A Washington Post Notable Nonfiction Book for 2011
With the British Industrial Revolution, part of the world's population started to experience extraordinary economic growth—leading to enormous gaps in wealth and living standards between the industrialized West and the rest of the world. This pattern of divergence reversed after World War II, and now we are midway through a century of high and accelerating growth in the developing world and a new convergence with the advanced countries—a trend that is set to reshape the world.
Michael Spence, winner of the Nobel Prize in Economic Sciences, explains what happened to cause this dramatic shift in the prospects of the five billion people who live in developing countries. The growth rates are extraordinary, and continuing them presents unprecedented challenges in governance, international coordination, and ecological sustainability. The implications for those living in the advanced countries are great but little understood.
Spence clearly and boldly describes what's at stake for all of us as he looks ahead to how the global economy will develop over the next fifty years. The Next Convergence is certain to spark a heated debate how best to move forward in the post-crisis period and reset the balance between national and international economic interests, and short-term fixes and long-term sustainability.
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About the Author
Michael Spence is a Professor of Economics at the Stern School of Business at New York University, a senior fellow at the Hoover Institution, and was the chairman of the independent Commission on Growth and Development. Winner of the Nobel 2001 Prize in Economic Sciences, he lives in California and Italy.
Michael Spence is a Professor of Economics at the Stern School of Business at New York University, a senior fellow at the Hoover Institution, and was the chairman of the independent Commission on Growth and Development. He is the author of The Next Convergence. Winner of the Nobel 2001 Prize in Economic Sciences, he lives in California and Italy.
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The Next Convergence
The Future of Economic Growth in a Multispeed World
By Michael Spence
Farrar, Straus and GirouxCopyright © 2011 Michael Spence
All rights reserved.
1950: The Start of a Remarkable Century
I was born in 1943, during World War II. It was near the end of a turbulent half century, militarily and economically, a violent period with a Great Depression sandwiched between two great wars, a nightmare for many. It was the end of an era and the start of something quite revolutionary and new.
The Industrial Revolution started in Britain at the end of the eighteenth century. It had been under way for two hundred years by World War II. Before that, growth, by modern standards, had been negligible for a thousand years all over the world. But then Britain, and in sequence continental Europe, North America (the United States and Canada), and Australia and New Zealand, began a growth acceleration. It was not breathtakingly fast by postwar standards, on the order of 1 to 2 percent a year. Over a long period of time (a century or two), however, that growth (and its scientific and technological underpinnings) caused huge differences in incomes between what we now called the industrialized countries and the rest or the world.
You can see this inflection point and sudden change in direction in a famous chart produced by the distinguished economic historian and Nobel laureate Robert Fogel (see here). It is a picture of population growth with the underpinnings being the rapidly expanding productive capability of the growing economies.
The beneficiaries of this growth were the populations of those few countries. They represented then and still do now about 15 percent of the world's population. The remaining 85 percent experienced little or no change in circumstances. Parts of Latin America were something of an exception, a fact that we will return to later. The rest of the world, including all of Africa and Asia (East and South), was poor. Incomes were typically about a dollar a day, sometimes less. The vast majority of people were rural, engaged in subsistence farming and closely related activities.
Before 1750, most of the world was like the 85 percent in 1950. They were poor and lived in an environment that was technologically and economically largely stagnant. There were a few wealthy people, those who owned land or other assets or who had political, economic, and military power. Intercountry differences were not large. Continental Europe and China did not differ much in economic terms: indeed, around the time of the Ming dynasty (1600), China's income per person is believed by scholars to have exceeded those in Europe — though, by today's standards, not by much.
