection these last years. I believe that the opportunities for students to participate in ROTC and the program’s ability to support more students have increased. That certainly has been what I have been trying to do, but I believe that we still have some ways to go.

Whatever you think about any given policy issues – and there are important policy issues on which there is fundamentally divided opinion – whatever you think about any issue, I believe that our country is most important and I believe that our country is best served when great universities like this one stand with those who defend the freedom that makes it possible for us to do all the wonderful things that we are able to do here.

So let me just conclude by saying what I have said each year at this ceremony. America is strong because it is free and America is free because it is strong. And it is strong because of the service of wonderful individuals like those we commission today. Thank you very much. 

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And we’ve got some things in common:

• Our Harvard time felt like it went by very fast, and we are ready for quite a vacation.

• We are on our own – no more Harvard housing and we won’t be eating any more Harvard food.

• We were here a while, and we never saw Harvard lose a football game to Yale.

• We think some professors, some members of the faculty did very well by us – and others were well … less well disposed. Think about it.

• We are ready for the next chapter in our lives – yet not sure just what comes next. We wonder about banking – and also about how to achieve the greatest fulfillment. About travel – and staying reasonably close to those we love. About achieving all we can – and staying faithful to ourselves.

We will leave with recognitions of various kinds, some marked on parchment, some engraved on pins or plaques – some not. It is really too soon, really too soon for any of us, to know how much, or just what, we have accomplished ºÚÁÏרÇø. But one thing is for sure: the world has high expectations of anyone who spends time here.

Of course, whatever we do, we will take Harvard with us. We have formed relationships here that will last the rest of our lives. In December, I married the woman I met in my first year ºÚÁÏרÇø. Some of you may do similarly. We have all stored up so many memories. Some are wonderful. Some are painful. Some memories are the kind the passage of time turns to sober wisdom; some, the kind the passage of time makes funnier and funnier. All of these memories will shape our complex feelings about and for this special place.

To be sure, there are some differences between our situations, mine and yours:

• My friends and I will not follow each other’s progress on facebook.com.

• I have not had to pay tuition these last years for my Harvard education. But then, again, my parents already lost me, and your parents are about to lose you, as a tax deduction.

• I doubt anyone will warn me – as I am here to warn you – that your graduation depends on your returning all your silverware to your dining hall by 8 a.m. on Thursday morning.

• As I go on sabbatical, I will maintain my library privileges.

• You will follow Ralph Waldo Emerson, Conan O’Brien, Helen Keller, John Kennedy, Franklin Roosevelt and Yo Yo Ma into the Harvard Alumni Association – with the lifetime promise of dozens, hundreds of mailings from Harvard – each with a return envelope enclosed.

ME: I’ve paid my dues – for this year.

• • • • •

But I claim membership in your class for another, deeper, reasons. For me, the greatest joy of being the president of Harvard has been the opportunity to represent, to teach, to converse with, to work with, and to celebrate the students of Harvard College. Of Harvard students, my memory brims :

• I think of telling your tearful parents that everything was going to work out for the best as I welcomed you to Harvard just 45 months ago.

• I think of learning from you about everything from two-photon microscopy to the Ching dynasty as you told me about your senior theses.

• I think of being there when the women’s ice hockey team won in triple overtime. And of listening to two of you play Mozart – and three more play jazz – at my wedding.

• I think of dancing with a few of you and talking with so many more of you in study breaks in Annenberg or your houses.

• I think of being reminded very forcefully of what I always like to say about Harvard, that is a place based on the authority of ideas rather than the idea of authority, when a student four weeks into my freshman seminar told me that the paper I had written as secretary of the Treasury was, as I quote, “kind of interesting,” but as he told the students in the seminar, “President Summers’ data did not even come close to proving his conclusion.”

• I think of some of the best discussions I have ever had of globalization issues.

• And yes, I did get a kick out of signing for you the ever dwindling supply of dollar bills with my name on them.

This is because I thought then, and I think now, that there is not much anyone can do that is more important than to provide students with minds like yours with an educational experience commensurate with your excellence. For you are remarkably gifted, deeply committed, gifted, and – as history suggests – more likely than any other group of 1,650 22-year-olds to change the world.

But now, talk about whºÚÁÏרÇø will do about grade inflation, Allston, or Springfest – or even the Core – is fading in importance for you and for me. You will leave here with your transcripts and honors, with your friends, and with your memories. I want to share with you additional hopes for what you leave here with – a hope for what we on the faculty helped you to develop during your years here. It is something different and broader than knowledge of a field or of a disciplinary approach – something that transcends even the Core’s 11 categories. It is an attitude towards your own minds, and the difference that thought can make.

At one level, what I am about to express are personal convictions of mine – you will sense this, I suspect, in what I say. But I believe what I am going to say expresses the obligation that all of us who have been privileged to study in this Yard should feel.

• • • • •

I hope that more than anything else you leave here with a reverence for, and a personal commitment to, the power of human thought and the positive contribution reason can make.

I speak of a reverence for the power of human thought because our existence is shaped by those ideas that come sometimes as a spark of genius, sometimes as a product of a great debate, sometimes in a moment of serendipity. One of my heroes, John Maynard Keynes, famously wrote of the sphere in which I have lived “The ideas of economists and political philosophers – both when they are right and when they are wrong – are more powerful than is commonly understood. Indeed, the world is ruled by little else.” Keynes went on to warn that persons “who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.”

Ideas and their power allow even the poor in our country today to take for granted things that John D. Rockefeller or J.P. Morgan could not have dreamed of – the ability to cross the country in 5 hours, to talk with anyone … anywhere, to enjoy the recreation of watching movies in one’s home in a room with a controlled temperature, the confident expectation that most children will live to be an adult.

The idea of freedom and the genius of the Constitution enable us to take for granted all that we take for granted, that we may say what we think, read what we choose, and sleep secure in the knowledge that agents of our government will not be pounding our doors in the middle of the night.

It is the power of human thought that has given us some of life’s most sublime moments – hearing the music of Beethoven, seeing the paintings of Picasso, pondering the philosophies of Plato, or viewing the dramas of Shakespeare.

To be sure, reverence for human thought no more than reverence for anything else does not mean uncritical appreciation of all its products. Countless millions of people have been sent to their deaths in the name of misguided ideas. History’s tragedies must inspire awe, and sometimes dread, at the power of human thought to wreak misery as well as good.

So yes, a few moments ago I expressed the hope that you would leave here with not just reverence for the power of human thought but I also express the hope that you would leave here with a personal commitment to the idea of reason. For, as a graduate of Harvard, this iconic institution, you represent and stand for the idea of the mind. And you can show that analysis and logic – though fallible, though susceptible to abuse – can, and must, carry the day.

It is an irony of our time that at a moment when the power of reason to cure diseases, link nations, emancipate the enslaved, and improve living standards has never been greater, the idea of reason is increasingly in question. Perhaps the greatest large-scale threat to the lives we all plan to lead over the next decades comes from the threat of faith-based terror – from the threat of destruction carried out with the objective of destroying the commitment to open-minded inquiry, of casting doubt on the idea of society organized on the basis of what its citizens choose. The deliberateness of what we call “deliberative” democracy vests power in all of us to think, to reason, and to choose. When this deliberateness is threatened anywhere, the world grows more dangerous everywhere And the threats to reason can be close to home.

Think about this, at a time when biological science has done more to reduce human suffering and has more potential to reduce human suffering than ever before in all of history. There is today, in American public schools, more doubt cast on the theory of evolution than at any time in the last century. American public policy remains in thrall to those who doubt the reality of man-made global warming – this while global warming is about as debatable as the idea that smoking is bad for your health.

How do we respond to such threats? We respond by insisting that our public choices be reasoned ones, ones informed by the power of data and experience, analysis and logic. We cannot confront enemies – but nor can we effectively heal, or feed, or build, or trade – without penetrating understanding and comprehensive analysis of realms we still find mysterious.

This applies to all of us. For assumptions – even the most well-meaning assumptions – are often inadequate and frequently harmful: the world does not always match what we would like to think, or what current conventional wisdom tells us is true. How, without the deep, counterintuitive, cultural understanding of the kind our country invested in gaining of Japan after the Second World War can we have any hope of making progress in today’s Middle East? How, without a commitment to understanding in the most rigorous and careful way, not only the mechanics of biological transmission and the ethical imperatives of treatment, but also the logistics of local distribution and so much else, will we head off pandemics? Analysis – focused, tough-minded, and searching – will be essential to all our future.

I ask you – if we do not uphold the ideal of reason, who will?

And there are other threats, less urgent, less obvious to the power of reason you will encounter – threats that come from elevating the values of consensus, conformity, and comfort above the value of truth.

Someone I greatly admired, a colleague of mine in the Economics Department, John Kenneth Galbraith, who died a few weeks ago, was the tallest – in many senses – professor Harvard ever had. Galbraith once warned that “The conventional view serves to protect us from the painful job of thinking,” and he commented wryly on another occasion: “In any organization it is far safer to be wrong with the majority than to be right alone.” Galbraith thus urged: “In all life one should comfort the afflicted, but verily, also one should afflict the comfortable especially when they are comfortably, contentedly, even happily wrong.”

I agree with Galbraith that the power of thought to do good is in peril when we imagine that just because people may construe truth differently that truth itself is inaccessible, or that every argument is as good as every other. Indeed when consensus or comity overshadows clarity, when the airing and incorporation of diverse views becomes the end rather than the means, then we set the bar too low.

It is not enough, if we are to make the world better, to sign on to processes that explore all positions but cede the hope of changing anyone’s mind. Ultimately, for effective action, people do have to agree on some things and reject others to find dynamic ways forward. When Galbraith said, “there is something wonderful in seeing a wrong-headed majority assailed by truth” the wonder he meant to celebrate was that of progress.

And so I urge you, you bearers of the power of thought: think, and broadcast your thoughts bravely and listen attentively for the advent of new truths. Stand up for what makes sense, and risk seeming unreasonable now and then. George Bernard Shaw once observed “The reasonable man adapts himself to the world; the unreasonable man persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.”

Live with the discomfort, sometimes, of having made others squirm, and respect and listen, too, to those who leave you ill at ease. Hawthorne thought this way, too. He said, “the world owes all its onward impulses to men ill at ease.”

Certainly, the awkward have no monopoly on truth, but truth itself – as Galileo, as Plato, as James Joyce, as Philip Roth, all learned – sometimes has an awkward and unpopular way of announcing itself. Its inconvenience should be no bar to entertaining it on the merits. I hope and trust that you have been trained, even driven, here to think outside your comfort zone. Use this experience. Be among the first to recognize the wild originality of the next Joyce, the transformative synthesis of the next Weber, the elegant wonder of the iPod, or, indeed, the power and originality of your own wild surmises.

