Russ Roberts

Spence on Growth

EconTalk Episode with Michael Spence
Hosted by Russ Roberts
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Nobel Laureate Michael Spence of Stanford University's Hoover Institution and the Commission on Growth and Development talks with EconTalk host Russ Roberts about the determinants of economic growth. Spence discusses the findings of the Commission's recent report and how it compares to earlier attempts to uncover the sources of growth and the lack of growth such as the Washington Consensus. Spence makes the case for government provision of infrastructure including education and the problems of corruption and governance. The conversation closes with a look at Spence's career and the lessons of that experience.

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0:36Intro. [Recording date: January 18, 2010.] Commission on Growth and Development work, started in 2006. Background on mission and how it's unfolded. Mission had two parts: feeling on part of those who became part of the commission that the importance of growth is that it has been an enabler objectives, poverty reduction. Difficult problems in the developing world without the tailwind of growth. Never meant to be negative with respect to important achievements in health, education, other things. Complementary. Also, Washington Consensus that came together in the late 1980s-1990: experience accumulated in developing world: India, China; growth had turned up after a long hiatus in parts of the world, Africa, South America. Experience plus academic world; goal to assess what we still didn't know. Outlines of the Washington Consensus: put together put together principally by John Williamson with colleagues; attempt to try to understand what the key necessary had to be met in order for a developing country to grow and develop. Put together a list; even to this day sensible; list has been expanded over time. Problem wasn't the idea; it was the way it was interpreted. Interpreted as a set of policy actions by government, or a strategy that if you did that you were pretty much assured to grow. Turned out not to be true. Misuse of the Washington Consensus was that it was a kind of formula, necessary and sufficient conditions for growth. Now, most of us think of them as a close approximation to necessary conditions; sufficient conditions missing. Problem really was in the application; got turned into a prescription for a very limited role for government, including Latin America: the market will take care of most of it and if the government gets beyond a certain size it will start making things worse rather than better. That was not what was intended by the framers of the Washington Consensus. President Obama in inauguration speech: the issue isn't whether the government is big or small but whether it is effective at doing things that require collective action. Washington Consensus was an emphasis on markets, rule of law, private property; but also restraint on government spending because developing countries didn't spend their money wisely. Got interpreted to mean little or no government rather than wiser government. Wiser government tricky. Commissioners mostly policy leaders from the developing world; few exceptions: Bob Rubin--former Secretary of the Treasury--Bob Solow, modern growth theory and Nobel Laureate. Went in thinking it was fairly complex economics; came out thinking this is a lot about government and governance, not thought of as economics. 22 commissioners altogether, most from the "real world." Heads of central banks. Would have predicted in advance that it would be hard for politicians to be brutally honest; hard enough for academics. Was there a lot of political infighting? No. Harder in public forum; not speaking for one's country; output was the Commission's output. Their experience in their own thinking didn't always lead them to agree. Very controversial aspects. Decided to just say they didn't agree when they didn't agree.
8:20Produced report about two years after the Commission was started in 2006. In 2008, Report came out. Sentence startling, might be first of the Overview: "Since 1950, 13 economies have grown at an average rate of 7% a year or more for 25 years or longer." Rule of 72: If you can grow at 7%, you double the size of your economy every decade. If you do that for 20 years, you quadruple the size. What was the secret? Learned two things; don't want to over-generalize from the successes; have to look at the failures and the also-rans if you want to get a complete picture. Understood that; used device to highlight some things. Openness of the global economy, by policy, wise policy on the part of the United States, European Union, advanced countries after WWII was the enabling factor. Two parts: huge markets for developing countries that can find a place in them; and a lot of knowledge they can import: technology, management capability. Increases productive potential much faster than you can do it on a standalone basis, or faster than the advanced countries can do it. Overwhelmingly the dominant factor, more than aid. Then a whole lot of things that go on inside an economy, some political, some economic that take advantage of that favorable environment. On economic side: very high saving and investment levels are critical, including on public sector side: infrastructure, education. Public sector under pressure in a poor country, so investing their 5-8% for the future rather than the present; have to have a supportive population. Takes leadership; people will make those sacrifices if they think their children and grandchildren will be better off than they are. People do that; but they have to believe two things: that it's possible and that their all in it together. Inclusive element that is essential.