Even though Germany and Japan had expansionist aims in the twentieth century, one in the industrialized world and the other with a more colonial flavor in a preindustrial part of the world, those were thwarted by defeat in the war. Everywhere else, the dismantling of the colonial structures was already under way. Colonial empires were dissolved completely after World War II, creating scores of new states of varying sizes and shapes, each beginning a sometimes bumpy and difficult journey as a new nation. From a purely economic standpoint, some of them should have been parts of larger states. But designing for economic viability probably was not a feasible program as the colonial period ended. Colonial history and geography and tribal differences had much more to do with the outcomes than economic rationality or common sense. The legacy is a world with over two hundred countries, many of which have little economic viability. In addition, in many there was no sense of nationhood or citizenship. Building the essential foundation of national identity and unity has proved challenging.
After the war, the international agenda included rebuilding war-ravaged industrialized economies, building the governance and the economies of a raft of new countries that had been former colonies, and, finally, creating multinational institutions to manage and invest in this fluid multinational landscape, in the hope of a less violent, more stable world.
War, bloodshed, and the inability to manage or prevent conflict were not an invention of the twentieth century. The scale, efficiency, and extensiveness of the damage were. Postwar leaders and citizens alike strove to fashion a new, cooperative, and less zero-sum approach to the international architecture that determined, or at least influenced, how countries interacted with each other. The driving force behind the spreading Industrial Revolution was science and rapidly advancing technology. It made incomes rise and war more dangerous.
A generation of postwar leaders saw this potential for destruction and understood the potential for further conflict in a world characterized by struggling postwar industrial economies, a battle for access to scarce natural resources (especially energy), huge differences in incomes and opportunity across the world, and deep political and ideological differences. Without knowing the final destination — no one did — they set out to change the trajectory of the global economy. Looking back, one can see that they largely succeeded.
Japan had joined the industrializing group in the nineteenth century. It began a lengthy process of modernization and opening with the Meiji Restoration in 1861. By 1940 it was a partially industrialized country and the only non-Western colonial power in Asia. By 1945 it was a defeated nation with an uncertain future. But it was about to become the first sustained high-growth country in the postwar period — indeed in recorded history. Its growth, and the underlying strategies and policies, became an example that was emulated all over Asia and eventually more broadly. Looking back, one finds it hard to overstate the importance of the example that the Japanese case set. Among other things, it grew at unprecedented rates armed with almost no natural resource wealth of the conventional kind, and in so doing upset much of the conventional economic thinking about the sources of wealth and growth in the developing world.
China fared worse. Battered by external interventions its per capita income actually declined in the nineteenth century, a relatively uncommon occurrence in economic history outside of periods of plague. The two thousand years of dynastic rule collapsed in the early part of the twentieth century, replaced by a republic that presided through a Japanese occupation and the Second World War. The Republic never really had a chance to succeed. By 1949, when the Communists took control, China was one of the poorest countries in the world, and thirty years later, under central planning and collectivized production and agriculture, it had made little visible progress.CHAPTER 2
Static Views of a Changing World
In 1750, most people, if asked, would probably have said that the preindustrial configuration of the world's economy was a largely permanent state of affairs — that the world had always been like that and probably always would be. They would have had the facts on their side. Not much change had occurred by our modern standards for many centuries. To put it differently, since even low-percentage changes add up over centuries, the pace was truly glacial by our standards.
But the world was not really static. Science progressed. Florence experienced a Renaissance with a flowering of art, architecture, commerce, finance, banking and science, architecture and engineering. There are such periods when some breakthrough occurs in the minds of people and innovation occurs in a burst across a broad range of fields of human endeavor. It is still something of a mystery why this occasionally happens.
Still, viewed through an economic lens, the lives of most people did not change all that much. Growth was very low, and as a result the distribution of income and wealth approximated a zero-sum game. What one individual or group got, another gave up.
If you had suggested to a European in 1750 that in exactly 200 years, Europe would have incomes roughly twenty to forty times those of Asia, you would probably have been regarded as deranged. By the same logic, if in 1950 you suggested that in 100 years incomes in Asia and much of the rest of the developing world would be approaching the levels in Europe and Northern America, you probably would have gotten a similar reaction. But that appears to be the journey that we are about halfway through.