As individuals, we might not achieve what Newton, or Jefferson, or Beethoven did. But you can, we can, each in our own way, seek to bring the power of our minds to bear to do something, to create something, to influence someone in a way that has never happened before. As creators and implementers of thought, we can make a difference in the world.

I have loved my years as president of Harvard. I hope you have loved your student years here. Now we go forth shaken in some of our convictions, fortified in others, older for sure, wiser we trust. Never before has there been so much ability through new ideas to contribute to the lives of our fellow citizens. Let us strive to be beacons of reason in our lives and in the lives of those we touch. My classmates – Godspeed to us all.

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Difficult marriages sometimes end and so it is with ours. Life is too short for anger, and yet, it is too long not to reflect on experience.

I will always be grateful for the opportunity I have had to serve as your President and I will always treasure the memories of my work with members of this Faculty.

Among the fondest of these memories are the many occasions upon which I learned from you. The Harvard President’s role as final arbiter of appointments to the Faculty is a unique one. It is a rare opportunity for any intellectual to hear scholars across a range of fields survey the distant, the recent, and the emergent work in their area of expertise, and I have felt privileged to be tutored on everything from Mayan archaeology to string theory and from continental philosophy to international history.

I have, in addition, been honored to say ceremonial words launching a dazzling array of this Faculty’s new initiatives And it has been inspiring to ask students each year at my freshman study breaks about their favorite classes. I have enjoyed watching their eyes light up as they talk about their language course, or “Justice,” or their first introduction to literary theory or the new life sciences course.

I will always be proud of the nearly 100 FAS senior appointments I have approved, of helping to advance the progress that will transform the North Yard, of joining the effort to secure a full five years of funding for entering graduate students, and of beginning work on what was my highest priority for this Faculty as President: improving the experience of the students of Harvard College.

* * *

I leave the Presidency at a moment of unprecedented opportunity for the University and for this Faculty. Harvard has never had the global reputation and presence it has today, and the world has never been more in need of outstanding graduates ready to embark on careers of leadership in every corner of the globe.

At the same time, the University – and this Faculty – is extraordinarily fortunate in its own resources: in the human resources represented by its students and scholars; the physical resources represented by the land ready for development in Allston; and in the financial resources now at our disposal to support exciting visions. Over the last three years, preliminary information suggests that the University endowment has performed far beyond our planning assumptions, generating more than seven billion dollars beyond what we could have planned on just three years ago. This figure exceeds the endowment of all but three other universities in the world. The increase in the endowment of this Faculty, after adjustment for inflation, alone exceeds $3 billion.

At such a time, and with such resources, there is really only one important question on which history will judge us. With all of our good fortune and all of our wealth, did we do all we could to blaze new paths for higher education and change the world through our teaching and research? Or did we continue to do traditional things in traditional ways, enjoying the greater comfort that increased resources provide?

From the day I was named as President, I have felt it to be a matter of urgency that the FAS renew and greatly strengthen its approach to undergraduate education. I know that every member of this Faculty shares a commitment to providing an undergraduate education worthy of our remarkable students. I have been troubled, and I believe you should be troubled, by survey data suggesting that student satisfaction ºÚÁÏרÇø is much closer to the bottom than to the top of any list of leading American colleges, and that the relative satisfaction of our students declines with each year that they are here.

This faculty, with leadership from Bill Kirby and Dick Gross, and many others, has taken important steps to strengthen the Harvard undergraduate experience – as freshman seminars have become universally available, as new courses in the life sciences and other fields have been introduced, as opportunities for students to study abroad have been multiplied, and as Harvard’s system of concentrations and concentration choice has been brought in line with prevailing norms in American universities.

And yet, if history is to judge us to have taken full advantage of the opportunities inherent in this remarkable moment, this Faculty with so many brilliant and dedicated teachers has much to do to strengthen its collective approach to its students. I know from countless visits to their Houses that our students are looking to you as a Faculty for a general education curriculum that is based on a theory of the liberal education they need at this point in history, and it goes far beyond an amalgam of what individuals and departments want to teach. Our students are hoping to be taught in new ways that enable them to be far more active participants in the learning process than has traditionally been the case. And they are hoping that with all its many obligations this Faculty will find ways to afford them much more attention than it can today.

Beyond teaching, the Faculty’s other great mission is to push back the frontiers of human knowledge. No greater collection of scholars than this one has ever been assembled by any institution at any time, anywhere. While many of you individually have taken bold and creative steps to cross traditional boundaries and move beyond existing paradigms in your teaching and scholarship, I believe the Faculty as a whole can do much more to meet the challenge of the moment by moving beyond existing structures and approaches.

This Faculty can do what it has not done in 35 years by creating, merging and eliminating departments so that its structure reflects the architecture of knowledge today, rather than the architecture of generations ago.

This Faculty can find ways to assure that scholars like our late colleague John Kenneth Galbraith, whose work did so much to enrich intellectual life but did not fit neatly into any one discipline’s scholarly journals, can be tenured and flourish in today’s FAS.

This Faculty can build on the examples of the ongoing University science planning process and Dean Skocpol’s new approach to the interfaculty Ph.D. programs to enhance and indeed transform its relationships with the rest of the University. The other Faculties badly want to work with a renewed FAS that is able and willing to move expeditiously and cooperatively on matters ranging from joint appointments to the academic calendar, and from the establishment of international presences to the design of our Allston campus, and from information technology to establishment of interdisciplinary centers.

Beyond faculty appointments, beyond amenities, fellowships, leaves, office space and library privileges, we have not yet, I think, grasped all that can be achieved with the opportunities and resources now available. This Faculty will be able to name – and see realized – the most ambitious hypotheses, projects, and visions of which it can conceive. Our resources and our moment in history demand commensurate imagination, daring, and a readiness to think boldly and big.

* * *

There is a common thread in all that I have said here today, and much more that I could say. It is the challenge of aggregating individual genius, brilliance, and dedication into collective innovation, creativity, and momentum. As you have recognized, this goes very much to approaches to leadership, but it also goes critically to issues of culture, mores, and governance.

Here, we have had and probably still have our differences. But I wonder if we do not agree on the most important things.

We agree, I believe, that the greatest Faculty is one animated by the prospects of the future, and which invests its resources, human and financial, in the future.

The greatest Faculty is one that serves the long advancement of human knowledge, puts its students and the world before its own needs. It understands that the pursuit of knowledge is larger than any field, any department, and any school. It recognizes the difference between priorities and prerogatives, and sacrifices, when necessary, the latter to the former.

The greatest faculty is one in which the values of consensus, respect, and collegiality are cherished, but also balanced against other values – clear excellence, measurable progress, and the urgent demands of a world whose needs change.

The greatest Faculty preserves its past, honors its own, but also acts nimbly and efficiently to innovate, and remains open and accountable to the world of which it is a part.

The greatest Faculty is one in which long preeminence is no bar to constant transformation.

I leave with the confidence, complete confidence, that there is within the Faculty of Arts and Sciences the wisdom, the love of Harvard, and the spirit of service and the energy that will be necessary to bring its collective effort to new levels of distinction and excellence that the moment demands. I urge you to join together with purpose for the large task before you, and wish you joy and success in your pursuits.

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I am really glad to be here. As this is the last foreign trip that I take as Harvard president, it will very likely be the most important trip that I have taken as Harvard president, because it is symbolic of the ties that the University is making with India at a moment that I believe is of great importance in India’s history, in Harvard’s history, and in the world’s history.

I think it’s worthwhile to step back and think, every once in a while, about what it is that’s happening today that will be in a history book 300 years from now. The first thing to remember is that not very much will be in a history book 300 years from now. How many of us can really talk, in detail, about the difference between what happened between 1675 and 1700, and what happened between 1700 and 1725? But I’m convinced that, when the history of our period is written three centuries from now, one of the major stories, or the major story, will be the profound transformation that has taken place in Asia. Where, for the first time in all of human history, huge numbers of people are living in societies where standards of living are doubling within a decade or a little more. Where, for the first time in all of human history, it is reasonable to expect that standards of living could rise by 30-fold or more within a single human life span. Something that has never come close to happening, in the history of Europe or in the history of my country. And that it is happening in societies that include nearly 40 percent of humanity. And India is at the center of all of that. And that is why, I believe, that it is so important thºÚÁÏרÇø do all it can to understand what is happening in India, to promote this profound transformation, that has such great implications for so many people, and to support historical processes that I believe will rank in the history of the last millennium only with the Renaissance and the Industrial Revolution.

What I’d like to do this afternoon is talk to you about four broad things that are underway at the University that have, I believe, very considerable energy. That need, I believe, far more energy in the future. And that have important implications for Harvard’s relationship with India.

The first is our ongoing effort to continue to strengthen Harvard’s commitment to assure universal access to the University for all students, regardless of their background. I had a chance to spend a little time, earlier on this trip, with my Business School colleague, Krishna Palepu, who today is leading Harvard Business School’s efforts internationally. Krishna grew up in a village where there was no electricity. And, thanks to a remarkable set of efforts in India, efforts that made a staggering difference in his life, but still touch the lives of too few people, he made it to university, ultimately to Mumbai, and to the United States, and ultimately to the vantage point from which he is able to exert so much influence as the leader of the Harvard Business School’s international efforts. That is higher education at its best. But at a time when, at America’s leading universities, only 10 percent of the students come from the lower half of the American income distribution, I say to you that we need to be doing much more. We took an important step ºÚÁÏרÇø several years ago when we eliminated any expectation of a family contribution for any student with a family income below $40,000. We did that for families in the United States, and we did that for families around the world, and as a consequence, we have 20 percent more such students in this year’s class than we did before. But that is only a beginning of what we have to do, to send a signal, and to recruit students from every background to the University.

At the same time, all of us who care about the University need to think about the University as a collective entity. We are so proud of the need-blind policies that we have ºÚÁÏרÇø College. The Business School is, rightly, so proud of all it has done to promote access for students from every part of the world. Shouldn’t it be the case that any student of sufficient excellence who wants to come to the School of Public Health to study with Barry Bloom about the diseases that affect developing countries, or wants to come and study education, should be able to come, regardless of their family’s financial position? Shouldn’t the students who want to come to learn about government and governance be able to come to the Kennedy School and pursue that objective? Here, too, we have made great progress. More than 100 new scholars each year are able to come to these schools and go on to careers that may not earn them the highest income, but offer the potential for enormous contribution. But I would say, to all of you friends of the University, shouldn’t a university with a network as remarkable as our network of 300,000 alumni, with an endowment as fortunate as ours, of nearly $27 billion, be able to do more, to assure that, to every part of our university, everyone of sufficient excellence can come, can learn, and can go forth to contribute? That is our first great objective.

Second. We are engaged in Harvard College in a discussion, in what I believe is a profoundly important discussion, of the definition of liberal arts education and of the experience of our students ºÚÁÏרÇø College. That discussion has many aspects. Much of the preoccupation, I believe, very importantly, is assuring that the focus of the faculty is increasingly in the vital area of undergraduate education. That more of our students have the opportunity to interact in small groups with remarkable people like Sugata Bose and Homi Bhabha, who you heard this morning. That we have more faculty so that students are able to be much closer to our faculty.

