Michael Spence — The Future of Economic Growth

welcome to uncommon knowledge I'm Peter Robinson a fellow at the Hoover Institution and professor of economics at the New York University Business School Michael Spence is a winner of the 2001 Nobel Prize for economics his latest book the next convergence the future of economic growth in a multi-speed world Michael Spence welcome thank you people the history of growth Mike let me quote to you from the next convergence in 1750 most people would probably have said that the pre-industrial configuration of the world's economy was largely a permanent state of affairs that the world had always been like that and probably always would be and they would have had the facts on their side explain well we know from the historian agus Madison that who studied as best we can with the data we have Peter that the growth economic growth for a lot of centuries say starting when we can count in the year 1000 was essentially negligible most countries were the same most countries were consisted of poor people with a few rich people who were powerful in her country differences weren't that big you know the Ming Dynasty in China was a bit you know higher income than most of Europe but but the differences by art standards were small so that was the way life was and what happened around 1750 around 1750 we had the British Industrial Revolution an inflection point in the kind of economic history of the world that really does stand up there's no revisionist that that is a big moment and everybody knows it ya know they said just a kink in the pattern of growth and all the things that went with it you know the the use of scientific knowledge and technology to create economic value and and the interesting thing is that the mall Susa fact which is population will grow to eat up all of the incremental income didn't actually happen either and so per capita income started to rise and then you talk about a multi-speed world mmm-hmm so phase one no growth right phase two what we would now term the West Rose starts to go now we come to the next point that you're talking about in this book again I'm quoting to you from the next confirm the next convergence the snapshot picture of the world economy in 1950 was the result of this room that remarkable 200 years of economic history breakout period for the minority of the world's population starting after World War 2 the pattern shifted again the countries in the developing world started to grow at first it was relatively slow in in isolated countries then it began to spread and accelerate this sounds pretty straightforward the rest of the world is finally catching up it's simple we should rejoice right yes by mayna a no unbalance yes how did it happen the colonial empires fell apart and they arguably had built-in asymmetries in them one would have guessed I think incorrectly there were cultural differences holding these countries back some inherent defect that I don't think that's turned out to be true so colonialism fell apart we had a bunch of new countries that were finding their identity finding a governance structure that worked was chaotic and a mess and then the other key ingredient to actually one very wise people led by Americans decided not to repeat the aftermath of World War one to crush the Vanquish and create a situation that led to another war instead we built up the vanquished we work through the Marshall Plan on rebuilding Europe we worked on restoring Japan we opened the global economy so that these con amis became permanently interconnected and when we did that Peter we probably didn't know that the long-run beneficiaries were going to be these poor countries whose future we didn't really know in fact their countries that we called backward right you know not developing not emerging backward and they're a bunch of other terms that I refer to on the way through in this journey but but that's that once they figured out a way to connect to the global economy third key ingredients so you have colonialism goes away they're not held down you've got opening of the global economy through the GATT and the set of policies that really just turn out with a benefit of hindsight to be a generous and be really farsighted and the third one is technology I mean you can fly on airplanes the cost of transportation went down communication costs went down there the tools that you use to integrate a global economy were being built and then used I want to in return to a little bit of economic theory and talk about technology in a moment but I want to make sure so the United States is that there's a distinctively American piece of that story which is to say that after the Second World War the United States measured as a proportion of world domestic output is at a position of dominance that it that constantly continues to recede and the United States let's it happen indeed seems to welcome the growth of other cuts now you're a Canadian I know you've raised in Canada and you live in Italy but Americans ought to be proud of that right absolutely okay thank you very much just want to establish that tender tender tender moment for Americans as the economy wobbles we'll get back to all that but I'd like to note that there's one moment of which we can be unambiguously proud segment to a closer look at growth the next convergence again since the Industrial Revolution began incomes and productivity keep rising so the obvious question is where does that come from the short answer is innovation where does innovation come from what do you mean what does that what does someone who thinks rigorously about these questions