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'Advanced Economies Will Restore Balance'

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Michael Spence is a former chairman of the Independent Commission on Growth and Development, which focuses on growth in emerging economies. In 2001, Spence received the Nobel Prize in Economic Sciences for his work on markets with incomplete and asymmetric information. His recent book, The Next Convergence: The Future of Economic Growth in a Multispeed World (Random House) lays out a framework for how the global economy will develop over the next fifty years. In an email interview with Businessworld's Jinoy Jose P., Spence talks about the book and beyond.  Your book says the recent growth in developing nations is leading to a convergence with their advanced peers. That sounds like an ambitious thought. Could you talk about how this idea came to you? To get there, that is to the convergence conclusion, one needs to think in terms of relatively long time horizons; several decades. I looked at the spreading pattern of growth accelerations with special emphasis on China and then India following. Recently, the significant effect China has had on sustaining emerging economy growth in the post 2008 period after the crisis. Emerging economy growth now seems sustainable even as the developed economies struggle with growth and issues that affect it. This is new and this degree of decoupling would not have been true even 10 years ago, I don't see anything insurmountable that will stop the EM growth. The global economy remains open and an enabler of technology transfer and catch-up growth. There will be sustainability challenges, globally and especially in Asia, (east and south) where most of the growth in absolute terms will occur. Asia will cause the global GDP to triple in the next 25 years. Asian countries (lead by China and India) will have modified the growth pattern of their predecessors in terms of natural resource impacts, in order to complete the journey. You can go country by country and identify these challenges, which are substantial and vary across nations. Perhaps to some they seem daunting. But developing countries understand the growth dynamics and required reforms and policies and have become very good at economic management and at implementing the required adjustments. So while it is not a sure thing, my best guess is that the major economies in the developing world and many more (in part carried by the large economies' momentum) will continue to develop and grow and will join the ranks of the advanced countries between 2030 and 2050, depending on where they are now. We now see how economies, at least a few, in Europe are in trouble. The US is also not a bright story these days. How would you link such a scenario to the central thought in your book? These economies are in serious difficulty. Europe has an immediate sovereign debt and contagion problem. Then they will need institutional reform and greater fiscal centralisation to produce a more stable structure in the future.  All this has to be done by agreements among countries with different circumstances and perspectives. It is difficult. The US has dysfunctional politics, a big fiscal challenge and structural issues associated with unbalanced pre-crisis growth. I can elaborate on these. Roughly, domestic demand has declined as a result of the reduction of excess consumption. That means the non-tradable sector and part of the tradable sector are not growth engines. That leaves the part of the tradable sector that is participating in emerging economy growth. That part is growing, but the result is overall growth is weak. In addition, the tradable sector is not an employment engine, and has not been for a couple of decades. That means that the employment problem looks persistent and serious. But the effect will be to slow them down for some time. Both growth and employment challenges will be persistent if either one or both have a major downturn, which will slow the emerging economies but not stop them. Eventually the advanced economies will restore balance. But it may take five years or more. For the emerging economies, the big risk is not slow growth in Europe and the US but a huge downturn. The fact that they have slowed down, while slightly accelerating the rate of convergence. But that is not a first order effect. Do you think there is a structural problem in the way global economy has been managed? Yes.  First, the extent of economic integration is much further along than any form of effective global economic management. That is not a surprise. Integration has been very rapid. Developing effective global economic management is difficult and will take time. It requires building institutional capability and trust. And it requires some delegation of national sovereignty. In the meantime there will be unaddressed imbalances and as a result, risk and volatility. For much of the post war period, the US and then the US and Europe dominated and largely provided what global economic management there was. And there was by and large, stability, a functioning GATT, now the WTO, adjustments to the international financial system. It was not perfect but it did a lot of good. The governance and economic management challenge has become larger and harder because the major emerging economies are now systemically important and are rightly and necessarily part of maintaining global stability and balance. But there is now more heterogeneity in the group (particularly the g20, where over 85 per cent of global GDP resides. So we are