Wednesday, May 21, 2008
JOHN CASSIDY: Good morning, ladies and gentlemen. Welcome to this meeting of the Council on Foreign Relations.
We're here to hopefully create a bit of news and also to have an interesting discussion. There will be questions to the audience after the panel has spoken.
We're here for the launch of this publication, the growth report by the Commission on Growth and Development, an international commission of very imminent people from around the world which was put together a couple of years ago by the person to my left, Danny Leipziger of the World Bank, and is an attempt to review the lessons we've learned about growth and development over the last couple of decades.
I was speaking to one of the panelists yesterday. And he pointed out to me if we had had this meeting 20 years ago, we'd be in the middle of the debt crisis and everybody would be very pessimistic about the prospects for growth and development. Since then, of course, things have changed a lot and we have a lot more examples of successful growth -- China and India being the two most prominent examples, but there are also examples in Latin America and even in Europe -- places like Spain and Ireland are transformed from 20-30 years ago.
So anyway, I'll get right to the -- let's get right to the launch of the publication. The people on the stage with me: Immediate to my left, Mr. Duck-Soo Han, the former prime minister and former minister of Finance and the Economy, the Republic of Korea; to his left, Danny Leipziger, the commission vice chair and the vice president and head of Networks, Property Reduction and Economic Management at the World Bank. He's been working on these issues for a very long time.
To his left, Pedro-Pablo Kuczynski, the former prime minister of Peru who is now the president and CEO of Latin American Enterprise Fund and partner and senior advisor at the Rohatyn Group here in New York. And then on my extreme left, Professor Robert Solow of MIT, a Nobel laureate-winning economist and a man who's growth model I, and I'm sure many other members of this -- people in this room studied when we were in college.
Anyway, turning immediately to Danny: Perhaps Danny, you could just open up by telling us how this -- a word or two about how the growth report's put together, who's idea it was and what it's main points are.
What's new about this? We've all seen lots of reports on growth and development before. The IMF and the World Bank put them out every year. What's particularly new and significant about this report?
DANNY LEIPZIGER: Okay. Well, thank you very much. I'll try to be quite brief.
Let me tell you first what this report is and is not. It is a report of an independent commission. It is not a World Bank report. It is a set of observations about what drives long-term growth and it is not a blueprint. And thirdly, it is policymakers, such as the people on the stage with me, talking to their peers in developing countries. It is not the rich countries telling the poor countries of the world what they should be doing.
What does it say? Let me give you four or five takeaways. One is that growth is indispensible for welfare improvement and poverty reduction. We know of no cases that counteract that. That long-term growth requires persistence, vision, experimentation, continuous effort and flexibility by governments. In other words, it's not easy. It requires a certain passion.
Third, that the role of government is extremely important. There have been debates about the size and role of government, but we find that political leadership and vision are important and that there's no one single paradigm that drives growth.
Fourthly, that leveraging the global economy is indispensable. Of course, you need an open and somewhat benign international environment. But the cases where catch up has occurred have been countries that have leveraged the international environment. And fifth, that growth needs to be inclusive and that for sustainable and inclusive growth, you need to invest in people and infrastructure increasingly in urban environments, as our report indicates, because that's where the people will be.
Let me answer your question about what's perhaps controversial -- new about this report. And let me say first that we take an open mind on things like investor of policy, and we think that there's an important nexus between public and private sector interactions, which can't be seen ideologically. We take also a more flexible attitude on the pace and sequencing of capital account liberalization and exchange rate management.
I think the report -- and this is where it's clear that it's not a World Bank report -- points out some of the flaws of the international coordination mechanism and points to the need for more voice in terms of global governance for developing countries. We also -- and you can see this in areas in the report dealing with migration or climate change, current public goods kinds of issues.
We are open to special trade preferences for Africa and other activities that would help in that continent. We, I think, lament that globalization is taking the rap for poor internal management of income distribution issues. And we think that it's up to national governments to deal with internal matters and not blame it on globalization.
And I think we distinguish between efficiency and fairness in dealing with issues of the global comments -- particularly climate change. And we think that it's important to reduce carbon emissions, but we don't think it should be put on the backs of developing countries or that they should be asked to slow their growth rates unnecessarily.
So I think these are, in a nutshell, some of the things the report says. We have a website, www.growthcommission.org, that has all the background papers -- close to 100 of them -- that were done in the two years of this project around certain thematic workshops. And I just wanted to also mentioned that the report is being launched here and in London and in Cairo and in Cape Town this morning. And so you are in on the initial conversation about this report.