mean when he says innovation and where does he think that comes from it comes from entrepreneurs who figure out better ways to do things or lower cost ways to do things and the theory of modern endogenous growth theory is developed by Paul Romer here at Stanford Philippe Guillaume Bob Lucas and others was to take the Bob Solow model which established clearly that innovation was the only way to sustain long term growth because you can't capital deepen economy forever hold on that's a very important concept I think I want to make sure that I've got it yeah in an economy of this size there are so many people there labour yeah and there's so much capital right and to begin with you can make pretty good progress by pouring more capital on top of labour giving them more machines but eventually you run out of capital you have the returns to it the incremental investment fall so you so the innovation lies in combining labor and capital capital more and more cleverly doing new things finding new ways of mixing them that right yeah okay all right shows up in cost reductions that shows up in new companies that shows up in new products that help us do things that we couldn't do or do things that we do do better you know it shows up in iPads and iPods and you know computers and networks and all kinds of things more efficient cars just hundreds of things and what the theory of modern endogenous growth Theory did was to say to explain there's enough incentives for people to invest in these technologies even though the next technology will kill it off this is Schumpeter's creative destruction so you you have a continuous process of creation and then the next creation you know that kills it off is a bit strong but you know takes away part of the future and the next one takes that one away and that turns out to work that's this is the dynamics of a competitive capitalist system and what we've learned in the last few decades is that isn't it is not distinctive to the Western world no it's not that's right I mean it is spreading rapidly as as countries in who used to be in the what the developing category approach our size they start to act like us and innovate and they become part of this multi country ecosystem you know when we don't innovate for the United States we innovate for everybody and the Europeans innovate for everybody we collectively innovate and that generates growth until recently you explain in the next convergence the Western discussion of the developing world what's the correct term for it anyway I mean it used to be third-world that makes no sense developing it's almost impossible to find one that it's a moving target you know it is an all right okay no developing world still pretty good Jim O'Neill at Goldman Sachs who invented the term BRICS is now telling us that we can't use it emerging anymore because the big developing countries aren't emerging anymore they urged Brailler for it as Brazil BRICS is Brazil but can you remember all sure Brazil Russia India and China okay anyway quote the implicit assumption appears to be that sorry you're saying you say that the Western discussion is tended to focus on what we our interaction with the developing world quote the implicit assumption appears to be that these external interactions are the principal catalysts for change this is an incomplete and somewhat narcissistic view so it's not what we do to them but at the same time you said a moment ago that the openness of the world trading system is critical so what's taking place in these developing countries that is that is specific and internal to them well they start out in a relatively poor state they have to get everybody together this is the function of leadership and say look you know they're in a sort of low-level low growth equilibrium the leadership wherever they comes from as to get everybody to gave their labor the business community the agricultural sector whatever else is there and say look we're going off on a new path and here's the vision of what it looks like we you know it's a long journey we don't know and it's going to involve short long time horizon short-term sacrifice we're gonna have to invest at high levels and we're going to have to open ourselves to the global economy which will carry very big benefits but some costs in terms of risk volatility you know being buffeted that wouldn't happen if we were closed and the and the countries that managed to take that approach and get the investment levels up high enough to drive the growth then and set off on this journey and you contrast in the new convergence North Korea and South Korea hmm which half a century ago had about the same GDP of a little over a dollar a day and now the GDP in South Korea is about $20,000 a year right and the GDP in North Korea is about a dollar a day like where it's been and then here is in some ways to me this was the most stunning quotation in the whole book quote this is you quote when I started studying growth in the developing world I thought the subject was mainly about economics I no longer believe that explain that like I think that what I what I thought was sort of complicated high-speed dynamics in the economic sphere turns out to be only a piece of the puzzle and what I really believe now is that the critical things are the the governance the interaction of economics and politics the the policy-making process the wisdom with which it's conducted the intent to help all the citizens in the country as opposed to grab as much as you can for yourself when I go across the developing countries and ask myself what's the largest single explanation for the huge