Michael Spence: “The Next Convergence” | Talks at Google


>>Michael Spence: I’m gonna try to be brief
’cause I’d love to chat with you about this general subject. I wrote a book called The
Next Convergence. It’s based on the work I’ve been doing for the last seven or eight years.
I can give you the flavor of it; it involves the developing world and the emerging economies. I chaired a commission on growth and development.
Was populated by political and policy leaders, not academics like me, who had fought the
battles and won and lost and been the agents of change and accelerating growth in the developing
world. And I learned a ton from them and have been involved of lots of different countries:
Brazil, China, and India trying to be helpful, trying to bring international experience into
all the complicated policy decisions that they try to make to deal with accelerating
growth and poverty reduction. And so, I thought at some point for a reason
I’ll mention in a minute that it was a good time to write a book about growth in the emerging
markets. And I guess the reason I thought that is that we are at kind of crossroads.
We’re within 10 years of having the so-called emerging economies. Jim O’Neill who invented
the term BRIC’s; he’s at Goldman Sachs has announced we’re not allowed to use the term
emerging anymore because they’ve emerged. And so now we’re fishing around for another
term. So I’ll use emerging for now. They’re gonna be more than half the global economy
and I’ll give you some other data, but this is the point in history in which the emerging
economies are becoming systemically important and that has all kinds of implications. The way I framed the book is I went back with
the help of Angus Maddison who’s the best known economic historian and way, way back
to the year 1,000. And if you do that, what you notice is that for about eight centuries
there was almost no growth in the world. Countries were rather similar; most of the people were
poor and lived in agricultural environments at a subsistence basis. There were a few wealthy
people who also had power and if you compared countries and asked yourself how different
were they the answer was not much. In the Ming Dynasty, China was slightly richer
than Europe and then that all changed with the British Industrial Revolution and at that
point income started to rise, you had real growth. It wasn’t breathtaking by our standards,
welcome, was like 1½% a year in real terms. And the British Industrial Revolution spilled
over into continental Europe and into what Angus Maddison calls the European offshoots
that would be us and Canada and Australia and New Zealand. And we grew at a breathtaking
pace of 2½% and this went on for 200 years. And at the end of that 200 years the 15% of
the world’s population that lives in what we now call advanced countries had incomes
and wealth that were on the order of 40 to 50 times what everybody else had, the other
85%, because for lots of reasons they didn’t participate in this. And then after World War II a bunch of very
wise people with the United States, the dominant sort of survivor of that event, decided that
they would not reproduce the sort of disastrous policies that followed World War I where the
vanquished were supposed to be crushed and that lead essentially to a depression and
World War II, they did something different. They decided they would rebuild the vanquished
economies in Europe and Japan, open the global economy, and then with a huge tailwind from
technology, what amounts to what you do, this global economy turned into an opportunity. And so what the book is about is, this century
that we began after World War II, in which I believe what we’re in process of seeing
is: the expansion of the people who live in high income countries with the kinds of opportunities
and so on, that we have expanding from 15% of the world’s population to something like
80% and maybe more if things go well in certain parts of the developing world. And so the book I’ve written is an attempt
in the first part to explain that evolution doesn’t happen very often in the history of
the world, I thought it might be kind of interesting. And then I focus on how this high speed growth
that we’ve seen actually occurs. So, if you look at the developing world in the period
since World War II you discover there’s 13 economies that have managed to sustain growth
rates of 7% or more for 25 years or more. Now that’s the kind of thing if it’s sustained
that changes economies and people’s lives because if you’re growing at 10%, which is
roughly where China’s been recently, you’re doubling every 7 years. It means in a 30 year
period you’re 16 times as well off as you were before unless you have an awful lot of
population growth. I won’t spend a lot of time this morning but
I get asked by investors and other people a lot who are interested in, “Well, they’re
growing fast can they keep this up? Are they driving toward a brick wall,” and so on. And
the only way to answer that is to try to understand both the policies and the economic dynamics
that work. The economic dynamics are not mysterious;
they’re sort of a version of what Hal described a minute ago, Schumpeter’s Creative Destruction.
But the key element in the global economy that’s enabled this growth is its openness
and that causes, if you think of this 200 years of divergence followed by this converging
pattern for a century, the gap in terms of the knowledge and technology base of these
economies was enormous, the advanced versus developing. And what’s happening is that the
technology that’s been developed over these 200 years and continues to be developed is
rapidly imported essentially through multiple channels into emerging economies. And so the
potential of the economy to produce output of a variety of kinds grows enormously. So
that, growth is really about knowledge and knowledge transfer is what it comes down to.
