 Well, it's such a pleasure to be here Yeah, I have to tell that arrow story. So He said I got a call from a secretary and he said you didn't hand in the paper at the end of this course on general equilibrium theory and obviously his secretary had lost it and so I Fortunately had a copy Learned a lesson and I took it in and she said I'll give it to professor arrow So I went in and sat there and he took the paper out and went like this and I thought this is a disgrace He's not reading it And then he started asking the questions The other arrow story is he was he's a Just a brilliant broad Thinker in a way that very very few people are but But he hasn't he can multitask And so when young people would come to give seminars as part of the job market search He'd read the paper and I can remember many occasions in which you know A young person would literally fall apart with Ken arrow apparently not listening To the lecture, you know, and then of course after a 35 minute presentation arrows hand would shoot up And he'd say and ask a question about what was this going on and everybody thought he wasn't paying attention. Anyway It's more fun for you and me if At any point in this and I'm not going to try to get through all this Why don't you just buddy in and make comments or ask questions or Rather than just have me stand here and talk. Okay, just stick up your hand We'll go I I've I've spent the last 10 years of my life thinking about growth in one form or another And and the early part of that period and a continuing interest is developing country growth um, and so A chair to commission on growth and development most of the people in that commission were people who had leadership positions and economic policy finance or The political people So I learned a ton from them because they had fought these battles and won and lost the only two academics were bob solo Who actually knew something about growth and me? Who didn't and so I want to talk a bit about that and then and then I kind of edge into the post-crisis period and talk about growth dynamics in In a variety of places I do spend a fair amount of time in china and try to be helpful when they have Issues that they think international experience or expertise or both is relevant And if you're interested i'll spend some time on that. I wrote this book called the next convergence and and it's basically About growth. It's about the developing country growth. And so this what and so the story I had I had a Agent that That paul collier put me in touch with his name is andrew wiley Uh, i'm the least well-known person he ever dealt with you know, these people are people like philip roth and what not actually serious writers and uh, he took me on regrettably for him And uh, so I said well, you know the developing world is kind of like a mosaic. It's really interesting And he said well, it won't be for most people And I said well, what do you mean? He said if you're going to write a book for anything other than your Three friends in economics Then you got to tell a story So I went away and thought about that and I said there is a story And so this is the story is that for much of the history of the world Uh, lots of interesting things happened, but one of them wasn't growth Uh, and this is now pretty well known as a result of the work of agne angus madison and so we started to see growth in the 18th century That's the start of the british industrial revolution that That spread throughout europe first and then Uh across the atlantic and eventually got to australia new zealand But you can see this pattern and I don't know what the 21st century is going to look like and I don't think I'll see the end of it myself uh, so And this is so this is the first time we had uh The uh breaking of the malthus malthus effect right growth wasn't used up By population growth and and income started to rise and there's thousands and thousands of books written about this And I don't have anything additional to contribute to that But except to note that it literally stopped at what we now call the boundaries of The advanced countries or industrialized countries or whatever term you want to use And then it went on for 200 years and the growth wasn't breathtaking It was maybe one and a half one and three quarters percent in real terms in britain Maybe two to two and a half in continental europe in the united states. I mean, this isn't not high growth by postwar standards in developing countries But it was a long time and so at the end of that period when I was born in world war two You know you basically had a world that was divided into two parts One part had enjoyed this whatever this experience was and the early parts were pretty tough In cities and the other was pretty much where they were before except there were a few cars and buses and trains running through And then that pattern broke All right, so that you can call that divergence and it broke after world war two Although it was almost impossible to see it at the time because there's a lot of stumbling around associated with with growth starting But eventually For reasons that I think are pretty easy to understand the developing countries started to grow And the and the reasons are basically three After world war two the Leaders in the world set out notwithstanding the cold war to create an environment That was very different than after world war one world war one was rightly viewed as a catastrophe you know Punished the vanquished, you know crush, etc. And it led to Everything everybody knows about National socialism a depression. I mean it was a disaster and so they didn't want to do that and so Item one was german austrian japanese recovery. That's where the world bank came from And a second very important item was the gat the general agreement on trade and tariffs Which essentially was designed to dismantle all the protectionist measures that have been stuck that were already there But stuck up even higher at the in during the great depression thanks to the american policies And it was brilliant Then you had the colonial empires with all the built-in asymmetries literally fall apart Uh and just go away now that left an awful shambles In lots of places including much of africa, but nevertheless That fundamental structure You know disappeared and then you had this cascading sequence of technological tailwinds, uh, you know transportation costs airplanes, you know Telecom ict communications and so on And it created an environment in which The developing countries could conceivably grow And grow they did so they grew at astonishing rates. So We found in the growth commission 13 countries that grew at seven percent or more a year. That's doubling every decade For 25 years or more and that just That's never been seen before So one question you might ask yourself is how do you do that? Why Why do you see growth at those rates and at that stage of development, you know, meaning So what are we talking about