diversity of economic performance it falls in this territory all right segment three China Mao and the Communists take control of the country in 1948 you've got a very poor country with a lot of people being killed and in 1979 something changes tell us what changes now is the Dada the Gang of Four is in prison and I guess executed and dong Xiao ping was a very smart you know well educated peasant like Mao and a few of his colleagues get up and they say you know we're gonna lose the whole thing and what they meant of course is the Communist Party will lose its credibility if we keep up this performance poor performance in economic terms with no noticeable real benefits in the lives of people I mean it was compounded by the Great Leap Forward where oh I don't know 10 to 20 to 30 million people stopped numbers are staggering staggering the Cultural Revolution which really wasn't economic but and they said look they were pragmatic they said we have to do something different the centrally planning business isn't working it hasn't worked anywhere else either we have to use markets and and create a certain amount of economic freedom for people to act we have to let market incentives operate because people are just not there producing to quota or or something like that and we have to open up we have to start learning from the rest of the world and so they they did both of those things with with you know your result is spectacular let me try something let me try a quotation a chestnut of a quotation from Adam Smith on you might quote little else is requisite to carry a state to the highest degree of opulence but peace easy taxes and a tolerable administration of justice close quote one of Milton Friedman's favorites as you know yeah is that what it comes down to in China but the government just got off people's backs that it got out of the way in other words with China from this country that it's constantly back to what extent are they simply engaging in the kind of economics of which Milton Friedman would have approved they're just getting out of the way and letting markets operate and to what extent are they instead directing this economy making choices about capital allocation to what extent is that in some way it's still still a command economy it's it's a hybrid it they adopted the market system and appreciated what it does and the dynamic and they opened it up so they get the benefit of entrepreneurs creating new companies they get the benefit of export-led growth they get the benefit of multinationals coming in to produce things and eventually hope to sell them in this growing large market and all the technology and know-how transfer that goes with that foreign direct investment process they got all that right so a very large part of this story is getting out of the way given the starting point but there's another component which is government's invest in things that the private sector tends to under invest education human capital infrastructure and China is a star performer because because the government has a huge balance sheet a gigantic access to resources which they of course can misuse if they if they so choose but they chose to at least deploy some of those assets in not falling behind in creating the complementary assets that increase the returns to the private sector investment and let the engine run and where does the intellectual framework where did the intellectual framework for all of this come from did angel ping say in 1979 Wow we'd better get some of our best students over to MIT and study up on Western economics it doesn't seem to have been the case does it they've gotten an amazing amount right on their own is that right one of my friends went with McNamara to China McNamara I was then the head of the World Bank yeah Rober back in there and at don't shout things requests and don't show up being sat them down and he said you know we're embarking on this new course it's more promising you know to be honest with you we don't know much about running market economy and managing it and you're a bank but we don't think we really need money you know we're we save at a pretty high rate here but what we need is knowledge we need knowledge in everything and so would you please help us with that and the World Bank said about to bring you know the leading figures in economics from the United States around the world you know Milton Friedman James Tobin you know not people from all over the political spectrum to give lectures to teach them what they knew so they could start this long journey of learning how to manage an economy in transition the next convergence meeting the challenge of the domestic restructuring to sustain growth and asserting the right to develop and not be penalized purely for being large our major new mountains for clot for China to climb close quote penalized for being too large is that what you're talking about there is the International green Lobby you're not allowed to produce greenhouse gasses yeah that's part of it but the other one I think the more fundamental point but you know there is a disobey in there there's also an advantage I've discovered since writing the book but we'll come to that later no China has a per capita income now as a result of 31 years of high-speed growth of $4,000 less than a tenth of ours but it's a heck of a lot better than 400 dollars which is where they started and and they're growing very rapidly but because of the sheer size of the country in terms of population they're now the second largest economy in the world if you don't count Europe as one they just went past Japan and what they do has a