Does market-led development have a future?

very nice to see so many people even as exams lumen which is a testament to the subject and to the reputation of the speakers I'm Robert Wade I'm a professor in the department of international development here at LSE and I'm going to follow the law of introducing speakers which says that the less confident the chair is about the interest in what the speakers are going to say the longer the introduction of the speakers has to be and I can almost stop at that point because everybody two speakers are Dany qua is going to do the first he is professor of economics and now I'm very happy to say also professor of international development in half and half of his time is not going to be in my department and he's going to be speaking somewhat in favor of the question Danny came to LSE in 1991 in fact he came as Mervyn King was exiting LSE to be governor of the Bank of England and Danny came to take over Mervyn King's lectures however in the intervening period from 1991 until today Danny has gone on to many other kinds of subjects including lots and lots work on the economics of globalization hi John Chang is at Cambridge he's been on the faculty of economics since 1990 he is one of the two I think the suspenders day remaining quote heterodox unquote economists in the Faculty of economics at Cambridge practically all of the others having been successfully ejected into marginal departments like the department of land economy or the judge the judge institute of management at HUD Jim and Gabriel Palmer who remain so he too will be speaking for about 20 minutes somewhat somewhat questioning the question and then we will open it to discussion just want to say by way of one further point when I was doing research in the World Bank in 2010 I was very interested at the way that World Bank economists were receiving the ideas of the chief economist of the World Bank who was who was Justin Lin the very first non g7 chief economist to the World Bank in fact his Chinese but very importantly he has a PhD from the University of Chicago and he was using his position as chief economist mode what he called new structural economics which was a kind of a code for Industrial Policy and so I was interested in how are the World Bank economists including and his own vice-presidency were receiving these ideas of a more proactive role of the state and the answer is they were receiving it with great skepticism which was son death by one who said for every career there are a hundred failures who would you put your money on and with that he simply closed down the whole discussion of Industrial Policy assuming that Industrial Policy means doing what Korea did if you don't do what Korea did then you're not doing industrial policy which is a complete nonsense but anyway that was the current of thinking in the bank so and when he left in 2012 to the best of my knowledge his ideas of new structural economics left with him so with that introduction that is where the wider debate in the world out there is to get to the question this market led development have a future I have a very simple answer to that my answer is yes and then after I answered that yes I realized I would have nothing more to say for the remaining time so I figured I should buttress this out somewhat so let me take an extreme position to liven things up I will say that the answer to the question is not just yes but that indeed more than that market led development is the future but I want to very quickly amended position to clarify what I mean by the primacy of the mark this way and what the amendments that I have in mind lie and in particular where these amendments lead to problems that in conventional thinking the developing world needs to confront so having answered yes jump to how the common mindset or markets comes with baggage and a lot of that baggage is in essential at best but it's actually obstructionists and destructive and worse among that baggage are issues that have to do with whether markets the concept of markets the practice of markets are essentially a Western advanced developed economy phenomenon are they native only to developed economies and therefore when we ask this question are we actually asking about whether markets behind years of markets need to be exported to developing economies within another way for the developing world to develop do they have to become like us I will argue that market led Feldman does not mean this package and indeed is by jettisoning this package then we can come to a better understanding but I do think there's a problem and here's where it is it is a truism that we live in an interconnected world and in this world has some extent distribution of power and political legitimacy and this is a distribution that informs and conditions global leadership and where we sit today is the midst of a recession that will not go away and in this recession the global economy is desperately seeking sensible world governance but in this search we stumble over and over again on a confusion between global leadership and global Germany the latter being an idea that ought to be past its sell-by date but instead is making a comeback it might never indeed have gone away because it takes different guises now here's the problem with the deep recession in the advanced economies confronting the developing world that seems to be going great guns blame and accusation others are stealing our jobs this rice and economics my profession is dangerously really energizing this call for global hegemony and protectionism we now are in a world when political leaders look for parochial populist interests for support to seek containment of chunks of the emerging markets so when I come down on at the end of this is that I will argue that there's now an unholy alliance an unholy alliance between those who want the best for emerging markets but argue for what the best for emerging economies but argue against market let globalization and unholy alliance between them want the best for merging economies and others who don't or at least don't care much about developing economies so long as their own economy does better and that is the problem so I want to do this I want to make this argument in three chunks I don't have very much time so I'm obviously gonna have to go over this in relatively like relatively light but it's useful to say that I stand up here as an economist but I am NOT obsessed by GDP I do not think that GDP is the only way by which we're gonna measure development by development I mean as I hope I think the process of empowering your people so that they feel secure they are healthy they're well nourished and they have the capacity to pursue goals that advance their well-being without unfairly disadvantaging others around them significantly others who are worse off than themselves the words development is about your people having reasonable control over their environment and their destiny and in this reckoning for me freedom from the fear poverty and starvation is the first step in getting there economic growth she talked about GDP it's an essential part of this process but it is not the only thing now in doing this discussion I'm gonna have to gloss over lots of details I need to focus on larger political realities I want to talk about facts about the world and I know that there's lots of quibbling we can take over this but large set affects and I want to argue are the set of facts I think almost all scholars have great concrete a confidence in so I begin by saying that if we're going to look at this process of empowerment and development you cannot deny certain basic rules from science and engineering the science and engineering tell us that what you need to do to empower these people is to put together capital and labor and other factors of production in a way to create value and to create security you can do that well or you can do that rather logically the mix of production factors can bring about creative and productive follow-through or they can stand idle and die and for me what market led development talks to me about is that you need to leverage these rules from science and engineering you