A. Michael Spence, distinguished visiting fellow fellow at CFR, assesses the relationship between economic growth and global inequality.
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Distinguished Visiting Fellow, Council on Foreign Relations; Senior Fellow, Hoover Institution, Stanford University; Professor of Economics, Stern School of Business, New York University
FASKIANOS: Good afternoon from New York, and welcome to the next session in the CFR winter/spring 2020 Academic Conference Call Series. I’m Irina Faskianos, vice president of the National Program and Outreach here at CFR. Today’s call is on the record, and the audio and transcript will be available on our website, CFR.org/Academic, if you would like to share it with your colleagues or classmates. As always, CFR takes no institutional positions on matters of policy.
We are delighted to have A. Michael Spence with us today to talk about economic growth and global inequality. Dr. Spence is a distinguished visiting fellow at the Council on Foreign Relations, a professor of economics at New York University’s Stern School of Business, a senior fellow at Stanford University’s Hoover Institution, and the Philip H. Knight professor emeritus of management at Stanford’s Graduate School of Business. Previously he served as chairman of an independent commission on growth in developing countries as dean of the Stanford Business School and as dean of the faculty of arts and sciences at Harvard University. He is the recipient of the John Kenneth Galbraith Prize for excellence in teaching and the John Bates Clark Medal for significant contribution to economic thought and knowledge. In 2001, he received the Nobel Prize in economic sciences. He is also author of the book, The Next Convergence: The Future of Economic Growth in a Multispeed World that was published in 2011.
So welcome, Dr. Spence. Thank you very much for being with us today. I thought we could just begin with talking about economic growth, the main factors underpinning development, and how we can reduce inequality in the world.
SPENCE: Well, thank you, Irina. If at any point you or anybody else has trouble hearing me, just let me know. I’m in Milan, in northern Italy. We’re kind of locked down here because of the fairly severe form of the outbreak of the new coronavirus. But I’m delighted to be with you. I thought what I would do, following Irina’s lead, is to say some words about growth and inequality, both within countries and globally. And when leave lots of time for the questions, so we can talk about what you’re interested in rather than have me blather on.
So let me start with growth. People who study growth pay attention to what are sometimes called cyclical or secular factor. Cyclical things are things that come and go, things of the business cycle. And they’re important for many points of view. A lot of macroeconomic policy focuses on them, but I’m going to focus on the secular factors, which you can think of as sort of longer-term factors that determine, you know, average rates of growth over, you know, multiple years, even decades. And we’ll probably want to talk a little bit about shocks that occasionally hit economies, either, you know, from the outside, or from the inside, or from nature, or manmade. But I’ll come back to that later.
So if you sort of look at global growth and go way back in time—Angus Maddison is the scholar who taught us most about this. You know, basically produced evidence that what we think of as modern economic growth really didn’t exist until the British industrial revolution. And then—and then it really started to grow. But the pattern in the world was that the group of countries that we know called developed had experienced abnormally high, by the standards of the time, growth—say, 2 ½ percent, in real terms—while the rest of the world for a variety of reasons, you know, weren’t participating in that.
And so we had a period that lasted a couple of hundred years, practically up until World War II, in which the growth in the world was real growth in incomes and wealth. You know, really it was confined to the developing world. And let me just say a word as an aside about growth. You know, there’s a lot of discussion about whether growth gets too much attention. And indeed, it does. I mean, growth is only one imperfect measure of one aspect of what you might call wellbeing. And it’s not what people care about. It’s just a statistic. They do care about material wellbeing, but they care about a lot of other things like health, and economic security, education, opportunity, how their children and grandchildren are going to do. And they care about social things, things like fairness and inequality, at least in an extreme form. And I’ll come back to that.
So if you look at the period after World War II, global inequality by almost any measure has been declining. And the reason for that is that group of countries that didn’t grow in the previous two hundred years before World War II started to grow for the first time. Now, if we had an infinite amount of time or if you want to pursue it, we can discuss, you know, why that happened. But that would take me on a tremendous aside. The thing that I wanted to note for the purposes of this discussion is that they not only started to grow, but their growth was faster than anything experienced before. You can find a significant number of countries that have grown for extended periods, like a quarter of a century, at rates of growth of 6, 7, 8, even 9, and 10 percent.
And as they grew, they got bigger, meaning their economic mass got bigger and they counted more in terms of global growth. So global growth has not only been relatively high in the postwar period, but it’s also in some sense, with lots of bumps and things along the road, it’s sort of been accelerating, at least until recently. Let me give an example that, you know, draws a distinction between growth on the one hand and the size of the economy on the other. So if you go back twenty-five years, China was growing at 10 percent a year. And it had been doing that for some time. And it continued after that for some time.
