The Commission on Growth and Development

<p><em>Romesh Vaitilingam interviews Michael Spence for Vox</em></p>
<p><em>January 2009</em></p>
<p><em>Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/3456]</em></p>
<p><strong>Romesh Vaitilingam</strong>: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with Professor Michael Spence of Stanford University and Chair of the Commission on Growth and Development, which reported in May 2008. Mike and I met at the American Economic Association's annual meetings in San Francisco in January 2009. I began by asking him how the project bega</p>
<p><strong>Michael Spence</strong>: Well, the guy who was the secretary of the Commission - a wonderful guy named Roberto Zagha, who's a long-time World Bank guy - I had given, at his request, a lecture at the Poverty Reduction Economic Management Network part of the Bank's meeting in 2005. He asked me to talk about growth, and he wanted a micro-economic perspective, which was my background.</p>
<p>I'd been thinking about information technology and what it was doing to the structure of markets. Somewhere along the line, I had realized - although I don't know how Roberto knew this - that the big effects of this technology had to do with sort of distance, collapsing distance and time, which is now so well known it's almost not worth saying.</p>
<p>I was wondering what I was going to do. But there was a kind of element of inclusiveness, integrating things into the global economy - whether they're labour markets, batches of valuable human resources, or reducing transaction costs and making extended supply chains run much, much more efficiently, you know lower product cycles and so on. So, he asked me to talk about it. And out of that came a suggestion that why didn't we put together a commission of this type.</p>
<p>The way we did it was we decided - because they knew a lot of these people, and I knew a few of the others - that we'd ask them and see if they thought it was useful. The underlying idea was to focus on growth, because there was a sense in which in a lot of very useful activity that sort of growth and its relation to poverty-reduction has &hellip;.</p>
<p>So that's kind of how we got going. We conducted the test, and virtually everybody said, &quot;Yeah, let's give it a try.&quot; You know the list of people on the commission. So then we said, &quot;Will the World Bank support it?&quot; We wanted it to be independent, and this is not a group that's going to work for an institution. We asked the UK government, the Swedish government and the Dutch government, Australia, eventually, and the Hewlett Foundation. They all supported us, and that's where this mass of $4 million apparently came from.</p>
<p>I don't know where that's all coming from. I think a lot of these things are sort of fighting old battles, and I wasn't around. I was around, but I wasn't a part of it, because I was doing something else. Then I think we basically got the group together.</p>
<p>There was a transition in the World Bank leadership. Jim Wolfensohn stepped down, and Paul Wolfowitz came in. Wolfowitz, because he was new and had a different approach to running the bank - it was a little rocky. We basically didn't get an answer about whether the World Bank was going to support it, and because Roberto and Danny Leipziger - who's the head of the PREM network and vice-chairman of the Commission - that was sort of important.</p>
<p>I eventually, actually, almost gave up on it. Then I wrote and email and said, &quot;Look, we've raised some money and we have these commissioners on board. We ought to either abandon the thing and give the money back...&quot; I meant immediately - this was in early 2006 - and that seemed to unlock it, so we proceeded.</p>
<p><strong>Romesh</strong>: What do you think the key new contributions of the report are to the debate about this massive issue of achieving sustainable growth in so many impoverished countries in the world?</p>
<p><strong>Michael</strong>: Well, I'm not sure I'm the right person to ask. I can tell you what the hope was. The hope was that we would characterize growth sufficiently accurately to accomplish a number of things for practitioners. One is to embolden them to be, you know, a little aggressive, a little experimental, and to kind of do things their own way.</p>
<p>We wanted, at least, to support the notion that this really - while there are principles are they're important, what an economist would call the outlines of a model and which provides some guidance - this gets to be country-specific very quickly. And the politics, the sequencing, the occasional opportunism when something presents itself, the getting rid of bad ideas when they surface is probably - none of which appears in the kind of purely economic version of it - seems terribly important.</p>
<p>So, we wanted to provide in a sense a set of tools, a framework, that made people a little more confident about venturing out to develop a set of strategies and policies to achieve growth. We wanted I guess, also, to underline its importance and to underline it in such a way that people - the well-intentioned leaders in a whole variety of countries - would think&hellip;it's sufficiently hard to do that; if you don't get up in the morning and make it a high priority to worry about this, it won't happen. So we really wanted to up it on the agenda. Not to the exclusion of other things -not security, not health and not sort of basic human rights, for sure - but make it a priority.</p>