have to influence how productive factors accumulate whether it's investment in physical human capital and development of skills and capabilities of your people for me market led development means acknowledging a number of things the importance of incentives in a setting that allows the environment to spontaneously reveal in an emergent way what incentives will produce the greatest good for that individual and for the people around him one hopes for society but that's not really what the critical thing is here what matters is what is good for the individual family and those around them now included in my picture market led development why I am such a fan of it is that you put these incentives together with the institution of private property for otherwise incentives have nothing to rub up against stability matters because otherwise promised rewards fail to materialize they're not in passing that including in this description include this description incentives that reveal the benefits of schooling and building skilled skills they're revealing returns to investment in machines and in public infrastructure and a stable environment is needed because these returns only emerge over time so I summarized my view on markets you need loss of private property you need appropriate incentives and you need a stable environment and with that resources are allocated productively a growth and development in the empowerment sense that I referred to earlier then occur now beyond this I'm completely agnostic about markets I'm not a market fundamentalist I don't think that markets and only markers deliver these outcomes I'm quite happy to look at alternative chasms that proceed with these three criteria but for me this is the core of what market-led Holliman means I don't see the use of proceeding with exa Matic reasoning at this point I'm gonna go look at evidence about the world and a striking example that I use here is modern day China by every account China according to the rules that I laid out has worked out how to implement a market-based economy it named it is socialist it's run by a communist party but it is a market-based economy in a sense that I described and let's look at what's happened in terms of incentives and signals what has that delivered over 600 million people in the last thirty years have been brought out of extreme poverty China has become a major economic power growing 40 fold in the three decades following per capita incomes have risen 15 times China has single-handedly driven the global economy after the global financial crisis when the rest of the world lay in ruins China added to the world economy four and a half trillion dollars and market exchange rates not in funny purchasing power parity but four and a half trillion dollars three times for the United States economy did China is driving the world innovation on renewables on green energy in solar manufacturing yes technologies that are not as sexy as the latest iPhone but perhaps technologies that will be much more important for the world than what Apple Computer delivers to the rest of us so here is the bottom line we're come out we're standing up here you're in this audience because all of us believe development is a hard thing to do you can announce that there are these principles that we need to follow but in practice it is extremely difficult implement the best examples that we've gone our small island economies like Singapore to some extent Hong Kong to a different extent have been able to follow these rules and principles and achieve an interesting outcome development is just plain difficult it's plain difficult to do in small economies it's difficult to do you must be impossible to do elsewhere but here's the thing then when you look at China China is the world's largest country it's got 1.4 billion people it is the calm it is the complete opposite of Singapore so when we realized that China looking over these facts the world's largest economy has also wrapped up the world's fastest growth rates and has been able to sustain the global economy at a time when the global economy lay in ruins when Western advanced economies could do nothing to mobilize their economy I and I think many others come to the realization that my friend he showed my boo bonyen is my new school articulated and that is that when you realize what China has done it is like realizing that okay I'm sorry it is like realizing that the fattest kid in school has just won the marathon and hence the hundred and ten meter race stunt that through a market led development process I've got a little bit more time so I mean I get to develop my case a little bit more most of us are in the opposed to simple nine year view of market led development and that's because the rest of my presentation market led development comes with a baggage it comes with an intellectual baggage along the lines that I've already described you so let me describe that baggage by saying how the rest of the world criticizes some of the development paths in China one large criticism is that China is rapidly coming up to a middle income trap and coming up to a middle income trap for many different reasons its invested too much it's people are going to be too old its governance systems are just wrong its political system is political system is inflexible there's a mismatch between its market led development its economics and its politics it does not have a traditional system of Western derived liberal democracy and that is a reason many people say that the middle income trap will catch China and indeed when the World Bank reports this they say over 120 economies are sold that have either poor or middle income in the 1960s and the 1970s only 13 have been able to the middle income trap and East 13 are the ones that have desirable properties this is an observation made by my mother's Daron Acemoglu and James Robinson in the book Why nations fail and many other observers I want to argue against this position so the governance mismatch idea says that once you've gotten your economy off of the very bottom as China did then one you need a open inclusive flexible and responsive political institutions usually with some mixture of ballot box democracy and independent judiciary transparency and rule of law none of which China or other Asian economies display in any great extent because otherwise the system can be manipulated and it does not take care of its poor and its weak and its vulnerable it is democracy that guarantees that instead in China and elsewhere that do not follow this path of Western deriving liberal democracy even if they do follow a markets led development path the system is manipulable corrupt extractive elites will emerge they will disrupt progress they will distort incentives they will lead to behaviors that economically unproductive come away from this I'm the first to sign up while all of these things are not good things that you want to have in a society obviously corruption is a bad thing social injustice segments of society getting luxury and wealth when they don't deserve it that's a thing ordinary people being unable to obtain basic medical care Oh see redress for wrongs they have been done then because of corruption in the system that is a bad thing all of that is deeply unpleasant all of that ought to be eradicated and at the same time meritocracy accountability transparency need to be elevated how does this square with my optimism for Asia following a path that's different from the West but nonetheless using a markets led development path trajectory we need to separate these surface manifestations of malfeasance and misbehavior from the question whether a system the country a developing economy can organically grow its own solution to the problem of development without wholesale importing of Western models of the growth democracy or the associated a different important question whether liberal democracy is the only possible coupling with markets that delivers sustainability and political legitimacy I would feel and I do feel a lot more comfortable answering yes to this question if we can indeed separate these things my first observation in this regard is democracy does nothing