CASSIDY: And Danny, who's financed the report? You say it's not a World Bank report.
LEIPZIGER: Well, we have a lot of support from the Hewlett Foundation, from certain bilateral aid agencies such as DFID in the U.K. and the Swedish Aid Agency, Australia and Canada. The World Bank has put staff into it, and so we've obviously supported it, but it's independent as a commission.
CASSIDY: So it's ultimately the view of its members, not the World Bank.
LEIPZIGER: Absolutely. I had one vote out of 21.
CASSIDY: Okay, thank you.
I should have said, ladies and gentlemen, this is an on-the-record briefing, so you should be aware of that when you're asking questions.
Duck-Soo, as Danny said, it seems that this report sort of is a move away from the old Washington consensus, but it does still stress the importance of integration into the world economy.
What does that mean and what lessons have we learned about that in the last few years?
HAN DUCK-SOO: I would like to mention two things: one, the globalization and the integration of the successful economies with their long-term growth. Long-term high sustainable growth with the efforts to integrate their economies with the global economy have been quite successful.
And we find that that is the characteristic which is quite common for these successful economies. But there were a lot of discussions on how to make this integration successful.
Everybody knows that this globalization and integration with the global economy will give us the technology required, and also the quite elastic market -- infinitely elastic market where labor-intensive products can find a lot of big markets with very good effects of economy of scale and so on.
But what the commissioners worried about was whether this kind of experience can be repeated in the future for the countries who would like to develop. The conclusion was that it can be repeated. There was discussions of other problems -- if all countries would like to develop through globalization, then will there be sufficient demands to absorb all these supply from these economies who would like to develop?
We find in the experiences of successful economies during -- after the Second World War, that although most of the economies start with labor-intensive manufacture red products, after some developments, there have been consistently some kind of a specialization among these economies -- whether they were in intra-industrial, sectoral specialization or some kind of political one. So Korea completely, I think, now scrapped the very low-skilled manufactured textile products. When you look at all the very big shopping centers here, there are no products from Korea; although, some very highly sophisticated ones still remain, but most of the, you know, apparels are gone.
And China sooner or later will suffer from a rise in wages and they also will specialize in more sophisticated products. When you look at the shopping center here, Chinese products are somewhat more high-value added, while Cambodia still has the portion of rather more cheaper products.
So there will be a specialization. And from a specialist point of view, there will be a consistent change in the relative prices of these products. So we think that these adapt problems can be surmounted. Then will this experience apply to Africa, for example, without no capacities and without no institutions and things like that?
The globalization, although through this integration into the global economy, these successful economies have been success. Still, because of this globalization, the countries who'd like to develop now -- for some countries in Africa -- can really take advantage of the merits of globalization. If there is good leaders and good policy packages, then this globalization will entail the transfer of capital, transfer of technology and even transfer of skilled labor. So these later developing countries will be in a better position to utilize the merits of global economy.
Of course, we commissioners worried about lagging progress of Doha Round -- that it'll be very crucial for the countries who would like to develop.
DUCK-SOO: And for the leadership, we think that this kind of development does not just happen. There will be very shrewd packages and commitments and pragmatisms of the leaders and the governments. So this does not mean that governments should be paralyzed, but know that a committed and effective and pragmatic governments and leaders are definitely crucial in our developments.
We discussed about some kind of conflicts with a democracy, because we find a lot of -- many cases of successful economies that there are some kind of long-term sometimes-authoritarian governments. But we think that as these economies develop, the middleclass will develop and democratization process will be much more on track.
So we think that leadership -- strong leadership with perseverance and commitments and pragmatism is necessary. And also, the effective government is crucial and successful economies all have these kind of characteristics.
CASSIDY: Thank you very much.
Pedro, I think one of the things people will be interested in in this report is that it is not just another academic report. You know, people like yourself are practitioners and have been involved in the frontline for a long time.
But one of the things that comes through to me is that, you know, there's no sort of magic bullet here. It's a long-term process and you've got to stick at it for a long time -- growth and development.
Is that true and what lessons do we need to learn about that?
PEDRO-PABLO KUCZYNSKI: Well, I'd like to make two points. First, as a former finance minister in various governments, the finance minister in most of the these countries is sort of appointments for the fights -- the fights with Congress, the fights with various interest groups that are opposed to various things or in favor of various things.