And you all and others have made this easier. The second critical component that goes with
this kind of high speed growth is the global economy size and demand. I think the easiest
way to see it is in a poor country no matter how many people there are if the per capita
income is $500 the economy’s small. And if you look at the demand side of the economy
it’s not just small but its composition is uninteresting from the point of view of specialization
and exporting things. In a very poor country the lion’s share of income and output is devoted
to food, shelter, energy. Once you’ve added up those two things there’s not a whole lot
left. So you can’t grow an economy by trying to produce for that economy alone. Then you switch over to the global economy
and if you’re a small country and you’ve found something where you can compete, what economists
call comparative advantage, and you have a sort of 2% market share and you miraculously
grow by 50%, then you have a 3% market share in the global economy so you can’t impact
the global economy. The way that impact would show up in an economic model is you would
start to affect the prices and you would turn the terms of trade against yourself. That basically doesn’t happen and so the third
component since you have this almost unlimited, think of it as infinite market to sell into,
then basically you can grow as fast you can invest. And high speed growth of this type
requires investment rates as a fraction of GDP of about 25 to 30%. So if an economy falls
short of that then they will slow down. You just can’t, the capital output ratios in economies
are two and a half to three, you’ve gotta get the investment rate up or you can’t keep
the growth. When you’re poor that’s very hard. Part of that probably 5 to 7% is public sector
investment in education and infrastructure and most economies find it difficult to do
that for the understandable reason that if somebody comes along and says, “I’ve got a
great deal for you. You’re household income is $500 a year. You’re not gonna spend a third
of it, we’re gonna invest it so that your children and grandchildren are better off.”
It’s an amazing inner temporal choice that gets made and in some countries they manage
to make it. The other thing I guess I wanted to report
to you on this front is that when I started this I thought this was mostly about sort
of fairly complicated high speed dynamics, economic dynamics. Now I think it’s a lot
about leadership and politics and so on. So if you look at the cases where economies grow
and succeed, you can usually find leadership in the form of bringing people together, leadership
in the form of picking the right model. The institutions aren’t there to kind of help
do this in the early stages of growth. We looked at the 13 high growth economies
and said, “What do they have in common?” They have certain economic ingredients in common.
What they don’t have in common is governance, in the form of governance. So you have India
which is about to join the group, China, a very different system, Botswana, a tiny little
democracy that’s succeeding landlocked somewhere in Southern Africa. And if you look at the
countries that are struggling, you can find failing democracies with pathologies like
vote buying and chasing after natural resources, the kind of things that Paul Collier describes
so well. And then you can find autocratic systems that fail so you’re all quantitatively
oriented. If you have a two by two box with high and low economic performance and somewhere
between democratic and autocratic on the other dimension, you can fill in all the boxes.
And so I think the correct conclusion is not the form of governance that matters. And it
turns out what it does matter is making correct choices but more importantly intend and long-time
horizons but intending to benefit all the people in the economy. [pause] I will now undercut myself, economists are
lousy forecasters. [laughs] [laughter] And so you shouldn’t believe anything I say
about — [laughter] the future. In the 1950’s and 60’s development economists,
the leading people in the field, were asked, “How is the developing world gonna go?” And
for the most part they said that Africa would be the star performer and Asia would be the
basket case. Now that’s about as close to dead wrong as you can get I think. And the reason, but the more interesting things
is the reason they said that. They said it because we believed incorrectly that enduring
wealth and value creation depended on natural resources in the developing world and not
on people. Africa is way more wealthy in terms of natural resources than any other part of
the world, and Asia isn’t. So in Asia, people and Asia was the poorest part of the world
in 1950, by some fairly large amount. And basically people looked around and said, “Well,
what have we got here?” And the answer was, “We’ve got people, they can be educated, and
we can turn loose this thing.” And now we have completely different conception of what
sustained growth and sort of well-being is based on. Last part of the book I sort of turn my attention
to the future because as I said minute ago, this is sort of a crossroads and you have
the developing economies becoming large and having systemic impacts and there’s all kinds
of dimensions of this, there’s natural resources in the environment and sustainability. We
talk a lot about that but this is serious. I mean a reasonably conservative estimate
is the global economy measured in terms of GDP, which is somewhere between $55 and $60
trillion and big enough to cause worries about whether the planet we live on will sustain
this, is set to at least triple in the next 20 years. To something on the order of 160
or sort of and that’s not the end of the growth. So there are real questions about this and
I’ll say a word about the Asian view of this in a minute. There’s questions of stability in governance.