But there’s another aspect of our change in undergraduate education that I think may be, over time, even more important in the life of the University, and perhaps even in American national life. And that is the change underway with respect to our attitude towards our students’ spending time studying, or working, or researching, abroad. As Dean Kirby likes to say, there’s no better place to learn Chinese than China. And there are a set of fairly obvious corollary propositions about other countries.

I don’t think there’s been a time, certainly since the Second World War, when the United States has been so misunderstood in the world and so misunderstanding of the rest of the world. It says something about American attitudes that one of our key congressional leaders a few years ago was asked: Will you be going abroad during the congressional recess? And he responded, abroad? No, I’ve already been there. And, at one level, you laugh. But at another level, we are seeing today a consequence of a failure to think deeply, to comprehend closely, to look in depth at the cultures and contexts of other countries. And surely there is no greater contribution thºÚÁÏרÇø can make than to assure that each of our students before they graduate has a substantial international experience. Whether it is studying abroad for a semester, whether it is working abroad over a summer, this is something that is very, very important. Four years ago, between 200 and 300 Harvard students were going abroad each year. This year the number is expected to be over a thousand. That means we are more than half of the way there to having our whole class, each year, have a meaningful international experience. And there’s nothing more important than we get there over the next four years.

And I will say to you also that it is my hope, and this will take much more effort on our part, and if I may say so, I think it will take more effort on the part of some people here’s part, that much more of this will take place in India than has been the case historically. More Americans, six times as many American students, studying in Australia and New Zealand as study in India, despite the fact that India has a population nearly 30 times the combined population of Australia and New Zealand. The figures for Harvard are not very different. Surely it is incumbent on us to find the partners, to find the relationships, that will enable there to be many more students who have the remarkable experience of spending time in India at an early stage in their lives. Harvard is prepared to do its part, and one of the important subjects that I’ve had a chance to take up in my conversations with government and university officials here, is the importance for India of being prepared to welcome more students from Harvard and from other universities.

This is crucial. But it is also crucial that, as we study abroad, we make sure that students studying abroad be wrapped in a broad context of international understanding. I already referred to the costs, for American objectives, of failing to understand what was happening in other societies. Surely, we need to make it the case that, in every part of our curriculum, whether it is in the study of economics, or the study of political science, or the study of literature, that the experience of the rest of the world be brought strongly in, and that we define the rest of the world in a much less European way than has been the case historically.

Ensuring access, educating and teaching in the best possible ways that bring in the international element. These are two critical elements. Here is a third. Pursuing deep truths in every area. We do that as our faculty carries on remarkable research in so many areas. We understand the nature of colonialism and how it shapes society much better because of Professor Bhabha’s research. Those of us who comment on globalization and its implications do so in far more nuanced ways because of Professor Bose’s research looking at earlier eras and earlier periods of globalization. And there are so many other examples.

One area, frankly, where I believe that over the decades of the ’80s and the ’90s Harvard did not do all that it could, or all that it should have, is in the sciences and particularly in the application of science. Along with the changes taking place in Asia, the other story that I think is likely to be in that history book 300 years from now is the revolution that is underway in science and technology, especially the life sciences. You know, when I first came to India, only 15 years ago, I was a rabid fan of the Boston Celtics. And I was concerned to know whether the Celtics had won their games or not. It was prohibitively expensive to make a phone call from the hotel to ask and so one had no recourse except to the International Herald-Tribune. And if you were lucky, you could get the Tuesday International Herald-Tribune on Thursday, and it would have the result of Sunday night’s game. Contrast that with, at least at the level of hotels, a universal CNN society. That’s coming because of technology and its spread.

Even more important is the revolution underway in the life sciences, which, for the first time in all of human history, is offering an opportunity to systematically address problems of disease. Yes, medical science has made great progress over the years, but historically, much of it has been a consequence of serendipity and accident. Fleming finding the mold, and so forth. Today, we have the opportunity to find cures systematically. Within the next 25 years, we are likely to see as much medical science progress as we have seen in the last century. But it’s not something that’s going to take place automatically. You know, it was estimated a few years ago, and there’s a lot of controversy about this number, so it may not actually be right. But if it’s even remotely close to being right, it says something very powerful. That the American pharmaceutical industry spent more money on pet disease research than it did on research that bore on diseases that took place in tropical countries. That may or may not be exactly right. But that the comparison can even be made suggests the presence of a staggering gap. A gap that institutions with the kind of resources thºÚÁÏרÇø has, with the kind of ability to bring together people of extraordinary ability thºÚÁÏרÇø has, needs to fill.

That’s why I’m pleased to be able to tell you that, as I speak, there is construction underway on the Harvard campus of 14 football fields’ worth of laboratory space, in a number of locations, with much more to come. That’s why I am pleased to be able to tell you that, with the tremendous leadership of Dean Venky, Harvard is on its way to strengthening its engineering program within its Faculty of Arts and Sciences to ensure that technology has its proper place in a Harvard education.

And I’m pleased to be able to tell you that, as we think about all of this, we are recognizing that scientific progress is not something that takes place in isolation, but is a profoundly cooperative enterprise. Cooperative between the different parts of the University that are coming together, for example, in our new life sciences Ph.D. programs, in ways they have not before. But much more importantly, collaborative across the world. That’s why I’m so proud of the collaborations that Venky is launching with the IIT. That’s why I think the work that the School of Public Health is doing to support, along with Rajat Gupta’s tremendous energy, the establishment of a network of public health schools here in India, so that we are working together, to build the institutions that will make sure that this scientific progress takes place as rapidly as it can, with such large implications for the betterment of humanity.

These three things, ensuring access, teaching as well as we can, pursuing in every direction, truth and all that it means, are central missions of the University. They are the central missions of the University. But I believe that a university as fortunate as Harvard is, fortunate in so many ways, cannot be satisfied there. That we are called to do everything we can to use our knowledge, our power, our influence, to lever as much human progress as we possibly can. We try to do that in many ways. David Ellwood is bringing great energy to the Kennedy School. One of the things that he’s celebrating on his trip here is the Kennedy School’s major collaboration with the government of India to become involved in training its Civil Service in a set of techniques, in a set of methods, that the School has developed in the area of governance over the last three decades, at a time when what the Civil Service of India decides to do, and if I might, what the Civil Service of India decides not to do, and withdraw from, is of such great importance for the future of India.

Mike Porter, at the Harvard Business School, supported by his colleagues, is teaching a course in global competitiveness, that yes, is being offered to 70 students at the Harvard Business School, and students from all over Harvard, but is also being offered at some 57 other universities around the world with the use of information technology. That, I believe, is a harbinger of things to come. If we think, and we do, and we’re right, that we have some of the most remarkable scholars in the world ºÚÁÏרÇø, don’t we, as an educational institution, owe it to them, and owe it much more broadly, to ensure that their wisdom, their lectures, what they can teach, is transmitted as broadly and widely as possible? Professor Porter’s is one of many experiments, and there are many different models. I don’t know which one will work out the best. What I do know is that, with everything that is happening, we have the opportunity to touch and reach more people than we ever have before.

The University has embarked on a partnership with Google. No one knows just where that partnership will go. But let me tell you what its ultimate objective is. It is that every book, in the Harvard library, be accessible, be searchable, everywhere on earth, by anyone who has an Internet connection. There are a million issues of intellectual property. There are a million issues of copyright. There are a million issues. But those books have started to be scanned. And when that becomes available, think about what it will mean for the possibilities for collaborations. Think about what it will mean for the democratization of access to knowledge. Think about what it will mean for the very idea of a university library.

We are doing a great deal. But I believe that we can do so much more in the future. This is an important moment, I believe, in India’s history, as India takes off. I believe it is an important juncture in the life of the University. In ways that go far beyond the influence of any individual. In ways that go far beyond any single sphere. India is changing and evolving and strengthening, and so, too, in its way, is Harvard. And I believe that both will be much stronger for their ever closer collaboration. And that’s why I’m so glad to have been here, to have had the chance to be here with all of you today.

Thank you very much.

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It is a pleasure to be here at the Reserve Bank of India and to follow so many distinguished economists in giving this year’s L.K. Jha Memorial Lecture.

It has been six years since I was last in India and more than 15 since I first came. The changes have been remarkable – in the economy, in the financial system, in education and health care – and as a consequence, there has been vast improvement in the lives of literally hundreds of millions of people. And the change in India’s relations with the United States has been a profoundly positive development – one that I hope and trust will prove lasting.

This all is a tribute to many people and many things. Thinking back to that moment in the summer of 1991 when India was on the brink, it is a tribute to the resolute determination and extraordinary wisdom of those who have guided India’s finances. It is a tribute to this great institution, the Reserve Bank of India. And it is a tribute to successive Indian governments and to the enormous thoughtfulness of Indian economic discourse on almost every subject.

As remarkable as developments in India have been, they are not my primary subject this evening. Instead, I want to focus on some implications – both positive and normative – of what is to me the most surprising development in the international financial system over the last half dozen years. That development is the large flow of capital from the world’s most successful emerging markets to the traditional industrial countries, and the associated enormous buildup of reserves in the developing world. To my knowledge it was neither predictable nor predicted and the implications are large and have not yet fully been thought through.

The Current Global Capital Flows Paradox

Three aspects of global financial flows stand out as being without precedent:

First, the net flow of capital is substantially from developing countries and emerging markets towards the industrialized world and principally the United States, as the world’s greatest power, is the world’s greatest borrower. Figure 1 depicts global current account balances as estimated for 2005. It is apparent that the United States is an overwhelming absorber of global savings while the rest of the world is a supplier of global savings. While the combined current account surpluses of Japan and the non-European industrialized countries represents about 35 percent of U.S. net international borrowing, the remainder is financed overwhelmingly by emerging markets and oil exporting countries. This broad pattern, which has been going on for several years now and on current projections will continue for quite some time, runs very much counter to the traditional idea that core countries export capital to an opportunity rich periphery.

Second, the buildup in U.S. net foreign debt is substantially mirrored in reserve accumulation by emerging markets. While claims flow in many directions, it is noteworthy that a large fraction of the buildup in foreign claims is represented by reserve accumulation. Brad Setser, whose regular web log¹ on this topic should be a resource for all concerned about these issues, estimates that global foreign reserves, netting out valuation adjustments increased by $670 billion in 2005, of which Japan accounted for only $15 billion. As Figure 2, drawn from Setser’s work, illustrates, this pattern of substantial foreign reserve accumulation has been underway for several years though there has been a shift from Japanese accumulation of reserves to increased accumulation by oil exporters.