for you if you have to vote for a party not because you think you'll do you any good but because you think the other party is evil if civil society is underdeveloped a freer political system simply means greater instability and instability is a very bad thing it is the thing that I referred to earlier but what will make market development and here I think the testers did we had Peugeot so let me conclude by reciting a set of differences across societies that have followed different paths of this kind of political engagement let me return to China again and compare it with one other economy so China's per capita income I said grew 15 times in the three decades after 1980 but here's the other remarkable fact its median wages its wages at the 50th percentile doubled every decade it's inequality yes was high was rising continues to rise but in terms of the bottom half of the population they're better off by contrast the United States median wages have declined not just relatively but in real absolute value between 1970 and 2007 when we measured them in an inflation adjusted values this configuration of a Western liberal democracy being unable to take care of its own people it's weak and the bottom part of its population squares ill with the idea that you need liberal democracy is only with that that you're able to take care of the weak and society since 1980 China has reduced extreme poverty within it by over 600 million people more than the entire world combined ten times the population of the United Kingdom one and a half times the United States or Western Europe in contrast in 1980 the share of US income accruing to the top one percent of its population was ten percent by 2007 that share had reached 25 percent so where do I come out with this pretty much everyone is that China can do a lot better China for me is the example of market led development but without the political baggage that comes with Western liberal democracy yes extracting it needs exists there fact of life here's the other fact of life extractive elites exist everywhere they exist in liberal democracies they exist in places they are not liberal democracies I want to argue that market-led development is in the future where we need to not get tied down to is the idea that there's just one pathway to legitimacy of a regime or of a state but instead there are multiple pathways to achieve that let me end with an insidious conspiracy theory view of the world by arguing that emerging economies even when they follow a market land development path taught the trajectory but don't check out all the tick boxes but how they are now like us like Western liberal democracies this.d legitimizes the regime's and the growth trajectory in emerging economies why does this matter this matters because the world now is in a situation where the needs global leadership global leadership is needed to provide global public goods to maintain security in the world the battle piracy and terrorism to combat and enix to combat global climate change to write and maintain the rules on international and Finance but in this thinking a number of writers have blamed the weakness of the recovery from the 2008 over financial crisis to be the result of the u.s. diminished influence and the lack of my successor on the world stage the message there is that we can restore the world to balance if only we restore the position of the United States in its primus in the global system now here's an experiment that I want to end with go to Hainan Island in the South China Sea and draw a circle 4000 kilometers in radius that's the picture you come up with that's the highlighted region here's the fact that region contains about 25 million square kilometers of land area with a 1/16 of total wool and at one sec sorry 1/6 of total land area in that circle more than half the world's population lives more people live in that tiny circle and live outside in a system that you believe the primacy of democratic ideals in this those people who need to determine how the system of global governance runs but that is not indeed how the world runs the good news is that the world's economic center of gravity we said by GDP in different parts of the world is now rapidly converging to that circle and if global governance follows economics just as it follows democratic ideals of the popular that is indeed the new system of global governance that we need to converge to but what it also means is that it is sharply different from this kind of alone most of the last century the world's political center has sent firmly on the transatlantic axis more than that it's set in just Washington DC so we're rapidly coming to a situation where market led development in a part of the world that refuses to make to make friends with the sense of political ideals that we think they ought to have will soon be the world economic center the world's economic Center will soon be ten time zones distant for the world's political center this fractures the world's global economic and political landscapes and it sets up a tension between how economies perform and what global governance looks like and we need to repair their friendship so thank you very much gives his answer to that question let me just press you Danny on one thing to which I think it's an effort to clarify what your general argument is your general argument is that there are three three families of necessary and sufficient conditions for development you recognize that these are tough to implement but you do say as I understood you these are necessary and sufficient namely one appropriate incentives to private property three stability of investments in the future accrue to those who invest today the point I want to ask you is simply has this been tested have you tested it I mean empirically measuring countries in terms of their degree of private property their degree of whatever you call appropriate incentives the danger is that that's complete tautology because if it works then the incentives must be appropriate if it doesn't work then obviously the incentives were inappropriate and so the question is how can you get out of it tautology okay we did have a further discussion on this subsequently as well but let me quickly address your point by saying I don't think these are necessary and sufficient conditions different mechanisms by which we can achieve these okay I did hear you say that they were necessary institution that that leaves open the possibility of different ways to reach those necessary institution conditions the point you just made okay Tanya that electoral rules of liberal democracy cannot be the judge of how the governance system is in I meant the robot knows about this much better than I do but I was in Iceland last December and I was told that the former Prime Minister and then central bank governor had just instituted himself as the editor of the biggest newspaper you know I haven't heard of anything like that even you know the country with the current political system the Icelanders I'll tell you that they had the Parliament since that 1356 or something but you know the reality is quite complex anyway you know development is a very difficult process I mean I think it can be described as driving a crapped-out second-hand car with missing part and running low on fuel with malfunctioning sat-nav system and having fight with your friends aware you want to go in the so it means all the help you can get and yeah let me make this clear Marcus the most powerful institution vehicle for economic progress that humanity has ever invented so make no mistake about that but exactly because it is so powerful we need to properly regulate it you know which country had traffic rules as speed limits when people are riding around the bicycles and horses yes exactly because we invented cars that we needed to introduce those things and it's exactly because we started getting these powerful cars that we started building in the ABS brakes and airbags and side impact bars because when I mean they were like driving around in those funny cars in the 1920s you didn't need those things huh so I start from that observation you know it's the powerful vehicle but