significant external effects they are systemically important this has never happened before to a country with a per capita income of four thousand dollars you know smaller countries like Japan get to be systemically important when they get to twenty thousand dollars way further down the way further down the line by systemically important you mean the price of oil is up because of China yeah up the price of rare earth metals all over the world is up because China right that's what you mean yeah and financial stability if they do if they misstep with their three trillion dollars with the reserves they'll destabilize all feel it yeah so they know this but but so now they have attention you know they're we're still not a rich country measured in per capita income and there's domestic people who it forces that you know opinions that say well let's just still pay attention to our domestic growth in a development agenda will keep us busy and then the other group inside China is saying oh look and and outside China people who are sympathetic and want this whole enterprise to succeed say look you know it would be nice if you had the luxury to do that but you don't it's not even in your interest to ignore the external effects so actually you have to accept these as responsibilities you have to be part of the process through the g20 of managing the global economy and you have to make policy decisions with an eye to their external effects and that's and your general sense of it is that they are being responsible that they are welcoming or at least to live with these yes it's a learning curve I mean you know this is something you learn to do over time increasingly effectively you don't get up one more okay say I understand your global here as you know here's the other question on the at some level in the back of every American's mind on a scale of one to ten yeah with ten being the Soviet Union in the old days and one being Canada yeah where is China enemy friend adversary of some kind yeah I would say eight you would eight eight toward friend I mean we're not so totally aligned yeah alright there's there our interests in theirs are aligned better than most people think from reading newspapers segments for India the new convergence India is about fourteen years behind China and China's growth jumped up in the late 1970s while India's growth accelerated in the late 1980s China grew because the supreme leader Deng Xiaoping said we're going to grow hmm why did India begin to grow you know it was said more gradual I mean I admire the people the leaders in India who've engineered this particularly the current Prime Minister and the people who've worked with them you know they had a system that was malfunctioning xenophobic on the economic sense overly managed not as bad as central planning but way too big a state sort of sense of control and they just slowly dismantled that Pratt's a friend of mine who was work with Manmohan Singh all the way through this said you know there's two aspects to reform the first thing is the thing that Milton used to talk about you got to get the government out of the way if it's in the way and let the private sector run and they've been doing that and it's just harder takes a little longer in the world's most complicated democracy democracy you just said the word China unambiguously has put economic growth ahead of democracy I have heard over and over again from Chinese friends of whom there there are people in and out of Stanford University from China a lot as you know very and so if I had a nickel for every time I've heard this I I could retire we can't do it now but in 50 years we'll be a democracy do you hear that as well hmm all right India already is a democracy and it's a great big messy democracy they had no choice they're stuck with democracy what's the right model there if you're if you're Russia and say whoa we tried democracy that's a do you feel some some sympathy for for poutine is the example of China state control free markets growth versus India democracy and you've got to fumble around for a decade and a half before you even begin to get in here is this bad news about democracy no okay why not no I went the way I put it is look there's trade-offs there it probably is true that if you have an autocracy that is reasonably competent and smart and benign that is is acting as if it were a democracy and at least in some dimensions on behalf of the people then it probably can move faster if it knows what it's doing on the other hand it's more dangerous if they don't know what they're doing or they don't care about the people and go off and you know without really any constraints so people just put different values on these things that democracy is safer probably a bit slower but the truth is in the long run they can both get the job done all right it's almost a commonplace to say that China is getting infrastructure right you go to the new airport in Beijing or you just watch the Beijing Olympics all these spectacular highways and Olympics day whereas India to get from the airport into downtown Delhi you've got to get in a pedal card it seems almost these days still that the infrastructure why is that China understood the importance of infrastructure and because of the history you know that's taking over all the country's assets they they inherited the situation where the where the state had a gigantic balance sheet and by and large they've deployed that asset tremendously good effect so India is the more normal case most countries struggle to find the resources to deliver poor country to deliver enough services to keep the country the