As I shall discuss in substantially more detail later, global reserves of emerging markets are far in excess of any previously enunciated criterion of reserve need for financial protection. Figure 3 uses one familiar criteria, the so-called Guidotti-Greenspan rule that reserves should equal 1 year’s short term debt to demonstrate the spectacular increase in what might be thought of as excess reserves in emerging markets. These reserves have grown from half a trillion dollars in 1999 to over two trillion dollars today. As Table 1 demonstrates, they are distributed quite broadly around the world.

Third, expected real returns on these reserves are very low. Assuming constant real exchange rates, reserves will earn the expected real return on primarily dollar and secondarily euro fixed income assets. Indexed bond yields or comparisons of interest rates and forecasted inflation rates would make 2 percent a somewhat optimistic estimate of expected real returns in international terms. If real exchange rates in emerging markets are likely to appreciate then domestic returns will be even lower and more risky.

These three elements, flow of capital from emerging markets to industrial countries, huge accumulation of reserves, and expected negative returns on reserves constitute what might be called the capital flows paradox in the current world financial system. While borrowing and consuming is functional for the United States and reserve accumulating and exporting is perhaps functional for many other countries, the sustainability and the desirability of the capital flows paradox seems to me to require careful thought. Let me turn first to the American situation.

Unsustainable and Problematic Dependence of the United States on Foreign Capital.

The American current account deficit is unprecedented in our economic history or that of other major economic powers. Today, it is currently running at a rate approaching 7 percent of GDP. Barring some discontinuity, most knowledgeable observers expect it to increase. Imports substantially exceed exports, the dollar appreciated over the last year, the income elasticity of U.S. imports exceeds that of U.S. exports, and so forth. International debt accumulation at these rates cannot go on forever.²

Moreover, most of the classic indicators for deciding how serious a current account deficit are worrying.

• First, 7 percent and growing is an unusually large deficit, as Figure 4 illustrates.
• Second, as Figure 5 illustrates, the current account deficit is financing consumption rather than investment as the U.S. net national savings rate is now at a record low level of under 2 percent.
• Third, investment is tilted towards real estate and the non-traded goods sector rather than the traded goods sector and away from exportables.
• Fourth, the net flow of direct investment is out of the United States and the flow of incoming capital appears to be of shortening maturity and coming increasingly from official rather than private sources.

This configuration, whatever its causes, raises obvious risks. There is the hard-landing risk. This is not just an American risk, but a global risk at a time when the U.S. external deficit is creating nearly an export stimulus demand approaching 2 percent of global GDP. And as we are seeing with increasing frequency, whether it is regarding ports or computers or automobile parts, the current situation is creating substantial protectionist pressures. In addition, it is hard not to imagine that there are geopolitical risks associated with reliance on what might be called a financial balance of terror to assure continued financial flows to the United States. Indeed, I was reminded about the geo-political issues that such dependence posed for the United States when I read recently about the effective American use of exchange rate diplomacy to force the hands of the British and French during the Suez crisis.

To be sure the United States should be viewed differently from an emerging market and so there has been a certain amount of complacent commentary – commentary that has gained in strength as the U.S. current account deficit has continued without evident ill effect. In general, my view thinking about past experience with tech stocks in the United States or with the Japanese stock market or with a range of emerging market situations is that the moment of maximum risk comes precisely when those concerned about sustainability lose confidence in their views as their warnings prove to have been premature and when rationalizations come to the forefront.

I will not reflect at length on the commentaries of the complacent. Suffice it to say that intangible investment as well as tangible investment in the United States has also declined in the United States even as our dependence on foreign capital has increased.³ Even if home bias is declining, there are surely limits on the tolerance of foreign investors for increased claims on the United States. And while arguments about “financial dark matter” or the U.S. ability to issue debt in its own currency probably have some force in thinking about what level of external debt is sustainable for the United States, they surely do not make the case for indefinite continued expansion of debt.

U.S. Adjustment and the Global Economy

The massive absorption of global capital by the United States is of questionable sustainability and if sustainable, of dubious desirability. But the one thing that we all know about markets is that they have two sides and that one cannot understand U.S. borrowing without understanding foreign lending. One cannot understand U.S. deficits without understanding others’ surpluses. And one cannot think through the consequences of reduction in U.S. import led growth without thinking through the consequences for the export led growth of others. Let me turn then to the global economic configuration.

As have been conventional in many international discussions, it is frequently suggested, sometimes even in India, that the U.S. is sucking capital out of the developing countries because of its fiscal deficit. Yet one has to worry about getting what one wishes for in the form of a unilateral U.S. increase in national savings.

There is one striking fact about the global economy that belies a dominantly American explanation for the pattern of global capital flows: real interest rates globally are low, not high. Whether one looks at index bond yields, measures of nominal interest rates relative to ongoing inflation, and yields on most assets, especially real estate or credit spreads, capital market pricing points to the supply of global capital tending to outstrip demand rather than vice versa. Real interest rates globally are low not high from a historical perspective. If the dominant impulse explaining global events was declining U.S. savings, one would expect abnormally high real interest rates, as with the twin deficits in the 1980s, not abnormally low real interest rates. America’s consumption growth in substantial excess of income growth has been matched by substantial export led growth in the rest of the world.

Imagine that somehow through some combination of U.S. policy adjustments, U.S. national savings were to substantially increase resulting in downwards pressure on U.S. interest rates and a sharp reduction in the U.S. current account deficit. The result would be a substantial contractionary impulse to the remainder of the global economy, an effect that would be magnified if other currencies appreciated against the dollar causing a switching of expenditure towards U.S. goods. Moreover, those countries seeking to peg their currencies as U.S. interest rates declined would have to further expand not just their reserves but their rate of reserve accumulation. An unwinding of global imbalances, if it is not to be recessionary for the global economy, thus requires compensatory actions in other parts of the world. What are these actions?

As a matter of arithmetic, any reduction in the U.S. current account deficit must be matched by reductions in current account surpluses or increases elsewhere. If this simply takes place automatically as a consequence of reduced U.S. demand the result will be contractionary on a substantial scale. After all, the U.S. current account deficit represents an impulse of close to 2 percent of GDP to global aggregate demand. What compensatory actions are appropriate? It is conventional to start such a discussion with the industrialized countries. But as Figure 1illustrates, their surpluses offset less than a quarter of the U.S. current account deficit.

Japan at last appears to be recovering, though as is all too traditional, its growth appears to be export led. Unfortunately, given Japan’s fiscal situation and the structural reality of an aging society and shrinking labor force it’s not clear just how much scope there realistically is for a shift to domestic demand led growth.

The situation in Europe is in some ways less clear. Some European policy makers have taken the position that since Europe is in approximate current account balance, it has no major role to play in the global current account adjustment process. They urge U.S. fiscal contraction as a means for reducing the U.S. deficit but do not see any European movement into deficit as part of the global adjustment process. I find this view implausible. As long as there are going to be substantial structural surpluses in the oil exporting countries, it is hard to see why Europe, which is even more dependent on imported oil than the United States, should not be comfortable running at least a modest current account deficit. Moreover there is scope for both microeconomic policies that reduce regulator barriers and macroeconomic policies to increase aggregate demand.

Without the gift of prescience regarding oil prices, it is harder to prescribe for the oil exporting countries. The accumulation of significant current account surpluses in the face of a transitory increase in the price of oil seems rational and appropriate. And the long experience of natural resource exporters, including the experiences of oil exporters during the 1970s, suggest the dangers of being too quick about assuming that price increases will be permanent. There is a likelihood that over the next several years either oil prices will come down or oil exporters’ contribution to global aggregate demand will increase. But in prescribing a path for overall global adjustment, caution is surely in order here.

The net surplus of emerging Asia led by China exceeds the combined surplus of Europe and Japan. And given the magnitude and attractiveness of investment opportunities in emerging Asia it would be natural for it to run a current account deficit. This suggests that the primary source of global demand to offset increases in United States savings should come from the Asian consumer. India is a positive example here. It is noteworthy that consumption represents close to two-thirds of GDP in India, and significantly under one half in China. I will return in a few minutes to the question of reserve accumulation and to the potential for shifting to a more domestic demand led growth strategy in emerging markets.

In addition to the benefits for the global system that a domestic demand led strategy would bring, I suspect a less export oriented strategy would also contribute to ultimate financial stability. Looking back, it seems relatively clear that Japanese economic policy could wisely have supported more consumption sooner and in the process avoided the bubbles in asset prices during the 1980s associated with preventing yen appreciation that created such havoc in their financial system.

The rest of the world is probably not in a position to make large contributions to the global adjustment process. Healthier policy environments in Latin America and Africa would reduce capital flight, tend to increase private capital flows and lead to somewhat larger investment driven current account deficits. Given the current euphoria reflected in emerging market spreads, it would be a mistake for policy makers to cheer this process along too rapidly.

The Opportunity Cost of Excess Global Reserves

So far I have argued first that the U.S. current account deficit is unsustainable and dangerous, and second that managing its decline will require substantial adjustments in other parts of the world if a recession is to be avoided. I want to return now to the question of official reserve accumulation of which I referred to earlier. It is striking to estimate the cost to developing countries of reserve holding that goes beyond what is necessary for financial stability. Even if we used a standard more rigorous than any that has been proposed and treated reserves in excess of twice short-term debt as unnecessary for insurance purposes, these reserves, as shown by Figure 6, represent almost $1.5 trillion and are growing at several hundred billion dollars per year while earning what is likely to be a zero real return measured in domestic terms. This represents a substantial cost. If the wealth tied up in reserves were invested either domestically in infrastructure or in a fully diversified long-term way in global capital markets, 6 percent would not be an ambitious estimate of what could be earned. The resulting gain would be close to $100 billion a year. Aggregating the 10 leading holders of excess reserves, the opportunity cost of these reserves comes to 1.85 percent of their combined GDP.⁴

As Dani Rodrik has pointed out, this is comparable to the gains thought to be achievable from the next round of trade liberalization, to global foreign aid, or to spending on key social sectors in a number of countries. This idea of an excess of low yielding reserves in the developing world represents a radical departure from the problems that we have traditionally focused on in thinking about the international financial system. From the founding of the IMF to the creation of the SDR through discussions of expanded SDRs during the 1990s, the emphasis was on the need to find low cost ways of manufacturing insurance that reserves could provide capital importing developing nations. It is a very different world when developing nations are accumulating reserves to finance the United States.

Towards a Revised International Financial Architecture

The two new elements in the global financial constellation that I have been stressing – the U.S. current account deficits mirrored primarily by surpluses outside of the traditional industrialized nations, and the staggering accumulation of reserves by emerging market countries, both suggest the obsolescence of the G7/G8 as the dominant forum for international financial discussion. It is neither in a position to discuss many of the most important domestic policy adjustments necessary for global stability nor does it include the largest official suppliers of cross border flows of capital. The G7/G8 finance ministers’ process was started at a time when major issues of global demand and policy coordination involved only the industrial countries – when exchange rate policies were largely a matter of concern between industrial countries and when the only issues involving developing countries were periodic breakdowns in the flow of capital from rich country lenders to poorer country borrowers. None of these premises are currently met.