exactly because it's powerful it needs to be properly regulated them and marketer means not ends I mean this is something that a lot of people say but I think the needs are repeating so you know answering the question from that point of view we don't want the market the development in the sense of accepting whatever is doing I don't think that questions necessarily arguing that point but that is important to repeat that yeah I would accept or even expand markets when they are helping us achieve development or whatever other goals that we are pursuing Wow say that we should restrain or even shrink them when they are not so it's a very pragmatic competition following the former Chinese leader mr. Deng Xiaoping who famously said I don't really care whether the cat is black or white diasporas it catches myself now somehow I got to write of any kind of theoretical reflection on this issue maybes are not so much fun but the limited that trying to think through this I should market first to stay the dichotomy that has define development debate in the last at least three decades probably five decades if you are in a less able to defeat a power how do the tortoises are fundamentally misleading dichotomy because when you think about the markets are not actors in the sense the states of forms are so sets of set of relationships and set of rules so if you really want to talk about that I quote to me you have to talk about stay private sector dichotomy rather than state market I this market has no will of his own now I think even daddies are not very helpful because the relationship between the state and the private sector is complementary rather than antagonistic of course many colors they are when they talk about crowding out when they talk about the need to deregulate and get the state out and so on but again you need a well-functioning state to have power well furniture markets and vice versa now given that markets are not actors whether we accept marques in particular cases depends on two things first the rules that define those markets and secondly the characteristics of the actual actors that operate in those markets consumers and producers and the state actually can't be both yeah it is a consumer when did you know buys things are from the private sector it can be a producer when it produces Aetna police service social service commercial services through state-owned and the president now first a let's to court rules at different markets are very different rules on what can be bought and sold how they can be exchanged how computation is conducted how people are compensated and so on and these differences exist not just across countries not just across times but also across markets within a single country at a particular point of time and so any country contains markers with very different rules and depending on what these rules are the results of our market development can be very different so whether you could introduce a rule that foreigners have to pay taxes to enter your national market that's called protectionism oh you can introduce a rule saying that we give tax advantage to those who invest in machines rather than say house houses you can introduce the rule saying that you cannot make these kind of past speculative investments and so on so you know I mean according to these rules that the results can be very different now which other right rules now actually as I argue in this book and elsewhere in more academic papers these rules cannot be in the end chosen through some kind of scientific laws they are Indian critically constructed is there any reason why we shouldn't have slavery in terms of pure economy reason these economists that who made the so called wouldn't answer a libertarian case for voluntary slavery you know if I asked Robert who give me I don't know five million pounds and promised to work as his slave for the rest of my life no he didn't force me I wouldn't kill for it who are you to say that I shouldn't do that you know there was a time when people thought yeah banning child labor was nonsense and so on so you know pastelito in the end that all these market rules are politically decided now we may agree to pretend that some of them are not politically determine and accept those underlying political decisions for the moment fine but if you really go to the end that there is no rule that is are not political now if there is no scientific theory to tell you where exactly you should that drew the boundary of the market what are the rules you should have and so on what would you choose depends on what kinds of outcomes they create and what kinds of outcomes you want once again you have to be pragmatic now even with and even with the same rules the outcomes of the market process will depend on the characters of the actors in it there are producers and consumers if you to buy them big and then there are all these different categories of actors now of course that consumers can make a difference I mean consumers demanding more organic or green products have recently changed some markers quite significantly many governments have actually significantly changed the course of their economic development by acting as a type of consumer through government program policy the Japanese computer industry and the Finnish mobile phone industry would not have existed if the Japanese and the Finnish government bought these rubbish products from the old national companies for a long time because they wore evasion but the more important that the producers with a government entities like gas state-owned enterprises or government departments are producing certain services all private private sectors from them and two things about these producers well as well as the consumers matter and they these two things are the motives and their capabilities first let's talk of a motive them in many societies we have producers or potential producers that are not interested in long-term investment their product of the girls and Danny actually has given the statistics that I was going to use and top 1% of Americans take instead of 10% as they used to thought the other world now taking 25% despite that investment as a share of GDP in the United States has fallen this is quite a shocking statistic because the whole justification of trickle-down economics whether you keep those people more money so that again there's more and create more jobs and close them yeah you pay them two and a half times more so to speak and they are doing even less this is a problem to say the least you know there are many countries are where these kind of things happened I mean basically supposing investors are not doing their jobs they are not investing they are engaged in conspicuous consumption they are engaged in capital flight or when they invest that they are investing in the wrong things we always state the speculation and so on now what do you do when your producers broadly define do not two things that encourage development well first of all you can be placed them with other actors after the Second World War vital European countries especially France naturalize a lot of companies in the belief that their capital is particularly on dynamic and conservative and they need to modernize the industry and they couldn't just let those guys do it because they have won had failed at least at for the previous 100 years and to do that in East Asia after the Second World War a lot of countries had land reform and we distributed land from absentee landlords were not really taking of their land and gave them to more eager small farmers now once again I meant that that this is a pragmatic question because there is actually quite strong consensus among incoming historians that the Japanese landlord class until the first world war actually quite dynamic forces these people that I invested in irrigation they introduced you varieties the organizers are small farmers include some kind of working collective and so on but when that generation died down their children will move to Tokyo and Osaka and couldn't care less about the line so a lot of people study arguing that diseases are holding Japanese agriculture back anyway you can do something lesser