So for most of the period that we’ve been involved in up ’till now developing economies
could focus more or less intensively on the complicated domestic job of growth and development
and they had external effects. The policies that were adopted had external effects but
they weren’t big enough to cause a major problem in the global economy but at a certain scale
this is no longer true. One of the things I had to do is teach myself
to think about size as distinct from growth. So 20 years ago China started growing in 1978
when Deng Xiaoping decided with his colleagues that they were gonna do somethin’ different
and they set off on a pretty intelligent market-oriented growth path, freed up agriculture to sell
at market prices and so on. And after 10 years the economy was growing at a nice pace, 9
or 10%. But if you asked, “What was the increment to the global economy?” At that point the
answer was relatively very small in fact, notwithstanding the numbers of people, 1.3
billion. Fast forward another 21 years and they’ve
been at this 31 years and they have the second largest economy in the world. And when China
grows at 10% it is a major event in the global economy. I mean that’s just an illustration
of this point that China is now in a very, very complex set of transitions that are important
to everybody. It is the engine of growth not just for itself and a good chunk of the global
economy but virtually all of the emerging economies. The major export destination for Brazil, India,
Korea, and a long list of countries is China. So if we were 10 years ago and investor’s
thinking about what is the developing world depend on? It would be our growth, America
and Europe, now the answer is they’re kind of a little bit independent of us, not completely.
If we take a nose dive that will hurt them, but they’re really dependent on the Chinese
growth, so a lot is riding on what’s going on in China. China’s in the middle income, what’s called
the middle income transition. This is a term you may not have heard. It’s the phase of
growth that comes at about $4 or $5 thousand to $10 thousand of per capita income. And
the reason it’s so interesting and treacherous is that the engines of growth that have been
running in the export sector: labor intensive, process-oriented manufacturing and some services
aren’t competitive anymore. And so Schumpeter’s Creative Destruction which is mostly creation
and diversification of the economy, which it occurs for the first 20 years or so, sort
gets added to by having the destruction come into the model as well. And there’s a very,
very strong tendency to resist that change. I remember being in Korea in the 1980’s; Korea
was one of the more effective high speed transitions through the middle income, and the journalists
came rushing up and said, “The wages are going up.” And I said, “Yep, that’s good.” And they
said, “And we’re becoming uncompetitive in this high quality, low cost manufacturing.”
And I said, “Yep.” And they said, “Well then we have to hold the wages down.” I said, “Wait
a minute. I thought the whole purpose of this exercise was to have incomes and so on go
up.” And they said, “Well that’s true.” And what people find very difficult to understand
is that growth in this sense and structural change are basically the same thing and you
can’t halt the structural change without halting the growth process. And so you have to, and
in the middle income transition, domestic demand becomes more important, the market
decides more and the government decides less, it’s more hands off, it’s more like an advanced
economy. Innovation becomes more important than it is in the early stages where you’re
mostly importing technology. Unless this sounds sort of theoretical, if
you take those 13 economies you’ll find ’em in the book and in the Growth Commission Report
only five managed to sustain high growth through the middle income transition and everybody
else stalled out or slowed down dramatically or even worse. In the case of Brazil which
was an early high growth country in the mid-70’s it literally stopped, became a dictatorship,
had several rounds of hyperinflation, turned inward, all kinds of things went wrong. Those
five countries are Japan, Korea, Taiwan, I guess you’d think of Taiwan as an economy
now not a country, Hong Kong, also part of China now, and Singapore. So that’s the, it’s
treacherous and it’s not a done deal. I have found it interesting and I tried to
share some of it in the book, try to help the Chinese government think through the policies
that are associated with this transition and they’re pretty well embedded in what was just
passed. It’s called The Twelfth Five-Year Plan in China. So let me close on the sort of environmental
and natural resources front with something I learned since I wrote the book. If you look
at Asia, its 3.8 billion people east and south and about 60%of the world’s population, slightly
less. In absolute terms, most of the growth in the global economy I adverted to a minute
ago is gonna occur in Asia because it’s high growth. It contains the two future economic
giants China and India assuming nothing goes wrong with the growth process. We’re talking
decades’ long processes but they’re well on the way. And so when they confront the question of
whether or not the growth model that we used to achieve our current status and that all
their predecessors used in getting to be where Korea is or Taiwan is and so on and ask themselves
the question, “Can we just use that growth model to complete the journey in the rest
of this century so that we’re in this category living the way we do?” The answer they come
up with is probably not. That it just doesn’t scale. That you cannot run economies with
85%of the world’s population living the way we do at energy, intensities and so on. And so they are going to set off on a course
to try to reinvent, at least at the margin the growth model, so it is sustainable in
this dimension. And this is new. I mean this is I think we haven’t confronted this question
before, but what’s interesting about it is this isn’t a global issue for them. This is
a long term growth strategy issue, that it’s a question of their own success with China
in the lead. But if China and India at their scale, 40% of the world’s population in two
countries, internalize this the rest of Asia will and it’ll completely change the dynamics
of the global economy in the next 30, 40 years. And I expect Asia actually to be increasingly,
because of the incentives, to be in a leadership role in driving toward less impactful growth
paths than we’ve had before. In Asia, for those of you who know it well,
you’ll recognize that when start talking about, this they start talking about lifestyles.
