Transcript Michael Spence The Israel 2021 Conference January 12

Accelerating Growth
Recipes, Ingredients and the Global
Context
Michael Spence
The Israel 2021 Conference
January 12-13, 2011
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
Planning and Time Horizons
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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
Israeli Economy
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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
Relative Income Distributions
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
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
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
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
Leadership
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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
• 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
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.
The Century of Convergence
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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
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The Next Convergence
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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
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Efficiency and Distribution
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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
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The ongoing challenge is to shift the market outcomes enough to achieve
distributional objectives while keeping benefits of openness
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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.
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
USA Employment
Total Change in Jobs, 1990-2008
27,304
26,679
30,000
Change in Jobs, in Thousands
25,000
20,000
Net Difference
Tradable
15,000
Non Tradable
10,000
625
5,000
Net Difference
Tradable
Non Tradable
16
Tradable/Nontradable Jobs (1990-2008)
140,000
Jobs, In Thousands
120,000
114,947
100,000
Tradable
80,000
60,000
40,000
34,279
Nontradable
20,000
-
17
Nontradable Sector Jobs, 1990-2008 (Majors)
Government
21.5
16.5
Jobs, In Millions
Health Care
Retail
Accommodation and Food
Service
11.5
Construction
Other Service (Auto Repair/Dry
Cleaning, etc)
6.5
Wholesale
Transportation and Warehousing
Employment Services
Education
Real Estate, Rental, Leasing
Services to Buildings
Arts & Entertainment
1.5
1989
Finance & Insurance
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Mangement of Companies
18
Tradable Sector Jobs (1990-2008)
Manufacturing III (w/o
Auto/Aero/Electronics)
5000
Finance/Insurance
4000
Jobs, In Thousands
Manufacturing II (w/o Pharma)
3000
Retail
Manufacturing I
Information
2000
Agriculture
Architectural, Engineering, and
Related
Computer Systems Design
Electronics
Management & Consulting Services
Accounting, Tax Prep, Payroll, etc.
Auto
Mining
Business Support
Other professional services
R&D
Advertising
Health Care
Aero
Other Support Services
Pharma
Specialized Design Services
Travel Arrangements
Utilities
19
Education
0
1000
0
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
6,000
5,000
4,000
3,000
2,000
1,000
Change in Jobs, In Thousands
7,000
All Industries Change in Jobs, 1990-2008
0
Non
Tradable
20
-1,000
-2,000
Government
Other Services (Auto Repair, Dry Cleaning)
Accommodation and Food
Arts & Entertainment
Health Care
Education
Waste management and remediation service
Other Support Services
Services to Buildings and Dwellings
Investigation and Security Services
Travel Arrangement & Reservation Services
Business Support Services
Employment Services Tradable
Facilities Support
Office Administrative Services
Management of Companies and Enterprises
Other Professional, Scientific, and Technical Services
Advertising
R&D
Management, Scientific, and Consulting
Computer Systems Design
Specialized Design
Architectural & Engineering Services
Accounting, Tax Prep, Payroll, Bookkeeping
Legal Services
Real Estate, Rental, Leasing
Finance/Insurance
Information
Transportation and Warehousing
Retail Trade
Wholesale Trade
Aero
Auto
Electronics
Manufacturing III (w/o Electronics, Autos, and Aero
Pharma
Manufacturing II (w/o Pharma)
Manufacturing I
Construction
Utilities
Mining
Agriculture
Tradable
-350
21
Other miscellaneous manufacturing
Medical equipment and supplies manufacturing
Other furniture related product manufacturing
Office furniture (including fixtures) manufacturing
-100
Household and institutional furniture and kitchen cabinet…
-50
Ship and boat building
0
Other transportation equipment manufacturing
Autos
Railroad rolling stock manufacturing
Computers, Audio
equipment)
Aerospace product and parts manufacturing
Motor vehicle parts manufacturing
Motor vehicle body and trailer manufacturing
Electronics (e.g.
Motor vehicle manufacturing
Other electrical equipment and component manufacturing
Electrical equipment manufacturing
Household appliance manufacturing
Electric lighting equipment manufacturing
Manufacturing and reproducing magnetic and optical media
Navigational, measuring, electromedical, and control instruments…
Semiconductor and other electronic component manufacturing
Audio and video equipment manufacturing
50
Communications equipment manufacturing
Computer and peripheral equipment manufacturing
Other general purpose machinery manufacturing
Engine, turbine, and power transmission equipment manufacturing
Metalworking machinery manufacturing
Ventilation, heating, air-conditioning, and commercial refrigeration…
Commercial and service industry machinery manufacturing
Industrial machinery manufacturing
Agriculture, construction, and mining machinery manufacturing
Other fabricated metal product manufacturing
Coating, engraving, heat treating, and allied activities
Machine shops; turned product; and screw, nut, and bolt…
Spring and wire product manufacturing
Hardware manufacturing
Boiler, tank, and shipping container manufacturing
Architectural and structural metals manufacturing
Cutlery and handtool manufacturing
Forging and stamping
Foundries
Nonferrous metal (except aluminum) production and processing
Alumina and aluminum production and processing
Steel product manufacturing from purchased steel
Iron and steel mills and ferroalloy manufacturing
Change in Jobs, In Thousands
Manufacturing III (Steel, Hardware, Machinery, Electronics, Autos, Aero, and
Furniture) Change in Jobs from 1990-2008
A
e
r
o
s
p
a
c
e
-150
-200
-250
-300
Value Added Does not Show the
Same Pattern
Total Change in Value Added, 1990-2008
5,000
Billions of Chained 2005 Dollars
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
Total
Tradable
Non-Tradable
22
Log Tradable/Nontradable Value Added, 1990-2008
9.2
Log (Billions of Chained 2005 Dollars)
9
8.8
8.6
Tradable
Nontradable
8.4
8.2
8
7.8
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
23
Value Added Per Job, 1990-2008
130,000
121028.9964
Value Added in Chained 2005 Dollars/ Per Job
120,000
110,000
Tradable
100,000
Nontradable
90,000
89129.64724
Total
78114.93642
80,000
79616.6803
72148.30326
70,000
69873.36288
60,000
50,000
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
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