reticle and lead the existing producers alone but change the rules of the market so if you want to enhance productivity enhancing as we increase our productivity enhancing investments especially in countries like the US and Britain you need to change rules about corporate takeover rules about the CEO pay which is totally dependent on how well they serve short terms speculative Passover now how about capabilities and I mean this is the more important question when it comes to developing countries because in mainstream economic models it is usually assumed that everyone is equally capable the best example is heckscher-ohlin summers and trade theory there's the one best practices technology for each product we shot that uses the different factor combinations different countries have different relative factor in common and they choose one of those technologies according to their factor endowment and when they choose things in which they are B is bad because that people often misunderstand is the notion of comparative advantage and comparative in comparative advantage doesn't compare different countries and it's a comparing different possible activities so you know that when you hear some people say all such and such poor country doesn't have any comparative competitive advantage in anything that's wrong everyone has comparative advantage in something and you might be rubbish at everything but there must be something at which you are the least rubbish no this is a very important inside but in this son well lamented in the actual inversion because of that assumption about technology if one Tamela is not producing pmw is not because they cannot but because it doesn't want to disadvantages are pourquoi Tamela to produce that things like BMW but in the end I made a key problem for developing countries is that their producers are not capable I mean that's the knob of the problem so things like infant industry protection tries to create the space in which the producers can increase their capabilities not the way I just have formulated I'm not saying the protection itself increases capabilities yeah there might be a little bit of increase because there is learning-by-doing effect which comes from cumulative experiences so if you are protected and have bigger where more consumers to serve you have partner more production experience and your product if I may imprison a bit but that's not nearly enough you need to invest in productivity enhancing things like what investment in machines skills research and what have you so to summarize Marcus are the most powerful institution beakers for economic progress let's get that straight part whether we should leave things to the market as we have been recommended to do in the last few decades will depends on the exact rules that those markers have and on the motives and capabilities of market actor ISM and if these rules motives and capabilities are inadequate we should change them this that are nothing secret about any of the areas so in that sense you know maybe that the poor market better itself is quite loaded but no interference that we use it in the sense that it has been used my answer to the okay well one of the themes that ran through that is about markets the role of markets and the role of states and I think both of them would agree that that basic polarity which is a key part of neoliberal thought that basic polarity is itself mistaken because it implies that there is a necessary trade-off more state means market more market means less state and once you embark upon a debate couched in those terms with it necessary trade-off between state and market then the debate goes nowhere I think it's much more constructive to think the state and the market meaning small and medium enterprises and number three giant global corporations and number four a civil society and a kind of quadrilateral relationship between them and then the question is what is the appropriate configuration with these four kind of entities in terms of producing the process that we call development and so there are all these kind of issues but then Danny did talk about something towards the end and I think we should not lose track of this second big theme came out in the context of his he's got great deal of publicity from this analysis about the changing location of the economic center of gravity of the world moving from the mid-atlantic in 1980 to somewhere near Turkey at the moment and going quite quickly in an easterly direction and then the question becomes okay so this if this happens in terms of the economic center of gravity what happens to to what extent his political power that his power in the World Bank and the IMF and the g20 the Bank for International Settlements and the International Accounting Standards Board and so on and so on and so on in the UN to what extent is political power following this trajectory of changing economic weight towards the East not towards the south towards the East so these are two big sets of issues and just before we begin do you want to quickly comment on either of your presentation that we need to I think those are two extreme planks that most people would sign up to and I suppose the real question whether some problem is the road between you and me is where exactly that the gulf between those extremes breaths and I suppose I'm happy to take the first stab at this that is that I think you know I think market found fundamentalist by which I mean you know the idea that you could go around thinking that everything that markets do have to be right and then everything every time you disrupt markets has to be wrong no market fundamentalism has no place in the discussion except as an extreme whipping serve as an extreme poster child of a certain way of thinking but nonetheless I do think that the way in which markets provide incentives the way which they signal where resources and factors of production skills that is the right mechanism by which we should and I wonder if when you say markets are powerful we should regulate them tell you even disallow the possibility that markets give the right impression so sometimes it keeps the right incentives or sometimes it doesn't but that buy beliefs that are what is more important is that we need to talk about capabilities move and I'm not just talking about a Mattias and kind of capability but the social capability productive capability because that economies have focused too much on incentives they have forgotten about our capabilities you know if someone comes to me and says well dr. Chang if you win next year's at London Marathon I'll give you fifty billion dollars and it cannot be bigger incentive I just can't do it so that we also need to think about ways to raise capabilities and some of these might require restraining certain parts of the market in the sense that you know let me give you a striking example back in nineteen fifty five forty twelve Japanese car companies put together build 70,000 cars and the same year General Motors alone produced three point five million cars the United States as a whole produced seven million cars and so if Japan opened the car market at that time the Japanese our auto industry they wiped out them but in the enemy because Japan protected iced car producers in the end the whole world benefited because that they produced a fuel-efficient car that revolutionized the method of mass production and invented that also for lean production system and what have you so you know once again assembling a question I'm not saying that you know protection ways green said benefit I mean needs to be well kenapa designed and the incentive to improve constantly put on the recipients and so on but I mean if I you can produce something like that by using protections why not long the same reasoning the same industry when you see you know the US car industry was once thought to be on the single mmm but in last 10 years the Chinese car industry you know which one might have word said they would be in the position of being offered a fifty billion dollar price and not being able to run a marathon but they have increased their production nine for the Chinese car market now is large and Chinese