Monday, October 8, 2012

The Next Convergence - Part 2

Sustained high growth in the developing world

7. The high growth developing countries in the post-war period

8. The opening of the global economy

9. Knowledge transfer and catch-up growth in developing countries

10. Global demand and catch-up growth

11. The internal dynamics of sustained high growth

12. Key internal ingredients of sustained high growth recipes

13. Opening up : an issue of speed and sequencing

14. The Washington consensus and the role of government

15. Managing one's currency in the course of growth

16. The middle income transition

17. The political, leadership and the governance underpinnings of growth

18. Low growth economies in the developing world

19. Natural resource wealth and growth

20. The challenge for small states

21. The adding up problem

Part 2 is an extension of the analysis we considered in our previous book club book - Why Nations Fail.

This section of the book considers 2 questions:

Why did this process of rapidly expanding modernization and growth state in the postwar period?

What do developing economies to (and not do) to sustain the high rates of growth and poverty reduction? (55)

In answer to the first, Spence advances: globalization and increased openness and participation to international trade (57)and knowledge transfer (59). These factors lead to the familiar catch up effect that is a mechanism for the convergence that Spence sees as portions of the developing world achieve high growth rates and move from low levels of GDP per capita to higher levels.

The analysis invites a consideration of the problems of transition and last month our work in considering Acemoglu and Robinson's institutional argument seems in line with Spence's view in chapter 17. The scaffolding necessary to support policies of trade openness, knowledge transfer and the incentives to integrate the results of these policies into, what Acemoglu called the "virtuous circle" must support and incentive change. Using China as an example we are told, ". . . the central task for development and growth was learning at all levels, in the private sector and the government."(61) This assertion seems to be to exemplify the notion of emergent order - that the institutions of a society must encourage trial and error and overcome the natural resistance to a dynamic process of exploration. Very Schumpeterian and when Spence writes of "high-speed learning environment" he is hitting on a key element in the process of change.

I very much appreciated Spence's treatment of comparative advantage in chapter 10 was his clarity in contrasting the dynamic nature of comparative advantage with the static view of the world held by some, including many public leaders.

Spence clearly presents the consequence of this dynamic nature: "Sustained growth and structural change go hand in hand." (67).

I am looking forward to our discussion of chapter 11 and the role of government is supporting growth. That discussion will be, I hope, informed by the first two paragraphs on page 71 as well as the contentions outlined in the past paragraph on page 105.

Spence outlines the role that the public sector can play in the investment areas of education and infrastructure. Public education is at the center of our next book The Race Between Education and Technology.

This book provides a careful historical analysis of the co-evolution of educational attainment and the wage structure in the United States through the twentieth century. The authors propose that the twentieth century was not only the American Century but also the Human Capital Century. That is, the American educational system is what made America the richest nation in the world. Its educational system had always been less elite than that of most European nations. By 1900 the U.S. had begun to educate its masses at the secondary level, not just in the primary schools that had remarkable success in the nineteenth century.

The book argues that technological change, education, and inequality have been involved in a kind of race. During the first eight decades of the twentieth century, the increase of educated workers was higher than the demand for them. This had the effect of boosting income for most people and lowering inequality. However, the reverse has been true since about 1980. This educational slow-down was accompanied by rising inequality. The authors discuss the complex reasons for this, and what might be done to ameliorate it.

The recent Institution for International Economics Studies conference had a presentation on point with a comment on the presentation by Claudia Goldin, co author of The Race Between Education and Technology.


Comment by Goldin

Returning to Spence's book, he finds 4 attributes of government involvement in society that are positively related to growth (106):

1. The government takes economic growth seriously.

2. The governing group has values that cause it to try to act in the interest of the vast majority of the people

3. The government supports open trade, high levels of investment and a future orientation.

4. Economic freedom is supported by the legal and regulatory policy.

I am looking forward to both the discussion and reaction to point 4 above and an analysis of Spence's chapter 17 analysis.

Spence asks, at the bottom of page 109, ". . . what could be done about failing states."(109). This question bedevils social scientists and policy makers and I wonder, after reading Douglass North, Daron Acemoglu, Michael Spence and other contemporary thinkers and reflecting on Adam Smith's analysis of the causes and conditions of the wealth of nations, what really can be done?

I also wonder, to what extent, there are constructive responses to what Spence sees (third paragraph of page 113) as the common causes of poor economic performance.

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