<p>One of the ways that we got to characterize it is I remember asking some people I won't name. I said, &quot;Which most accurately characterizes your approach to growth? One, we get up in the morning and we worry about growth, and we think, what are the things we really need to do as a group? The second one is you get up in the morning and you get the policies right by some conventional definition and then growth turns out to be whatever it is.&quot;</p>
<p>A lot of people said to me, &quot;Well, it's the second.&quot; You know, you get the policies right, and then growth will just be whatever it is. But that's not characteristic of the high-growth cases. And it's hard to know what &quot;getting the policies right&quot; means - at least in this framework, in which you're sort of experimenting and trying to accomplish an objective.</p>
<p>So, that's what I hope, and I hope it came across as modest. I mean in the sense of being clear and bold when we thought you could be, but recognizing this is still an area in which we have very incomplete knowledge.</p>
<p><strong>Romesh</strong>: Over the last few months, you've been presenting the report to various international organizations, various policy-makers in developing countries, no doubt, and to academic audiences today, here, in San Francisco.</p>
<p><strong>Michael</strong>: Developing countries, yeah. Right.</p>
<p><strong>Romesh</strong>: What would stand out as the reactions that you've been getting? What things really stick in your mind as the way that people have reacted to it?</p>
<p><strong>Michael</strong>: Well, the overall reaction you know in all of the environments seems to be it's very useful; maybe I'm kind of seeing it&hellip;there have been critical reactions, but they've been rather few and far between. And then a lot of the reactions are, &quot;Well, if you went further in this direction, it would help a lot.&quot; I think those are all fair. You've heard some of that today.</p>
<p>There is a very delicate balance about getting the emphasis sort of right. It is true that policy at the country-level tends to sound more macro-economic. It leaves you with the impression that it's the main event, whereas, that's actually the supporting event.</p>
<p>I mean I can go find the page in which it says the proximate drivers of growth are entrepreneurs, people who build businesses, entry and exit, competition and whatnot - the things that drive both the statics and the dynamics of a market system. But you still end up&hellip;when you turn to the kind of government's role in the area of policy and politics, it sort of sounds like something else. So, that's one of the reactions that we get. But overall, I think people appreciate some combination of the organizing content and the tone. That's the impression I get.</p>
<p><strong>Romesh</strong>: What do you think of as the key obstacles to sustain growth and development? I mean you've talked today about some of the big issues and the things around politics and around the environment. You mentioned this adding-up problem about whether we can take the example of small successful countries and then apply that to others, when also now we have two very, very big successful countries.</p>
<p><strong>Michael</strong>: Yeah. The report isn't quite as clear as I am, I think. Bill Klein's the one who's done the most effective work on the adding-up problem, at least in the sense of, does it add up to the total demand in the market? I think his conclusion is tending toward &ldquo;yes, it does&rdquo;. It's certainly my conclusion, in part because of the time sequence.</p>
<p>You know one of the reasons China is a big challenge right is they are simultaneously pretty global economy dependent - not completely because of the big domestic market now - and an economy that's also in a structural transition. So even if we weren't having a global slow-down of significant magnitude, a lot the noise you hear out of China would be going on anyway. Because frankly in the coastal areas, the incomes are at levels that are sort of like the 1980s in Korea. Some of those businesses aren't going to be around.</p>
<p>I was on the board of Nike. Nike's shoe manufacturing was almost entirely - in the 1980s - in Taiwan and Korea. It's just the way it works, right? So, China's going through that set of transitions. They have very flexible labour markets and whatnot, but it's still hard because of the size of the economy.</p>
<p>I think Takahito is right. The best way to think about China is it's six different developing economies at different stages of development; that makes it even harder. I guess what I would say is, I think China will exit fast enough to let India in. And nobody else is big enough in market share to make a difference. So if we could withstand China, I think it will probably work.</p>
<p>The second part of that is, well, China did affect the relative prices. It was big enough. So what's the conclusion from that? The layman's conclusion is you can't compete, or you have to wait. I think the probably more economically-correct way to say it is, the social return to the investments that go along with gross strategies maybe aren't as high as they were before, especially if India and other countries pick up the slack where China is.</p>