here? Let me just kind of frame it If you looked at the world in 1950 You know with latin america being something of an exception, you know, argentina Actually in the early part of the 20th century who had a higher per capita income in china then canada Where I grew up And so on but for the most part You know africa asia these are countries with per capita incomes of you know, two or three hundred dollars less than a dollar a day average This is more like the you know the pre pre british industrial revolution And so When these countries start to grow, you know, they have to grow for a long long time To get that you they got to double and double and double and double and double again before you get to 10 Thousand and you're you know, kind of what we call middle high middle income And and that's actually what happened. It didn't happen immediately in all countries Uh, and so a lot of us who Kind of want to spend time thinking about this, you know, think about What was going on but the basic but the basic Building blocks are pretty clear And and the the fundamental one is this divergence, right? So this high speed growth is called catch-up growth because Because economies grow At least in part because they're learning how to do new things. That's that's sometimes called technology It's sometimes called know-how. It's sometimes called whatever Uh, but it is the most important intangible asset some some of it's embodied in people some of it's embodied in institutions You know and processes and systems That work and we don't describe it very well and we don't measure it very well And because you don't measure it very well, you tend to ignore it a little bit But I was asked the following question. So I'll ask it to you If you had the following draconian choice Which was substantial war induced destruction of the physical infrastructure Of an economy. That's option one and two amnesia. So you forgot everything you knew how to do Complete amnesia None of the institutions could function. None of the people could remember how to do things Which would you choose one, yeah I have I have everybody to choose one Even because you can build that stuff again. It's not fun But it's a whole lot better than not being able to Remember how to do all this stuff And so that's the core so what happens in a high speed developing country is that that Through multiple channels essentially what we learned to do over 200 years they started to learn to do in their own way And and and that works The two other critical pieces of this are The global economy So If you have an economy with a per capita income of three or four hundred dollars, it doesn't matter how many people you are You'll be small In the global economy, right Even if you have 1.3 billion people you go back to 30 years And ask yourself what fraction of the global economy was china You know when it was coming out of this long period of economic and other Kinds of mismanagement before the reforms of dung shop ping. It was tiny If you isolate that economy and say now how fast can it grow The answer is it can't grow very fast The economy consists of on the demand side Of housing mostly food Substance getting by right Now think of the growth engines that drive these economies in an open global economy. None of them are there You develop, you know an ability to serve some component of that demand. It's tiny It's downward sloping you hit a wall Then you have to learn how to do another one a little bit better and then you hit that wall In the global economy you find one or two things That you really know how to do this has been known since adam smith, you know, this is specialization You know and and comparative advantage But but the point that people didn't realize is I think or didn't completely internalize because most theory is about advanced countries Is that when you're small You never turn the terms of trade against yourself. You can just grow and grow and grow Right So you find something that you're comparatively good at that you can sell in the global economy And then until you get to china's scale you can just keep doing it So that's component two a gigantic market That doesn't limit your growth And then I want you I want you to remember that point because i'm going to come back to it under the heading of advanced countries And the third is you have to invest at very high levels Now this is the hard part right So you can't do this by just sort of you know importing technology You have to build the stuff that enables you to do it And high levels means above 25 of gdp as best we can tell that is not a theoretical conclusion And of that 25 5 to 7 has to be public sector investment That is infrastructure education stuff like that that increases the return to private investment domestic and foreign that drives this This process Now you say well those are just numbers I don't think anybody in this room has lived in a country where the per capita income was $400 But if you invest 30 percent of it Save and invest 30 percent of it Then you've got about 260 dollars left over for daily living This is an amazing intergenerational choice At that level of income Now think of the what we've done in many of our economies You know borrow against the future to increase our consumption now Under invest America is the most guilty party Don't say under invest and don't save enough to cover your investment I mean think of the intergenerational choices that we're making relative to what the successful high growth countries do I'll just leave you with that but It's I think an important lesson Anyway, so this process that now this high speed growth process is running This is my favorite graph. I I don't know where it came from originally, but I think it came from bob fogle In an article in the journal political economy. This is a picture of the population of the world and for most of that period the per capita incomes were going up so Any increase in productive capability got used up and more people there were plagues There was all kinds of stuff and then we're clearly in a just a completely different pattern here I won't dwell on this but this is my way of describing Divergence and convergence so In 1820 10 of the world's measured income inequality Was the result of intercountry differences They weren't big You know the Ming dynasty per capita income was a little higher than continental europe, but by and large is all seen And then it rose and rose and rose And this is this is just what I said before this is You know the advanced countries now about a billion people then less you know Going off on their own and that by think you got time you get to that just after world war two the measured Income inequality is 60 percent Intercountry differences and then the developing countries joined the party slowly haltingly At first and then this pattern starts to shift and now I think what you'll see Is the even though there's rising inequality in many countries intra country That