people in the country going and invest you know and there's you know obviously you know if we're talking about long time horizons and people are poor and have immediate needs the democratic process puts pressure to tends to squeeze out the investments right that the Chinese in some sense never really were forced to make that choice the Chinese are not over invested in infrastructure well maybe a little bit there's only a little yeah I mean people say that a country that's run the investment rate up to forty five percent of GDP must have some inefficiency in there and even if they don't know exactly what it is and there's some truth to that but but they've done an awful lot of good ok another commonplace innovation yeah it's said over and over again all right fine if we here in Silicon Valley design an iPod China will build a city to manufacture it but they can't design an iPod of the wrong there's that there's a some visit this gets this question there's still this is the one place where the question of culture still seems to come up again and again where is India you get the feeling that at the very top levels of education they're turning out really top-flight engineering talent that there's some openness to entrepreneurial activity that that the in various places in India there are little sort of nascent Silicon Valley's of their own springing up a is that correct and B why should it be is there some cultural component to growth here to innovation to innovation specifically yeah I doubt it you could I doubt it yeah I think it's um I think the entrepreneurs respond to the large opportunities in their environment and they're a little different in the to environment so there's a lot of successful entrepreneurs but they've sort of taken advantage of the supply chain opportunities in this what was their but to be honest with you on the journey to advance country status I think both of these countries are gonna be major innovative forces you do I do if you could if we could create two index funds Mike hmm actually I'm sure index funds of what of the kind I'm about to describe and one is just a straight index fund on GDP per capita in China 15 years from now you get to invest today and you get it out in 15 years and the other is an index fund on GDP per capita in India which one would you invest in bulls all right fair answer yeah no no I just because on diversification I think they're both a very good chance of sustaining the growth you do I do I really do so the nine percent growth rate in China is sustainable order 15 a decade and a half really at least a decade I think you know they'll slow it down on purpose the 12th five-year plan that des passed in the in March and is the operating game plan for the economy and the new leadership team coming in said it at 7 percent you know what they're doing is they're buying space if you like to devote the rising challenge of the income and other kinds of inequality and to sustainability issues you know Natural Resources environment energy efficiency so so they're just they think those are important that they'll slow themselves down in order to achieve those objectives segment 5 what it means for us the next convergence this is also a pretty compelling quotation I think got my attention let's put it that way currently the EU and the USA together account for 60% of g20 income g20 being the 2020 most industrialized countries know it's the 20 largest countries the big emerging markets thank you yeah thank you for that correction by the middle of the 21st century the output of China and India will account for almost 60% the United States and Europe by then will each account for 10% it will be a very different world in terms of the distribution of economic power close quote okay here's the first cut at it is the United States today experiencing what Great Britain experienced in the last century yes it is yeah we won't be dominant forever we'll be well I think we'll live well there's no reason to think we won't be competitive it's not a zero-sum game I mean the global GDP will quadruple then probably in the next 30 years with China and India and Asia in the lead I mean causing most of that increase but but if we are on top of our game look at think of it this way Peter after World War 2 we were dominant and we built up our enemies and that and the Europeans are now pretty effective especially they have great companies that innovate they compete with our great companies and we're doing fine in that dimension then the Japanese came along and we were a little scared in certain areas like autos but you know basically they've joined the global economy and it's bigger there's room for all of us and you know 20 30 years from now we'll have China in India and we won't be dominant anymore but we'll be doing fine as long as we educate people remain innovative and so on I find in talking to people that there's a worry that if they win we'll lose right right and there is no need for that well I go so let me push a little bit on that and the economic arena clearly if they win we win if we win they win everybody gets richer I'm very happy to have a little extra disposable income because I can buy toys for my kids that were made in China right and the prices goes down fine Walmart lives because China has pushed prices down yep everybody's better off terrific but on the military side they can it is a gigantic completely unitary country they don't as best I can tell they actually the leadership in Beijing does make decisions for 1.3 billion people and they can have a defense budget quickly that places all kinds of pressure on us I was talking