Accelerating GrowthRecipes, Ingredients and the Global

Context

Michael SpenceThe Israel 2021 Conference

January 12-13, 2011

Re’ut Institute and the Marker

• Have initiated an import discussion of longer term economic and social goals

• and of policies that may help achieve them• Learning from the experience of other countries, advanced and

developing, is useful– But all edible recipes are country, context and time specific– And they cannot be created independent of the evolving external

global environment• The evolving global economy presents opportunities and challenges • In my view, it is crucial to take these structural shifts into account in

formulating strategies for inclusive growth and employment generation

Planning and Time Horizons

• There are 13 high growth developing countries (7%+ for 25+ years)• Soon to be 15 (India and Vietnam)• Despite differences in form of governance• Shared certain characteristics (ingredients)

– Long time horizons– Low revealed social discount rates – they invest at high rates– Agreement on objectives and focus in inclusive growth– Ongoing debate about strategy and policy with inputs from all sectors of

society – That means a process that leads to a shared sense of direction– The effect is coherence of policy on “a long voyage with imperfect

charts”– Engagement by government in the longer term agenda

• What are the five year plans in India and China?– Pragmatic, problem solving orientation and relatively little ideology

Israeli Economy

• Advanced (economically, technologically, human capital)• Impressive development given resources required for security• Per capita income around $30,000• Rank 25-30 (less with PPP adjustment)• Advanced human capital and technology• Small (7.3M people) – economically specialized – $200B economy• Open (exposed globally with benefits and risk)

– X+I about 80% of GDP • Growth substantial – but so is populations growth• Slow growth in advanced countries will help raise rank

Relative Income Distributions

Accelerated Growth

• Impressive crisis response and recovery• Reasonable chance to accelerate and leapfrog • Focus should be on human capital and employment opportunities in the

middle income group• This will require elevating public investment• Also requires expanding institutional and technological base for

diversification of the economy and the export sector– Reverse net exports of human capital

• Above average or trend growth requires structural change in the economy – This is clearly visible in the microeconomic dynamics of the high

growth developing countries

Economic Diversification and Structural Change

• Porter, The Competitive Advantage of Nations (30 years ago)– Industries are not scattered randomly around the world– Economies diversify on different paths– Industries in the global competitive sector are concentrated

geographically, though the supply chains are dispersing globally now

• Ricardo Hausman’s work on export diversification patterns.– There are richer and less rich clusters– Defined by overlaps in the value added chains

Lessons from Emerging Economies

– Recipes are not ingredients or lists of todos– More like strategies– There are common ingredients

• Openness and leveraging global economy markets and technology

• Hence the term catch-up growth• High levels of investment on public and private sector sides• Inclusiveness and management of the degree of inequality• Competent macro management and macro stability

– Otherwise investment subject to too much risk and is dampened

Growth Strategies and Supporting Policies

• Differ across countries and across time within countries• Responsive to initial conditions• Sequencing and political feasibility matter and depend on the

political system and the composition of interest groups• Willingness to trade off present consumption for future opportunity

varies (for high growth it has to be tipped toward the future)– That is harder but not impossible in democratic systems

• Accept market incentives, decentralization, price signals and capitalist dynamics driven by private sector investment

• Government has several key roles– As investor (human capital and infrastructure) to increase the

returns to private sector investment– Maintain stability and predictability

Leadership

• However hard to define, is crucial• Consensus building among stakeholders around a vision and strategy• Credible commitment to inclusiveness• Adopting a workable model (there are lots of alternatives that do not

work)• Acting as a counterweight to the normal short term incentives inherent

in democratic structures

• Intent matters – the goal has to be making future generations better off in a reasonably equitable way

• Hence the term (from India) inclusive growth• Persistence, pragmatism and a problem solving orientation• You don’t know the answers in advance – ideologues do but they are

usually wrong• Willingness to experiment, change course

• Use economic analysis and experience of other cases, as guides, but not doctrine or othodoxy

Evolving Structure of Global Economy

• Emerging economies are increasingly large and systemically important

• Also higher income and on supply side moving rapidly up the value chain,

• Increasing impact on the structure of the tradable sector in the advanced economies.

• Creates challenges for employment, growth and income distribution in the advanced economies

• Risk is the advanced economies get crowded into the a declining set of high value added components of global supply chains.

The Century of Convergence• In 1750, 10% of the measured income inequality was due to inter country

differences• By 1950, the figure was 60%

• Post 1950, the pattern shifted– Hard to see at first

• Mid-point of a century at the end of which the vast majority (70% or more) will live in advanced economies

• The Next Convergence

• High speed growth in developing world, and the growing impact on the global economy

• In my view, in most advanced countries, way too little attention is paid to the these trends and the underlying driving forces

• The result is domestically and supply side focused – half the picture if you like

Efficiency and Distribution• Global economy has powerful market forces • It is highly efficient

– Multinational companies go where the market and supply chain opportunities exist – it is a highly competitive, constantly shifting landscape

– Global supply chains are decomposable and moveable• Efficiency does not guarantee that outcomes in terms of distribution will be

acceptable

• The ongoing challenge is to shift the market outcomes enough to achieve distributional objectives while keeping benefits of openness

• It is a challenge at the national level (in most countries) and internationally in the G20, to adapt the rules of engagement so that the distributional objectives can be met.

Structural Evolution

• Tradable and non tradable sectors• Shifting boundary• Components of the value added chain

• Project to collect similar data for G20 plus or a wide range of countries with MGI

USA Employment

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Value Added Does not Show the Same Pattern

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