For a Westerner when you hear the term lifestyle you think, “What are you talking about?” Lifestyles
for us are the choices you make: a Google T-shirt, sandals, Spence in a suit in this
huge territory that we have allocated to individual choice and freedom. And then there’s another
subset of stuff we acknowledge where our choices are constrained, but by and large we think
that second class should be as small as possible and this should be huge. [pause] What they mean by lifestyles is not what we
mean. It’s not this sort of funny little stuff in big territory. It means how we go forward,
it means how cities are built, and whether you can drive a car, it even means how many
kids you can have ’cause these all have very large external affects if people are just
making their own choices. And because there’s so many people involved and lying behind it
the sustainable question, the Asian countries do and will continue to just draw and redraw
that line in different places. And this causes tremendous communication problems because
this idea that this belongs sort of constitutionally in the area of sort of free choice is an idea
that’s deeply imbedded here, and not the same concept as there. So when you hear talk about
lifestyles you’re really hearing talk about sustainability, something that actually works
when you scale it up. I’ll conclude by saying I find China fascinating,
its per capita income is $4,000; it’s very pragmatic. The highest speed learning environment
I’ve ever been in in terms of picking stuff up is quite amazing to watch. But China is the only country ever at $4,000
a per capita income, which less than tenth of ours, to have systemically important effects
on the rest of the global economy. It’s just never happened before. Most countries that
become, like Japan, that become systemically important get there at something like four
or five times that level of per capita income, so there’s a very big challenge in China,
it’s sort of a tension. There’s a subset of people who say, “Look,
we haven’t really completed this journey yet and we’re gonna focus on our domestic growth
and development agenda.” And there’s another set of people both internally and externally,
and this second set is right, who are saying, “No, you can’t do that. It’s sort of too bad
that you’ve reached this point where you have to balance global stability and other issues
in the policies you adopt with the domestic growth and development agenda, but it’s not
in your interest to ignore these set of external effects.” And so we’re entering a world in which the
emerging economies are gonna be part of the governance of the global economy in the context
of the G-20. The G-20 is gonna have to learn how to be effective or we’re gonna have a
long period of unmanaged and unregulated growth and interaction in the global economy. And
I think actually that’s inevitable. The kinds of shocks and things that we’re
starting to experience now I think are gonna be a regular feature of the global economy
for some time. Because the sort of governing it with the starting point being national
identities and national decision making units is just not gonna happen overnight. In fact
I think it’s probably the work of a generation. The only thing I regret is that I probably
will not see the end of the century I’ve just written about. Maybe if I get lucky, I’ll
see most of it. But if you stand back from it’s pretty extraordinary phenomenon and where
so many peoples’ opportunities to be productive and creative are expanding so fast that it’s
pretty exciting just to see part of it. Well, let me stop there and turn it over to
you. [applause] I’ve decided the dog can ask the first question. [laughter] [people talking in background] That’s right, food. [laughs] This is great.>>male #1: So let me, let me ask an economic
history question.>>Michael Spence: Sure.>>male #1: You jumped over that pretty quickly.>>Michael Spence: I did.>>male #1: So everybody agrees [bad audio,
lots of talking in background]>>Michael Spence: Um-hum.>>male #1: [bad audio, people talking in background]
permeated in England and Europe. But what do you think the reasons are that it didn’t
impact [bad audio] or that the rest of the world [bad audio]>>Michael Spense: This won’t be a complete