12:46Two aspects of public activity. Infrastructure in the United States: bridges, tunnels. In poorer countries, much more basic than that. Can't get the crop to the port; can't bring stuff from the port to the people; can't use a real truck. Educational part harder to understand. Lots of countries pour money into education but get no return; didn't get education but just spent money on it. Ironic for the father of signaling theory, which downplays education for its role in creating human capital and emphasizes its role as a signal to talk about its importance in developing countries. Inputs are more like requirements: if you have one without the other it tends to slow you down. Not surprising that economic development tends to start on the coast or around rivers; historically true, infrastructure already there. True in China case. Paul Collier: a lot of landlocked states in Africa. Infrastructure expensive; in a poor country tends to get pushed aside by immediate problems like disasters, famine. Not trivial things; crowding out effect dramatic on long-term growth. Most of these countries--Japan's an exception--were very poor when they started growing: China, Korea; Singapore was a poor fishing village. Big sacrifice, tough choice; requires inspired leadership. Education: academic studies using data and cross-section studies turn up a huge variety of results. Specification of the model complicated. It is true that there is a tendency to measure education by inputs to it--how much money is spent on it, how many kids are enrolled. When you measure the output, you get surprising and disappointing results; do not get good output in terms of development of young people; ubiquitous. True in the United States also. We often give it away, and people don't treat things they are given with the same care as things they earn. Subsidized education. Data support that. In many developing countries there is family commitment to education including financial commitment, in cases where it seems to be working well. In India, nobody monitors public employees. Resembles political machine from certain American cities; patronage system. In some cases young women don't get to go to school because when the family is under pressure, they are the ones who are pulled out. Complex challenge to up the quality.
19:15Globalization: You don't want to just look at the winners. Any examples of countries that have cut themselves off from the global marketplace and have been successful? No; unable to find any. You can cut yourself off or try to partially cut yourself off and for a while lots of people thought that was a good idea. Runs out of gas; may look like it's working for a decade or so but not going to work for 25 years. You pay an increasing price in terms of cost or efficiency by taking that route. Examples even in advanced countries. Canada, Australia, and New Zealand all had very high tariffs, import substitution policy that developed their industrial sectors; have all abandoned them because the costs got too high. Can measure the costs: amount of protection you require to have an automobile in one of these countries; end up with tariffs that are effectively 80%; too expensive to support this strategy. Lose the economies of scale and lose that competitive edge. Runs out of gas: thinking of the United States and the big three auto makers. In a lot of industries, three competitors is plenty. But in the United States something happened in the 1950s-1970s that made the industry relatively cozy; something then happened in Japan that forced that the big three to work a lot harder and some of them couldn't do it. In a developing country, subtle aspect of policy: want to have the objective of being open and fostering competition, but it is possible to do it too fast. If you had relatively inefficient sectors and then expose them to global competition too fast, the Schumpeterian job destruction instead of job creation can get out ahead. Generally see countries that are succeeding going in the right direction but at a measured pace. Didn't make it easy for the automobile companies; many automobile companies elsewhere operate globally and build cars for countries where the price of gasoline is much higher. Managerial cultural dynamic. Get scale economics: Adam Smith, comparative advantage--what you are relatively good at and can compete in. Advantage you get from the global market. Seeing the potential for an enormously large pin factory that sells to the global market and thereby takes advantage of specialization and application of capital is the road to productivity. Also the road to vulnerability: dependent on the world economy; recent crisis. Lower variance if you are cut off from the global economy, but the mean is not very high.
25:26Corruption. Challenge in these stories: government being the right size, enough to cover infrastructure. What role does governance play in success and failure? Important role. Wholesale corruption--grand theft--is devastating because there are just not that many resources in poorer countries. Banks in Switzerland and the Cayman Islands. Paul Collier. Major issue. When done well, effective leadership. Botswana: president came from the tribe where the diamonds were found, well-developed regional decision-making process at the tribal level; these belong to the country, off in the right direction. The other road is a pitched battle. Natural-resource-wealthy countries: competition to control the resources when cash flow is in a geographically limited place. In developed countries, resources relatively dispersed, in the brains of people. The most you can extract from it is via income tax, not like what people can do to oil and diamonds. Back to the 1950s: where in the developing were things predicted to go pretty well: Africa. Where major problems: they said Asia. Dead wrong. Underestimated the importance attached to human resources when developed. How were they going to make the single asset of people better.