Any attempt to manage jointly any increase in U.S. savings and an offsetting increase in global demand from global sources will clearly require a forum broader than the G7/G8. So also will any global attempt to think through the implications of the massive reserve accumulation on which I have commented.

Just what process is right for addressing these issues is a delicate and sensitive political question involving aspects that I am no longer close to. There has been an explosion of financial fora involving emerging markets in recent years, including the APEC finance ministers, the Latin American finance ministers, the ASEAN finance ministers and most promisingly, the G20. It may well be the appropriate successor to the G7/G8, though I worry about just how much serious business will get done in a forum with 40 principals. What should not be in doubt is the importance of creating a forum that structurally has political clout over the international institutions and at least some ability to influence domestic policy decisions of individual countries. I would suggest three areas of focus in the next several years:

First and most importantly, the formulation of a global strategy for managing the U.S. current account deficit downwards without excessive risk to global growth. I do not minimize the domestic difficulties in the United States here, nor am I falsely optimistic about the ability of any international forum to influence U.S. fiscal policy. Nonetheless I believe that much more frequent and intense discussions on a multilateral basis than have taken place to date will raise the prospects for a successful adjustment process and reduce the risks of either a hard landing or of dangerous unilateralist responses to current account imbalances.

Second, a new forum should look at the role and governance of the existing international financial institutions in the current environment. Clearly, the influence and governance of the major reserve accumulators need to be increased. More fundamentally, the IMF has always had as its raison d’être addressing imbalances, but its surveillance and indeed its lending has always been focused on those who are borrowing excessively. I used to quip that IMF stood for “It’s Mostly Fiscal,” though the fund’s work in recent years has expanded much more broadly. But it must be acknowledged that the energy it devotes to current account deficits that need to be adjusted downwards dwarf the energy it addresses to current account surpluses that need to decline to facilitate smooth global adjustment or the energy it devotes to encouraging current account deficits where these can finance either consumption on attractive terms or productive investments.

In a similar vein, the IMF has perhaps been too reluctant to criticize the exchange rate policies of its members. When exchange rates are overvalued, the IMF does not point it out publicly for fear of creating a panic. When exchange rates are undervalued, the IMF often does not see financial problems for the country in question and so does not raise an alarm. It has always struck me as ironic that the IMF, which is charged with maintaining the global financial system and therefore should be particularly focused on policy choices that affect multiple countries, is prepared to address domestic monetary and fiscal policy choices, which while they may have international ramifications are primarily of domestic concerns, but is so reticent about addressing exchange rate issues which by their very nature are multilateral. It is unlikely that the IMF will take on this role alone and so will very much need the encouragement of its major shareholders.

Third, the group should take up the question of deploying the reserves of developing countries. There are of course the questions that are much discussed of the potential implications for the international financial system of shifts in the composition of currencies in which reserves are held. This is obviously a sensitive subject for everyone, but as long as the ex ante returns on dollar assets and euro assets are relatively close together it may not be a matter of welfare significance.

Of greater concern is the risk composition of the assets in which reserves are invested. When reserves were held at levels that represented self-insurance against possible financial crisis, the case for their investment in maximally liquid, maximally safe form was compelling. When reserves are far greater there would seem to be a case for more aggressive investment either in support of imports that have a high social return or in a much richer menu of international assets.

By investing in a global menu of assets U.S. institutions have earned substantial real returns over the years. Indeed the average large higher education U.S. endowment fund has earned a real return approaching 10 percent over the last decade or two. It is natural to ask whether the excess national reserves of emerging markets should not be invested with an aspiration in this direction.

If India, for example, were to follow this course, the result would be extra returns that would amount to between 1 and 1-1/2 percent of GDP each year. This figure, which dwarfs the seigniorage considerations that traditionally played so large a role in monetary theory, represents an amount greater than the Indian public sector spends on health care each year. Annuitized and valued as a stock, it is comparable to 40 percent of the market value of all the traded stocks on the Bombay Exchange. And India is not an extraordinary case. Reserves as a share of GDP are actually very substantially larger in China, in Taiwan, in Russia, and in Thailand than in India.

In principle, decisions about reserve investment can be made domestically. But I suspect that there are at least two important roles for international discussion and coordination. There are important risks for any central bank that attempts to go in this direction. It is likely to reap much more disfavor in years where investments go badly than favor in years when investments go well. And the opportunities for mischief in picking assets, in exercising control rights, in misvaluing assets are likely to be very large. Some form of legitimated international scrutiny and monitoring of central bank reserve investments could help to overcome these problems.

Perhaps it is time for the IMF and World Bank to think about how they can contribute to deploying the funds of major emerging markets rather than lending to major emerging markets. More ambitious than simply providing surveillance and monitoring that would support most ambitious investments by emerging markets would be the creation of an international facility in which countries could invest their excess reserves without taking domestic political responsibility for the process of investment decision and ultimate result.

If such a facility was able to attract even a limited fraction of excess reserves and to charge even a relatively modest fee, the sums of money available to support the concessional and grant aspects of global development would be significant. For example, globalizing $500 billion at a fee of 100 basis points would produce $5 billion a year that could go towards global public goods, multilateral grant assistance or debt relief.

There are many problems here. As we have found with state pension funds in the United States any large investor cannot completely escape political issues. There is the question of how central bank profit contributions to government budgets should be handled when returns vary. There are issues of assuring integrity. I don’t minimize any of these difficulties, which might prove insuperable.

But it is an irony of our times that the majority of the world’s poorest people now live in countries with vast international financial reserves. The problem for these countries is not being supported in borrowing from abroad – and so it seems appropriate that some part of the focus of the international financial architecture move towards the challenge of deploying their large reserves as effectively as possible.

Conclusion

Just as India’s remarkable development over the last 15 years comes with both great opportunities and challenges, so too the dramatic changes in the pattern of global capital flows come with remarkable challenges and opportunities. I don’t think any of us have the answers. I will have served my purpose today if I have induced you to reflect on the future of a global economy increasingly defined by a large flow of official lending from developing nations to the world’s largest and richest economy.

Thank you.

Table 1.

Figure 1

Figure 2

Source: Brad Setser and Sangeetha Ramaswamy, “RGE Global Reserve Watch”, March 2006

Figure 3

Figure 4

Figure 5

Figure 6

1 http://www.rgemonitor.com/blog/setser
2 For a fuller treatment of these discussions see my Per Jacobson lecture (2004).
3 Corrado, Hulten and Sichel, “Intangible Capital and Economic Growth”, NBER Working Paper 11948
4 Dani Rodrik has powerfully made essentially this point, though he focuses on countries’ international borrowing costs rather than their potential social gain from investing reserves.

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It is a great honor and a privilege to have a chance to speak at this conference and to follow so many distinguished speakers already. As I contemplate the task of following the many challenging speakers who have already spoken, I am reminded of a meeting I attended in the government when someone said, “This meeting is not over. Everything has been said, but everyone has not yet said it.”

And I am very mindful that I find myself again in the occupational hazard of the university president. The occupational hazard of the university president is that you are called on to speak in many different places – to a group of theoretical physicists one day, a group of divinity scholars the next day, to a group concerned with the constitution the third day, and a group concerned with the higher education in a particular nation on a fourth occasion. When you come right down to it, those things have nothing in common save for one thing – that on every single occasion everyone to whom I am speaking knows more about the subject of my address than I do, so I approach this topic with a certain humility here today.

I want to do three things and then, if the organizers will allow just a few moments, I can respond to whatever questions are on people’s minds.

First, reiterate the importance of higher education and private higher education for India. Second, offer some observations on why higher education in the United States has been successful and its implications for India. Third, say something about the issue of higher education as an export, which is something that I think needs more thought here in India.

First, the importance of higher education. Montek [Singh Ahluwalia] said it very well. We need to move beyond the traditional debate between primary and secondary education on the one hand and tertiary education on the other and what the balance between them should be. The answer is that everywhere in the world as we move towards a knowledge economy we need more of both. And that is surely true in India.

To discuss the question of how much more investment India needs in higher education is like the question of how much weight should I lose. It is not a critical issue starting from where we are right now, because we know which direction movement has to take place. Nor can there be any serious doubt that if objectives are to be achieved, there need to be increases both on the private side and the public side.

I was impressed by some figures that I was given suggesting that the U.S. and India have in common that about 70% of all education is publicly financed and 30% privately financed. But a sharp distinction between the U.S. and India occurs at the higher education levels – only 20% of Indian education is financed privately where as more like 50% of American education is financed privately, suggesting the desirability on grounds of balance of moving towards increased higher education. One of the reasons why this is so important? I would suggest three: Wisdom – education is in many ways the foundation for civil society and the basis for democracy; prosperity – there can be no question that increasingly higher education is central to prosperity and creating the kind of leaders of institutions that can drive an economy forward. Going back to Abraham Lincoln’s insight in starting the land grant college system in the United States, this has been recognized for a long time. Third, opportunity – the question of equality of opportunity is of central importance at a time of widening inequality in both my country and yours. And without providing a strong basis for individuals born in any circumstances to move to higher education there is not the possibility of creating the kind of equality of opportunity based on merit and excellence on which the legitimacy of our society depends. More and better higher education that my good friend Montek suggested – of the highest kind.

Second observation. Five lessons from the American experience for you to consider in strengthening your higher education system. First, the most important guarantor of both quality and adequate investments in American higher education is competition. All of us in American higher education, particularly at the highest levels, see ourselves as engaged in a brutal competition.

Sugata, as a member of the History Department, is constantly engaged in thinking about which outstanding historians from other universities we could – with appropriate tactics, appropriate salaries, with an appropriate offer – bid away from another institution. Even within the University, it is not uncommon for an outstanding social scientist to be recruited by both our Kennedy School and our Faculty of Arts and Sciences or for an outstanding biologist to be recruited by both our Medical School and our FAS. And we regard it all as good. Not as something to be discouraged, not as something to be managed, but something to be seen and treated as a spur forward. If there is a single reason why American education has excelled, it is the brutal competition for students, for faculty, for grant funds, that drives American institutions forward. And that is a central reason why private higher education is so important. At the risk of touching on a controversial issue, I will observe that this speaks in a fundamental way to the relative merits of two kinds of support.

Direct public support for institutions and direct public support for students. At the federal level in the U.S. we rely primarily on direct federal support for students who can then take that support to the institutions they choose who then compete to attract the best students.

We allocate federal financial aid funds in the way that we allocate federal research funds – on the basis of competition and peer review, not on other bases. And these judgments support the competition and drive our excellence.

Second lesson. American higher education depends on flexibility and the capacity to respond. Unlike what takes place in the primary and secondary level, there is in the U.S. no standard for what constitutes a necessary curriculum. No mandate as to how the academic calendar is to be organized. No set of requirements for what a university must provide.