It’s now growing at about 6 percent. But it was—by twenty-five years ago it was a relatively small economy. And then you—but at those growth rates it becomes fairly big fairly fast. At 10 percent you double the size of the economy every year. Sorry, not every year. Every seven years. And so if you fast-forward to today, it’s growing at about 6 percent—setting aside the virus and the shocks that we’re just experiencing now. But it’s about 80 percent of the size of the European or the American economy. And it is the largest single contributor to global growth, you know, by country or region. And so—and so that’s kind of the growth story.
Now, growth itself is—so you might say, well, what was going on? There’s lots of components that go into the story about growth at these speeds. But basically growth is driven by productivity, and productivity is driven by innovation and investment and trade, which means specialization. And there are other components. Good governance, you know, reducing or eliminating or setting aside unnecessary risk is one. And inequality is also an important factor. When I was serving on the commission Irina mentioned people who had a whole lot more experience than I did said that—basically said that if they had to say one thing to anybody who was listening, they would say that non-inclusive growth patterns, that is growth patterns that have a high degree of inequality or leave people out, essentially fail. They may not fail immediately, but they don’t work. So I would put inequality in that category.
And so we have a pretty inclusive pattern globally. Basically a group of countries who have appropriately 85 percent of the world’s population starting, and increasingly experiencing, the kind of growth and wellbeing and material wellbeing, and so on, that we associate with the developed countries. This is, at the moment, and you may want to talk about this or ask questions about it or comment. An obvious question is, is this going to persist? And there are reasons to be a little concerned.
There’s a fairly clear pattern of rising nationalism, political and social tensions and polarization. There’s shaky governance in a number of places. There are a rising set of trade and international tensions. And all of these are helping at the moment to produce a bit of a slowdown. And we don’t know, and there’s probably no way to know, how long that’s going to last and, therefore, whether there’s some significant shift in the potential growth in the global economy and various important parts of it.
Finally, there’s one other factor that I wanted to mention before turning directly to inequality. The economies in the global—if you had asked people fifteen years ago about digital technology, most people would associate it with a bunch of interesting new services. That would correspond almost exactly with the arrival of the global internet and the first iPhone. But they wouldn’t think of it as something that was—they’d think of it as sectors, or services, or new markets, or part of the economy that’s sort of interesting but not kind of the main event. Now if you ask the same question a growing number of people, I think correctly, would say that we’re in a very complex process, which is far from complete, of building entire economies in part, and maybe in substantial part, on a digital foundation. And that process is, because it’s incomplete and because it’s very complex, and there are headwinds associated with it, has probably in the short run produced some diminution in the sort of performance in terms of growth.
And there are challenges in this area. I mean, in the past, I would say, less than a decade, for sure, we’ve gone from in many countries thinking of, you know, the internet and digital technology as all good to, you know, having—it’s either all bad or having significant downsides associated with it. And it’s also become clear more recently—although maybe we should have seen it coming—that digital technologies are not only powerful, you know, technologies in the way the economy functions, but powerful in the way society’s put together and interacts. They’re powerful with respect to, you know, who thinks they know what when. And they are very important in national security and defense. And they, unlike previous dual use technologies, these ones came from the—from the nonmilitary, nondefense side, and then spilled over into national security and defense.
And that last one, national security and defense in particular, is pushing us into a kind of technological protectionism that—and that reason for that’s fairly simple. You know, unlike the economic sphere there are fairly high costs to being behind, or second, or a distant second, especially when you’re talking about the United States and China, which appear to have decided they’re going to be strategic rivals. So that, you know, the cost of being second in the economic world isn’t terribly high, at least, you know, as a country. But in national security and defense—so it’s a very different sort of set of incentives and will lead to a kind of difficult to predict in specifics, a kind of protectionism that we haven’t seen before.
Let me shift and say a few words about inequality. Inequality is deceptively simple and is actually quite complex. There is much discussion of it. At least when I listen closely, I find that people are sometimes not even talking about the same thing, or that they have very different views of values about what matters in the distribution of income, and the distribution of other things like access to essential services or opportunity, meaning opportunity to be educated, productive, and creative. Or access to health, and so on. There are many dimensions in which one could worry about inequality.