I mean, when I was in the government last round, I had fights on protectionism the U.S. free trade negotiations, labor laws, tax amnesty, privatizations. There was barely a day that there wasn't a fight. So you've got to be willing to fight and you've got to have the support of somebody, presumably the president, which I did, but it's a struggle.
The second point I'd like to make, which I think Bob Solow is also going to make, is the importance of infrastructure in this. In Latin America, certainly there is not enough investment in infrastructure. Public-sector infrastructure investment is around 3 percent of GDP, private is another 2 points, a total of 5. That's way too low if you want to grow at 7, 8 percent for a long period.
And the final point which I think is an important point in the report is the labor market. The report, you know, takes an agnostic position on stuff like industrial policy, exchange rates and so on. But it is very clear on labor markets. Labor markets have to be flexible. And unfortunately -- and here again, I'm speaking about Latin America -- we have champagne labor laws but beer incomes. And so the result is you have a very high proportion of the labor force that's informal, that doesn't pay taxes, no Social Security, no pensions. And the paradox is if you want your labor force to be covered and thereby increasing your savings, you've got to have much more flexible labor laws.
CASSIDY: Okay, thank you.
Professor Solow, Danny said, you know, this is reflective of an evolution in thinking about development among academics and practitioners. And one of the issues, obviously, is this issue of government involvement and infrastructure investment. Are we going back to the '50s and '60s, you know, talking about how government should be building dams and roads and highways? What's new here?
ROBERT SOLOW: Well, first of all, let me begin by reminding everybody here that this was a commission of 21 people that included exactly two academic economists, namely Mike Spence, the chairman, and me. This was a very educational experience, not for the others, but for us. It was very useful to be sitting with people who have done this sort of thing and succeeded and sometimes failed.
But I think this point about infrastructural investment is very important. And some of it does go back to the 1950s, but I think we've learned a lot since then.
We're talking here about a process that we'd like to see in many parts of the world, which amounts to a shift from a predominantly agricultural and small-scale commerce and industry economy to an economy which gives much more room to the development of manufacturing. In the first instance, probably labor-intensive manufacturing. That's the importance of the world market, of getting involved in the world market, because developing countries, at the beginning, have to specialize, have to learn to specialize, and they need a market in which their cost advantages can bring them increasing scale, the kind of scale and revenue that allows further development.
Well, this kind of shift from predominantly agricultural to manufactory industry necessarily involves another shift from rural to urban. Developing countries will, in the normal course of events, find it absolutely necessary to move people and move economic activity from a rural environment to an urban environment. And somehow, they have to invest -- this is the point that Pablo was making -- they have to find the means to invest efficiently and in some kind of organized way in urban infrastructure and also in industrial infrastructure, in manufacturing sites, in internal transportation, in port facilities, in power and water generation.
When academic growth theory talks about investment, the picture it normally has in mind is private investment, is investment directly in industrial capacity. But this underlying infrastructure is at least as important, and it involves a heavily involvement necessarily, for standard textbook economic reasons, involves a deep involvement of the public sector in cooperation with private-sector sources of investment.
It means also that governments, even the governments of poor countries at an early stage of development, have to generate the revenue to finance the infrastructure investment, without which they can't make this shift to expansible manufacturing.
We talk a little bit about the foreign direct investment in the report. We talk a little less about aid, actually, than about private, foreign investment. But we come to the conclusion that the healthiest kind of development along these lines involves the generation and use of domestic saving to finance at least a large part of the infrastructural investment that's absolutely necessary in order to get this process of transformation from rural, agriculture and handicrafts to manufacturing.
I think that the Americans, in particular -- well, it's not only Peru that underinvests in infrastructure. So does the United States.
MR. : Argentina, too. (Laughs.)
SOLOW: And I think one of the merits of this document is that it emphasized that.
CASSIDY: All right, thank you.
Danny, you were saying, you know, this reflects sort of the evolution of ideas. What is left at this stage then of the old Washington consensus, privatization, liberalization, free trade? You talk about, you know, you're more open-minded on industrial policy, capital account, liberalization. Are those ideas history? Or are you saying that the World Bank and the IMF have been telling people the wrong thing to do for the last 25 years?
LEIPZIGER: No, I wouldn't say that. But obviously, we've learned some things. The liberalized, privatized, stabilized kind of -- (inaudible) -- I think is not overly useful. On the other hand, it doesn't mean that the alternative is a great idea, either.