29:46Policy and how we might get more than 13 economies to grow at 7%. Collier and Easterly: Russ pessimistic about the ability of outside influences to do anything in the short run to help. No evidence we can help them; hope but no evidence. Optimism? Have tried aid. Other than opening our borders and trading is there anything the developed West can do for the less developed world? Can do a lot in humanitarian terms. Even countries that are going badly still think it is their business, so external influence, interference, not likely accepted even for poor countries. Humanitarian disaster, manmade or by forces of nature, situation changes. Palliative. Easterly and Spence don't agree on much agree on this; part company on how to think about the role of the state. Effective government, effective leadership an important input; so is the private sector dynamic. When they come together, powerful. Washington Consensus overreaction. Challenge is: selectivity bias. If you look at the successful states, their governments tend to be fairly well run. We don't know much about how to get from A to B. What are we going to do about that? Who is "we?" Not too pessimistic: demonstration effects have enormously large impact; lots of examples in that. China: Deng Hsiao Ping went to Singapore and then New York and it just opened his eyes with respect not only to what was possible but how you'd go about it; why the market was so important. India. A big neighbor, similar in size and population has a big influence. China now starting to have an impact on the developing world both in knowledge transfer and in using their resources. People worry about the international political economy. Nation, identity-building, adapting policies. Reasonable basis to hope we can return to that pattern in the post 2008 financial crisis period. In Brazil, grew rapidly till the mid-1970s, more or less stopped dead in its tracks for 25 years; now is growing very promisingly. Haven't listed those 13 countries. Cultural question: Japan, Korea, Singapore, China, all in Asia; India, close to Asia. How much is a good kind of contagion where the success of your neighbor puts pressure on you or you learn from your neighbors. Not a lot of success in Africa or Latin America to be copied. Any from those areas? Brazil and Botswana. Oman. Majority are in Asia. India and Vietnam about to join the club but haven't been at it long enough. We don't know; but it looks like the demonstration effects are more powerful regionally, so probably a cultural component to it. Hard to reach a definitive conclusion because there are other factors. One of the disadvantages the African countries have is that they are new. Conflict/tribal structure; not a lot of years in building national identity. When push comes to shove, do we all think we are in this together? Still building that identity. United States, China. Deeper questions about the politics and cohesiveness that turn out to be constraints on collective choice, policy, decision-making and investing.
39:17What are the most exciting areas in research on this topic of growth that have the most promise? Work in political economy: incentives created by the economy and the effect of the political system on that and vice versa. Once you put the political system in the model and make it endogenous--rather than thinking of development as having exogenous government policy and the economy reacts, so the model is about the economy. The political economy research agenda is to make the politics part of the model. If you talk to policy-makers, they say it's like you're telling me you've got a model that's going to predict what to do tomorrow. Wonder about where are the levers. What's exogenous with this? Answers will turn out to be interesting. There are constraints on politicians. Creative part in developing country context has to do with sequencing things so you can get things done without too much political resistance. Recipe problem: you might know the ingredients--Washington Consensus--but don't know when to add what to what, don't know the process. Bob Solow used exactly those words. Recipes are country-specific. Nobody thinks that a country with a literacy rate of 40% is going to grow--certain things that everybody agrees on. Nobody thinks that a country where you have to take a horse and buggy to get inland is going to grow at high rates.
42:54Practical aspects of the Commission. Two major reports. First report: requirements for growth, success. What are the prospects that people are going to listen to this? Does the nature of the Commissioners being non-academic help or hinder it? Helps. They are not anti-academic. Highly educated, came to work interactively with the best of the academic world. Conversely, the best of the academics benefit. Because of who the Commissioners are, the Report seems to have a life of its own in the developing world. Public attention. Growth rates of 10% are out of the range of the experience of the developed world. Most popular part of the report: idea of one of the Commissioners: fun, Bad Ideas. Smash hit. Email, newspapers: governments doing 18 of the 25. Good idea to put it in the negative. Anti-demonstration effect.