So let me start with income and wealth. Some people, you know, when you talk to them about that seem to be focused on the rising income and wealth of the top 1 percent, or the top one-tenth of 1 percent. And some others are focused on the very poor. And others still—some people focus on all of these things. Some are focused on the bottom 30 or 50 percent. I believe the World Bank decided a number of years ago to focus on—not just on the very poor in developing countries but on the bottom 30 percent. And a lot of people—and this doesn’t show up in numbers—focus on how income and wealth is acquired. That is, they’re not only concerned about the levels of income and wealth inequality, but they’re concerned with something that has to do with fairness, or whether it’s the result of not having a level playing field of some kind. And I think it’s important not to forget that.
So because we have limited time let me just talk about results and then causes. Globally, income wealth inequality has been declining for pretty much the entire postwar period. And to understand that, the only thing you really need to keep in mind is that the weighting in this case is by people, right, not by income or asset. And so why is the wealth inequality been declining? Because in 1945 almost all the developing countries were very poor. They had per-capita incomes in the five hundred to a thousand range, or some even less. And by the way, you know, the poorest region was probably Asia, at the time.
And that group of countries contained, I don’t know what it was at the time, but at the moment probably 85 percent of the world’s population. So when they started to grow, and grow very quickly, the inequality declined. But then you can think of global inequality as having two parts, just conceptually. One is inter-country differences, as if there were no inequality within countries too. Global inequality would be the differences in per capita incomes or wealth across countries. And then a second component which is inequality within countries. And so the global result is that the first one dominated the second, and global inequality has been declining.
But that’s not what you read about most now. What you read about is within country inequality. And that is a more mixed picture. In the developing world, there is a fairly natural tendency for inequality—income inequality to rise as part of the early part of the development process. And if you want, we can kind of go into why that is. It varies somewhat from country to country. But most of the discussion now that I think you run into is a trend in the developed economies, which is that for the past thirty or forty years, inequality has been rising.
And to take the postwar period as the framing, for about thirty years after the end of World War II most of the measures of income and wealth inequality were declining—inequality are declining. Meaning, things were getting better in that dimension. And that pattern essentially reversed in the last 1970s. And there’s lots and lots of discussion and even differences of opinion about why that happened. But there isn’t much difference of opinion that we’ve seen a rising pattern of income and wealth inequality in the past, say, thirty to forty years. The dating varies from one analyst to another.
Second, you know, for the—for the first couple of decades when this pattern was underway, people basically ignored it, maybe because it wasn’t as visible as it is now. That pattern too has reversed. So now what used to be a kind of closely guarded secret—(laughs)—is now the subject of a great deal of writing and really careful research by a group of scholars all over the world. So we now know a lot more about it than we did before.
This pattern of rising inequality varies a lot from country to country. So the United States and the U.K. would have a fairly extreme form of it. Most of the continental European countries measured inequality as lower, and the trend has been less dramatic. And the reason for that is probably that, if you move across countries, what I think of as countermeasures are different in content and power. So what are these countermeasures? Well, there’s a tax systems, the social security systems, and the systems that provide critical services like education and health, particularly public education in the context of education. So these things vary significantly across countries, and therefore the pattern, while it’s similar, is, in terms of outcomes, it varies as you go across countries.
What’s been driving this? I mean, there’s a lot of discussion of this. And it would be disingenuous of me to pretend that, you know, anybody, including me, has all the answers. This is a subject of discussion, and it’s an important area of research because you can tackle a problem the wrong way if you—if you get the cause kind of off base. But the list, I think, is fairly generally agreed on. One is globalization. Globalization, once it got into high gear, moved middle income manufacturing jobs from developed to developing countries. And when China came on streak in the 1980s and ’90s, and then hit its kind of full potential in the post-2000 period, that is a big enough economy in terms of potential to produce a noticeable effect. And there are a number of studies that document this.
Second, while we sometimes talk about digital technologies as starting to have an effect, they’ve actually had an effect for some—for some time. So digital technologies, particularly in the form of automation, have had a documented pattern of removing routine mostly middle-income jobs from advanced economies—mainly advanced economies. And so that’s added to the pressure. Now, there’s a heated debate about which one is more important. And I won’t try to arbitrate that right now.
Third, you have failures of governance. That is, allowing subgroups or special interests to tilt the rules in their favor. This is called in economics—frequently called in economics rent-seeking. And it could get out of hand, right? And it varies from place to place. So if money is important in politics, then money can tilt the regulatory environments in favor of specific groups or collections of them, and that can exacerbate that system. The tax system itself would be included in that.