this thing will start to fall. This is what convergent if if the convergence proposition is right That we're 60 years into a century long process where they where a very large fraction of the world's population ends up in advanced countries That that that is the convergence process If the global economy survives it'll be three or four times as big as it is now and There are real questions about that But if we figure out a way to solve that problem and our children and grandchildren This is one of the most amazing things that you know one could ever imagine happening people who lived at or near starvation levels You know all of a sudden having an opportunity to live like us And it's not really growth What it really is is expanded opportunity It's health and education and the chance to be productively employed and the chance to be creative and a whole lot of other things that human beings care about So i'm rather glad that I got to see in my lifetime at least the first part of this This process I think it's extraordinary and there's lots of hard things about it. There's lots of things that You know create frictions that you know our world is moving around at us are on us pretty fast Um here are the 13 countries the first one was japan and almost simultaneously was brazil Uh, so japan was a little bit of a hybrid. It was a middle income country and war and war recovery as well Um, most of the asian economies are in one form or another used japan as a model korea quite explicitly south korea Uh, they're not all in asia although asia is prominent in there Um, I used to say that india and vietnam work on the way to joining this group and maybe some others Um, there is a pattern of a widespread pattern of growth in the developing world It goes up and down a bit You know with the tapering announcement produced a rush of capital Out of the developing countries and the ones who were running current account deficits You know kind of were sucking for air And had credit tightening and other things were scrambling around to kind of figure it out But on the whole there the one of the things that's happened in the developing world is that There's real learning. I mean the macroeconomic management is really just stunningly much better than it was 20 or 25 years ago And that's learning from experience and learning from global experience From from us and each other when I was um Going around talking about this book Uh, the most calm in america. I felt like a politician It's the first time I ever felt like a politician So I was going to little bookstores and very nice people who were concerned and didn't really know much about what was going on out there But you know had a sense of it Listen to this and and you know and then ask questions So it's really quite a rewarding experience and the most common question I got asked in one form or another was if they win do we lose And the answer to that I think is interesting. So the obvious answer that an economist would flip off is of course not Um, it's not a zero sum game And in fact, I think the uh By and large sort of people kind of understand that They but the political systems, you know when they need an explanation for why you've lost your job Or something tend to blame, you know somebody out there and china's a convenient um person to blame In america. I said look You know zero one thing that is a zero sum game is market share Right and we are losing market share and that's a good thing So if you're asking are we do we lose in the sense of being dominant and losing market share the answer is yes And you you can stop worrying about it because it's already going to happen Uh But I said does it mean that you know, you're done in You know, I mean if you project out to another 30 years The future economic giants are china and india You know united states position in the global economy would be more like germany says now or japan's Um, but it doesn't mean we won't be a highly dynamic economy Uh, and you can say the same thing about a lot of countries provided that global economy is put together pretty well And everybody's on their game. Yeah, sorry for interrupting Could I just um as regards to we lose? okay in aggregate And take the example of the u.s. You might say that the u.s one comes out. Yeah, but you have Two sort of related issues going on in the u.s. You'll have a very large Co-art of society who haven't had a real increase in income in a long time and you've had an increase I think an inequality of income within the u.s. Yep, and possibly in other developed countries. So Do we lose out? Well, maybe You could argue you could get to a stage where a large group of americans might lose out or even the majority Particularly if you have uh increasing inequality of income Yeah, no, I think that's right. Those are powerful forces. So now that you've asked the question I'll just hop Forward quite a long way So I got concerned about this in the post-crisis period and this is really what led me Uh to start thinking about advanced countries and sort of growth and we were talking about it Uh, you know at lunch Uh So we've obviously made mistakes. This is this is the advanced countries Trending up to a hundred plus percent of sovereign debt to gdp ratios That's well known. What's not well known is the developing world including the low income countries are trending down to 40 percent So this is just a different set of choices related to the inter temporal choices Now this came from bitter learning from past experience and crises And uh for those of you who know this economic history the the crisis that really Produced the maximum amount of learning was the 97 98 crisis that emanated out of asia Uh I'll come back to this Oh, this by the way is federal reserves balance sheet the united states central bank It's a little scary, isn't it? And if we default on our debt and the interest rates go up they'll have to accelerate this Yeah It's scary because we're in uncharted territory. Nobody knows what the limits to this are It's possible It's just that if you don't know whether there is one and nobody can give a coherent account Of what there clearly limits to sovereign debt because at some point you can't pay it back Okay, so if this is and this is not this is pretty much all now sovereign debt Excuse me It's not this is the sovereign debt part and then Sorry, this is the sovereign debt and these are mortgage backed securities So they're trying to they're trying to you know make the housing market recover But so the answer is nobody knows So it may not be scary once we kind of figured it out My my version of this is the the issue really is sovereign debt And this is just a particularly Interesting way of controlling prices Now price controls are fine in the short run if they have a targeted purpose Pursued too long or in with too heavy a hand They produce fairly bad resource misallocation in most places So I would guess we don't want to do this forever, but I don't