car production is larger than all of the United States and Japan yeah you know Germany sells whole BMWs and Mercedes Benz in China than it does in Germany yeah if you went to Mexico if you go to Argentina there are lots of Chinese cars I guess maybe they wonder is it really the market that started that processor because in the beginning the Chinese our government could get a lot of technology transferred from Fox wagons of this world exactly using the political bargaining power it was a protected market so if you want to comment build your cars in joint venture with our producers with lots of conditions you can do it so it's a mixture these are not straight Ford market it's not straight for the government intervention and that's the problem but framing the question does is market led development it doesn't have a future it implies that this thing market led is a clearly defined home idea and the point about Hodgins remark is that the distinction between incentives and capabilities is fundamental and markets can operate in situations where capabilities are being built up in ways that reapeth the market or protect the market but it's still a market it's not the producers in that market is simply not exposed to international incentives they are given some form of protection in order to build capability is a fundamental point about development okay you can tell they've got many dogs in this fight yes yes hi firstly I'm thinking I'm ten years too late to have jumped on the center of gravity as it went past like why didn't daddy tell us when it was closed my question was going to be so if market rules and all markets have rules they're not really free they're all some rules as you say they are rules if they're set politically without just using the examples of America as Western liberal democracy and China what political systems our government set the best rules is their answers to that yeah it's taken several questions three yes Thank You professor quite you conflated the mineral income trend with arguments political arguments about whether people want their markets to be run with or without full democracy and civil rights and so on but isn't there aren't there a whole bunch of economic arguments about why you might might not want to be a middle-income country it's obviously we don't want to be impoverished countries but is it even possible for everyone to be a high-income country and you did mention climate change it's interesting that the the previous speaker talks about climate change isn't the problem with market-led economies is that they lack the responsibility or don't appreciate the consequences of what they do I'll give an example the chemical industry is a billion-dollar industry as I'm not in economics person or anything but the problem is is that ordinary people scientists and ordinary people have realized that heat the pesticides that they produce it is fundamentally causing problems to the ecosystem and therefore is a direct threat to human existence doctor of the professor is me sorry president I mean where have you not included in these model communities and responsibilities and I disagree that market-led the economies have a future simply because there's too much conflict of interest between ordinary people and basically the globalization there's three questions yeah well you Sara ideal political system um well I don't think so at least telling from what countries have been doing I mean yeah maybe the Scandinavian countries come close to it but you know I mean first of all the rich countries are you know many of them have become democracies only very recently in a Switzerland gave women both in 1971 actually 91 if you count these are two row controls are which are because to keep women posts in local elections until 91 now the u.s. became well the problems are still not a democracy the hanging Chad and all that yeah but even he's regarding the adamant until the civil rights movement the southern states actually had with this a food qualification requirement which said that you have to be paying taxes and you have to be literate and all kind of India Australia okay but that non-whites are both only nineteen sixty two and so on so the history of democracy is actually very short and very kind of freedom and then you have cases like Iceland which used to rank number three in the transparency index and corruption perception index in the whole world and when the financial crisis happened that young as it used to be run like a mafia no that's the only word I can use to describe what has been going on in the country so you know it's a constant struggle you know there are people who don't one would you add people to have a voice thank you all day let me basically unless you are rich white male you couldn't vote period so I mean that is a concern struggle and yeah in that sense we need citizen activism and community pressures and what have you now I mean I haven't included those things I hear because I'm talking about the market huh so that is an even bigger frame of that I didn't talk about but you know this is what I did today yeah and right I mean the markets take into account only things that they are forced to take into account through laws yeah so you have to set those things right once again I mean sat down your vehicle so you know if you are I don't know if you keep a powerful sports car to someone like me I'll probably hit five people and kill three of them if you keep it to Lewis Hamilton yeah with the ground free and all a lot of money so you know the vehicle really depends on the result really depends on how you use the vehicle who's using the vehicle for what whole person okay okay on the question about you know the world's economic sentiment every it's not too late ahead of the game because right now as and said while we know about the world center of gravity is that in the last 30 years it's moved five thousand kilometers from the middle of the Atlantic Ocean to now about the Gulf the Persian Gulf so you can get ahead on the game by Singapore getting winner money is still good which government sent the best rules I don't think that that question can be answered in the abstract certainly my own thinking about when you compare how different countries run markers and run governments it's it depends on circumstances it depends on the development of civil society it depends on the strength of competing interests and the level playing field that's engendered by Free Press depends varies from the level of education in a society different things work best at different times in my view but the the us-china comparison is a nice one because it sharply contrasts to different large models of the way the world should go and I think that comparison there shows that you know the u.s. is actually not in this comfortable position or we in the West hydrogenous comfortable position is maybe we would like to think the middle income trap there was a little bit of an accusation that I had tried to confuse matters by talking about the building come trap the real problem the world there according the World Bank or the 13 countries of 200 I've been able to DV the accusations for the countries that are trapped in this middle income trap revolve around how they have government's actually misdirect investment how the governments have twisted the demography demographic profile in this society so then and now too many old people and how governments have manipulated the exchange rate so that you know these countries that are potentially being caught in militant right now have exported too much to the rest of the world and so they are they are caught in this bind because the people that they were exporting to before are now no longer importing as much as they used to actually interestingly other than the faults that you know people many people have identified with the countries not going to unable to build up traffic actually have a lot to do with state intervention rather than that market so maybe that's the case no point on my side having said that however the case for people the countries have been able to evade the middle income trap by actually is actually not that persuasive with 13 countries