<p>Having said that, Bill says and I agree that there is a bunch of other adding-up problems. In the long term, meaning on a multi-decade horizon, I would say energy, energy pricing and environmental issues are the unknown and maybe unanswerable - except by taking the journey with the best incentives you can create and policies, globally. Whether those will actually just slow things down, I can tell you what I think. I'm cautiously optimistic they won't, but that's because I'm a great believer in the right incentive structures.</p>
<p>Let me tell you what I mean by that. We have all this discussion about climate change. The best possible thing we could do for climate change - because a big chunk of it is energy consumption - is stick the price of energy up. You know there will be marvellous responses to that in terms of alternatives and whatnot.</p>
<p>I'd be in favour of putting a floor under energy prices. I mean having a general agreement that we're going to get them up and then if supply outstrips demand in a downturn of this type, we'll adjust the taxes and make the demand side face a price that has a floor on it. That will take a lot of risk out of the alternatives and you could justify that interference in the market system by the fact that there are externalities associated with the consumption of energy and the production of particulates, carbon dioxide and so on. I think we have a very good chance of innovating our way out of this.</p>
<p>The really hard problem, which I'm going to spend a little time on, is how do you get from now until 2050 or '60 with reasonable growth in the developing countries, particularly in the short run when a lot of them are still quite poor? And some of them will be poor, but it's the big ones that matter, because the little ones won't make that much of a difference until they get richer.</p>
<p>That's a hard problem. I mean basically, what you have to do is design a set of incentives and a way of paying for this stuff that allows them to keep growing, but starts you moving toward the targets. It's an interesting dynamic problem. Bottom line is I'm sort of optimistic about that on those adding-up questions.</p>
<p>I think where I'm less optimistic is on the governance side, you know the countries that aren't growing. The proximate cause of it is dysfunctional governance, which leads to leadership that's doing something else, ranging from stealing stuff, to not knowing what they're doing, to representing the interests of some subgroup - a tribe, a region, you know whatever. I think it's very hard to know anything systematic about how that turns around. Sometimes a crisis, but it looks, when you stand back from it, an awful lot like luck.</p>
<p>But there are demonstration effects, and successful performance with the kind of communications we have among people and a kind of generalized learning curve. People get less and less tolerant of poor performance when there's a clearly better alternative. As time goes on those forces get more and more powerful.</p>
<p>I think that if we have 60 to 70 percent of the world's population living in countries where there's clearly a future, even if they're not there yet, it will have a big impact on the other 30 percent. China had a big impact on India. India could sit there and say, &quot;Well, that's kind of the way the world works.&quot; And then this huge country to the north - admittedly not a democracy - sort of said, &quot;Well, no actually maybe it isn't.&quot;</p>
<p>You know? And Deng Xiaoping went off to Singapore and then showed up in New York. He'd never been out of the country. Well, this is different...</p>
<p>So you never know about those things. They sound kind of anecdotal. I mean, there's more effective leadership in Africa now. They take responsibility. There's a very slow process. It's a bad word now because it's used in the context of interventions, like Iraq, but &ldquo;nation-building&rdquo;. But there really is a sense in which it's easier to do these hard things, like grow and invest and save a lot and do things for your kids and grand-kids, if the people in the country sort of more or less think of themselves as kind of united, at least by virtue of their citizenship, being in it together.</p>
<p>And it takes a long time for that to happen. I mean, a lot of European countries are 150 years old. Canada is 150 years old. The United States is older than that. The post-colonial countries are&hellip;I mean, India is a miracle, but the African countries are only kind of 50 years into this.</p>
<p>And take China. Most Chinese, except for the outlying territories where they have problems, think of themselves as Han Chinese. Well, why is that? Well, it's because the country was unified about 100 years before zero, maybe 100 BC. So they've had 2,000 years of people developing a sense that they belong to a country. And it matters. It affects their behaviour. I don't know that we know how to say anything precisely about that, but those things are things that I don't think you can short-circuit.</p>
<p>Now, leaders have an affect on it. They can accelerate the process of people coming to think - by virtue of their experience and the way they kind of imagine the world and their own country - that they belong together. I think Lee Kwan Yu did that in Singapore. It's a little, tiny place, but it's very diverse. And he realized it would blow if you don't do that.</p>
<p>So I think that's an area in which there's natural breaks and lags, but also things you can do.</p>