think this is necessarily On the brink of disaster I would say it's more on the sovereign debt side But it still makes people nervous. I mean we haven't seen this very often This is the sequence of quantitative easing the composition is pretty interesting and I'm going to answer your question So I went and looked at the American economy because I was convinced that we were talking about structural problems And we didn't know what we were talking about And so I'm going to show you a couple some slides about what happened in the American economy I've studied Germany and Italy in this respect And the patterns are similar not identical, but similar So over about 18 years Including in this case through the crisis we did it up to the crisis and this runs to 2010 We looked at the American economy sector by sector From the point of view of tradeable and non-tradeable tradeable means goods and services that can be produced in one country and consumed in another And non-tradeable is huge It means you got to do it at home So it's government education retail Most of health Restaurants hospitality that you know, it's a very very education. It's a very big part. It's two-thirds of a typical Advanced economy is the non-tradeable side now. It's a moving target the tradeable side is getting bigger For reasons you all know, you know, we can trade services now that we couldn't trade before So this is employment in the American economy in this period of time the non-tradeable sector generated all the employment And the and the tradeable side actually lost it generated essentially zero up to 2008 These numbers would be bigger in 2008 by six million It was a fair amount of job loss Came after that And these are the reds are uh, you don't read this now. I'll just leave it behind This is in detail What happened so on the on the non-tradeable side the economy generated a ton of income now remember This is an economy that over time was increasingly running on debt fueled excess domestic aggregate demand So it's not surprising the non-tradeable and you know, there was a huge kick up from healthcare This is a major problem in america So when you stare at this graph for a while you think boy, that's not going to keep going In that direction for very long And then then the non-tradeable the tradeable which is blue generated real increases where you'd expect Consulting designing computers, etc. You know and then losses in the manufacturing sectors And if you look inside the manufacturing sectors, you realize their supply chains Their value added chains. They're long. They have lots of components And so what what disappeared Are the lower value added components now it's a little more so that's the globalization story And so that disappearance that's a lot of middle-income jobs You know, we're not talking about the people who manage multinational enterprise We're not talking about the people who design the products. We're talking about the people who are making them You know and a few other things like that And so when you met all those positive and negatives out you get up with zero With me so far, okay This is a value added if you add up value added across industries you end up with gdp. So this is growth Not the same pattern tradeable generated actually fair amount of growth And the non-tradeable side generated a fair amount remember it's two thirds one third So the tradeable side actually grew a little faster In spite of the fact that there were no more people employed there And so if you look at value added per person employed per job On these two sides then the tradeable side Essentially generated growth and used it all up stuffing people in there who were not finding employment As the labor force increased in size on the on the tradeable side And the tradeable side didn't need anybody and kept generating more value partly because they were moving up these value added chains right and so the tradeable Value added per person went like this. What happened in the american economy? What happened in the american economy one final? graph This is work that's been done at mit and in other places So these are people looking at kinds of jobs And i'm saying this not because some of this is idiosyncratic of the united states, but these are Quite powerful forces that are affecting advanced economies everywhere. So I think it's of general interest So they said let's divide jobs into in two ways McKinsey two by two matrix cognitive And non-cognitive you can think of is using your head or using your hands And routine or not routine Routine means there's an algorithm and a machine that could do the job I mean i'm oversimplifying a little bit but forgive me, okay So this is a pattern in that we see in the united states This is non-routine cognitive So that grows because that's what you associate with a high-end, you know advanced economy That's what grew in the tradeable sector. This is non-routine manual Who are these people? Well, they're working in restaurants or nursing homes with an aging population. They're doing a lot of things The construction You know that we haven't figured out how to automate yet and so on And these are all of the routine jobs and they were sort of drifting down and not really contributing much And then or somewhere around 2000 There's a huge change Now even if these data don't measure these things perfectly you get the pattern So technology It's not just globalization technology is stripping out Routine jobs So if you stand back from this what you see is an economy that Should have had an employment problem Overcame it with excess domestic aggregate demand Didn't shift Over to the tradeable side as much as it needed to and even if it had Would have had the income distribution problem. It's just that we wouldn't have the shock and the unemployment problem probably And that is something that that every country faces and and I took the graph out but I can there's startling differences across advanced countries in the pre and post tax income distributions your genie coefficient is 33 America's is somewhere between 41 and 45. China's is up around 47. Germany's is 28 Uh brazils used to be 60 and it's whizzing down to 56. You'd think the place would blow up Was measured income inequality of that size? We're at the boundaries of what we actually know in economics. I do not believe these income distributions Are purely the result of market forces now? I can't prove that but I think there's a social sort of value overlay That's different in different countries But anyway, that's the story of the american economy. The rest is just Late breaking news is I figured this pattern that I just showed you Would actually start to change in As the economy recovered in america. We're at about 2 real growth And that's well below potential, but it's better than nothing And and I thought well because we had this big negative demand shock and we have a fairly flexible economy my hypothesis Was that resources labor and