And then we have a pattern of sort of winner-take-all outcomes at the sector or industry level. This has now been pretty well documented. There’s a fairly substantial rise in concentration across many industries, with implications for the distribution of income and wealth. Some of that is for structural reasons. You know, in the digital area, the combination of network effects and marketplace effects, you know, tends to be relatively small, even a single, in some cases, kind of big winner, and then a bunch of others who are less able to compete. But it’s also, I think many people believe, due to a lack of aggressiveness in competition policy. What in America we would call antitrust enforcement.
And finally, the great financial crisis is a subject of study because it seems to have contributed to this. One of the main policy responses to the great financial crisis in the context of trying to recover was to lower interest rates and force people to buy riskier assets and drive their value up. And then if you look carefully at who owns those assets, it tends not to be a representative sample from the population. So you have a contribution to rising wealth inequality from policy choices that came from a kind of different source.
There are people—you know, an important subject is, you know, well, what about the very poor in society? Both in developed but mainly in developing countries. And Abhijit Banerjee and Esther Duflo have just received a Nobel Prize for really important research in the area of the poor. So I think their perspective—there’s an article on the list that—it’s an article in Foreign Affairs that captures some of their work. They have certainly led the way, along with quite a few others, of understanding the specific barriers that the very poor in society face. And the perspective is that, you know, a lot of earlier research treated the poor as a kind, you know, caricature. You know, they’re just the people at the bottom of the spectrum and not much else is known about them.
And their perspective is that they face specific barriers, challenges, to participating successfully in the economy. And if you want to have a policy that deals with poverty, you have to understand those specific barriers and then you have to have policies that are designed to remove those barriers. And if you’re not sure they’re going to remove them you need to experiment and figure out which ones actually do remove them. And they’re fairly—(laughs)—how do I say, negative on—about the sort of side of it that has to deal with growth. I think the simple kind of flamboyant way to say it is growth—you know, trickle-down benefits from growth, pretty much for sure, don’t work.
My perspective, for what it’s worth—and, you know, and I’ll pretty much stop on this level—is actually you need both, right? If you want to have the things that people care about, like health, and good education, and so on, sustainably, you can’t get it from resources from outside the country. You need growth to make it affordable. But I certainly surely agree with Banerjee and Duflo that that’s not enough. If you want to, you know, eliminate, as most people do, absolute poverty then there’s a whole lot more that needs to be done along the lines that their research has pointed to.
Last comment is, many people ask themselves the question, are there tradeoffs between growth and reducing inequality. And I think the general answer is no. If you understand the sort of growth dynamics, there’s very few benefits that one can find that come from a rising pattern of inequality. And if you look at the kind of list we went through before, globalization, digital technologies and all those things, you know, you don’t really get forced into a corner and admit that a society has to make a choice between their secular rates of growth and reducing inequality. Not only in terms of outcomes, but most especially reducing inequality in the area of opportunity.
So that’s—Irina, why don’t I stop there. Those are a few thoughts on the subject.
FASKIANOS: Michael, that was great. Thank you very much. Let’s open it up to the group for their questions. And we’ll give students priority, hopefully.
OPERATOR: Thank you.
(Gives queuing instructions.)
Our first question comes from Brigham Young University.
Q: Hi. Can you hear me?
FASKIANOS: We can.
SPENCE: Yes, I can. Thank you. Yes.
Q: Oh, perfect, hi. Thanks so much for talking about this. This is such an interesting and relevant topic. My name’s Lillie Haggard. So I’m a political science student at BYU.
I had a couple of thoughts. So my first thought is I view automation in two ways, right? One way is kind of creating new things, and the other way automation works is making already processes in place more efficient. So in the ’90s we see a lot of new creation of things, the computer and things like that. And now we’ve transitioned to an era of efficiency, where we’re making the process more efficient to get rid of expensive labor. And that is decreasing jobs. And then also, pivoting to globalization, globalization creates—overall it creates economic benefit, but there’s an argument that the labor force isn’t flexible enough or mobile enough to transition to areas of that economic growth, right? And so you touched on this a little bit, but my question is, with this type of leaning automation and then inflexibility of labor, immobility of labor, what can the government do or society do to kind of combat these specific areas? Does that make sense, my question?
SPENCE: Yeah, absolutely. No, those are very good questions kind of at the center of the—both the concerns and the kind of—what you might call the policy discussion that’s going on. So there was a lot of creating new things with automation. But earlier—the way I think about it is, at least in the digital technology area, is the early form of automation was—so you created these marvelous machines that had—you know, the debate of Moore’s law, and you have a 1980’s supercomputer in your pocket now, I imagine. (Laughs.) And that’s—you know, and it cost less than desktop computer did, you know, when I got my first one in the early 1980s. So it’s just extraordinary what’s happened.