that the World Bank trumpets as the countries that we should emulate well true five of them are Farnese Asian economies their Confucian based the Japan South Korea Taiwan Hong Kong and Singapore two of those countries are small island economies that do follow this incentives but they're also small island economies and on the other nine well for kind of different in peculiar ways one of the four is for the record others Mauritius the third is Equatorial Guinea and then the fourth is Israel so there are all different factors about why they might be able to evade the middle income trap finally although the middle the World Bank does not trumpet this particular fact the remaining four economies in the thirteen that we've added a middle income trap Portugal Ireland you guess Greece XP actually exactly the four economies that are dragging down the eurozone currently in the in this sovereign debt crisis away from so the middle income trap is complicated and lots of different things to say about it however the point remains people out there in the emerging world from Malaysia through all of East Asia running up this China and beyond all deathly afraid of their being trapped in this middle-income position now you might say well what's so bad about me her haircut trap not everybody can be the number one and I suppose these people would say fine but maybe we should have no round-robin kind of situation where some of the time the top countries come and see you at being middle-income countries well and then the rest of us get to enjoy first world incomes I think most people want to get into the malinka situation now left over lost the climate change point and should greatest market failure in all of recorded human history this is really bad news it's a problem with markets but I suspect it's a problem that would have emerged whether or not we had markets dictating the outcome of our industrial activity you must remember for a long time none of us knew anything about change there's only very recently that we've had to worry about that and then having said that who are the people who are doing the most to try and combat global climate change well China is doing a lot because it sees the incentive that if it doesn't its economy will be totally followed up who's doing very little the United States because right now is just sitting on a huge amount of shale gas and oil is totally redrawn the hydrocarbon map for u.s. economic activity it has no plans to do anything further on the global climate change for and that's totally dropped off at sunrise but the thing that drives all of these sections is incentives people have to see what the payoff is to them of taking different kinds of I think that is the powerful message that I think we should take away business just before we have the next round I just want to press you Danny a bit more on your core the conceptual argument as you said there are three conditions for economic development appropriate incentives private property and stability you said that you didn't do not regard these as necessary and sufficient conditions but you also said that when these three are present growth and development will happen so I just want to press you what is the nature of the causal status of these three conditions it is true though one of the reasons that I said this is not necessary or sufficient I thought I should have said that this is not necessary or sufficient is that you know we see around the world economies like China actually where the institutional private property is actually very recent it suddenly did not exist around all of the 1980s and all the 1990s but what they did was cobbled together a system they were sufficiently arranged so that if you undertook certain actions you were the one who are rewarded before them and I think it is those kinds of mechanisms that in a short head I say private property and incentives I'm actually quite relaxed and stability but stability no question I think that stable system stable country stable governments are the ones that allow productive activity to occur whether they are driven by the state or they're driven by markets they are the ones that allow people who have reasonable planning horizon didn't know that if they plan something if they put together a factory if they undertake certain kinds of contractual agreements then the payoff will be there for them so I think stability is absolutely key and the reason that I think that you know the usual strictures of Western liberal democracy don't are necessarily fit for purpose is that in many circumstances they will not necessarily just okay so the conclusion I draw is that you do think these three conditions are necessary and sufficient I don't see any other interpretation all right yes I mean I completely agree with you about that no country no one in the East would want to be trapped in the middle income aspire for higher income I find it quite interesting that you compared the West and China the US and China because US Britain very owned capitalist countries China is whatever you say it's obviously a new player okay and kind of comes across like reasons why the US and Britain are not doing really well is because of the fact that they are liberal democracies so to speak that's where it comes across to me when I'm listening to it and I don't particularly think that is the reason why the Western capitalist countries are lagging behind uneven development always gives you that kind of scenario if you like and I would argue that the reason why the West particularly Britain in u.s. are lagging behind this is when SS always happens production moves to other countries because of competition and all that there has been a real lack of initiative and political leadership to be able to really assess that as your main production core production centers are moving into the East you have to think about how can you make your country more productive rather there's been a lot of investment speculation on financial services which ultimately don't really create value in the sense of what value means so I'd say that it's probably more the reason why the West is lagging behind and not anything to do with liberal democracy and by the way I wouldn't necessarily argue or say that the values which are free freedom to speak Free Press all these things democracy healthy a perv you know posing you know in fractions and everything else for me it's a universal right if you like so clearly would prefer as well the eastern countries that are doing really well also you know sp you know civil society argues and fights for those rights because they're not particularly linked to just the West I mean that's not our to say it okay thanks there's a Christian thank them yes professor Chan said you said that different markets have different rules and that those rules are politically constructed so they also I suppose may be political this deconstructed I mean when market actors create artificial situations to fight government actions aiming development I mean when the market elite have no interest in a country development what should be done I mean what can rule do for us in this situation of political struggle so Danny because you mentioned the definition of development and I think is quite comprehensive covering human rights and everything but when you mentioned the case of China it seems that when you measure whether a country is really successful the only thing I hear is mainly steel economics rather than the other human rights all other things so I think if we simply comparing China and America one thing is you say you look we look at where do people move so people still want to move to America and leave there so that means economic is do not the only criteria to measure the success so my question is do you think that market can really lead to the comprehensive definition you give about development we will we have to engine about six minutes yeah I cannot believe that the World Bank excited Equatorial Guinea you know this country used to have a hot captain called three hundred and eighty dollars in nineteen ninety five hit a huge oil bonanza now he's incomes about $15,000 yeah in those star that period they grew