45:55Haiti. Don't know how horrific it's going to be. Infrastructure: there's nothing there, not about buildings but about government, the normal channels you would go through in a developed country. Part due to so much being destroyed; part due to its not being a good system. Good opportunity to start over? Observation: very difficult to change things when they are not going well; but when they are going horrendously badly or there is a crisis, that's when you have a chance to change things. In a crisis the constraints that normally operate get removed. Lots of examples. Crisis doesn't always produce good results; does produce an opportunity. Make a massive humanitarian effort, and then keep going. Tall order. Have the resources; relatively small country; neighbors in North and South America; lots of relationships: Governor General of Canada is Haitian in origin. Reason to make a supremely large effort. As in every case, they are going to have to take it over. Let the Haitians move to the United States--if we had a different welfare system. Incredible challenge to deliver the aid. Could increase GDP worldwide overnight by 10% practically overnight--meaning in a decade--just by lightening up on immigration. Right, but a tough subject. Natural that some people would be opposed on personal grounds; others opposed on ignorance, assuming it would hurt us; others would be helped by having more folks here. Where young people are coming into job markets and the jobs don't match, enormous matching problem. Lots of countries where even the highest growth rates you can imagine wouldn't have the absorbing capacity for these people. Probably need supervision. In a country like the United States, people move to jobs and jobs move to people. In the global economy, jobs move to people, works pretty well. People are more constrained about moving to jobs. Not letting the pace of creative destruction get too far ahead of the labor market: crude understanding of the labor market. If you make it more expensive to hire and fire people, labor market more dynamic. But also risk, other things we haven't thought about. Right now, with 10% unemployment in the United States right now, it's still a dynamic place to be. In poor countries, creative destruction doesn't work the way it works here. Cultural, infrastructure, legal environment? Different thing. We don't understand it very well. Barriers in incremental employment creation are partially man-made. Relates to the political economy discussion. If you have a formal labor market and a huge informal labor market that is less skilled, less educated, you have a dual economy situation. If you try to work with the formal labor market, may not work very well. End up with barriers to the people who are not in the modern economy entering it.
54:12Wanted to ask about second report; instead will put a link. Deals with financial crisis and global economic crisis. Instead: Spence, unusual career. Standard academic economist, innovative and sophisticated mathematical highest level stuff; became dean of a world-class business school--Dean of faculty of Arts and Sciences at Harvard first--narrow academic economist; academic administrator; changed gears to become dean of a business school, faculty who view themselves as largely self-employed, fund-raising; then win Nobel Prize; then chair international commission. What have you learned? Wiser than at age 25. Which experiences valuable, what relearned? Lucky to have these opportunities. Dean at Harvard and then at Stanford, viewed as leadership. Enjoyed getting to know the people; inside view of management as people were on boards. Commission: leaders in the political and policy area. Came to appreciate not only the people but how many different kinds of skills and capabilities and imaginations and intellects it takes to run a successful society and successful economy. Complex set of things that go into a productive, innovative, rewarding opportunity for society--have a sense of what that means. How can the rest of us understand that without following your career path? Everybody has brushes with this. Nobody ever has the complete picture. Society manages to run where nobody has the whole grasp. People's experience gives them a sense of this: institution they are in or their community gives them a chance to do something different from what they do at work. Young people are very creative; kind of have the advantage of narrowness of focus. Fixated on informational structure of markets and how that worked. As you get older--interview many people, contact with many people, tend to acquire managerial responsibilities--not just the direct experience. Maybe give up the innovative edge and acquire the broader view; sense of how important people and their values are in making things happen. Leadership from values, integrity. Focus: what people say about entrepreneurs; Adam Smith: grotesquely inaccurate assessment of their chances of success--which is a good thing because if they knew their real chances they'd give up. Narrowness of focus: in your 20s and 30s you think you know everything. Handicap, but advantage to it because you focus. Doing this program you learn how little you know. Not a bad system. Spence: Youngest daughter graduated from high school, gave graduation address; you need to understand that you are entering the period when you are most powerful and most creative. Later on you'll be wiser, more balanced. Natural cycle. Understand where you are in that and throw yourself into it. Interview with Commission is not meant to last. What next? Stay involved with things related to the global economy and the developing world; writing, research, teaching. Country level involvement. China, Latin America. Agenda bigger than time available. Indonesia, Commission member from there; switching jobs. Stay involved with the private sector, boards, investment.