Then a lot of things get done with that. And some of them, and it’s very—because it affects so many areas, you know, it’s very hard to make generalizations about it. But one aspect of it was automation. And it was basically, the idea was—of automation then—was if you know how to do something—if a human being knows how to do something, and they know exactly how to do it, precisely what steps you take, then in principle we can tell a machine by coding and software how to do it, and then the machine can do it. Now, there’s lots of ands, buts, or ifs on the way through that story, but that was the basic idea.
The thing—and that did produce some automations, right? I mean, you know, there were some things that have all of those characteristics, you know, that basically there’s a simple set of rules that we can write down, that the machine can be coded to follow. That produced some of what we’ve seen now. The thing that scares people is that that version of automation, you know, has its limits. And this is where the discussion of artificial intelligence comes in. So artificial intelligence was, for some time, thought of as basically the application of that kind of automation. If we want a machine to translate from one language to another, you know, or read intelligently or something, then we just figure out how we do it, and then we tell the machine to do it, right?
Unfortunately, that doesn’t work. And the reason is, there’s a lot of things that we know how to do where we don’t exactly know how we do them. Like recognizing images. Well, it turns out one of the most powerful recently developed general-purpose technologies that’s used in robots, autonomous vehicles, multiple medical applications, and so on, involves image recognition, because if you’re blind you can’t do a bunch of stuff. And every human being can recognize a whole range of images. That’s one of the things that happens to the brain, you know, from childhood. And we don’t—we can’t describe how we do it.
And the breakthrough in artificial intelligence is that people gave up on the model that said we had to tell a machine how to do it, and now we’re going to—because you couldn’t do it in things that really mattered, or that we think really mattered. And so this different technology, which is machines learn how to do it themselves through deep learning algorithms and looking at millions of, you know, whatever it is—images, passages in books, et cetera.
And that is a real breakthrough. And so the range of things that we think where machines can be—can perform important functions—not jobs, but functions—has been dramatically expanded in the last decade. And so I think a lot of people, including me, are sort of trying to figure out what means. The consensus being, for what it’s worth, is work’s going to change and we’re going to work with machines beside us. (Laughs.) Digitally enabled machines. But what the overall macroeconomic effects are going to be is not—is not yet clear.
So on this question, just one other thought. It won’t be a complete answer to your—the interest that you have, but a number of people have written, including Dani Rodrik, that we shouldn’t think of technology as sort of marching to its own drum, right, and then we all got to adapt to it. I mean, that’s been a sort of implicit model, if you like. It’s sort of, you know, we don’t control this stuff. So it just comes along, and then we, human beings, have to sort of deal with it, whatever we’re—whatever our background is, and so on. And his point, with which I strongly agree, is that you can adapt the technology to be beneficial to and suitable to the collection of people we actually have.
And there’s lots and lots of examples of that. I mean, in the big, powerful e-commerce platforms in China, you couldn’t have that rate of growth in online commerce and, you know, mobile payments and stuff if it was really hard to do it. I mean, you’re talking about literally tens and tens of millions of people. So the technology is adapted to be acceptable for people. The best example of this that I know is what’s called the graphical user interface. There was a time—many of you on the call will be young, so you won’t—(laughs)—have ever experienced this—when if you wanted to talk to ta computer, you had to speak computer, right? Write gobbledygook, you know, on lines that you had to learn how to do.
And then at Xerox PARC they developed the graphical user interface. Steve Jobs picked it up. It’s now the way we interact with virtually every device we have, right? And it democratized computing power. So I think we can do a better job with that, is what I’m trying to say, and not just focus on efficiency, and try to make the technology develops produced—proceed in a fairly inclusive way.
Q: Thank you.
FASKIANOS: Thank you. Next question.
OPERATOR: (Gives queuing instructions.)
Our next question comes from Chapman University.
Q: Hi. This is Tom Campbell, your former colleague at Stanford. Hi, Michael. Good to hear your voice.
SPENCE: Hi, Tom. (Laughs.)
Q: Hi. I’m teaching economics and law at Chapman University now. And my economic students are with me. And I’ve been dealing with the tradeoff between inequality and growth in the context of tax policy. And I would love to hear your thoughts on—just a quick summary of what I’ve been teaching, that the disincentive for growth from an increase in the marginal tax on investment is greater than a disincentive created by an increase on the marginal tax on income, and the least disincentive is a, you know, marginal tax on wealth. I wonder if you could speak to those issues, which are very prominent in the present political debate.