As humans, we first become aware of the world the way it is. We see a snapshot of the world first and the motion picture only much later. We seem to assume initially that the snapshot is a permanent state of affairs and not a moment in a journey with a constantly shifting landscape. Perhaps this is because fundamental change is, or seems, slow. And perhaps also because change is hard to anticipate or to think about in advance. Looking back is much easier.
As we get older we discover that we ourselves are on a rather longish voyage of discovery, learning, pain and joy, children, grandchildren, perhaps a little wisdom. In modern history, the external environment seems to change quite quickly too. And so, over decades, the magnitude of the changes becomes easier to see. We start to appreciate historians more, those whose job is in part to help us understand that things change, as well as how and why that change occurs. Now as before, there is always a large gap between the young, who tend to assume that the world has always been the way it was when they entered it, and the old, who can remember a world with propeller-drive planes and no Internet.
This propensity to view the snapshot of the world that we now see as "reality," as opposed to a frame in a motion picture, sometimes traps us and holds us back. Right now there are lots of developing countries, but as the term implies, that is probably not a permanent state.
The evolution of the terms describing "the other 85 percent" is interesting. At some point we stopped referring to poor countries as "backward" in favor of the term "underdeveloped." Then came "Third World," suggesting total separation. And then came "less developed," intimating that it might not be permanent. After another lag we shifted to the term "developing countries" and, more recently, "emerging economies," in a slightly delayed recognition of the fact that a fundamental and permanent change was not only hoped for but actually under way. This evolution in language signaled a growing awareness over time that these economies were not permanently lodged in a stationary state of underdevelopment but rather were in some kind of transition, albeit a long one — on the order of a century — to being high-income places.
By the time my education started to make me aware of the global landscape (the continents and the life conditions and opportunities in them), huge differences in economic circumstances across continents were part of the economic landscape. In the 1950s and sixties, most of us probably thought that this was just the way the world was configured. I know I did. I can still remember heated boyhood discussions of fairness and unfairness, and arguments about the reasons for the wide divergences. There were relatively poor countries and rich countries. The question was: Why? How could differentials of that magnitude persist?
Our natural instinct was to look for a villain, some human constraint that held in place the chains of poverty. That wasn't an entirely incorrect inclination, but nevertheless overly simple. Some felt this was permanent and others vaguely thought it might change, without really knowing how. But the snapshot view dominated. Dynamics and thinking about rapid, accelerating, and permanent change is conceptually harder and more than slightly unsettling for most of us.CHAPTER 3
Postwar Changes in the Global Economy
My parents, like many others born during World War I, went looking for jobs in the mid 1930s in the depths of the Great Depression. Not a great hand to be dealt. Like so many of their generation, that experience had a lasting effect on the way they saw the world and the opportunities in it. They either knew or hoped that fundamental change would occur. But they would not have bet the family fortune on it. They were basically pessimists at heart, and most of the postwar experience was a pleasant surprise.
Their hopes, focused mainly on their children and grandchildren, were for a less volatile and precarious existence. Those hopes were rewarded and exceeded, at least in the industrialized countries. The world finally pulled out of the Great Depression with the help of the extraordinary economic measures required by World War II. In the postwar period, Europe and Japan rebuilt their economies and governance structures with support from the United States and the newly created international institutions. Growth was restored. Rapid technological advancement (again accelerated by the exigencies of modern war), rising productivity, and rising incomes dominated the economic landscape in the developed countries, with the Cold War and the threat of mutual assured destruction hanging as a dark cloud over the process.
Growth rates take some getting used to. There is a rule used by statisticians and economists called the rule of 72. It says that the time it takes in years to double in size at a specific annual growth rate is that growth rate divided into the number 72. It sounds crazy, but it works. So, for example, at 1 percent growth, income (or whatever it is that is growing) doubles in 72 years. At 7 percent growth (about the highest sustained level ever achieved until recently), that figure for doubling falls to a decade. That is, at 7 percent growth, incomes and output double every 10 years. These numbers are approximate but good enough to get the general idea.
