Accelerating Growth Recipes, Ingredients and the Global Context

1. Accelerating GrowthRecipes, Ingredients and the Global Context Michael Spence The Israel 2021 Conference January 12-13, 2011

2. Re’ut Institute and the Marker • Have initiated an import discussion of longer term economic and social goals • and of policies that may help achieve them • Learning from the experience of other countries, advanced and developing, is useful • But all edible recipes are country, context and time specific • And they cannot be created independent of the evolving external global environment • The evolving global economy presents opportunities and challenges • In my view, it is crucial to take these structural shifts into account in formulating strategies for inclusive growth and employment generation

3. Planning and Time Horizons • There are 13 high growth developing countries (7%+ for 25+ years) • Soon to be 15 (India and Vietnam) • Despite differences in form of governance • Shared certain characteristics (ingredients) • Long time horizons • Low revealed social discount rates – they invest at high rates • Agreement on objectives and focus in inclusive growth • Ongoing debate about strategy and policy with inputs from all sectors of society • That means a process that leads to a shared sense of direction • The effect is coherence of policy on “a long voyage with imperfect charts” • Engagement by government in the longer term agenda • What are the five year plans in India and China? • Pragmatic, problem solving orientation and relatively little ideology

4. Israeli Economy • Advanced (economically, technologically, human capital) • Impressive development given resources required for security • Per capita income around $30,000 • Rank 25-30 (less with PPP adjustment) • Advanced human capital and technology • Small (7.3M people) – economically specialized – $200B economy • Open (exposed globally with benefits and risk) • X+I about 80% of GDP • Growth substantial – but so is populations growth • Slow growth in advanced countries will help raise rank

5. Relative Income Distributions

6. Accelerated Growth • Impressive crisis response and recovery • Reasonable chance to accelerate and leapfrog • Focus should be on human capital and employment opportunities in the middle income group • This will require elevating public investment • Also requires expanding institutional and technological base for diversification of the economy and the export sector • Reverse net exports of human capital • Above average or trend growth requires structural change in the economy • This is clearly visible in the microeconomic dynamics of the high growth developing countries

7. Economic Diversification and Structural Change • Porter, The Competitive Advantage of Nations (30 years ago) • Industries are not scattered randomly around the world • Economies diversify on different paths • Industries in the global competitive sector are concentrated geographically, though the supply chains are dispersing globally now • Ricardo Hausman’s work on export diversification patterns. • There are richer and less rich clusters • Defined by overlaps in the value added chains

8. Lessons from Emerging Economies • Recipes are not ingredients or lists of todos • More like strategies • There are common ingredients • Openness and leveraging global economy markets and technology • Hence the term catch-up growth • High levels of investment on public and private sector sides • Inclusiveness and management of the degree of inequality • Competent macro management and macro stability • Otherwise investment subject to too much risk and is dampened

9. Growth Strategies and Supporting Policies • Differ across countries and across time within countries • Responsive to initial conditions • Sequencing and political feasibility matter and depend on the political system and the composition of interest groups • Willingness to trade off present consumption for future opportunity varies (for high growth it has to be tipped toward the future) • That is harder but not impossible in democratic systems • Accept market incentives, decentralization, price signals and capitalist dynamics driven by private sector investment • Government has several key roles • As investor (human capital and infrastructure) to increase the returns to private sector investment • Maintain stability and predictability

10. Leadership • However hard to define, is crucial • Consensus building among stakeholders around a vision and strategy • Credible commitment to inclusiveness • Adopting a workable model (there are lots of alternatives that do not work) • Acting as a counterweight to the normal short term incentives inherent in democratic structures

11. Intent matters – the goal has to be making future generations better off in a reasonably equitable way • Hence the term (from India) inclusive growth • Persistence, pragmatism and a problem solving orientation • You don’t know the answers in advance – ideologues do but they are usually wrong • Willingness to experiment, change course • Use economic analysis and experience of other cases, as guides, but not doctrine or othodoxy

12. Evolving Structure of Global Economy • Emerging economies are increasingly large and systemically important • Also higher income and on supply side moving rapidly up the value chain, • Increasing impact on the structure of the tradable sector in the advanced economies. • Creates challenges for employment, growth and income distribution in the advanced economies • Risk is the advanced economies get crowded into the a declining set of high value added components of global supply chains.

13. The Century of Convergence • In 1750, 10% of the measured income inequality was due to inter country differences • By 1950, the figure was 60% • Post 1950, the pattern shifted • Hard to see at first • Mid-point of a century at the end of which the vast majority (70% or more) will live in advanced economies • The Next Convergence • High speed growth in developing world, and the growing impact on the global economy • In my view, in most advanced countries, way too little attention is paid to the these trends and the underlying driving forces • The result is domestically and supply side focused – half the picture if you like

14. Efficiency and Distribution • Global economy has powerful market forces • It is highly efficient • Multinational companies go where the market and supply chain opportunities exist – it is a highly competitive, constantly shifting landscape • Global supply chains are decomposable and moveable • Efficiency does not guarantee that outcomes in terms of distribution will be acceptable • The ongoing challenge is to shift the market outcomes enough to achieve distributional objectives while keeping benefits of openness • It is a challenge at the national level (in most countries) and internationally in the G20, to adapt the rules of engagement so that the distributional objectives can be met.

15. Structural Evolution • Tradable and non tradable sectors • Shifting boundary • Components of the value added chain • Project to collect similar data for G20 plus or a wide range of countries with MGI

16. USA Employment

22. Value Added Does not Show the Same Pattern