SPENCE: Yes. Hi, Tom. Yeah, that’s a very good—that’s a very good question. I think you’re right. You don’t want to—you don’t want to put a—certainly not a prohibitive tax on investment, because investment’s such an important driver. When I say investment, as I’m sure you do, I mean investment in everything, including the tangible assets, human capital, which is us, and whatnot. But you don’t want to discourage that, certainly, if you’re pursing sort of growth, but also if you’re pursuing, you know, equality in some dimensions. So I think that part’s right.
What I—what I think is—how do I say this? There’s no question that on the income side you can produce tax rates that are so high that they diminish growth by essentially discouraging people from sort of making the effort because, you know, the government’s going to take most of it anyway. But there is no recent research that suggests that, you know, those levels, the prohibitive ones, are pretty high. And there’s been a lot of focus on sort of, well, what do we learn from the small, open economies in Northern Europe, right, that seem to have relatively high tax rates?
The interesting thing is, they don’t just have high tax rates for the rich, they have high tax rates for everybody. But they use their revenues well, or fairly well, to try to produce kind of socially inclusive—economically and socially inclusive results. So there are big expensive social safety nets. And you can’t fund these by just taxing the wealthy, which is—there have been enough studies of that. It just don’t work. It’s part of the discussion in the American political system. But if the social values are such that we all accept relatively high taxes in order to have systems that, you know, produce inclusive patterns of growth, and help people with a transition to the earlier question I was asking about, then you can produce some pretty impressive results that don’t seem to—don’t seem to inhibit economic performance.
I mean, my take on some of the Nordic countries is, first of all, they’re small. So they basically have to be open economies, or they’ll suffer terribly. I mean, if you take a country the size of Sweden and try to produce a full array of tradable industries, you’ll just get rubbish. I mean, you can’t do it, right? You’re going to have to specialize. That means they have to be competitive. And that means they have to adopt all of these technologies. And there’s an interesting article in the New York Times that kind of captured this. The title of it was a little flamboyant. It said: The Robots are Coming, and the Swedes are (sic; Sweden is) Fine. And basically what it said was what I just said. They have to be open. They have to adopt the digital technologies. They don’t have any choice but to help people, workers, to make the transition to working effectively with the technologies. And they have—they have two things that make this doable.
One of them is, you know, these big sort of social security, social service systems that are kind of the backstop of the social insurance system that help people get through these things. And the second thing is they have a—they have something that I think is really important, is they have a culture in the country where business, and labor, and the government can collaborate in solving challenging problems. Now, that’s not unique. I mean, I think there’s some of that in Germany. But it’s not ubiquitous. And if you don’t have that, then you have something that’s more like a lack of trust. Then I think then you have a much bigger challenge in managing these structural changes and adaptations to new technology.
So my bottom-line answer to your question is, the tax things are important, but I think that probably best discussed in the context of what else, you know, that are complements and substitutes for the tax system that are important in achieving the results we all want to achieve?
Q: Thanks so much.
FASKIANOS: Thank you, next—thank you, Tom. Next question.
OPERATOR: Our next question comes from the University of Texas, Rio Grande Valley.
Q: Yes. This is George Atisa. One of the courses that I teach is politics of strategy.
And professor, I would like you to talk to the concept of wealth concentration, because a lot of the time we can say people in poor countries are getting out of poverty because their incomes are rising, but taxation itself, that support economic growth of those countries. So the global economy still sees an unequal footing between those countries that have amassed a lot of wealth and those that don’t. So the idea that, for example, rich countries have to give aid to these countries—to the poorer countries, tax their own citizens to satisfy local needs, how do we make sure that that inequality actually reduced? What’s missing in this variable? I’m not sure if I’m so clear, but I’m sure you can speak better to my question. (Laughs.)
SPENCE: Well, I think I understand the question. Let me—let me try to answer it by telling you what I learned from the experience of being on this commission and talking to a lot of people, most of whom were, you know, people who had leadership positions in developing countries. And, you know, they weren’t academics like me, with no relevant experience. So if you look at the cases of relatively sustained high growth, those cases require high levels of investment in order to achieve those levels of growth. You can do this mathematically, you know, if you have some sense of what the sort of capital output ratio is there.
But the idea is, I think, pretty straightforward. Which is, if you’re going to grow at 6-plus percent, you probably need to be investing at the rate of 25-plus percent of GDP, in a combination of assets. Certainly in human capital, but also the physical kind of infrastructure, and the private sector investment. They’re all included in that. And if you look across countries and where those investments are not occurring, then they discover that they might grow for a period of time, a relative short period of time, at high rates, but then it falls off. So that’s critical.
