Review by Jinoy Jose P.
Nobel Prize winning economist and author, Michael Spence talks
about his new book which lays out a framework for how the global economy
will develop over the next fifty years.
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.
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?
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
Do you think there is a structural problem in the way global economy has been managed?
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.
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.
Where do you posit China in the whole thesis?
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.
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.
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.
say that information technology is one of the most powerful factors
influencing growth today. Isn’t this thought a bit aggressive?
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.
said, what according to you are going to be the most important factors
that will define this era of global economic growth?
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.
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.
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.
Read the interview on Businessworld.in