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ABOUT THE LECTURE:Three billion people on earth live on less than two dollars a day. A relative handful of us fare astronomically better. How do economists account for global “haves” and “have-nots”? Roberto Rigobon attributes a vast income inequality across countries to four connecting factors: luck, geography, quality of institutions, and quality of policies. If a country lies close to the 50th parallel, its citizens’ average income is six times greater than that of an equatorial country. Heat takes a toll on nation-building. Take Caribbean and Latin American countries, which experienced a wave of malaria in the 1500’s. Spanish colonists preferred to extract resources and send them home, rather than risk death by staying. Those nations developed impoverished economies and institutions that continue today. Colonists moved to cooler climes settled down, invested in the new world, and created enduring social structures. Rigobon can’t recommend a single, economic, or political doctrine to help a struggling nation achieve prosperity. “The set of rules depends on a country’s culture, history and religion…. In the end the only sustainable regime is democracy, freedom of speech, and the rule of law, but how we get there isn’t irrelevant.” Rigobon encourages developing nations to embrace social and political conflict as “an opportunity to improve.”

Some of Rigobon’s findings: In Chile, when the price of wheat goes up by 10%, the price of bread goes up by 5% 18 months later. In Colombia and Peru, it takes three years for this same percentage increase to occur, with these countries taking longer “to digest the international shock of commodity prices.” Not only do the prices of bread, cookies, meat, chicken, move in lockstep with wheat, but in some cases, so do housing, health and education. But Rigobon found that when the international price of oil increases, there is an immediate impact on all products related to oil. What’s worse, when the price of oil increases, the price of gas at the pump or for a rental car goes up disproportionately.

It’s been true for years, notes Rigobon, that “oil is unconditionally negatively correlated with cereals.” If oil is up, maize, sorghum and wheat prices are down. But this has recently changed, a sign “of the unique times we’re in, the policy challenges we’re facing.” We are simultaneously facing recession (due in large part to the sub-prime mortgage crisis), and inflation, in both food and oil prices. Central banks, he notes with scorn and wonderment, don’t include food and energy in their calculations of “core inflation.” If the job of these banks and government is to take care of their citizens, they must respond to this crisis along the lines of the response to 9/11 or Enron. Rigobon endorses well-communicated, transparent policies, and some tough measures like interest rate increases.