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The Next Convergence: The Future of Economic Growth in a Multispeed World ReviewThis book is about the third century of the Industrial Revolution - now. During the IRs first 200 years a minority of the world's population (about 750 million, 15%) broke out of the up to then stagnant and low-income economies that had dominated life for over 1,000 years. The process, while slow - about 2-2.5%/year, had a major impact on those affected. After WWII the pattern shifted, and the developing nations started to grow, quite slowly at first, but reaching sustained levels averaging 7%+/year. The world's economies are now converging again, to inter-nation disparity levels more similar to those pre-IR. Throughout, leadership, politics, government structures and effectiveness have played major roles - both positive and negative.
General observations from author Spence: 1)Betting against China in the recent past has not been very profitable, partly because its governance model is so different that we fail to understand and appreciate it. 1)Africa's high-level of natural-resource wealth has proven to be a curse - permitting governments to stagger along without making fundamental improvements. (Avoiding the 'Dutch disease' in which exchange rates rise to the point where natural resources are the only viable export such as was the case in 1959 Holland vs. its natural gas finds, is likely to require making overseas investments.) 3)Many people care more about values, religion, and relations with others than growth. The importance of growth, for most citizens, comes mainly in wanting their children and grandchildren to have better opportunities than they had.
Growth requires investment. (However, money spent for 'investment' programs such as education, defense/Homeland Security, foreign affairs (support for Israel), and poverty reduction is still subject to basic economics - eg. the law of diminishing marginal returns. Enormous funds are wasted today in those areas, primarily for political reasons. Many of India's northern states also have educational performance problems.) Nationalism can help build cohesion - positive, OR blind citizens to the need for change (eg. the doctrine of American exceptionalism, our 'better days' with laissez faire economics) - negative. (China has the advantage here - 90% Han ethnicity, and a society-oriented Confucianism background; the U.S. is split by races, and a tradition of freedom/personal independence.) Similarly, market incentives (eg. Chinese farmers between 1978-80) and added capital are also subject to diminishing returns. Long-term growth requires innovation - recent examples include the Toyota Production System, cell phones, the Internet, Green Revolution seeds, computers, etc.
Innovation also destroys value - eg. old U.S. blast furnaces, factory layouts). Desire for recognition and respect also drives innovation - eg. art, construction of great cathedrals, etc.
Global poverty is mostly a rural phenomenon. Thirteen developing nations grew at 7%+/year for 25 years. At that rate income and output double every decade. Their experience shows that investment needs to average at least 25% of GDP, with the public-sector component of this running 5-7% GDP. (U.S. education 'investments' in education alone exceed this figure; add in government health care expenditures, and the U.S. is spending FAR more than what is required.) Developing nations are best served by financing most investment from domestic savings, not large trade deficits. (The latter are subject to withdrawal and currency risks.)
China's allowing farmers to sell in the open market any amount over their planned market quotas was a brilliant start - prices (and production) went up, and city dwellers grumbled - but they were only 18% of the population. China's second smart move was to ask the World Bank, not for financial help, but knowledge help. This knowledge was then combined with an experimental, fact-based (not ideological) approach to improvement.
High-growth countries set economic objectives within a high-priority context, then experiment toward improved performance without allowing guidliness to become ends in themselves. They recognize that effective governments AND markets are both essential. However, the U.S. has lost the concept of needing a private-public partnership, now seeming to believe that the private sector can do it alone.
Most developing nations manage their currency to limit capital volatility and ensure that their export sector remains competitive. High-growth is not coterminous with democracy; on the other hand, famines are much less likely in democracies. Developing economies tend to staff when GDP/capita reaches mid-class levels. They fail to make the transition from a labor-intensive economy to one more reliant on R&D and intellect. China is addressing this issue. Emerging markets understand the importance of having a significant fraction of their financial sector domestically owned and amenable to working with their government to avoid/mitigate crises.
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