capital would start moving toward the tradeable sector because The tradeable sector by now i'm teaching you growth economics you didn't learn before So the the reason tradeable and non-tradeable is so important from the point of view of growth Is that the tradeable sector is complete and the non-tradeable sector is completely Dependent on domestic demand by definition. So if you have a negative demand shock, you're dead In the water until you've done whatever it takes to recover from that D leverage all that the non-tradeable side. That's not true So if you become this is familiar talk in europe, right? It's familiar talk in italy Although we're not doing it if you become more productive There's a huge batch of demand out there for most economies That takes the growth the demand constraint away And it's really if you're constrained on that side is because you're constrained in terms of productivity So there's a completely different dynamic. So I figured the american economy like many others In europe had taken a big demand shock that killed off the Non-tradeable side So the growth would start to be generated on the tradeable side because the economy is flexible and the resources can flow there And then that would start to spill over backwards why Forgive me, right? This is sort of like doing modeling verbally. Why because the demand side causes the spillover, you know, if I make computers or washing machines And get paid to do it I don't go out and buy computers and washing machines. I might fix my house Or go out to restaurants more or whatnot so And this is a caution for those of you who do do this kind of thing So it spills over fairly fast and starts to become an engine of growth In the non-tradeable side as well But it's a huge mistake to do growth accounting Okay, if you do growth accounting what you'll see is all the tradeable side's growing a bit and then the non-tradeable Not much of a lag the non-tradeable starts start to grow. So you think well, they're both growing What that misses is what the engine is Okay, the catalyst And the and the reason I think we can we can learn to think this way is because of developing economies remember You know the domestic demand isn't big enough to drive growth in the developing economies It's that big global demand and the rapid explosive growth in the tradeable sector That really drives this very high-speed growth that we see in the developing countries and then of course it does spill back Across on the demand side into the non-tradeable side. So after your income gets to a thousand dollars You start spending on a little more interesting array of stuff I think it all makes pretty good sense. But anyway, so the last statement is so and now have the data On 2010 2012 and lo and behold, that's where the growth occurred It was in the tradeable side a very significant fraction of it and The tradeable side is now generating employment Wonder of wonders And that's what has to happen in a lot of our economies the distressing thing about Italy Is that our economy is? Lacks important dimensions of flexibility Especially on the labor side, but not exclusively there's little monopolies all over the place Now i'm not a market fundamentalist But if you have barriers to this kind of structural adaptation, you're going to get into trouble fairly quickly In this world because but is it shifting around us? So quickly, but that's so that's the story what happened in america Is so i've i've tried to tell you a little bit about growth dynamics And why the crisis and the demand shock helps us understand these models better But i'm also saying basically you're right a combination of global and technological forces Is turning The evolution of the economy into one in which the beneficiaries are for most part at the upper end of the education and income spectrum And the in the united states is an extreme case of that germany Is The the germany of course went through these major major reforms in 2003 2006 it was A friend of mine said The bad news was the economist called us the sick sick man of europe in 2000 the good news is we didn't read the economist But we knew it anyway And you know they it's very hard chancellor schroeder lost his job Getting that done, but that's an economy that had Very little Built-in capacity to structurally adjust And they knew that was a huge problem Initially because eastern europe was going to be the place In an integrated european market where a lot of stuff went and then you know the rest of the global economy following along So they thought they better fix this and what they did is remove those barriers And what did they give back to labor they gave back a promise of growth They gave back a promise that it restrained income growth would be shared Okay so that if If flatlining wage and income growth was needed to get productivity back in line with incomes It wouldn't happen just in the middle income range and they've delivered on that That's part of the reason the genie coefficients point is 28 or 0.28 And and finally and this I didn't learn until I actually asked chancellor schroeder I said no, what else and he said well the old social security system was we couldn't take your job away We couldn't close the plant and when we got the ability for firms to do that We had to replace it with something labor told us clearly You do this and there is no social security system and we're not going for it So he said we had to rebuild the social security systems and there's a huge I think europe's in the lead In many countries, you know building social security systems that augment rather than hinder The dynamism of the economy, you know unemployment insurance that focuses unemployment, you know the Skills and training systems that you find in many countries are I think you know important data points and case studies that Will be part of that kind of our collective learning how to live in a world that moves around us pretty fast But still we have This powerful adverse distributional effect And I will About germany there just for a second. Yeah, I didn't touch on this really, you know the it's true that the labor force in germany You know the government suppressed labor by consensus that it was an amazing achievement But unfortunately the european central bank then in the eurozone Dropped interest rates to effectively facilitate german restructuring Export the savings to the periphery and led to property bubbles in spain and Ireland and so forth And the normal monetary instruments that might be available for real were not available because we're all part of the eurozone That's right. In other words, you had a monetary union without a fiscal union and the periphery were literally defences in the onslaught It's not like a football league where the I'm trying to figure out a way of explaining this in terms of a nice way I'm almost there, but it is kind of scary really that the construction of the eurozone was so effective in the beginning And