So I think the question is, do you focus primarily on macro stability and efficiency arguments without worrying about either the long-term growth trajectory or issues of inclusiveness, equality, et cetera? So I think it's really a question of balance. I think the advantage of the report coming when it does is that it puts growth front and center in the development dialogue at a time when there are a lot of other forces at work.
Bob was referring to aid. You know, a large chunk of the increases in foreign aid in the last five years have all been vertical funds for fighting a particular disease, which I think is, you know, laudable and done for the right reasons. It does not, however, generate the kind of investment that my colleagues were talking about or the long-term growth that's necessary to really make sustainable progress in infant mortality or education.
So I think the way to see the report is that it's an evolution of our thinking. I think that Washington consensus was certainly overplayed, and there are aspects of it that are perfectly correct in terms of running manageable deficits and keeping inflation under control. That is not the same as maybe a necessary but not sufficient condition for generating the kinds of policies that will drive 7 percent growth for a decade, which is what you want in order to double your income.
So I think we've evolved quite a bit beyond that. And I think the controversial areas, I think, should be looked at in country-specific contexts. You know, there are certain combinations of policy packages that will work in one environment and will not work in another. So as I've told people, if you think that French longevity is good and that the French eat a lot of garlic and drink a lot of red wine, transplanting that to the U.S. and having a lot of garlic and red wine with your fast-food is not going to increase U.S. longevity. So you have to really customize your policy packages.
CASSIDY: Right, right, right. Another question I have is about governance. Obviously, it always comes up, and there's been a big rally these last few years at the World Bank about this. What views do you take on that whole debate about, you know, whether developing country governments are capable of doing the sort of things which you're saying they should in terms of infrastructure investment, industrial policy, et cetera? Some people would say that in places like Africa, the governments are too corrupt and incompetent to do this. I'm referring to, you know, this is the whole great Wolfowitz debate. Do you take a view on that?
MR. : Well, do you want to ask my colleagues first? (Laughter.)
KUCZYNSKI(?): You want to tackle this one? I don't think the central issue is corruption. I think that the bank went down the wrong road on that. The central issue is good government. And obviously, fighting corruption is a part of that.
But let me go back to another subject which is the subject of infrastructure and the Washington consensus. I don't think that we're saying that government should do infrastructure and build the dams. I think what the government should do, though, is organize the setting for these things to be built. Now, in some cases, in China, the Three Gorges dam is built by the government. But in most other cases, what the government does is set the right regulatory setting, the right pricing setting and so forth.
As far as the Washington consensus is concerned, the worst thing about it is its name. It's not its content, you know. If it was called the Dublin consensus or the New Delhi consensus, there would be no problem. But there is absolutely no objection to saying you've got to more or less balance your budget, you've got to control inflation, you should privatize what needs to be privatized, you should emphasize education. Those are all motherhood-and-apple-pie type of things.
I think what this report adds to that is the infrastructure point and the fact that you should take advantage of the global market. And of course, we are replying to the people who say globalization is bad. This report takes a different tack on that.
SOLOW: Well, I'm willing to push a little harder on the corruption issue.
KUCZYNSKI: All right, go ahead.
SOLOW(?): What you've heard here so far, amongst other things, is the importance of a persistent policy carried out consistently over a long period of time to generate the kind of capital structure that encourages and permits growth. A government that's largely or government officials or private people for that matter whose main activity is stealing from one another is unlikely to organize a really good, basic investment plan for an economy.
What we want -- Pedro is, of course, absolutely right. What we really want is competent, consistent government. But the point is that in some parts of the world, and not only Africa, corruption is one of the forces that makes it impossible to have competent pieces in government. We emphasize in the report the importance of having a good, non-partisan civil service, a bureaucracy that functions properly doing its job. And that's one of the things that corruption, amongst other forces, makes impossible.
DUCK-SOO: Well, one common characteristic of underdeveloped countries may be some kind of a, you know, some kind of existence of corruption. Although it's different in levels, but there are some kind of corruptions, and that is a characteristic of underdeveloped countries.
But we cannot require any country to be completely clean if you would like to start their development. That is not realistic. But when it's a very good characteristic of leadership which will be very strong and harsh on corruptions, but even with that leadership, sometimes the corruption exists.
But if the development starts, there's a lot of, you know, ingredients which can start development. Globalization, for example, certainly requires the government to be international standards. They would like to deregulate, they would like to attune their systems into the global standards, which reduces, to a great extent, the rooms for corruption. That is the experience of some of the successful countries.
