From G-7 to G-20
By David Wars
Spence’s The Next Convergence, my choice for the year’s best business book on economics, starts with simple arithmetic: China and India represent about 40 percent of the world’s population. Their combined GDP is growing at an annual rate of 7 percent or more; India is perhaps 14 years behind China on the curve. Their growth will slow in another two or three decades, as they finish the process of converging with the present-day industrial countries. By then, they will have become economic giants.
Indeed, Spence calculates that the world will have a global GDP that is four times as great as what it is now. But what kind of a world will a US$240 trillion global economy create? That is the question Spence seeks to answer in this book.
A considerable deepening of economics has taken place during these last 40 years, a process in which Spence has been an active participant. In 2001, he shared a Nobel Prize for contributions to the economics of information. By then he’d been drawn off into university administration — including nine years as dean of the Graduate School of Business at Stanford University. In the middle years of George W. Bush’s presidency, when Deputy Defense Secretary Paul Wolfowitz was posted to the World Bank with the goal of rethinking its agenda, Wolfowitz turned to Spence as an honest, independent broker of ideas whose views would be of interest to leaders of nations all around the world.
Thus began the Commission on Growth and Development, an ambitious project designed to bring senior political leaders and policymakers from 18 nations (such as Zhou Xiaochuan, governor of China’s central bank, and Montek Singh Ahluwalia, deputy director of India’s planning commission) together with the world’s leading economists (Robert Solow and Robert Lucas, for example). For four years, the commissioners traded visits to one another’s countries and elicited expert testimony, building a cautious case for openness and trade. Unfortunately, their report fizzled after Wolfowitz was forced to step down over an impropriety. Spence, however, soldiered on and produced this compelling tour d’horizon based on his experiences as chair of the commission — a view more or less from the quarterdeck of the global economic system. Except, Spence says, that there is no proper quarterdeck — at least not yet.
It used to be so simple. At the end of World War II, there were the industrial countries with 750 million people — 15 percent of the earth’s population — and there were another 4 billion people living in poverty, divided about equally among the Communist nations, a Second World determined to catch up, and the Third World, whose very name implied a bleak distance from the others. Yet already in 1945, the seeds of change had been planted. For 30 years Japan led the way; then, soon after the death of Mao Zedong in 1976, China abandoned autarky and set out to join the world economy. It was not long before underdeveloped countries gradually became less underdeveloped and emerging nations became newly industrializing ones, until, suddenly, there were the BRICs (Brazil, Russia, India, China).
The latest phase of global growth and development accelerated dramatically after 1980, but why? Certainly, shorter lines of communication had something to do with it. Spence devotes a chapter to the advent of the computer, spawned during World War II, and the Internet. By 2011, he writes, 4.5 billion people — two-thirds of the world’s population — had cell phones.
Many problems arise from these different growth rates. Some have already become clear, as Spence outlines in a series of chapters: financial imbalances, pressure on resources and the environment, the continuing attenuation of middle-class jobs and incomes in Europe and the United States. These problems lead to major questions: Can Western economies continue to find new sources of growth? Can the environment stand a fourfold increase in the ranks of the wealthy? Will there be enough food and fuel? What about climate change? Are there other kinds of social and cultural brakes that may slow or even fracture the prospects for global growth? What if every important nation feels it must have its own banking, agricultural export, automotive, and aerospace industries? If everyone tries to do the same thing, it won’t work.
Spence has something interesting to say about each of these questions; offers additional observations on the internal dynamics of China, India, and Brazil; and still devotes a quarter of the book to an examination of the financial crisis and its aftermath. The fact that The Next Convergence covers so much ground means that it has little time for the folksiness and redundancy that make for easy reading. The payoff is coherence — the argument of the book fits together as tightly as the formal models that Spence once built for a living.
As for globalization, Spence thinks that the benefits of open trade have been oversold, and its potentially adverse distributional impacts too easily brushed aside. So for the next few years, expect a volatile world, he says, especially given the magnitude of recent economic shocks. Once the advanced countries regain their confidence, however, he predicts that the dynamism of the developing countries should produce a strong new wave of expansion — and bring us back to the problems of multispeed growth.
None of the associated problems will be satisfactorily solved without the advent of new forms of cooperation, says Spence, starting with the Group of 20, the finance ministers and central bankers of 19 nations and the European Union. There’s nothing especially controversial about that: Economic growth in the past has always occurred in parallel with the development of new political, legal, and regulatory institutions, and mostly through trial and error. Whether the evolution of governance will keep pace remains to be seen.
Lapsing into the sparse lingo of game theory (which helped him win his Nobel Prize), Spence ends The Next Convergence by writing, “This is a cooperative game on a giant scale we are trying to learn how to play, a complex one because of the asymmetries among the players. The chances that asynchronous moves and separate agreements on distinct issues will lead to a fully cooperative outcome are very low. More likely is a non-cooperative outcome with attendant suboptimal results and instability. A bumpy road to a new and not very attractive normal.” His superior description and analysis of those high stakes are the main reasons to read this book.