The World is Flat!
China is the Future!
America is Finished!
Many of our most celebrated econopundits traffic in such oversimplified, sensationalized rhetoric, especially in times of market turmoil and economic uncertainty. But the global economy is too complicated for slogans. Which is one reason why Michael Spence’s new book is so refreshing. Spence, who shared the Nobel Prize in economics with Joseph Stiglitz in 2001, has systematically investigated the origins of hypergrowth, the process through which national economies rise from poverty to relative prosperity. In “The Next Convergence,” he presents a nuanced, highly readable argument on the symbiotic, fraught relationship between today’s booming developing markets and the seemingly stagnant developed ones.
In 2011, the global economy doesn’t stand at the dusk of one era, or at the dawn of another. Rather, we’re smack in the middle of the “third century of the Industrial Revolution.” Until roughly 1750, the world economy was a stagnant cesspool of poverty and misery. But after two centuries of innovation and growth, the handful of nations that followed the United Kingdom into industrialization prospered mightily. By 1950, Spence writes, “the average incomes of people living in these countries had risen twenty times, from about $500 per year to over $10,000 per year.” Unfortunately, these places housed just 15 percent of the globe’s population.
The author points out that in the decades since 1950, as political, social and technological barriers fell, the growth virus spread to populous nations such as China and India. And it’s still spreading like Groupon. By 2050, Spence argues, our descendants will inhabit a world “in which perhaps 75 percent or more of the world’s people live in advanced countries.” In the future, we’ll all be comparatively rich, and the gulf separating the typical American consumer from the typical Indian one won’t be quite so large. “The huge asymmetries between advanced and developing countries have not disappeared, but they are declining, and the pattern for the first time in 250 years is convergence rather than divergence.”
The formula for success seems simple: Unleash the spirit of capitalism and plug into the vibrant world of globalization and trade. As an open nation, capitalist South Korea saw its GDP per-capital rise from a pathetic $350-$400 in 1960 to $20,000 in 2005. By comparison, walled-off North Korea hasn’t enjoyed any growth in the past half-century. But Spence notes that convergence isn’t a matter of flipping a switch. For a country to boost per capita income from $500 to $20,000, it takes 50 consecutive years of 7 percent annual growth. And in the last half century, only 13 nations (mostly Asian countries, plus Brazil and Botswana) have managed to notch 25 straight years.
Nor is that formula for success quite as simple as many free-market economists would have us believe. Adhering to the rules of supply and demand and competing in international markets are important. But factors that typically don’t enter the glossary of Econ 101 textbooks can play a larger role, including leadership, governance, institutions and politics. While many economists profess disdain for the softer social sciences, Spence taps liberally into sociological and psychological factors. Human curiosity is a “very powerful, and largely noneconomic, force,” he writes. “Inclusiveness turns out to be an essential part of sustaining growth.”
Ironically, democracy is one factor that Spence says is not necessarily required to get rich. Countries whose authoritarian governments take economic performance and growth seriously generally act competently and offer a significant amount of economic freedom to make the transition. (Nihao, China!) But Spence is not a China bull in the bookshop. The world’s most populous country has entered uncharted territory, growing (collectively) rich as it remains (individually) poor. Never before in history has a country with such a low per capita income played such a central role in the global economy.
Departing from much of the economic consensus, Spence argues that China faces significant hurdles in powering through its awkward adolescence. Countries that have thrived as low-cost labor hubs lose out to poorer countries as they grow richer. In time, China (and India) will inevitably see their impressive growth rates slow. “Advanced countries do not grow at 6-10 percent a year.” From here on out, Spence writes, China’s growth will depend on major political and social decisions. And he’s skeptical as to whether Beijing can engineer a smooth transition from manufacturing to services. He is more optimistic about India’s prospects, despite that nation’s deficiencies in infrastructure, education and planning. (Readers will get a sense that Spence is rooting for India because it is a democracy.)
Convergence doesn’t just hinge on how well the poor countries can manage their progress. It also rests on how well the already rich minority can cope with and abet the process. Protectionism is on the rise in advanced economies that see their relative advantage slipping away, he notes. And the U.S. consumer’s insatiable demand for goods, which helped propel a great deal of developing-world economic growth, is now a fading force.
Spence’s use of data and history is as impressive as his avoidance of empty sloganeering. Rather than offer deterministic and hopelessly naive bromides, Spence offers deep insights with a winning, refreshing humility rarely seen in Nobel Prize-winning economists. He seems to have taken to heart the advice of another Nobel laureate, the Danish physicist Neils Bohr, who famously said, “Prediction is very difficult, especially about the future.” While Spence has written a book about what will happen in 2050, he concludes by similarly conceding that all crystal balls are hazy. “We do not know, and probably cannot calculate, what the medium-term destination will be,” he writes. “It is not that the principles and forces aren’t understood. It is rather that the system is too complex to lend itself to forecasting.”
Daniel Gross, a columnist at Yahoo! Finance, is working on a book about the post-crisis U.S. economy.