There is a capacity for flexibility, and there is strong support for the kind of leadership that responds to changing conditions. The phenomenon that Dr. Ahluwalia referred to – of the concern of being able to move with sufficient flexibility and activity – is not absent in academic life. But the culture of American private institutions, in which leaders are selected not by members of the faculty or student body or staff, but by independent trustees, is a powerful spur to quality. And where we have run into trouble has increasingly been where government has not been able to resist the tendency to start to run universities in ways that are too much like the way they run departments of motor vehicles. Success depends on flexibility. That means for example that ºÚÁÏרÇø and other great universities there are no fixed salary scales. When an extraordinary professor gets an extraordinary opportunity, we are in a position to change her salary. People of different ages or in different fields, because of conditions in the marketplace, have salaries that can differ by a factor of two or three. Students who want to change their curriculum or forge a major that cuts across two different fields are permitted to do so. The emphasis is on flexibility.

Third lesson of the American experience. Universities must be places based on the authority of ideas, rather than the idea of authority. Let me tell you a story. One of the things that I have enjoyed doing most during my time as president of the University is teaching a freshman seminar. And I meet each week with 15 students and offer them a seminar on issues related to globalization.

Two years ago, in about week five of the seminar, I asked the students to read the honored lecture that I had given to the American Economics Association several years before about global capital flows. And as was absolutely common as I did each week, I asked one of the students to introduce the reading by giving his reaction to the reading. And this 18-and-a-half year-old in his fifth week ºÚÁÏרÇø said something like the following: “And then there was the lecture by President Summers – it was kind of interesting but the data did not really prove the conclusions.”

And I stopped him and I said, you know, in a moment I am going to argue that the data actually do prove the conclusions a little more than you suggest, but this is really a remarkable and a wonderful thing and it wouldn’t happen in very many places that someone who has been here for all of five weeks would tell the guy who had the title “President” – who had been in charge of this stuff for his country – that he was all wrong and that he had thought about it and that is what he concluded. And that nobody would regard it as a big deal. And that is something that is absolutely central to the success of academic life. There is no question that should be impossible to ask, no subject that should be beyond the scope of inquiry, no issue that should be regarded as finally settled, and no one who should be above or beyond debate. That is a culture, that is an approach, that is a view that is very difficult to maintain in any institution, anywhere. And yet for the most creative ideas to come out, for students to be best trained, it is something that is absolutely essential. And it is something that we fight ºÚÁÏרÇø to preserve.

Fourth Lesson. For all of this to work, there must be generous philanthropy. Our ability to maintain an institution like Harvard, the United States’ ability to maintain a system of private higher education, depends on philanthropy. It depends on wealthy individuals who recognize their obligation to an institution that gave them their start, or to giving something back to society, or to promoting a cause that they believe in. It depends on a government’s set of policies, ranging from tax deductions to an attitude taken by public officials that celebrates and welcomes, and is unthreatened by, individual generosity. It depends on harnessing the fact that people like to be recognized for their success – by being prepared to name professorships and scholarships and buildings for those who provide generosity.

Sugata was introduced as the Gardiner Professor of History ºÚÁÏרÇø. I know nothing about the situation, except with a very high degree of confidence I know one thing and that is at some point there was a Mr. (or Mrs.) Gardiner who made a generous contribution to Harvard University thºÚÁÏרÇø University has recognized by labeling Professor Bose’s position as the Gardiner Professor of History. No one will succeed in establishing a system of private higher education that does not accept and welcome philanthropy.

That is a challenge for would-be philanthropists in this country, where I note the number of those included in Forbes magazine’s list of billionaires has increased substantially in recent years, but it is also a broader challenge for institutions to learn to work with philanthropists.

My final observation. Successful universities focus on research and on professional education as well as on undergraduate study. Some of the greatest contributions that American universities have made are in the upgrading of the medical profession and in the training of the legal profession. They increasingly, and this is something that I put great emphasis on during my time ºÚÁÏרÇø, strengthen the contribution that universities make to professions that are absolutely central to our global system, but that do not involve the largest financial rewards for those who go into them. Professions like public health, like government service, education. That is why I am so excited while I am here to support Dean Barry Bloom and Business School alumni leader Rajat Gupta in their efforts to work with the Gates Foundation with the government in India to support and develop a network of public health schools here at a time when the field of public health, I believe, is of profound importance and the right kinds of institutions like public health schools can make a great difference to the broader society.

At the same time, we need to recognize that universities have as their objective not just training students, but providing new knowledge. One of the reasons why I thought the South Asian Initiative that Professor Bose is leading is so very important is that as I look at the United States today, I do not think that there has been a moment when we have both so misunderstood the world and been so misunderstood by the world. Part of that is an obligation of our education system to address in the way we train students. But part of it is the obligation of institutions like Harvard to promote the kind of understanding of societies all over the world that can ultimately lead to a more enlightened approach by American institutions and by the American government. I guess the students that Professor Bose trained are very important. The courses that Professor Bose offers are very important, but actually in selecting Professor Bose to be a member of the Harvard faculty we place an equal or greater emphasis on his capacity to contribute to human understanding, through his research and through his writing. And so, as universities contemplate their role, they must also recognize the broad contribution that their faculty makes beyond the training of students – to their professions and to the broader area of knowledge.

My third broad topic, and this will be a briefer one.

Education as an export. I was struck earlier on my trip here, and it was not something I had known about, but what I learned about medical exports from India – the number of people who come here to be treated in one way or another in your medical facilities. And I thought about the implications for higher education. This is an important issue for the United States. Last year, we played host to 565,000 students from the rest of the world. And if you take no account of any multiplier effect from the spending they engaged in while they were in the United States, they contributed some $13 billion to the American higher education sector. And so it seemed natural to me to ask the question, what was India’s record in this regard? I asked the question because it seems to me with the number of outstanding institutions of higher education, with a language that is in common with the United States, with a national experience that is likely to be so defining of the way the global system evolves in the 21st century, that India should and can be a magnet for American students and students from abroad more generally. What I learned was that of 191,000 American university students who traveled abroad last year, just 1,157, a little bit less than one percent, about half a percent, traveled to India. Despite speaking English, despite having a population 50 times that of Australia and New Zealand, India attracts less than one-tenth of students who choose to study abroad in Australia and New Zealand. If one makes the comparison with other countries that do not have the obvious advantage of being able to offer instruction in English, India attracts only half as many American students as the Czech Republic and twice as many as Hungary. I would suggest that there is a major opportunity here for Indian higher education. Potential benefits to the Indian economy of developing it as an export are obvious. But there are more fundamental benefits as well. First, if my own experience is any guide, foreigners that come and spend any time in India will want to come back. They will tell their friends about the beauty of India and the warmth of India’s people and many will decide to come back later in life and to visit. Second, foreigners who study here will inevitably make long-lasting connections with their India counterparts. They will forge lifelong relationships that over time will change the attitudes of our nation and other nations towards India.

I can tell you that no small part of the influence and strength that the United States has in conducting its global policies over the last few years has derived from the thinking about America that has come from those who spent six months or a year or two years in American universities. It is something that any rising super power should consider.

Third, there are remarkable economic opportunities in this country, and those who come here and study them will see those opportunities and be more likely to exploit them to their benefit, and, I would suggest, to the benefit of the Indian economy. There will be those I am sure who will respond to this suggestion by saying that India’s universities are already full and that there is not enough university capacity in India even to serve those in India who need higher education without setting aside spaces for foreigners. There are those who will argue that at a time when many thousands of Indians are traveling to the United States, should we be trying to keep them in India rather than recruit foreign students? My response is a simple one and it is the basis of economics. By attracting tuition dollars and euros, by attracting the money that foreign students will inevitably spend on housing and other living expenses, Indian institutions can potentially develop a new and reliable stream of revenue that will support their domestic expansion and enable them to teach more rather than fewer Indian students. I have no doubt that by welcoming more students from abroad, India can accommodate more students from home.

Let me conclude by again congratulating the organizers of this conference. When the history of this period in India’s life and in our global life is written some decades from now, there will be much that will go into it. But I suspect that the products of universities – the ideas, the formative experiences for those who will go on to lead our societies, ideas that will go from being exotic bits of esoterica to conventional wisdom as they always have – will be a large part of that history. And so, the decisions that your country makes, the decisions that you make regarding your universities and your system of higher education, will be of the greatest importance, significance, and, I believe, positive influence for India’s future and for the world’s.

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Thank you, Director [of AIIMS] Venugopal for that introduction. Let me also thank Dr. Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, for chairing today’s session.

I want to start by saying how grateful I am to have the opportunity to be here today. I want to thank the leadership of the All India Institute of Medical Sciences for inviting me to be part of its 50th anniversary celebration. I am particularly glad to be here with Dean Bloom and a contingent of his school’s strongest supporters. And I want to especially thank the Indian government for the welcome they have extended to me and to the many faculty and staff from Harvard that have traveled to India this week. Thank you.

It is an occupational hazard of being a president of a university that you are often asked to make some welcoming remarks or give a keynote speech, and the various situations have very little in common: sometimes the subject is public health and medicine, sometimes it is the research frontiers of theoretical physics, sometimes is constitutional law. The only thing these gatherings have in common is that whoever you are talking to inevitably knows far more about the subject than you do. And that is surely the case today.

So with that risk in mind, I want to make several observations about policymaking and research in medicine and public health – observations that I believe have a special relevance to India today and that are based on my current vantage point as president of Harvard University, and also on my experience in government and background as an economist.

The Century of Public Health

The first observation is that I believe the 21st century will be remembered as the century of global health. Think for a moment about the major events happening around the world today and ask yourself which of these events will be important enough to be memorialized in history books published three centuries from now. I suggest that more than any particular event, or terrorist attack, or war, there are two primary trends that will be remembered as definitive of our era:

• The first is the revolution underway in the life sciences. The revolution that is changing our conception of human nature – that is giving us the operational capacity to change what human life is and how humans live – the revolution that is offering us, for the first time in all of human history, an operational understanding of the human disease process and the capacity to interfere with that process. The revolution that, in the United States at least, enabled us to have, for the first time in history, fewer people die from cancer last year than in the previous year.

• The second trend is the economic and social revolution that is underway in the developing world and the rapid rate of convergence occurring between the developing world and the industrialized world. To put this in perspective, it is worth remembering that there was no period in the history of the United States when standards of living as much as tripled within a single generation. Yet today, in significant parts of the world, human standards of living are improving by ten or twenty or thirty-fold within a single human lifespan. In India, thanks to this trend, it is expected that average incomes will double over the next decade.

Global public health stands as the fulcrum linking these two trends. What happens for good or ill in the field of public health and biomedical science over the next 50 years will touch as many people in as large a way as anything else in human history.