answer Hal, but surely there were asymmetries built into the colonial structures that where
it’s reasonable to guess, without being a thoroughly trained economic historian, were
the main reason why developing countries, what we call developing countries, were parts
of large colonial empires and their role was simply to supply natural resources and absorb
a very small amount of sort of output. And that was imposed pretty rigidly and where
it broke, it broke in the American case by having a continent that wasn’t pre-populated
so that, it was but we didn’t treat them very well. And basically it became a European off
shoot as Angus Maddison says and then broke free and then sort of joined the party. But
in most of the world that didn’t happen. So the collapse of the colonial empires after
World War II, of their own weight, was probably the major factor in freeing this thing up
and then you got the opening of the global economy, and that took time. I mean it opened,
it took Barry Bosworth and others who have studied this it’s fun to go back and look
at the gap and the steps in the gap and see what was opened when. But manufacturing wasn’t
the first step and that’s the territory where they found the chance to grow and create a
modern economy. Yep. Yes, sir.>>male #2: If you could just repeat the question.>>Michael Spence: Yeah, no loud as he can.>>male #2: What’s your point of view on particular
stability. We look at [bad audio] China and also Argentina [bad audio] their dictatorship
and [bad audio] governments and then those appears as actual countries that were really,
really [bad audio] well –>>Michael Spence: Yeah.>>male #2: So what’s your take on these [bad
audio]>>Michael Spence: Yeah. Yeah. The question is: you have countries that have
been relatively authoritarian in varying dimensions and growing fast. What’s my take on all of
that? Let me preface this by saying I think there
is a body of work lead by young colleagues of Hal’s and mine in the area of political
economy that’s really terribly important and making progress in understanding the interactions
of sort of economic processes and political and governance processes. And I think it’s
made significant progress and will have at least another 10 years. Having said that let
me do the best I can with it. There are people who believe, I think correctly,
that if you have benign authoritarian enterprise that’s also competent, meaning they know what
they’re doing and their intentions are good, they can move more quickly. And so the fact
that China, once it changed direction, could move very quickly to a set of policies that
supported nine to ten percent growth. Whereas India, probably the world’s most complicated
democracy, is getting there but it’s just harder in that political system to get there.
So you can say that. On the other hand, most people believe, and
I think this is also true, that the cost of democratic processes which is harder to make
changes is also a benefit because if you’re going in the wrong direction there are more
brakes that stop you, it’s safer. Now Marcus [inaudible] says you don’t have many famines,
I think he says any in a democratic environment and so if you have a non-benign inclination
in the part of people who are currently in power democracy has a better chance of getting
them out, if it’s working. Then you go around and look and discover that there are democracies
that aren’t working. A number of the Asian countries that are now
in the advanced income category including Japan, Korea, and Taiwan were relatively autocratic
in the sense that they had dominant single parties and the structure was put together
to keep them that way, and they’ve all evolved somewhere between middle and high income into
full multi-party democracies. I was in Singapore two weeks ago, they had
their first [laughs] it was hilarious. I called it political campaigning kindergarten [laughs]
but they had their first real campaign. And the people, friends of mine in the dominant
party, were kinda nervous and a little bit upset that somebody would actually stand up
and criticize them. So they may be in this transition as well, I mean it’s too soon to
tell. But I think that’s kind of where we are. The way I said it when I was talking is that
I think the thing that you can be sure of is that the form is not the decisive factor.