The question is, so who makes those investments? And you might think that the way that would work is that relatively rich countries, you know, with the capacity to save and invest, would be making those investments. But if you actually look at what happens, for the most part that isn’t what happens. So all the sustained high-growth cases that we were able to find using World Bank data, were cases in which the savings—domestic savings were roughly the same as the investment rates, and both of them were very high. And when I first saw that I thought, this can’t be right, right? I mean, if you have a relatively poor country, let’s say a per capital income is $700, and you’re sort of saving and investing at 30 percent, that means you’re not consuming 30 percent of the national output. And so that drops the consumption levels to 70 percent of seven hundred, which is under five hundred.
I thought, that’s a choice that must be hard to make. But the simple truth is that a number of countries have done that. If you go a little further and ask yourself: You know, are external sources of funds—are there cases where external funding seems to have a very important role? It’s pretty hard to find examples of that. And when I told Bob Zoellick, who was at the time the president of the World Bank and a very knowledgeably guy, I said: We can’t find any examples of this. And he said, well there is one, it’s the United States in the nineteenth century. We were—we were running big current account deficits and funding it with inbound capital from Britain and Europe in order to fund our growth. But in the postwar period, we can’t find those things.
And aid has lots of problems that have been well-discussed associated with it. So, you know, aid at the scale that would be required to externally fund this kind of investment is—has problems with it. It comes with conditions. You can’t lend somebody massive amounts of money and not have it come with conditions that have to do with the properties that are funded, and so on. And that is typically resented by the recipient. And then it gets worse. I mean, there are countries in which 60 percent of the federal budget—their national budget, the central government’s budget—was coming from aid. And that essentially means that, you know, some external entity’s running the country, right? And that doesn’t sit well in most countries, for understandable reasons.
So I think that the sort of picture’s mixed on this. Some people believe there’s a low-income trap, that is a country’s income can be so low that they can’t—they can’t invest their way into a kind of high-growth, you know, pattern. Maybe that’s true. I don’t know. But I’ve now seen lots of examples where it looks like even relatively poor countries can do that. Singapore is one of the higher-income countries in the world, and in 1950s and in the early ’50s, when they decided they weren’t going to be part of Malaysia, that was a fairly poor country. So who knows? But I think the message that I walked away with strongly was that there are real problems with having external funding to finance the investment that drives the growth.
FASKIANOS: Thank you. Next question.
OPERATOR: Our next question comes from Kentucky Wesleyan College. Participant, your line is live.
Q: Hello. Can you hear me now?
SPENCE: Hello. Yes.
Q: Hi. Yes. So my question is, as we see a rise in cases of the coronavirus and overall fear across the entire world, can we expect globally an increase in protectionist economic practices? And if so, what sort of effect would this have on the global economy and inequality?
SPENCE: That’s a very good question. So the answer—(laughs)—I mean, if I wanted to be brief, the straight answer is nobody knows. But I would say—let me try it this way. We’ve had big shocks like this in the past. Some coming from epidemics and so on. It’s possible this one will be so big—get so big it looks like the black plague in Europe, many centuries ago, in which case it’ll have very long-term effects. You know, reduced populations and produce chaos, and stuff like that. And it’s possible for the policies to be sufficiently slow and untargeted that you have lasting effects. I mean, I would say in the coronavirus case, because the response seems to be to reduce mobility substantially, at least for a period of time, to try to stop or slow down the rate of spreading the thing so that you don’t overwhelm the medical system—I think that’s certainly what’s going on where I’m sitting right now.
Then there’s a lot of—you know, the big companies will be fine, right? You know, they’ll deal with the banks, they’ve got reserves, and they can get through it. But there’s—in every country, there’s millions of small businesses that are basically healthy, if you can get them through to the post-shock period, that could go out of business. I mean, one of the problems with the Great Depression in the United States, and to some extent in other countries, is when the banking system failed, which it did, massively, then a whole bunch of companies that would have, if they’d made it through to the other side, they could have kept functioning, keeping people employed, and so on, failed as well, because they couldn’t get any financing to get through, you know, the lull. And there’s a similar situation here.