embarked on a process (probably lengthy) of learning how to manage and regulate the global economy. There are a lot of challenges. It does not help that Europe and the US are preoccupied with their own problems. In addition, crisis and post-crisis policies have caused distortions in the global economy, like large capital flows into the higher interest rate emerging economies, requiring unusual measures to counteract them. break-page-break Where do you posit China in the whole thesis? China is the second largest economy in the world, but still has a relatively low GDP. It is entering the complex middle-income transition, with several important structural shifts on the supply and demand side of the economy, which are required to sustain growth. In addition, china is now systemically extremely important, dominating large parts of trade and with 3 trillion dollars of reserves. Their policies have a direct effect on others and on global stability. Thus far, china is handling the balancing of its domestic growth and development agenda with its growing international impacts and influence and responsibilities. India is rapidly moving toward the same position. At 8 per cent growth rates, a reasonable estimate that in terms of per capita income and GDP, India is about 12-13 years behind china. Recent setbacks to finance capitalism prompt many to say that the heydays of free market and finance capitalism are over. In your opinion, do these events show that economies lack proper regulation? One has to distinguish between the financial sector and the real economy. The lightly regulated and self-regulating financial market approach is clearly discredited and is being abandoned. This is the right approach. Financial systems left alone and unregulated, become unstable and do considerable damage to the real economy. That has happened in developing countries in the past and now in the developed countries. Capitalist dynamics and incentives in the real economy, however, properly supported by public sector policies and supportive investments (in education, infrastructure etc) have not proved dysfunctional at all. In fact, it is the dominating and only successful model of sustained growth. There are lots of variants across countries, but they have the common characteristics of price signals, market incentives, decentralisation, and the dynamics of entry, exit, innovation and productivity growth, and also over time, structural change. You say that information technology is one of the most powerful factors influencing growth today. Isn't this thought a bit aggressive? Well perhaps, but I don't think so. Information technology has been the basis of the integration and increasing efficiency of global supply chains, financial markets and multinational companies. It has reduced transaction and search cost. It has (especially in India) made valuable human resources accessible in the global services industries. With 4.5 billion cell phones, hundreds of millions of people have or will have access to information, financial services efficiently delivered, and a host of other services. One needs to remember that up until 15 years ago, most people didn't have access to a phone, let alone the internet, because of the very high fixed/capital cost of the landline system. That said, what according to you are going to be the most important factors that will define this era of global economic growth?  Among the dominant themes will be the growing power and importance of emerging markets and related global coordination and governance issues. The shifting of the economic centre of gravity of the global economy to Asia (east and south) is important. So is the reduced dependence of major emerging economies on the advanced economies, the huge challenge globally -- but mainly in Asia -- of finding, over time, sustainable growth patterns that do not put excessive pressure on natural resources and the environment, and the management of the global economy for stability. There are some important advanced country structural challenges in terms of growth and employment that (with the exception of Germany and some of the northern European economies) have not been addressed; the evolution of Europe, either towards greater integration or the reverse. The status quo is not stable and it could go either way. Whether Europe is a unit or a bunch of medium-sized economies will make a huge difference in the global economy in the next twenty years, in all kinds of ways. On a lighter note, you quote Menotti, George Bernard Shaw and Paul Samuelson as a start to the book. That's a deadly combo! Tell us how this trio has influenced you.  I just liked the ideas they expressed. Paul Samuelson was a great economist with a unique combination of technical virtuosity and a balanced view of the world. I thought that his reminder that efficiency is not the be all and the end all was an important message and a reminder that distributional issues and inclusiveness are inherently important elements of effective growth strategies, in all countries. The other two, GB Shaw and Gian Carlo Menotti in different ways, seemed to me the capture the importance of humility in the face of the kind of complexity that we face, in all countries, as we make this journey together. George Bernard Shaw captures the importance of flexibility of mind in response to new information and evidence. Menotti is more purely a statement of the kind of humility that leads to an open mind and effective decision-making. In the post-crisis period, humility seems to me an important starting point for reforms and regaining trust.