And then you can get on to thinking about benefits and costs. It’s surely true that
China is pragmatic and moves with incredible speed, and you have to. At 10% growth, you
wake up in the morning and discover that there isn’t enough electric power and there’s 120
ships outside the port in Shanghai where you don’t have any way to process them. And you
can’t avoid that, there are just bottlenecks all the time so you have to just move fast
and deal with it. The other thing that China’s done, I think
you all probably know the investment rate in China when it started growing fast jumped
to 35%, so that was the upper end of the known range and it’s now at 45% and the savings
rate over half of the GDP. These are completely on the right tale of the distribution; not
always a good thing. But China uniquely has been able to build
infrastructure to support the growth even at advance of the need, like the high speed
trains, with a kind of a public sector balance sheet that’s big enough to do it whereas most
countries struggle to get the investment levels up. So China’s unique in that respect. Yeah.>>male #3: You mentioned Korea’s [bad audio]
Do you see, I mean just with the sheer size and population do you see them having the
same problems [bad audio]>>Michael Spence: Yeah I do. So this is actually
a very important question that scares the Chinese as well as puzzles outsiders. We got in the habit in small economies of
thinking that the export sector drove growth and the labor intensive part was where you
had a comparative advantage and that’s how you got all those people in the agricultural
sector into cities in the modern economy. I didn’t say it, but urbanization occurs at
a tremendous pace in the course of this. In China and India, as long as the growth stays
up and there’s still, in the case of China, 50 plus percent in the agricultural sector,
in the case of India it’s closer to 70%, they’ll basically have to build Los Angeles every
year for the next 30 or 40 years; each of them, not together. Sort of 13 to 15 million
people flowing in, not a big fraction of the population. And so that whole process goes
on. Now China, so what worries people in China
is the coastal wages started to rise very rapidly last summer after the Foxconn suicides
and the strikes in the Honda plants and so on. And of course they were waiting for this
they want the household income to rise, so this is a big tailwind in speeding up the
creation of the middle class. But then somebody sticks up their hand and says, “Well what
about the people who are still on the lower end of the skill and education spectrum in
the rural areas? If they can’t get into the labor intensive export sector ’cause it’s
moved on up the value added chain, where are they gonna go?” And you have to have an answer
to that. You need an employment engine running and the answer probably is the urbanization
process will create gigantic urban service sectors. And so the urban service sectors
will be the avenue into the modern economy that formerly was provided almost entirely
by the export sector. And if that engine fails then this whole process will stall and it
will create a kind of dual economy structure of the type that you see in parts of Latin
America. And Brazil is doing very well now but what
happened in Brazil is that first of all, unlike China and much of the rest of the developing
world, in Latin America and parts of Africa there was never any reform in the ownership
of assets, particularly land. So there’s very, very concentrated ownership of assets which
allows you in the agricultural sector, you don’t have to do land consolidation you can
mechanize it. So in Brazil agriculture became modern and
capital intensive and the people weren’t needed so they went to the cities not for opportunity
but for lack of opportunity where they were. And in Brazil they ended up living in little
tin cans up on the sides of hills called favelas. That’s the wrong kind of urbanization. That’s
the kind of urbanization that scares the wits out of the Chinese ’cause of the numbers of
people involved. And so the only way to make a process that’s
always somewhat chaotic a little healthier is they have it driven by the pull of employment
opportunity rather than the push of the absence of opportunity. And so this service sector
is gonna be the employment destination for the remainder of the people. The other thing that will happen is they will
keep the labor intensive parts of the export sector alive a little longer by building enough
infrastructure that it can move inland where the country is not as rich as it is on the
coast. So basically what you’re gonna see, simultaneously in the next 10 years, is the
labor intensive activities are gonna move to other countries, probably Viet Nam, India,
Bangladesh, and so on. They’ll move inland and they’ll move up and down the coast a little
bit. The companies will, a lot of them will move with them. We saw that in the case of
Korea. I tracked the Nike supply chain over a lot
of years ’cause I used to be on the board. It started in Japan, almost unimaginable now.
Japan moved on and it moved to Korea and Taiwan, almost unimaginable now. And then it moved
to China and then Viet Nam and Indonesia which had a bad patch in the ’97, ’98 crisis. I say this because when you watch the global
economy it’s just constantly in motion. And the architects of these global supply chains
are multi-national companies like this one. This is who decides where the opportunities
lie in terms of the supply chain and the matched markets. But I think that’s the answer. Yep. Yes sir.>>male #4: So I would like to have your take
on the growth in Western Asia and North Central Asia especially like Middle East and resource
rich economies and your comments on what some people call the curse of natural resources
which is gonna generate growth but in a competitive fashion and not benefitting the entire society.