I don't want to deny that that is the experience of Korea. As income goes up, as it is more globalized, it certainly requires regulations and a regulatory regime in compliance with global standards which will eliminate a lot of the rules for corruption.
CASSIDY: Okay. I just have one more question and then I'll take some questions from the audience. I'm looking through the report, ultimately I don't want to leave the wrong impression. It is an optimistic report, is it not? I mean, you are saying that it's (part of the ?) development which countries like China and Korea and certainly Latin America now and Peru, et cetera is open to everybody. Is that realistic? I mean, you look at Africa, obviously, is the great exception to the rule. Are you saying that, you know, countries in Central Africa, landlocked countries with, you know, terrible histories can follow the Asian model?
LEIPZIGER(?): Well, I think you're right that it is optimistic. I think we don't only look at China or even India. I think if you look at Vietnam 15 years ago with a per-capita income of $150 and now it's $750, so I think there's a lot in the report that is positive in the sense it's saying, you know, there are policy combinations that will work, but they require a lot of hard work and a lot of things to fall into place.
On the adding-up problem which is what Han Duck-Soo mentioned, there is the analytic debate, well, what if everybody was going to be an export-led economy. Would there be enough room in the market? That debate existed 25 years ago. And people said, oh, watch out, you know. There may not be enough room in the market. Well, no one took into account what China's growth rate was going to be and what it's role in the market was going to be.
So the analogy to that is as China moves into higher value-added issues like exports, as Han Duck-Soo said, it opens up a lot of space. So I think, analytically, we are less worried that this is not possible.
On the Africa side, obviously there are some impediments and initial conditions that are a lot worse than other situations. This requires some special actions. So I think we do talk about the trading regime. We talk about Doha. We talk about special preferences. We talk about over investing in education and infrastructure, like my colleagues have said.
So we don't take the view that this is hopeless. We do take the view that it requires a lot of things to go right, and we try to point out some of the elements. Without giving a one-recipe-for-all, we try to lay out what the elements are for a successful growth strategy over one to two decades. And we think that countries have the possibility of catching that train.
CASSIDY: Right, right. Anybody else want to --
DUCK-SOO: I think there are some successful countries in Africa, too, with a good leadership and varying integration with the global economy.
CASSIDY: Can you give us some examples?
DUCK-SOO: Well, Botswana or Ghana or Uganda.
MR. : Zambia, Cameroon.
DUCK-SOO: And all the investors are searching globally, which is the best place to produce or to consume? So certainly Africa can be one candidate. Of course, there are lack of infrastructure, capacities and things like that. But if there's a good leadership which are committed to growth, which will be definitely for any leaders who are elected or who came to rule, you know, manage the country's economy, certainly there is nobody in the world who don't want to do well. So certainly there are rooms for them to push and some kind of peer reviews and, you know, some kind of emulation efforts will certainly help.
CASSIDY: Okay, thank you very much.
SOLOW(?): Oh, John, I do want to add one thing which actually emerged in your question rather than in any of the answers.
One of the things the report does is talk about the kinds of countries that have particular circumstances, particular problems that are not shared amongst developing countries generally. One of them, for instance, is being landlocked, is having no port facilities of one's own, which makes the development of a thriving export of labor-intensive manufacturer's textiles or whatever it is, it makes it very difficult.
Another is countries which are rich in natural resources and can indeed. That's an advantage of a source of export revenue that can be used for development purposes but has dangers of its own that the phrase "Dutch disease" has been developed to describe.
Another is very small countries. There are countries which are -- Malta is never going to be a diversified, manufacturing country. And the report suggests makeshifts, suggests ways in which countries of the world with those particular problems can, by cooperating with one another, by cooperating with the international community, can arrange to do those things.
I think it was a really good idea -- I can say this because it wasn't mine -- a really good idea to start this investigation by looking at the 13 or dozen, however many, examples of recent episodes of sustained, rapid growth and then looking carefully at what they had in common and in what ways they were diverse.
CASSIDY: Okay, thank you very much.
Ladies and gentlemen, we'll take questions. Just ask you to stand up and identify yourself. And please wait for the microphone.
Gentleman at the front here.
QUESTION: Thank you very much for what I'm sure will be a very interesting report. My name is Arturo Porzecanski with American University.
And my question is, for many years, the signals coming out of the commodity markets were very clear -- get out of the land, go to the cities, find yourself a job in a factory and go on from there. I was wondering if the now, you know, six, seven-year-old commodity price boom entered into your discussions and if either you ignored it or colored some of your recommendations. Because all of a sudden, it's not clear that staying or even going back to the land isn't the best answer.