to some Australian friends the other day and they said well Australia country of 23 or 24 million people way over there in the Pacific which right now is doing very well because they're taking things out of the earth and selling them to this country of 1.3 billion they're delighted this is a perfect example Chinese growth benefitting Australians but if it comes right down to it and they say this very jokingly but only half-jokingly if 50 years from now China decided it wanted Australia it could just take it so how do you how do you think about that how do you how do you put it ease people who get edgy when they try to project their minds 50 years into the future and see the Pacific patrolled by sleek technologically futuristic Chinese submarines you know don't forget we're gonna have two economic Giants and they their queen them in how they interact and how they discharge the responsibilities that go with their size and power will have a great deal to do with how the rest of us do and you know we can be optimistic or pessimistic or just say we don't know but it is important there's going to be two of them so we place our big geostrategic bets on the Indians well on the balancing effect oh yeah absolutely okay but I think there's a reasonable chance eeeem concerned by this Mike no I think I mean look I care about the world of my children and grandchildren are gonna live in and if if if China or India or god forbid both of them turned aggressive with respect to the rest of us once they achieve this a position of relative dominance and don't behave the way we've behaved then there is real trouble a world of conflict you know but even between them you know I mean there'll be twenty percent of the global economy you know each of them and the rest of us will be the other sixty the rest of us if they got aggressive would band together okay so it may turn it there's one thing I do want to say about sure one of the reasons China is resource poor and they do have a legitimate fear that if they are militarily weak then in a world of increasing pressure on natural resources they could get cut off they're really worried about that and part of them say resource weak oil yeah just compare it with Africa I was knee-deep in mineral you name it and they got it right and purp and especially per capita in Asia tends not to jet pansy dream case but but aegis resource-poor so the chinese liquor under they say well we have to be operating from a position of strength not because we want to be aggressive necessarily but we can't be weak and vulnerable to being cut off right europe mm-hmm for um how to summarize the problems quickly slower growth in the united states from from the 80s on say you've got in France which is Germany is this is in the best shape economically France isn't that bad it's one of the great pillars of the European Union and even there you've had an unemployment rate of nine ten percent for some decades now among young males it's twenty four than twenty percent yeah and now of course we've got the tremendous pressure on the euro Greece is fundamentally unproductive aside from a center of tourism will the Germans put all kinds of problems with Europe question will the rise of China and the rise of India set a kind of example what will how will how will Europe or the United States for that matter in policy terms will agree will we respond to these two rising countries well I think in American case well no yeah let me take the American case because we're at least unified so we are I they're gonna you know my best guest is will muddle through and fix the fiscal situation eventually we will probably cut out some of the sort of growth oriented future in you know oriented investments on the way through because that's what you do when you're under you know financial stress whether you're a country or a company but eventually I think we'll get back to our normal pattern which is you know kind of being pragmatic and investing heavily we're just under investing now Peter we're under investing in the aggregate we're under investing in um crucial things like parts of Education in terms of effectiveness and infrastructure and in some parts of energy and whatnot and we're not even saving enough to fund our own investment that's why we're running a current account deficit and this has just eventually got a changeover or it'll weaken us over last question Time magazine founder Henry Luce yeah famous essay right after the Second World War and it which he referred to the 20th century as the American Century to whom does the 21st century belong I think it's more dispersed I think it'll I think it'll belong to us in Europe and in Asia broadly East and South I don't I think will be you know we're on it we're on a journey where we started with the 15% you know at the end of World War two after this 200 years of divergence to pray but now I don't know what it'll be 75 or 80 percent you know live like us right if we don't destroy the planet on the way through and instead find ways to to be less energy-intensive and use the resources that we have in a gentler way but I think we're clever enough to do that and and that's that's uh that's just world in which there's a dispersion of economic activity and power Michael Spence author of the next convergence thank you very much thank you I'm Peter Robinson for uncommon knowledge thanks for joining us

Channel: Hoover Institution

Views: 24,375

Keywords: HooverInstitutionUK, Economics, global economy, emerging markets, innovation, jobs, poverty, China, India

Id: sDKo38aIMHk

Length: 36min 32sec (2192 seconds)

Published: Tue Jun 21 2011