therefore we're now talking about a banking crisis, but the genesis Is at that period you're talking Well, it was yeah, well first up man. There's several things you've said and I think they're all right first germany's Sort of structural change An increase in competitiveness occurred in a much healthier global environment than everybody else is trying to do it in now So that was just You know a big big difference second Virtually all the central banks You know thought well, we can leave the interest rates down if the inflation isn't there And you know to be honest with you china Was it just an enormously powerful force? It drove the relative price of an increasing body of manufactured stuff down And helped contribute to an environment which there was an inflation and now everybody agree realizes that was a mistake And yeah, and if you leave interest rates down for long enough unless you have pretty powerful You know restraints of another kind regulatory then you then you build a defective growth model that we've Seen many variants of In a lot of countries and we shouldn't do it again I by the way, I think this concept not When we were doing the growth commission work montek alawalia, who's the deputy chairman of the plant He runs the planning commission the prime minister is the head of it Very articulate guy fellow oxford grad He said Is a lot of stuff, but he said I think we should have a section called bad ideas right Bad ideas are sort of the the flip side, you know, we often talk about what works, right? This is what really, you know doesn't work So we had a section there's only a couple pages at earth Maybe three was 20 really bad ideas, you know like subsidizing energy Is one of the worst ideas you it's also ubiquitous in the developing world Uh and very hard to stop Politically once you get into it Well, it was a smash hit You know, I was getting emails from people all over the world and they'd said, you know, I love that section You know, there were 20 items and our government's doing 17 of them No, it's great It's great Yeah, exactly Like I won't go on a great length what this is a very hard day to collect on a comparable basis And so don't over do don't over process that but this is a picture for the OECD countries of labor share of national income Wage income and what you can see in this and this is very small I apologize, but after world war two basically labor share rose tell about the mid to late 70s and then that turned around This is just another aspect of give us such an interesting question And then these powerful forces kicked in and then it started to decline Uh profit shares volatile Government shares tend not to be so volatile, but there's something really quite fundamental going on and it's not confined to a single country Although the after tax outcomes are are somewhat different Um, let me just flip back and because I may be used up enough of your time But I wanted to show you a couple of the things You saw you saw this I find this graph, uh, it's a little out of date Quite interesting. So that this is basically total debt In relationship to gdp divided into its four major components sovereign debt government debt Financial sector debt The rest of the private corporate sector debt and household debt And so you I mean, I just I guess we all know this but so the outliers are japan and the united kingdom. Although they're busy working on it The outliers in public debt are I mean, I apologize ireland isn't here The outliers in public debt would be if I push that button will the light go on or the whole thing will blow up What oh the middle one. Okay, cool What middle one? Never mind. It doesn't matter. Um, the outliers in public debt are japan Which is just huge. I mean this is impossible to understand how this is And when you first look at it and then of course italy And you're a guide of in the same league a little bit below But you'll come down faster than we can And And the saving grace in italy is the household debt never got big This is a country that like china doesn't use that much You know 50 down payment on I mean cash Into housing stuff like that and it's a very high saving country. So the per capita wealth Which is the accumulated savings is relevant with high in italy. So it's not as bad as it looks I mean it's dysfunctional, but I have the I have the privilege of living in two countries both of which has a government that doesn't work It's amazing Now So we're going to have to struggle our way out of this Let me tell you my own Sort of amateurish view of the eurozone Everybody knows it's a flawed structure But but so let me tell a story from a growth point of view So any sensible market fundamentalists You know, there was a in development. There was a thing called the washington consensus It was put together by a guy named john williamson very smart man Very sensible list of things The problem was Especially in latin america They took john williams sensible set of things that you probably ought to do if you want to grow at six or seven percent stripped it down This is the market fundamentalism and then sort of applied it as if it's a formula. There's nothing Formulaic about this at all. We know something about the necessary conditions for growth. We Only the most arrogant would say we know this is sufficient conditions. We just don't And so this is it's more a matter of fumbling around and experimenting and finding the solutions But that was anyway, that was sort of market fundamentalism in that form That model is wrong And the model where government does everything and kind of fills in all gaps is wrong too Arthur Lewis There's a Nobel prize winner in in development economics jamaican Said it best. He said you can have a government's too big and you can have a government's too small And and what you want is an effect of government that actually gets stuff done and is and is navigates well that is, you know figures out how to move and If you accept those two Sort of features of the growth model Then you've got a pretty good idea of sort of What direction, you know, what what the what the What the overall model is. I mean how how you do this And you have to make judgments which we're very reluctant to make so And I think this is the worst problem on in in america particularly So in the business world you live in a world of uncertainty You know, there's positives and benefits. You could a statistician would say type one and type two errors from doing anything, right? and And so you make you take your best shot at it and if you get it wrong you stop doing it and do something else In the policy world There's a very big asymmetry In in in in in environments where there's there's a kind of underlying current of respect for markets But I think we're only getting over now excess respect And that is if you want to argue for intervention in many places You have to argue in a pretty ironclad way that it's needed Otherwise the presumption is that it's