CASSIDY: Thank you.
KUCZYNSKI: Arturo is a former pupil of mine. Even though I'm not an academic, I did teach at the University of Pittsburgh.
I think that, obviously, this growth episode that we're living through is promoted in a number of emerging markets because of the commodity boom. There's no doubt. And there's also no doubt that at some point a commodity boom has to slow down. By how much, we really didn't discuss in the commission.
But I think some things have changed. I mean, you know, there are now 1.3 billion Chinese. Their income is three times what it was 15 years ago. They eat a lot more. They consume a lot more. And the whole of surrounding Asia is similar. And this, obviously, has a fairly permanent effect on commodity markets, including the oil market. So that's something that we have to factor in when we look at the future.
CASSIDY: Yes, gentleman in the front.
QUESTION: Joe Bartlett, Sonnenschein.
I questioned whether -- and I haven't read the report, of course -- whether there's any emphasis on the ability of emerging markets to take advantage of innovation, technological creativity. You look at what I call the three I's which are the three countries whose name begin with an I that all through off the British yoke at about the same time. And they have been hotbeds of innovation. And if you believe that the world economy is shifting to technology, innovation and invention, do you deal with that issue in any way, shape or form with recommendations, recognition, et cetera?
SOLOW: Well, we do say -- the report, as I remember, does say -- you haven't read the report, I have read about 18 different versions of the report, and it's hard to know what's in the 18th -- (inaudible). But we did discuss the issue that you mention. And we thought about, of course, the use of foreign direct investment as a way of importing technology and new ideas.
One of the reasons why we have something good to say about industrial policy, which was a no-no in the New Delhi consensus or whatever it was -- (laughter) -- is that one of the things that an industrial policy can do is provide resources, both for the generation of local technology and for the adoption adaptation of imported technology. So we do pay attention to that.
There is not a hell of a lot known systematically about how to do this. So there's no set of lessons that we could write down. But that we alert everyone to that is clear.
CASSIDY: Anybody else?
Lady at the right table here.
QUESTION: Patricia Rosenfield, Carnegie Corporation.
For those of us who were deeply involved in the Commission on Global Governance and the South Commission, we learned an important lesson in the lack of those recommendations to stick, and that is the importance of innovative institutional arrangements that take the recommendations of really significant and innovative commissions such s yours and make them stick and help them to get distributed and disseminated globally and have the persistency we're talking about. So I'd like to hear a little bit more, not about the problems with the Doha round, but what are your recommendations for innovative institutional arrangements that will make this new focus on growth last?
CASSIDY: Danny, is anybody going to take any notice of this report?
LEIPZIGER: Well, we've gotten quite a few important moderators, such as you, to moderate these sessions, so we certainly hope so.
(Off mike commentary.)
Well, I think there are different ways to influence thinking. The genesis of this was this is a report largely of a generation of successful policymakers imparting their knowledge to the next generation of policymakers. So we will be sending this report to heads of government. We expect that, you know, chiefs of staff to important people will be looking it over. That's the kind of influence that we hope it will have. And we have, obviously, a dissemination campaign.
In terms of institutional structures, we don't go in that direction, but we do remark, and we're clear about it that the current set of institutions that we have is not adequate to deal with some of the problems that we are dealing with. And so whether it's climate change which is given a fair amount of discussion in the report, or whether it's the issues of migration which are pretty predictable because demographics is one of things that is very predictable, we feel that we don't see the international structures that would satisfactorily deal with those problems, okay.
So we are, if you want, ringing the alarm bell in that respect, but we are not coming forth with a particular, you know, description that we need, you know, the G27 instead of the G20 or the G8 or whatever or that the bank and the fund are the wrong institutions, you know.
So we don't go in that direction. But that doesn't imply that we don't think that there will be take-up of the report. But it's up for you to see. If most of you leave this copy behind, we'll know that we did the wrong thing.
CASSIDY: The gentleman in the middle in the white suit.
KUCZYNSKI: There's a lady in the left here, John.
CASSIDY: Okay. I asked -- (inaudible) -- I'll ask her next. Sorry.
LEIPZIGER: There's one in the back, too.
QUESTION: Dan Rosen, Rhodium Group and the Peterson Institute.
Different people in the globalization debate have looked at China and come to different conclusions about whether China's a good example of something, like a Washington consensus, or is it the antithesis of the Washington consensus. I noticed Zhou Xiaochuan, the head of the People's Bank, was on the commission. Can you describe to me a little bit what the Chinese contribution in terms of lessons learned and point of view about growth was?