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COMMENTS (10 to date)
arc of a diver writes:

I liked listening to this, but wish there was more on where the Washington Consensus stands today. I thought its death had been exageratted after the 2008 crisis.

I also wish economists who discuss the developing world and future trends would bone up on technology, ranging from new malaria treatments to $100 laptops now in Latin American and Africa.

By 2022 or so, just 12 years away, those $100 laptops will be 1,000 times more powerful than today, and have the speed of a human brain. Something to consider when hundreds of millions currenetly impoverished will use those.

keatssycamore writes:

The scary part of this podcast is where Spence, at about the 1:02 mark, is talking about how important it is for young people to develop "values and integrity" and for older people to recognize the folks who have the "values and integrity".

Personally, I haven't seen much recognition of or promotion of either of these supposedly crucial elements in business & politics over the past 20 years and it's not as if I've been observing the Nigerian economy for those 20 years.

Joseph Steinberg writes:

I'm very skeptical of Lee Kuan Yew's "Asian values" argument. After reading Michael Schuman's "The Miracle", I am impressed by the playing field pax americana has played in East and South Asia. For all the poignant biographical sketches of diligent capitalists, Asian tigers started in a geopolitcal context that wanted them to succeed. And, not only did the US pour billions into many of these states, enterprises are horizontally integrated into a global corporate juggernaut. So, I ask, what is the discount for not having to pay for defense - Japan's Yoshida Doctrine assumes American patronage explicitly? And, in a context where capital is pouring in, how do we measure efficiency?

I wonder if Africa states just received grants and defense guarantees, as well as horizontal integration resulting in rapid industrial development, and that it was an American priority to make that work, if Africans could have used that money more efficiently. I tend to think that Asia's "success" is only a symptom of a deeper cause: Asia could not fail. But, did we get all we wanted, or what we all really needed? I also refer to former Secretary of State's assertion that his efforts to create the EEC in the 40s and 50s forced him to turn away from problems in East Asia, like the communist revolution in China. I wonder, too, if, in the context of Africa's human and natural resource capital, America not only spent too much diplomatic capital on Europe but none on Africa.

Joseph Steinberg writes:

"...the playing field pax americana has played in East and South Asia."

Should be:

"...the playing field pax americana has provided in East and South Asia."

Sorry

Seth writes:

Russ - I loved the connection between our dispersed resources in the U.S. (our brain power) and the method of extraction used by government to tap this resource (income tax). Nice job.

American writes:

I thought Spence kept approaching the "government is the problem" idea but couldn't quite bring himself to say so. Although this is the obvious conclusion.
Notice that he agreed with Obama's speech for "better government" but Spence changed it to add "we want a better government for things that require collective action." If you follow that requirement for collective action that ends up with a much much smaller government.

Mort Dubois writes:

I was under the impression that South Korea was a relatively corrupt country, based on my vague memories of news stories over the past decades. Perhaps it's not so corrupt in the ubiquitous/every transaction way that some countries are corrupt? It seems to have grown quite well. Is it useful to talk about different types of corrupt countries? Private vs. public corruption? Old-boy-network kind of corruption? A show devoted to the taxonomy of corruption and how different kinds influence growth would be very interesting.

AHBritton writes:

American,

"I thought Spence kept approaching the 'government is the problem' idea but couldn't quite bring himself to say so."

I think he didn't say this because he didn't believe it. I think "government is the problem" is a horrible way to look at the world and the main problem I have with the libertarian outlook. Things are more complicated than that. If you're in a country where local gangsters and warlords control and fight over influence and the majority of the local population is just caught in the middle as pawns in their game, proactive government involvement might be the best solution available. If you are in an area with an extended and continuous violent struggle going on, you might pray for any kind of strong government, even one you disagree with, in order to end the violence. This intern could (theoretically) pave the way toward economic growth... or not. There aren't always easy choices. If you were in Afghanistan in the 90's would you root for the Islamic extremists known as the Northern Alliance or the Islamist extremists known as the Taliban? Or support your local warlord? Or hold out for the hopes of an anarcho-capitalist utopia breaking out? Not really a more or less government question but, as far as growth is concerned, a strategic one.

Benedict from Australia writes:

Good podcast, as usual.

Interested to hear comments on Australia abandoning protective tariffs on motor cars. While protection has been reduced significantly over the years, tariffs on motor cars (and industry policy) are still with us.

http://www.theaustralian.com.au/news/nation/car-tariff-cuts-no-help-to-economy/story-e6frg6nf-1111117064614

It seems the motor car industry has powerful lobbyists in every country.

American writes:

AHBritton, thanks for the comments, very interesting in a practical sort of way.

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