<p><strong>Romesh</strong>: Mike, you mentioned the global economic downturn, and you mentioned the word &quot;crisis.&quot; Why don't we close by talking a little bit about that? You published the report in May of last year, and then things got really ugly in September of last year.</p>
<p><strong>Michael</strong>: Yeah.</p>
<p><strong>Romesh</strong>: How do you see the relationship between the financial crisis and the potential for recession, and perhaps worse, and the growth challenge?</p>
<p><strong>Michael</strong>: Well, first of all, part four of the report is kind of global things that matter to developing-country growth. And I think we would have made it longer if we'd known what we knew by November 1. And we would have paid a lot more attention to something that's already covered there but needs more depth and analysis, and that is: what do we need out of the global economy to support everybody, but particularly the aspirations of the developing countries?</p>
<p>And second, what kinds of risk-mitigating components or strategy do they wisely adopt, on the assumption that we have a fairly volatile global economy and we're not going to just fix that overnight, or at least it seems very unlikely? And the now global financial and economic crisis, which emanated from the advanced countries, would be the poster boy for this. But there are other examples of it.</p>
<p>So I think what's going to happen is a number of the commissioners want to have a kind of get-together, a workshop, some distinguished academics, and then try to produce an addendum, which you can think of as extending part four, that kind of focuses on this question, in a number of categories. Risk mitigation. What can we expect in terms of volatility? What changes in the way the global economy and the global financial system are needed to kind of at least reduce the probability of extreme instability?</p>
<p>I think, on this particular episode, the developing countries were somewhere between &quot;set back a bit&quot; and &quot;OK&quot; up until September, the fall of this year. The reason is the anticipated global slowdown wasn't huge yet. It's true that was going to affect them. There's no way to mitigate that risk, except maybe for the countries that can afford it that have big enough domestic markets and fiscal stimulus.</p>
<p>And the second one was the commodity price shock, which was actually a major event. It caused inflation and difficult choices between growth and inflation, and food emergency for the poor. I have characterized those as &quot;manageable headwinds.&quot; But then, the advanced countries went into this sort of, how do I call it, &rdquo;double spiral&rdquo;, on the asset and de-leveraging side and on the real-economy side, which we haven't gotten out of yet.</p>
<p>And then, right in the middle of the fall, the credit problem spread. And the reason it spread is because the balance sheets in the United States, the financial institutions were so damaged that they started pulling capital. So you can see it. All the exchange rates went [gestures] , except China, because China has a lock on its exchange rate. And so everybody went like that. And so they had the double effect of a rise in the dollar-denominated liabilities and an extreme drying up of credit, just overnight, like that.</p>
<p>So the combination of a much more extreme global slowdown, and the fact that they now have to deal with our exporting of the credit problem, at least for the countries that were reliant on pretty regular access to the global capital markets as part of the way the financial system function, means... it actually looks quite a lot uglier now. Every month, the IMF revises its forecasts, and they keep going down, and I don't think we're finished yet. So it looks a little tough.</p>
<p>On the other hand, assuming we don't have permanent instability at a much-heightened level in the global financial system and the economy, we can tolerate some volatility. And I don't think the fundamental growth strategies are different, but the growth strategies probably have a larger component of risk mitigation in them, including some that, in an ideal world&hellip;these are second-best, OK?</p>
<p>The first-best is a well-functioning IMF with a HUGE collection of resources - way more than 250 billion - that can stabilize currencies when they go unstable, especially if they go unstable for this reason. And nothing to do with that, right? Might just coming out. But we're not going to get that overnight.</p>
<p>And so there are a bunch of things. Finance most of your investment over to domestic savings. Don't run a big trade deficit; run up the reserves so you can replace some of the outflows with inflows a little bit. Nobody would argue, in a first-best world, these are ideal policies. Don't run big fiscal deficits because the time may come when you need to stimulate the domestic economy through a pattern of public-sector expenditure and tax reductions. So you want to be in a position to be able to do that.</p>
<p>I think all of these things are going to make developing countries, as they develop their strategies, more conservative. And I think it's right. So I think we'll probably write a little bit about that, as kind of the swan song of the Growth Commission.</p>
<p><strong>Romesh</strong>: Let's leave it there. Michael Spence, thank you so much.</p>