Where do you think that part of the world’s gonna be?>>Michael Spence: Well, first of all there’s
a high correlation between natural resource wealth and failures of governments. It’s well
documented by lots of people including Paul Collier in Africa which is his focus. So it’s,
while I think that economic sort of theory and analysis will catch up with this I mean
natural resource wealth tends to distort political incentives to the zero sum game version where
you get your hands on the wealth and that’s good enough as opposed to there’s not much
here we better make it bigger, which is where the growth orientation comes from. There’s a fairly significant set of initiatives
under way to help countries manage natural resource wealth even if they get by the sort
of we’re gonna fight over it kind of version of it, one of which is led by Paul and a number
of other people and I’m involved in called The Natural Resource Charter. So even if your intentions are good it’s pretty
hard to get this done and you have to sort of take the natural resource wealth, invest
a chunk of it outside so you don’t so your exchange rate doesn’t put you out of the market,
the so-called Dutch Disease Effect. Then you have to take the remainder and build enough
infrastructure and spend it on the public sector investment portfolio that drives growth,
sorry, doesn’t drive growth, it enables the private sector engine to start running. And lots of countries just don’t know how
to do that. They don’t have the human resources to do that and so you go look at what happens
and the procurement fails and the infrastructure construction is bad. One of the reasons the
Chinese are now the largest investor in Africa is they’re making deals with African countries
in which they basically have access to the natural resources which they and others need
and in return they’ll apply the expertise they’ve acquired to sort of building infrastructure. So this is, I talk about it in the book. On
the scale of things this is a reasonably important set of problems especially for the subset
of countries. Now in the Middle East, the management has
gotten better over time but the problem I think in the Middle East, well this is sort
of too simple. We could spend the afternoon on the Middle East. I believe a very important
reason for the recent sort of revolts is that these economies were proceeding in which young
people had very little future and they finally said enough. The youth unemployment problem
is fairly large in certain parts of the world but it’s gigantic through most of the Middle
East. How this is gonna come out I think is honesty compels one to say we don’t know.
It could come out very well with different governance structures and agendas. I spent quite a lot of time in Egypt. Egypt
has been moving in the right direction but too slowly. It was an economy dominated by
the government where young people went to university and if you ask, “What are you studying?”
They said, “Anything that’ll get me a government job eventually.” You don’t run a high speed
growth economy with people investing in their ability to track down a government job. And
they just weren’t unwinding this fast enough and the dynamism that we talked about a few
moments ago just didn’t start running and eventually the young people sort of said,
“There’s not enough opportunity here,” among the women where there was prominently a huge
non-amount of opportunity. I’m hoping this comes out well, that is that they get back
on track with governance systems that are stable, but you’d have to say that’s not a
done deal yet. Yes sir.>>male #5: What sort of take on growth and
the distribution of the income because different countries clearly have different points of
pay scale –>>Michael Spence: Yeah.>>male #5: and there is an insight on –>>Michael Spence: Yeah, I’ll try to be brief
on that. The Growth Commission said and the members of it believed that paying attention
to what the Indians call inclusive growth, which is equality of opportunity, not blocking
people out, managing the degree of inequality and the outcomes in terms of incomes and access
to resources, and protecting people through the transitions that occur in this kind of
high speed structural change, that that’s an inherent part of a successful growth strategy,
it’s not an add-on. And if you lose control of it or fail to pay attention to it with
a very high probability, you will fail. And I don’t think there are any exceptions to
that. Now having said that if everybody’s poor and
you start growing everybody doesn’t increase at the same time. So measured income inequality
goes up, but if it goes up enough it gets to be a problem. I would say China and the
United States are at the margin with Gini Coefficients of somewhere between.4 and .45,
that’s just the standard measure of income inequality. If it’s one, one person has all
the income [laughs] and if it’s zero we’re all equal. There are a collection of countries that have
higher Gini Coefficients and they’re in Latin America and Africa, for the reasons that we
talked about in relation to land and that causes big problems. You have high Gini Coefficients
like with concentrated income and ownership of assets; they control the political process
for a while and then people get fed up and you get a populace revolt and the pendulum
swings a long way. And then usually economic and other policies are adopted that don’t
work and there’s a kind of crisis of some kind and then there’s a swing back. And this
pendulum swing back from populism to whatever the special interests of the dominant wealth
are doesn’t do anything good for growth. I mean would be I think, on the political economy
side, an important factor in the struggles that have occurred in Latin America to get
things going. The bottom line is you have to pay attention.