DUCK-SOO: Well, I think that the Chinese experience certainly combines the arguments you have raised. But it's certain that from 1979 when the reform began in China, that was reforms toward the global economy. But at the same time, those orientation toward the global economy was not of the characteristic of the pure addiction to Washington consensus. They have, in one way or another, some kind of industrial policy and some kind of exchange rate, whether we should say management, but some kind of helpful exchange rate managements for exports were put in place.
So it's clear that they made the turn toward the global economy. But at the same time, they did a lot of things which can make their export more competitive, which are not quite supported in the Washington consensus.
CASSIDY: Question back in the back.
KYCZYNSKI: Can I just add to that, John? I mean, absolutely. I mean, exports are viewed as the powerhouse that propels China. But the reality is 90 percent of the growth in China comes from the domestic economy and the transformation that Professor Solow as talking about, rural to industrial. The exports are really just the consequence of that. The domestic economy is the crux of the matter in China.
CASSIDY: Thank you.
There at the back -- lady on the middle table.
QUESTION: (Off mike.) I wonder if you could talk about how you can incentivize more infrastructure being built. You know, I'm struck by the long payback period on infrastructure. It's probably better built out by a government than private enterprise. I think they would, you know, rather take the (metals ?). And you know, you can get it to be a payback by selling it on the world market. So I think it's really hard with these corrupt governments to want to basically invest in infrastructure. And I think one of the things that's dramatic is in the Middle East the money is now being plowed back into the local economies, into the infrastructure, and it's making a really big difference.
SOLOW: I think the short answer is yes, exactly. One of the reasons why the report emphasizes the importance of being able to generate a consistent policy, even across changes of government and all that, is precisely that the kind of long-term investment that's necessary to transform an economy, a, is not something that can be accomplished in a very short time and, b, just as you point out, there is a very long payback period, a good deal of uncertainty. It's not generally suited to private investment. That's exactly right.
CASSIDY: Anymore questions? Lady on the left.
QUESTION: Barbara Samuels, Samuels Associates and vice chair of the U.N. Business Steering Committee for Financing for Development.
As a peer group, you could have a lot of impact in dissemination in Doha where you'll have a lot of heads of state, finance ministers and other government officials along with the multilateral development banking community and how to push on public-private sector effectiveness. We know we can't finance infrastructure just with official-sector money. We've done a lot of work looking at specifically what are the political messages, what are the performance benchmarks, what other risk mitigation we need to do to deal with a Professor Solow uncertainty, all those kind of things.
Where can we use your report to really be more effective in Doha and get the immediate, widespread impact we need so desperately? Thank you.
LEIPZIGER: Well, you know, at the bank, we are trying to help set the agenda for this meeting, although it's, obviously, run by the U.N. in the first instance. I think bringing to light some -- the more experience that we can put on the table about what works, I think, the better. So combining your point with the previous one on public-private engagement and infrastructure, we know, for example, that in many areas of infrastructure, the public and the private sectors' investments are complements, not substitutes.
So I mean, coming back to the thinking of the Delhi consensus of a decade ago, one used to think, oh, well, the private sector will take over all these areas so the public sector doesn't have to worry about it. Well, that's true for cell phones, and it's true for ports, and it's true for a few toll roads. It's not true for rural roads, for water, for sanitation and even for the roads that link the rural area to the port.
So at the end of the day, as Pedro-Pablo says, you know, investment in infrastructure in Latin America is way below what would be necessary to generate these kind of growth rates precisely because the public sector is not doing its part. Ergo, the private sector doesn't see the returns. So I think that's one area.
The second is in this public-private area, the regulatory regimes are weak. So one can talk about, you know, ineffective or corrupt regulators. We can also talk about people that are coming in to do private provision of infrastructure under contracts that when they sign the contract they know there's no way that they can deliver those services at the tariffs that are posited. And they're going to renegotiate. And when you renegotiate a contract, corruption is the first word that comes to mind.
So in Latin America, an interesting statistic is that 80 percent of the concession contracts are renegotiated within the first five years of the contract. And that's not a good number.
So I think, coming to your point, the more that one can put out there what is good practice in terms of public-private relationships in infrastructure or in other areas, the better.
CASSIDY: Back to the back of the room, the gentleman in the gray suit.
QUESTION: Thank you. Bal Das from InsCap Partners.