So you know, there are a number of smart policymakers in China, in Europe, and I hope in America that are going to focus on—at least on the economic side. I mean, I’m not talking about the medical response for the moment. On the economic side on getting—making sure we don’t have any sort of lingering long-term damage that we don’t really need to have. And the digital technologies could help you. I mean, they’ve helped massively in China. I mean, when you think about it, if you take an economy and then sort of stop mobility, you know, there’s a huge difference between one that has a digital underpinning, which most of our economies do now, and one that doesn’t.
I mean, if you had a lockdown on the scale that we may see in a range of countries, and that they did have in China, and take away, you know, e-commerce, financing, the mobile payment system, you know, the logistics system that, you know, operates with a minimal number of people and so on, ordering things from abroad, and so on, and you know now to mention distance learning, which many of you are going to have to deal with in the relatively near future, maybe, working from home, and a whole bunch of other things—all that goes out the window, you know, without the digital part. So that turns out to be an important element of resilience in the context of this kind of thing.
So the question is, are we going to have reduced mobility at the end of all of this? And the answer is probably some. We’ll have more constraints. And in this sense, I think we’re on a—we’re on a trend. So we’ve had—if you think of globalization as being four flows, goods and services, capital, people, and sort of data, knowledge, and technology, all of them are—have question marks associated with them now, you know, that have to do with various issues. So, you know, we’ve had the threat of some reduction in people mobility associated with digital—I mean, technological protectionism. And we could have—we could have more of it than we’ve experienced in the past as a result of the heightened sense of a threat of major kind of epidemics going global.
We’re certainly more vulnerable than we were sort of twenty-five or thirty years ago because of the—well, because of all kinds of things. You know, the low cost of travel, tourists going everywhere. And that will have very big effects. I mean, you know, we can just go look at any country’s tourism data, and that will show a rising batch of tourists, who are important to many economies, coming from Asia, for example. That could—that could—that trend could reverse, for a while. I would not want to be in the cruise ship industry right at the moment, because they’re going to take a hit.
But overall, I think the—what I’ve said, what others have said, is no one can worry about a number of these things. If this thing is handled properly, and we go back to normal in, say, you know, six to eight months or something like that, there’ll be damage. There’ll be a bit hit, but probably the overall pattern would be a reasonably rapid recovery on the economic side, with some lingering areas of concerns. That would be my best guess, so.
Q: So what should the U.S. do to handle this, then?
SPENCE: Well, I said to Irina before the thing started, you know, we’re—in Europe, when you take Europe as a whole, you don’t have—we’ve got lots of initiatives, but we don’t have a coherent policy for dealing with it. And we didn’t—and we didn’t respond very quickly once it became clear that there was a big epidemic in China to get ready, meaning with testing stuff that works, you know, with plans to restrict mobility, you know, with attempts to stop the spread of the virus before it, you know, became sort of an untraceable social pattern, and stuff like that. And I would say for the most part, while there’s lots of effort now in the United States, that entirely sensible by companies, by organizations of all kinds, including the Council, to take defensive action to protect people and society. We’re late starting.
And I would say, in America we still don’t have a well-articulated overall strategy coming from the national level as how to deal with it. So we need that strategy. And we’re a bit late getting started. And I think that’s true in both the United States and Europe. It’s further along in Europe, especially Italy, than it is in the United States. But in the United States, we tested sufficiently small numbers of people we probably don’t yet know how far it’s spread.
Q: Thank you.
FASKIANOS: Thank you. Michael Spence, thank you very much for your insights with us today. I think we will have to leave it with that, and to all of you for questions. Michael Spence is on Twitter at @AMSpence98, if you would like to follow him there. So thank you, Michael.
SPENCE: Thank you. And thank you, everybody, for joining in. I appreciate it.
FASKIANOS: I encourage you all, since we ended on the topic of COVID-19, I encourage you to go to CFR.org and ForeignAffairs.com for information about it, as well as research and analysis on other topics. We also have launched a new website, global health website, at ThinkGlobalHealth.org. You will find the latest developments and analysis on COVID-19 there, including international containment responses, the governance of the coronavirus outbreak, which I think the WHO has just declared, as we’re on this call, is now a pandemic. So you all should do that. Again, go to CDC for information as well. And you know, I would contact your local officials to—and your state representatives and congresspeople to, you know, put pressure there.
Our next call will be on Wednesday March 18 at 12:00 p.m. Eastern time. Jendayi Frazer, president and CEO of 50 Ventures and adjunct senior fellow for African studies here at CFR, will lead a conversation on the future of democracy in Africa. So we hope you will join us again. I think many of you will probably be doing so remotely, since a lot of schools, as Michael mentioned, have gone to online classes. And so we hope to continue to be a resource for all of you during these challenging and uncertain time