fine And that's part of what I believe got us into trouble instead of looking at it and saying well We didn't have this structure before maybe we're blowing the thing up Let's listen to everybody on this and make our best judgment. We assumed Alan Greenspan assumed. I mean, I'm not making stuff up. They say they assumed That unless somebody produced a pretty tight argument That there was something wrong here. Markets didn't make mistakes Very bad idea. Okay. So now let's take the china case So don't show pain gets up one morning having survived the cultural revolution and the gang of four And and removed his predecessor a man named wall And said well, this isn't working very well Why don't we try something else? Let's call it the socialist market economy Uh And first thing we'll do is we'll have just a little we'll tip toe into market incentives by allowing in certain areas Farmers or collectives that produce above the quota to sell a difference on the open market Agricultural output exploded That's a good use of economics incentives really matter What he didn't do is say Well, we're over investing a bit much here and we've got an overheated economy We'll get the central bank to raise the interest rates I mean, I could put this crudely, but nobody in china gave a hoot About what the interest rate was none of the investment decisions were based on that Okay So they made practical sensible judgments that had to do with the institutional depth of the economy on both the market side and the Government regulatory side that change continuously over time They now do use interest rates along with administrative controls and they do have a in process Financial sector that still got a long way to go to be the kind of thing you're used to In the advanced countries or in any one of our countries Uh And the great skill Is the ability to bring really smart people together let them argue and navigate In that kind of environment. It's a kind of meta skill Let me give you other examples. I lived in silicon valley for you know, almost 20 years There are lots of clusters in the world of excellence in various things, but a subset of them Come and go As the kind of you know environment changes and a few of them reinvent themselves So silicon valley has reinvented itself I'm not singling it out as as unique in this respect at all But it's reinvented itself at least four times in my lifetime And seems now that you know, maybe it'll lose this ability all of a sudden But this isn't important. I think of this as similar To the policy You know navigation skills that it's the ability to bring in new talent have new ideas be open You know and learn If I leave you with nothing today, it's this proposition We are living with non cyclical change All right, we are going to take this journey Together on the planet once China will become a massively large economy once Affecting, you know, everybody in sight including the rest of the developing world and so on and so on You you have to have an ability to think about things That aren't repetitive right that aren't static And so on to navigate successfully in this environment and one of the lessons I think of the developing countries Is that over time they the successful ones have learned how to do that a growing number Have learned how to do that among other things Uh, there's not much more I can add to this. Uh, I I this is brazil A friend of mine who was on the growth mission at marbacha But there's two things I wanted to say i'm clapping around but there's two things I wanted to say about this Just to emphasize a point Brazil is doing many things right But brazil's investment rate is 18.7 There is no way on earth That you can sustain six or six five six percent growth on an investment rate that low It has to be Closer to 25 plus right ad mar we'd agree with that. I'm not telling you and it's low even in sort of latin america except for bolivia and paraguay so Now brazil has a very big problem with inclusiveness Which is crucial to mention of growth you you the growth commissioners if they were in this room with us would say Inclusiveness meaning equity in a variety of forms X anti x post protecting people and so on isn't a nice add-on It's an inherent part of a growth strategy if something goes wrong in that something go wrong somewhere else And it's usually political. It can be violence. Uh, it can be a lot of things uh So brazil's working away on that and and the evidence of that is this is for the last 10 years. This is These are the deciles of the income distribution and this is the growth rate of income in those deciles You see what they're doing Income growth is highest in the poorest Next highest in the next poorest right and so on on them. They are solving over time. So take the many years Uh, they're solving the problem of including everybody in the economy. I mean, you know brazil This is an economy that had a dual structure was in Excuse me an advanced economy and then economy people who lived in tin cans on the sides of hills For historical reasons, right? And now they're kind of integrating that and that uses up a lot of resources or government capacity And so maybe it's natural that they're under investing and maybe they've even made a rational choice Maybe you can't do everything at once So when I say that I don't mean it's a no-brainer. They should do something else, but I show it to you anyway Just in relation to china on the same thing because uh, you know As we're fortunate, you know so much about china because uh, you know, a lot of people come and they don't really I'm not familiar with the I don't know how they haven't uh, they haven't got their hands dirty sort of speak my time But just a model on china, you know, it's been very much investment driven, you know in the sense that it's a huge credit bubble now And they've got to make a really difficult transition and uh You mentioned inclusiveness because uh, I have to say I was hugely uh affected by that book why nations fail But you know the thing about nogales half nogales in the u.s And the other halves in mexico and then like the argument is you've just said, you know inclusive political and economic Institutions are pretty critical to explain why the bit in the u.s Has got three times the income lower crime and uh, you know better opportunities for instance So yeah this question about china and uh, when she bought the previous prime minister who I have to say was a Great great admirer off because he kept going on about the need for political reform Ie inclusive political economic institution to cross the rule because now of course He's a term place what he actually said and mine might be different But that's another story, but it sort of put that to you about the challenge china faced in that context And how you think it's going to address it based on what's on the side and we might come to a A conclusion with that. Well, it's perfect. Has that the last thing I was going to try to show you