Can I do a little advertising? After I wrote the book I started to decide to pay attention
to the distributional effects of globalization in the advanced countries and wrote a paper
with Sandile Hlatshwayo that you can find on the Council and Foreign Relations website
that’s about the structure of the American economy and its evolution. And it’s a little
worrying. I’ll give you one line from it in the hope that it might interest you. I don’t
have time this morning but I think were at this crossroads where these effects are big. So if you look at the American economy in
the 20 years roughly coming into the start of the crisis and ask, “Where did the employment
come from?” The answer is we created 27 million jobs and almost all of those, 98% net, meaning
netting, I mean Google puts people out of business, we have job destruction, job creation
all the time. But so these are net increments by industry sector. If you take the United States economy and
divide it into tradable, goods and services that you can trade internationally where you
all live and non-tradable: government; health care; construction. I mean you guys are making
the tradable sector bigger and that’s nice, but that’s gonna take time. Ninety-eight percent
of the incremental employment in the United States economy was in the non-tradable sector,
the tradable sector didn’t employ any incremental people. It did fine in value added and highly
educated people came in and did very well, and as the global economy gets bigger and
there’s all kinds of growth out there it’s a pretty fun place to play. But that’s not
where the middle class is employed. So within our own country the distributional
effects or the impacts of globalization and technology are very different at different
levels in the income and educational hierarchy. And I think it’s a major problem for us. In
fact it’s a miracle that we didn’t have an employment problem before. If we hadn’t had
excess consumption, huge growth in health care, and substantial growth in government
we probably would have had an employment problem before the crisis. Anyway there’s all kinds
of dimensions to this and I think we should pay attention. My next project is gonna go look at the reforms
Germany undertook in the last 10 years ’cause they’re performing very, very differently
from us right now. And then sort of try to triangulate. I think I’m gonna collaborate
also with the McKinsey Global Institute on sort of trying to figure out for all the major
economies in the world where we are and where we’ve been in terms of their structural evolution.
I think we’re, bottom line is we’re missing a complete picture of the structure of the
global economy and we need to do it dynamically and kind of figure out what’s going on.>>commentator: I think we have time for just
one more question.>>Michael Spence: Okay.>>Male #6: So it’s good to talk about India
and China but I think most of the world is [bad audio] democracy but poor [inaudible]
so would you consider countries like Sri Lanka, Bangladesh for example [bad audio]?>>Michael Spence: You gotta do it case by
case. So, Chile is functioning very well. Its growth is a little bit lower than they’d
ideally like because they periodically run into the natural resource curse with copper
being the driving force, but by and large it’s extremely well managed. It’s democratic
now and it looks like it’s an important case. It’s not as important as Brazil because of
the scale and so on. Sri Lanka, what can I say? Jury’s out I guess. It’s not been particularly
high performer yet but if they have some version of the internal conflict taken care of then
it could easily, and especially the big economies matter because they pull, they expand the
opportunity set for others. So if you get Egypt and North Africa, Brazil in South America,
India in South Asia, and then China in Asia going in the right direction the spillover
effects in other countries will be very large. If you look at the G-20, the G-20 is more
than 85%of the global GDP and it’s 66% of the world’s population. So if you stop paying
attention to the high growth cases and flip it over then you’ve basically got a third
of the world’s population with all of the low growth and thus far non-performing sort
of parts of the world, not all but a fairly large fraction, and probably somewhere around
12% of global GDP. So the question mark at the end of this century
is will that rather substantial number of people and huge number of countries, I mean
there’s probably 180, 190 countries in the world. The G-20 even if you add all the ones
in Europe together ’cause Europe’s in the G-20 as a unit, as well as a few countries.
But I guess the central question that we don’t know the answer to is: are they late starters
but in the process of joining the party or not? And we won’t know the answer to that
for another 10 years. I think the signs are good. I mean I’m an
optimist about Africa. I think the leadership is young, smart, and responsible in the sense
of taking ownership. They stand up and say clearly to their fellow citizens and others,
“This is our thing. We gotta solve this problem but we’re gonna do it.” They’ve built from
very tough starting points a sense of national identify which is just the rock bottom foundation.
They were handed a bunch of countries that made absolutely no sense, that were just boundaries
with several tribes in them and great leadership and other things have allowed them to pull
it together. I mean people like Nirerie and Mandela and others and I think the growth
shows it; it’s accelerated. They’ve even come through the crisis pretty well.>>commentator: Okay. How about a round of
applause for Michael Spence? [applause]>>Michael Spence: Thank you very much. [applause]>>Michael Spence: Fun being with you. [applause]

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