Unlike their historical predecessors, the high-growth developing countries have been growing at rates of 7 percent or more. It was the arrival of China thirty years ago and more recently India into the pattern of sustained high growth that changed the global economic landscape prospectively. The reason is that these two countries combined have almost 40 percent of the world's population of about 6.6 billion people. There had been prior high-growth cases like Korea in the postwar period. But Korea has 40 million people. Even at advanced-country incomes, the economy would be an eighth the size of the United States or the European Union. Japan was the first high-growth country and until recently by far the largest. With a population of 120 million (and shrinking) and advanced-country levels of income, its economy is less than half the size of the United States and the European Union. By contrast, a China or an India with advanced-country incomes will each have economies four times the size of both the United States and the European Union.
Many of us have never experienced an environment in which growth is that high. For reasons we will come to, the process is quite chaotic. And it is not easy to sustain.
Notwithstanding the recent sustained high growth in an increasing part of the developing world, it takes decades for countries to make the transition from poor to advanced. The poorest countries have incomes of about $300 to $500 per person. Advanced countries have incomes of $20,000 and above. To go from poor to the lower ranges of advanced, one has to double incomes five times, and then some. At 7 percent growth, the pattern looks like this:
Decade 1 1,000
Decade 2 2,000
Decade 3 4,000
Decade 4 8,000
Decade 5 16,000
Year 53–54 20,000
Income doubles every decade, and that is very fast — the economic analogue of driving at 120 mph. Putting this all together, even at very high growth rates, it takes well over half a century to make the full transition. And of course at slower growth rates, the transitions become much longer.
Middle incomes are in the range of $5,000 to $10,000 a year. The graph below shows the transition times from poor to middle and advanced income levels for differing growth rates (1 percent through 10 percent). Clearly, most of the time is spent getting from poor to middle incomes. Once one gets to high middle income ($10,000) one more doubling will catapult the economy into the advanced category.
Excerpted from The Next Convergence by Michael Spence. Copyright © 2011 Michael Spence. Excerpted by permission of Farrar, Straus and Giroux.
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Table of Contents
PART ONE - The Global Economy and Developing Countries,
1. 1950: The Start of a Remarkable Century,
2. Static Views of a Changing World,
3. Postwar Changes in the Global Economy,
4. The Origins of the Global Economy,
5. Economic Growth,
6. Common Questions About the Developing World and the Global Economy,
PART TWO - Sustained High Growth in the Developing World,
7. The High-Growth Developing Countries in the Postwar 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 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 THREE - The Crisis and Its Aftermath,
22. Emerging Markets During and After the Global Crisis,
23. Instability in the Global Economy and Lessons from the Crisis,
24. Stimulus in the Crisis and the Need for Cooperative Behavior,
25. Rebalancing the Global Economy and Its Consequences for Growth,
26. The Excess-Savings Challenge in China,
27. The Openness of the Global System and the WTO,
28. Legacies of the Crisis: Slow Growth and Sovereign-Debt Issues in Advanced Countries,
29. Periodic Systemic Risk and Investment Behavior,
PART FOUR - The Future of Growth,
30. Can the Emerging Economies Sustain High Growth?,
31. China and India,
32. China's Structural Challenges,
33. India's Growth, Diversification, and Urbanization,
34. Brazil's Growth Reset,
35. Energy and Growth,
36. The Challenge of Climate Change and Developing-Country Growth,
37. Information Technology and the Integration of the Global Economy,
38. European Integration and Transnational Governance,
39. Global Governance in a Multispeed World,
40. The G20, the Advanced Countries, and Global Growth,
41. Sustaining Growth: The Second Half Century of Convergence,
Also by Michael Spence,