Before you all actually go do something productive Other than listen, I mean and that doesn't include listening to me So china is in the middle of the middle income transition. This is frequently called a trap I don't call it a trap because you can get out of it But not many do so this is a sample of high growth relatively high growth countries Coming into the middle income range, which is three thousand and above dollars And most countries slow down or stop So there's massive changes associated with that transition And the the blue line is taiwan The taiwanese economy the red line south korea The other high-speed transitions were japan and the city states hong kong and singapore And that's it as far as I know There may be others if you hard enough So there's a very complex set of things that I've been involved in you know that go along with this transition reliance on consumption and the domestic economy Rather than just exports and a huge levels of investment China's china's big risk. Well, they maxed out on the tradeable side. It's the opposite. It's the flip side We maxed out a morton maxed out on the domestic demand In many countries they maxed out on the tradeable side And ignored this but this this one graph will tell you and then I'll answer your question oops here Here is household disposable income trending down From 70 to 60. It's now under 60 Now I need to supply you with a couple of other facts the household savings rate is 30 So most people's estimates That is that consumption in household consumption is well under 40 percent of GDP And then you hear the pundits say this is an economy that's going to be driven By domestic household consumption right explosive growth Well, it is but there's some things that have to happen and this is not one of them All right, so these are fairly complex demand management sides Income demand management sides of the of the chinese economy that they have to get their arms around We don't have time to sort of go through it all But it's crucial that side of it The rest of it is get rid of low return investment and whatnot Don't you know use the leverage model that we used so they're reining that in Don't have a shadow your version of a shadow banking sector that's unregulated. They're busy kind of getting that under control The bad news is, you know, there's always, you know, some potential instability and the good news is that they move pretty fast They got a hold of it now I not only read that book. I kind of commented on the cover I think it's a wonderful book and I think Darren Asamoglu is one of the leading, you know, political economy Uh people in the world and that it's that it's on a short list of some of the more important subjects You can't understand this growth Without the political economy component the the political side the leadership the constraints That come from the political side are important Having said that you could read that book and make the following mistake Suppose again, we have the McKinsey two by two matrix and we put on one side lousy economic performance And this is excellent economic performance and over here we put democracy and here we put pretty autocratic You can fill in all the boxes easily fill in all the boxes There the worst performing things are autocratic things where you know, they're not even interested in the well-being of the people There's hundred not hundreds but tens and tens of failing democracies Especially in the lower income categories and there's high performing democracies like India In the developing world and there's high performing democracies in the advanced world and then there's china and a bunch of others if you look carefully um, korea, taiwan and japan All had the form of a democracy But had a dominant single party and the political system was rigged For about 30 years of growth And then they evolved But actually they made changes on purpose To turn it into a multi-party democracy because that's what the people wanted and in one form or another that'll probably happen in china but But if you really want to understand growth you can't do it by the form of governance Or you could if that were true you couldn't fill in the the two by two matrix So what it tells you is you got to look for something else And the something else has to do with It not only capability in not making stupid mistakes, but it has to do with your objective function And that's where leadership comes in And an autocratic system can be benign In fact what china got out of the communist revolution wasn't excellent economic policy It was a commitment to make everybody over time better off Now they just didn't do a very good job of it for the first 29 years But that is embedded in that one of the reasons the communist party Still enjoys a fair amount of support Is because people understand that's a commitment and if they lose it It'll be because of corruption or losing track of that fact or rising inequality or all the other challenges that they They've got to face A surprising number of people have never been to china Including academics who write about it And and assume that you know that system I mean i wouldn't i'd be the last person to argue that that form that structure Will last forever in fact it's evolving You know, it's a very peculiar form of evolution because the democratic elements are inside this big umbrella Called the party But there is you have to take it a bit with a grain of salt which is a Pay attention to the data and be Maybe there's another way there's a really interesting discussion going on about the role of the state in china So a part of it's ideological, you know, literally Maoist But part of it is they they look at us and they say The part of the model we like is the microeconomic part the dynamism the innovation the stuff we want that and then they look at our Macroeconomic configurations and they said do we want that balance sheet? They think well, maybe not Now the china had the state in china has an unbelievable balance sheet They own the state-owned enterprises, which are let's call it 40 percent Of the market side of the economy. They have 3.5 trillion dollars of reserves, which you're about to go down in value Thanks to policy decisions And I got my hand and stuff like that there's so they have these resources But if they decide that's a good balance sheet because it gives you You know a buffer from shocks internal and externally administered and a bunch of other stuff Then you've got to manage those assets. Well, and it's pretty clear to the reformers that there's a way to manage those assets that interferes With the dynamism and ultimately innovativeness of the economy and there's a way to manage them That that is much more benign with respect to that and there that's actually Probably the most important pitched battle that's going on right now And in and the issue is what to do with the state-owned enterprises Thanks a lot everybody. It was fun to be here with you. Yeah