I'd like the panel's observation on a point -- I just thumbed through the report, I look forward to reading it -- which I found a little disappointing, which is the weak position on commitment by developing countries to fixed carbon emissions standards. I just leafed through it. It seems to me that if you are talking about India, China, Indonesia and you're talking about (load ?) driven carbon emission standards and just equating it to the advanced countries in particular, the United States is somewhat of a weak argument. I mean, I would like to look more at the efficiency standards of Japan.
Bottom line is I'd like your position on how you sort of come to a somewhat weak conclusion on developing countries committing themselves to more hard-fact emission standards. Your report seems to suggest, it's not waffling, but a weakness on that point that you don't necessarily have to do it, they're surrounding uncertainties. Let's set some standards, keep revisiting it, et cetera, seems to be somewhat on the weak line and is sort of following conventional -- (inaudible) -- logic.
CASSIDY: Okay. Have you gone soft on the developing countries on emissions standards, Danny?
LEIPZIGER: Well, we don't think so. I think this is an area where I wish Mike Spence were here because it's good to have a microtheorist to answer a question of how you deal with uncertainty. I think there are two separate issues. One is whether or not we have enough certainty that there's a problem. The other is, do we have enough certainty to set very clear marks for what we want to see happen by 2030, 2040, 2050? So I leave that one off. And you know, there's a lot of work out there dealing with decision-making under uncertainty.
I think where we're not soft is by saying that there's a difference between mitigation and who pays for it. And that the report is very clear on. The report has a very interesting graph. It shows per-capita emissions for countries. And the U.S. and Canada are way above anybody else. It's clear that the new incremental emissions will largely come from the emerging powerhouses of India, China, et cetera.
The question is, and it comes back to the global governance issue, what is the international community's deal which will deal with the problem where you could say, okay, just India and China, cut your growth rates down to 1 percent and you know, it will reduce our alarm bell from red to yellow? That, I think, we do not endorse.
On the other hand, there are certainly financing arrangements that could incentivate India and China to invest in cleaner power plants than dirtier ones. The question is, who pays for it? And it's in the report's, you know, view, I don't think I'm mischaracterizing it, that it would be unrealistic as well as unfair to ask India and China to bear the entire burden of mitigation going forward.
So I don't think it's soft in the sense that you describe. But you'll have to read it more thoroughly and let us know.
CASSIDY: Okay. One more question -- gentleman here.
QUESTION: (Off mike.) There is in fact a New Delhi consensus on the subject of taxes and infrastructure. And it sensibly recognizes that India needs a lot more infrastructure. It also recognizes that it does not have that machinery necessary to mobilize the revenues required to invest in this infrastructure. People from both parties have agreed what needs to be done.
CASSIDY: Do we have a question?
QUESTION: The question is, since this is well recognized, does your report actually contain best practice from countries that may have faced this problem before and solved this problem before for how to actually establish the systems to mobilize the resources to pay for the infrastructure?
LEIPZIGER: I think we recognized the importance of tax mobilization. So I think you look at two countries that look quite similar, and one's got, you know, 15 percent of GDP in tax take and the other has 10 (percent). And you say, well, with 10 (percent), you're not going to be able to finance the social expenditures, infrastructure, et cetera. So there's no doubt that benchmarking yourself on the tax side is important.
The other side, of course, is expenditures. So I don't want to debate India, but one would have to look very closely at the composition of expenditure. And there's a big deficit in India, and a lot of it goes to things that are probably less productive in terms of long-term growth than you would like.
So this is not a focus of the report, but we do have background papers on a lot of aspects of revenue and tax and expenditure management which you can refer to.
SOLOW: One of the points that the report does come down fairly solidly on is closely related to this. Countries with good endowments of natural resources and that can build export revenues on mineral deposits or something of the sort, we suggest those ought to appropriate a substantial fraction of the pure (rents ?) from those resources and invest them domestically. So that's a part of tax revenue, but it's not the standard income tax or sales tax or whatever revenue.
But to the extent that a country does have control over its own natural resource endowment, the pure (rents ?) on those resources are a very important source of revenue that ought to be reinvested domestically.
CASSIDY: Okay, thank you.
Well, we could talk for a long time about this. But unfortunately, I'm afraid we've come to the end of our time. So I'd like to thank the panel for a fascinating discussion and for all the work they did on the report. I urge you to take the report with you. There are copies around, I think. And obviously, check out the website for more details. And thanks very much for coming. (Applause.)
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