eight hundred twenty eight percent per year but you know he said development no I don't think so because I went people are talking about middle income trap they're referring at least implicitly about the inability to upgrade your productive capabilities without some extra love so I mean why has militia buildings too much love block factor yeah yeah because Malaysia has been able to generate ties own ability to kind of produce next Samsung whatever so that I think is quite a beast leading exercise and yeah very briefly I have my problem with tennis at that point on Confucianism you know in 1950s people used to say that East Asia doesn't develop because of Confucianism yeah qualification there um my father said there are huge problems with that particular contract concept III agree to your channel analysis now different market rules yes I mean actually market rules that can be politically deconstructed and yes I mean this is what actually has happened all the time because if you look at the last three centuries of history of capitalism through political actions the boundary of the market has been constantly redrawn and if anything the spear of market has been shrinking that it was a time when everything was stuff for sale not anymore and it's only because our people fought for these things are that we cut them and we still have to do that now I mean the difficulty is that as you imply market power spills into political power so when certain section of the economy becomes very rich the pie of the politicians they become the government like American financial industry no seriously I mean half the Treasury secretaries in the last 32 years up to tightener are from the financial sector and told them from one company goldman sachs so that is before we constantly rewrite the market bullsááá that whose stifle competition actually so sometimes you need to actually have before in spending market forces sometimes you need to argue for shrinking market forces I mean it all depends on the context and you objected now in the short run in looks at fight hope lesson but don't forget I mean 200 years ago a lot of people who would have called you crazy if you argued for abolition of slavery hundred the other would they put women in prison for asking of all you know a lot of respectable people argue that well when we have your husband why do you need a vote Oh your father or whatever happened and only fifty years ago I mean are not a party founding fathers of developing nations of today were hunted down by the British and the French as terrorists twenty years ago barely mrs. Thatcher said that anyone who believes that they'll be a black majority rule in South Africa is living in cloud cuckoo-land where she was living so if the government these things happened you know it doesn't go straight yeah zigzag backward and so on but but that these things happen only because people fight for it I think we can take just one more question yes can answer the last round did you a question about why compel us in China and again I'm a bit mischievous when it comes to these things but I figure that by do by doing these things in a stock way we get to draw general principles but there are three things I want to say about the us-china comparison you know first I'm not saying at all that liberal democracy is at fault for the decline transatlantic that is far from them but I am saying if we ask does liberal democracy take care of its poor the systems that we see in the world where liberal democracy is most entrenched does it guarantee that it takes care of the poor and the weak and the disadvantaged quick answer to that is no we see that example of the United States now there's a whole range of factors white if anybody's perform differentially but that's also part of the point that there's no silver bullet single factor liberal democracy market versus state that will explain differential performance is the combination of all those things but that combination shall also give all of us a little bit of you melody yeah we're not gonna go around saying that is one magic thing we need to do to your economy and then no stand back just watch it grow it is not it's a whole combination things basically things it's precisely by looking at these three things we will get some further insight and then finally under the question about China and whether I have misguided where the mislead people about you know when I first start talking of this broader shift oh man and then I did the Chinese GDP obsession I'm not obsessed with China's GDP I let me point out that you know the you know the United States today as a level of per capita income that six times that of the United States there are China China today in per capita terms is poorer than the per capita income of nine countries in Africa to hold up China and say that this has failed because people are not flocking to China but instead of flocking United States I don't think is an appropriate comparison that's more to do but I do want to say there are lots of things that are going well for it and we need to give it proper we don't need to probably acknowledge those successes okay I think we have time for just one more question addressing poverty one of the main of one of the communist ways for addressing poverty is has been aid using a to help market development in developing countries and none of the speakers mentioned as a possible forward well a you know I come from a country which has benefited a lot from a you know I was actually when I was born in Austria and abroad to is born in a country at their house you just built with American foreign aid so I have a lot of time for a but let's get it into perspective I mean the amount is not going to increase very much and at the moment he stands basically only at about one-third the level of remittances sent back home by migrant workers and even if it triples and matches remittances is not going to solve over time and the poverty can only be solved by development of productive capabilities and yeah maybe that that you know getting very specific groups at the out of a very specific type of poverty event maybe that are alias a role in that but as a general matter of lifting people out of poverty I think that is what is the limit there I let me just say I agree completely and when we look at actual concrete examples from East Asia what it is that's most lifted people from poverty you lived Riis is excessive technical expertise which actually the Japanese allowed through their foreign direct investment into other parts of East Asia that they were quite open about sharing technologies and the second thing is market access being able to sell the goods that you produce elsewhere in the world so the world if the West really wants to help the yeast really wants to help the emerging economies okay I will leave you with just one final thought if you ask the question this is really important if you ask the question how many non-western countries have become developed in the past 200 years since the Industrial Revolution then however broadly you define non-western and country define them broadly enough to include Hong Kong as non-western and a country and however broadly you define developed then the answer to that question how many non-western countries have become developed in the past 200 years the answer is six or maybe seven and it is striking to take your eight point all of them if you go down the list including Israel have had very large amounts of aid and secondly all of them have had lots of external enemies with the possible exception of Hong Kong so that to me and then the third the third point about them that they have in common is that have followed a strategy of what would commonly be called like for example in the World Bank market led development none of them so that is a very sobering thought I think on which to end thank you very much

Channel: LSE

Views: 15,009

Rating: 4.7197452 out of 5

Keywords: LSE, London School of Economics, University, College, Public, Lecture, Event, podcast, Seminar, Talk, Speech, Dr Ha-Joon Chang, Professor Danny Quah, market-led

Id: R84XoIinBL8

Length: 91min 31sec (5491 seconds)

Published: Thu May 16 2013