India will be no exception. The convergence of these two trends is already having a profound effect here. One need only look to the rapid increase in the number of people infected with the HIV virus and the remarkable strides that are beginning to be made to combat this terrible disease.

By 2010, estimates suggest that more than 20 million Indians will be HIV positive, up from 5 million today. The rapid spread of this disease is being made possible by the same modern transportation technology that is helping to fuel India’s economic growth and convergence with the industrialized world. Indeed, it has been conservatively estimated that up to 11 percent of India’s truck drivers carry the virus.

The answer to HIV/AIDS in India will come from increased public awareness and education, yes – but I have no doubt that the ultimate solution will be a product of the revolution in the life sciences – from AIDS vaccine research like the promising research that is being conducted even now by AIIMS researchers and others at institutions around India.

HIV/AIDS is just one example – the most glaring one, perhaps – of how globalization and the revolution in the life sciences is having a profound effect on the lives of millions of ordinary Indians. Whether India can embrace these trends and use them to its advantage – or whether these trends overwhelm India – will have more to do with India’s success in the 21st century than any other single factor.

Social Development and Human Development

The second general observation I want to make is based far more on my experience in Washington than on the experience I have had the chance to have as president of Harvard.

The observation is that social development and economic development are inextricably intertwined and need to be thought of together. Investing in health is just as important economically as investing in schools, roads, and telecommunications.

The importance of this interrelationship is the reason why when I was at the World Bank we chose to devote the 1993 World Development Report to the question of investing in health. Bill Gates has said that it was this report that sparked his interest in issues of global health. When he read it, “Every page screamed out that human life was not being as valued in the world at large as it should be.” Among our conclusions was that 11 million children each year were dying from entirely preventable causes.

That this tragic loss of life and lack of basic services has an enormous economic impact is suggested by common sense. But it can also be powerfully demonstrated by careful empirical research. For example, the World Bank has shown that higher HIV infection rates not only involve the potential for significant loss of life, but that high infection rates can also be a significant drag on economic growth – even more so than conventionally supposed. This is because the typical individual likely to be infected is a young adult in his or her prime working years. Death from the diseases destroys the “mechanisms that generate human capital formation.” In addition, HIV/AIDS leaves large numbers of orphans whose own social development is set back. The result is a vicious cycle that if unchecked can destroy a society’s potential.

Another example can be found in the work of Professor Bill Nordhaus of Yale University. Professor Nordhaus put together a survey where he asked people in the United States this question: Which would you prefer: To have the health care and the health system and the medical capacity of 1900 and the economic standard of living of 2000, or to have the economic standard of living of 1900 and the health care capacity of 2000. The answer that came out of that survey was that people were about equally divided between the two options.

That’s a remarkable thing. What those results say is that in the United States over the past century the product of a relatively small part of the economy and the research of an even smaller part of the economy produced as much good for human well-being as all the economic growth during those 100 years.

The survey results speak to the importance of social and economic development occurring together. And it points out something that is profoundly important for India as it continues on its aggressive development path and considers the various types of societal investments that are to be made. And that is regardless of what might appear to be the large absolute size of investments that India will need to make in health care, if the experience of the United States is any guide, those investments will produce benefits in terms of human well-being that will far exceeds their monetary costs.

Medical Metrics and the Importance of Evaluation

The third observation I want to make is that there is a truism in business that also applies in government and I believe applies with a special importance in health care. And that is that what you count, counts.

Let me give you an example from my own field of economics. I would argue that the creation of the poverty line and the annual measure of the number of people who are in poverty in the United States was as important an innovation as any other in promoting the reduction in poverty in the United States over the last 40 years. The fact that we as a society are measuring the number of people in poverty, reporting the number of people in poverty each year and comparing the number of people who are in poverty in different states at different times and with different countries has motivated significantly more aggressive efforts to eradicate poverty than there otherwise would be.

We need far, far more of that in health care. We need more measures of success. I believe that in the next few decades, the creation of systematic public health metrics that will enable people to see how well they are doing, and how well others are doing, will be as important as any particular new medical innovation or treatment to improving health care outcomes here in India and around the world. The creation of such metrics will in ways that no one will notice and no one can predict drive staggering amounts of improvement in the United States, in India, and around the world.

Harvard University is beginning to take some steps in this direction through the establishment of a new institute ºÚÁÏרÇø under the leadership of Professor Chris Murray. The Institute’s mission is to improve resource allocation in global public health by establishing key metrics that will allow governments, non-profits, and the private sector to evaluate and improve their performance.

Some of this type of activity is also beginning to occur here in India. Jishnu Das and Jeffrey Hammer of the World Bank have undertaken rigorous studies of the quality of care provided by Indian doctors in the Delhi area. They have found that despite the extraordinarily high standard of care in private hospitals, the vast majority of India’s urban citizens do not have access to this quality of care. Indeed the typical patient visiting the typical physician after being sick for three days could expect to see their doctor for around three minutes, be asked only three questions, and have less than a 50 percent chance of receiving instructions on follow-up care. While these statistics are disappointing, they provide a benchmark for assessing improvement and will hopefully provide an impetus for undertaking specific reforms that will benefit poor consumers of health services. India needs much, much more of this type of measurement in the public health sector.

At the same time, counting and measuring must be but a part of a larger attitude that embraces careful thought and analysis about difficult problems.

Let me give you an example of what I mean: In the United States, if you compare the rates certain medical procedures are performed in different cities, you will find some of these procedures are performed three times as often in some cities as they are in other cities, with no dramatic difference in health care outcomes but with dramatic difference in cost. We need to take the results of that analysis and do more of what works and less of what doesn’t. That is as true here in India as it is in the United States.

I can tell you based on my experience in government that this is much easier said than done. Because often a smart government official will have some new policy that she is excited about and that policy is put into place. But then someone comes along with the bright idea that you should do a careful evaluation to see if the policy is actually working. There are two possibilities: one is the evaluation shows that the policy was a good idea, in which case everybody will discount the evaluation because it came from the people who wanted to institute the policy in the first place. The other possibility is that the analysis shows the policy was a bad idea, in which case the person who was the proponent of the policy looks like a failure.

Governments don’t tend to over-emphasize evaluation for that very reason. And yet, if we are going to make progress, we must do on a global scale what businesses do all time – and that is to learn from success, but also to recognize failure and change strategies when what we are doing isn’t working.

And while this simple idea about the importance of analysis and evaluation can be difficult to put into practice, it is profoundly and urgently important that we do so in global public health policy. The sheer scale of human activity we are talking about – there are more than 50 million nurses and 30 million doctors and over 9 percent of global GDP is spent on health care – strongly suggests that we should be devoting at least a 10th of a percent of that expenditure and that time to evaluating whether we are getting value for our money and how to deploy scarce resources most efficiently.

The Power of Education

This brings me to my final point, which is the critical role of education and of the importance of institutions such as the All India Institute and Harvard University in developing that new knowledge and passing it along to their students, the rest of the world, and future generations.

Albert Einstein reportedly once said that the most powerful force in the universe is compound interest. In many ways, research and education is a form of compound interest – as knowledge is discovered and transmitted it builds upon itself. Knowledge is viral.

Twenty-five years ago, the present dean of the Harvard School of Public Health, Barry Bloom, was sent by the World Health Organization to this institution to teach the very first course in immunology ever offered in India. The class had 28 students. By the time he returned in 1996 to receive an award at the first international congress in immunology ever held in India, there were more than 3,000 registered Indian immunologists. That is the compounding power of education.

That is why the creation of new institutions such as The Public Health Foundation of India – a unique public-private partnership with a mandate to create schools of public health and to address the crying health needs of the people of India and the developing world – are so vital to India’s future. The Institute has the support of the Indian government, the Gates Foundation and was developed with the involvement of the Harvard School of Public Health. Harvard University through the School of Public Health stands ready to continue to assist in this important endeavor. I look forward to a mutually valuable partnership with a substantial two-way flow of students, faculty, and ideas. The Harvard School of Public Health cannot have the leverage it wishes without strengthening its Indian ties. And I am hopeful that the Indian institutions will gain from the world-class resources at our public health school and those of other leading American universities.

I want to make a related point about the power of education. The point is that there is probably no more important social and economic commitment a nation can make than the commitment to improving the educational opportunities of young girls.

This point grows out of research that I also had a chance to lead when I was at the World Bank. We looked at government spending on measures to support the education of girls – particularly in primary and secondary schools – throughout the developing world. We tried to determine through careful analysis all of the benefits girls received from that education.

We looked at how much healthier the children of more educated mothers were. And we thought about how much it would cost to achieve those same outcomes through pure investments in health care. Then we looked at the impact on maternal mortality and to the impact additional spending on education had in supporting family planning policies and smaller families and asked how much would it cost to achieve these impacts through direct spending programs.

When we added it all together we concluded that of all the investments that could be made in the developing world, it was quite likely that spending more money on educating girls would have as high or higher a return than any other type of investments that could be made in health care, in family planning, or in any other kind of direct subsidy that the government could engage in.

According to the United Nations, only 2 out of every 5 Indian women can read or write and up to 40 percent of girls under the age of 14 do not go to school. All of us can agree that this is a situation that needs to be remedied. But in addition to the moral imperative of providing equal opportunity for young girls, the returns in terms of economic development, in terms of social development, will be significantly in excess of the direct costs of providing that opportunity.

Conclusion

I want to conclude by sharing a personal story. Some 20 years ago I spent no small amount of time in one of Harvard’s great teaching hospitals, being treated with the ultimate outcome in some doubt for a time. My treatment worked out very well. And when that course of treatment ended, I asked a question.

I asked: At what point in the development of science had the discoveries been made that had made possible my treatment? The answer was about 10 or 15 years before I was treated. And I thought to myself, wasn’t I fortunate that that research program had been pursued as aggressively and as quickly as it had? And weren’t the countless others who were reaping the benefits of modern medical science fortunate that places like Harvard and the All India Institute existed and were as committed to the development of knowledge as they are?

There is no other area of human endeavor in which the application of thought and resources can make so profound a difference in as many peoples’ lives as in the world of public health and biomedical research. I commend you and your great institution for what you have accomplished in the past half century. If history is any guide, the next half-century will be truly remarkable – for this Institute, but also for the nation and people of India.

Thank you.

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And so what I thought I might do this morning is to share some of what I’ve learned and some of what I think after the last couple of years about the profoundly important subject that you are going to be talking about.

Let me make several observations if I could. First, the inclusion of women in leadership positions in every walk of our national life is of profound importance. Why do I say that? I think there are three separate reasons why this is something that is critical and that is critical for every organization. First, it is a matter of simple fairness and what is right that everyone who works in a business should have a chance to be a CEO. Everyone who comes to a university to teach should have a chance to be a tenured professor. Everyone who enters a law firm should have a chance to be a partner. Everyone who goes into political life should have a chance to be a congressperson or a governor or a senator or yes, a president. And it is a matter of basic fairness that those opportunities not just be open but be seen to be open for everyone. If one asks what is different and what is better about Harvard today than a century ago, well we have a long way to go. Probably there has been no single improvement clearly more important than the fact that a century ago we were a place where New England gentlemen taught other New England self-regarding gentlemen. And today we are a place that’s open to people from every part of the country, of every ethnic background, of every gender and increasingly of every part of the world. So simple fairness is one part of why this is important.

A second reason why this is important that carries great force, even if one was unconcerned with fairness, is that the logic of excellence requires openness. You know it’s a basic axiom of common sense that if you want to catch the biggest possible fish, you’d best go out fishing in the largest possible lake. And it stands to reason that if we wish for positions that are crucial to our organizations or to any other organizations to get the most impressive and extraordinary people that we can, that we need to search as openly and as widely as we possibly can. Those who deny themselves access to a portion of the pool of talent are not just discriminating and being unfair, they are sacrificing their opportunity to be excellent. A society that does not establish pathways to leadership for all of its citizens is a society that is denying itself a possibility of excellence that it could have had in leadership. And in this sense there is no conflict between the objective of promoting openness and inclusion and the values of meritocracy and excellence. They are reinforcing. They are not opposing.

A third reason that would make these deliberations crucial even if somehow the first two considerations did not have force is the importance of diverse perspective. You know it’s an interesting observation on academic life that no one has provided a completely satisfactory explanation for that if you look at the patterns of authorship in published research papers, a much higher fraction of them are co-authored today than used to be the case. Part of that is because there is more interdisciplinary work and political scientists like Joe work with economists like me. And things cut across boundaries. But that’s not all of it. If you look within economics, if you take my discipline, the fraction of the papers that are co-authored has substantially increased over the last 25 or 30 years. And I’m told that something very similar is true in other disciplines. I’m told by those who know much more about it than I that the number of physicians with different backgrounds who think about what’s wrong with you and what should be done if you are lying in a hospital room at the Brigham is substantially greater than it was 25 years ago. You approach a major American law firm today, your matter is much more likely to be handled by a team of lawyers rather than an individual lawyer than was the case a generation ago. And I could proliferate these kinds of examples throughout other organizations. And so we are increasingly relying on teams to do things rather than on individuals. And increasingly the question of how teams best function is being studied.

And I see from your program that there will be people who actually have deep knowledge of that subject who will be talking later, so I will only offer what seems to me to be a broad gloss on that literature. And that broad gloss is that the teams function better if the people come with more variety of perspective, that indeed when you get a team of people all of whom have the same perspective there’s actually a very substantial danger that it can so mutually reinforce itself that the team gets to a view more extreme than any individual member of the team had at the beginning. And there are those who look at certain aspects of American foreign policy in the last years and see a process of that kind at work. Well what I would suggest to you is that if teams are going to be more important, and we know that diversity of perspective is increasingly important within teams, it only magnifies the importance of having leadership positions be held by people with a diverse array of perspectives. This is a crucial issue for reasons of fairness, for reasons of excellence, for reasons of diverse perspective.

A second observation, a word about where we are succeeding and where there is much to worry about. Start with an observation that would have seemed almost inconceivable in the 1950s. There are today 130 women graduating from college in the United States for every 100 men. From looks at the nation’s leading law schools, the nation’s leading public policy schools, the nation’s leading medical schools, they are very close to 50/50 in the representation of men and women. If one looks at the leading business schools, the situation is not quite there. The fraction of women is much closer to a third, but it is way up from where it has been. And so with respect to what is happening to young girls as they go out to college, as they then go and pursue careers in graduate school, we are in a very different place as a country than we were at the time that I was born, and that’s something from which we can take great satisfaction. What I think many of us would have expected at the time when these trends began to be strongly marked in the mid-1970s, late 1970s, early 1980s is that we would have seen somewhat more change than has taken place in the composition of those who are in leadership positions. Yes, 50 percent of those going to leading law schools are women but only about 16 percent of partners in major law firms are women. Yes, a third of those going to business schools are women, but less than 2 percent of Fortune 500 CEOs are women, and even if one goes down to a broader and more expansive corporate offices category, it’s hard to get that figure up above 15 percent. Yes, in many fields the fraction of women who are going for PhDs is substantially enhanced, but ºÚÁÏרÇø, which is just about at the national average for leading universities, 29 percent of our tenured faculty in the humanities and social sciences are women and only 8 percent of our tenured faculty in the natural sciences are women. And if one looks across the professional schools, whether it is law, whether it is the Kennedy School, whether it is the Business School, the figures are certainly not substantially more encouraging. Nor because if we benchmark ourselves against our competitors is the situation qualitatively different elsewhere.

So the phenomenon I would suggest to you that needs overall to be understood and addressed without minimizing the huge issues that exist at early stages of the educational system is what is it that is taking us from a substantial majority of the college graduates being women, half of the leaders in professional schools being women, to an outcome that doesn’t fully seem to represent the potential contribution to excellence in our society. There are many, many answers to these questions and I don’t presume to speak to them and I trust that more will come from the discussions at this conference. But I do want to say a little bit about what we’ve been doing ºÚÁÏרÇø lately and then make a final observation on this broad question. In the wake of everything that happened last year we established two task forces that worked very hard to look at these issues, particularly with respect to women in science but more broadly with respect to women in academic careers ºÚÁÏרÇø, and to think about what it was that we could do. Frankly the easy part is putting resources behind the efforts for a wealthy institution like Harvard. The hard part is addressing some of the many kinds of challenges that arise. And I’ll tell you what surprised me most about the reports that came back from those task forces that Evelynn Hammonds, new senior vice provost with responsibility in this area, is doing such a great job of implementing. What surprised me most was that almost all the ideas that came were good ideas even if you weren’t concerned about diversity. They found that we were losing women to careers in science because they didn’t have opportunities of the kind that students at small liberal arts colleges like Swarthmore or Amherst have to work closely with professors who could emerge as role models and draw them into a career in science. And so we’ve established a substantially expanded undergraduate mentorship program. That’s good for diversity. That’s good for drawing scientists into academic life more generally. They said, and they were right, that when we search for assistant professors, too often we search for assistant professors in the way that poorly managed football teams do their draft. The guy who was playing right guard last year graduated or got injured and so we’re drafting for a person who can play right guard. That’s what football teams that stay mediocre do. What football teams that do much better do is they look for the best players and they search very widely and if they find someone who is terrific, they recruit that person and they assume that things will work themselves out and that they’ll allocate people to positions in an appropriate way. And we were missing huge numbers of extraordinarily talented people who could contribute to our diversity certainly because we didn’t do any search for which they qualified. We concluded that we needed to substantially broaden our searches. Well, that’s the right thing to do for diversity. It’s also the right thing to do quite apart from diversity to build a much stronger Harvard faculty.

I can go on with more examples but perhaps the anomaly that I am most struck by, and it is something I remarked on, though not the heart of my NBER speech that received the most attention, is this. If you look at any major American university today, if you are a member of the faculty and you have a child who is between the ages of 18 and 22 and going to college, it is happy times for you in the point of view of the university. The university pays your whole tuition if you go to that school. The university pays $20,000 a year as a tuition grant to you for those years. Or the university makes you an interest-free loan. Just what’s done varies university to university, but if you have children over age 18, you are getting huge help in what is meeting your personal problem of the moment. Well, I say to you, what about all of those with children who aren’t over 18 but children who are much younger? A group that is probably still waiting to see whether they are going to establish their career successfully, a group that is facing a much more profound time crunch in their lives, a group that represents, given the way American families don’t need to be but the way they are today, a set of burdens that fall disproportionately on them. What do we do for those with family responsibilities to young families? The traditional answer across academic life is precious little. And that’s why a significant part of whºÚÁÏרÇø’s $50 million commitment is going to do is towards improving the quality of the support we give for childcare, improving what we do to provide research leads for those with family responsibilities, providing for systems of evaluation for tenure, our version of partnership, that recognize that there is no standard career path for which eight years up or out makes precise sense. And you know what, this is going to be good for mothers. And what we’re increasingly finding is that this is good for fathers as well. And as more and more fathers are taking advantage of these programs, something very important is starting to happen. It’s starting to be much more comfortable for mothers to take advantage of as well because they’re increasingly recognizing that it’s showing that they are living the kind of balanced life that we want people to live as they provide role models to our students. And we’ve got a long way to go. But a culture where taking advantage of such benefits too often is taken as some sign of lack of seriousness about your career is beginning to give way.

If we’re serious about being fair, if we’re serious about being excellent, if we’re serious about having the diverse pool of people, these are the kinds of things that we need to do. There is much else that we need to do. But I believe that above all if we are able to open ourselves up, remove the blinders from our eyes, cause everyone who is involved in any kind of personnel evaluation everywhere to know about that famous study that you’ve all heard about of what happens when they chose people to play instruments in orchestras when you brought down a screen and so you no longer were looking at the person as they were playing, you were just listening to their music and all of a sudden that seemed to make the men play less well and the women play better. If we get that kind of knowledge out and we support the development of career paths in the kinds of ways that I spoke about, I am confident that we can make progress in addressing issues that are very, very important to the University.

A final thought, and a thought for the conference, and a thought for the University and beyond. I spoke in ways that 14 months ago at the NBER that I obviously would not speak today if I had it to do over again. Reflecting things I didn’t understand, reflecting consequences of the leadership position that I held and the way certain kinds of speculations would be taken. But I hope and I trust that at conferences like this one and in the work of universities like Harvard and other universities that in addition to what we are doing, what law firms are doing, what hospitals are doing, what businesses are doing in working pragmatically to find the most effective and best ways to advance this crucial agenda year by year by year, that we are also thinking in fundamental ways about the sources of this problem, doing research, drawing on all that is known in the social sciences and the sciences, putting forth hypotheses, some of which are attractive, some of which are unattractive, some of which ultimately prove to be right, some of which ultimately prove to be wrong, but opening this subject up to the most vigorous possible debate in every aspect. Because as much as a great university depends on a commitment to the mutually reinforcing goals of diversity and excellence, it also stands for the idea that only through the most vigorous, open, and challenging debate, bringing knowledge from all sources, do we promote the kinds of understanding that ultimately make the greatest contribution. And so I hope that when this conference, this series of conferences continue, and someone comes back and speaks as the president of Harvard 15 years from now, they will see some things that are different. They will see more men in the audience for a conference on this important topic. They will see more people in leadership positions not just in universities but in each of our great areas of society. They will see trends that are clearly pointing upwards, but they will also see that in addition to mutually reinforcing each others’ sense of importance and passion around these issues, that over the next decade some very important new ideas, new ways, new approaches that we don’t think of today have emerged. That some ideas we thought were obvious today turned out to be wrong and that we will make progress in understanding, and that that progress in understanding will have served its truest and deepest purpose by contributing to progress in action.

Thank you very much.

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