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Will Paul Romer Be the Cat Among the World Bank Pigeons?

By Shlomo Maital  

 Romer

Paul Romer – New World Bank Chief Economist

      The World Bank was created in July 1944, at Bretton Woods, NH, and has as its goal spurring growth among poorer countries by helping them  borrow capital for infrastructure projects. Repeatedly, the modern relevance of the World Bank has been questioned, when, in a globalized world, nations that run their economies well can access world capital markets by themselves – and nations that do not won’t get World Bank funding anyway.

     The relevance of the World Bank depends on understanding what are the underlying factors that drive growth. For years, economists simply did not know. Here is what The Economist says:

     Prevailing models of growth assigned an important role to technological change, but lacked a convincing explanation for how it came about. Instead, the models treated new ideas a bit like manna from heaven, arriving in a mysterious and unpredictable manner.

   Prof. Paul Romer had a different theory.  

   Mr Romer sought to change that. His work made the development of new ideas “endogenous”, meaning that it sought to account for them, rather than writing them off as “exogenous” surprises. In his “endogenous growth” theory, new ideas materialise as firms invest in physical capital or research and development, creating knowledge that spills over to the rest of the economy. That suggests that open economies, with institutions that encourage investment in physical and human capital, ought to do best.

   The importance of the quality of institutions and of the dissemination of innovation led Mr Romer to focus on urban areas, which are often hotbeds for the creation and transmission of ideas. That focus, in turn, sparked a radical notion of economic development oriented around “charter cities”. Poor countries, he argued, should create new cities and give them leeway to experiment with daring economic and political reforms.

I know Romer is right. Israel has startup cities, like Tel Aviv, that are vibrant entrepreneurship ecosystems. Berlin is one; so is Silicon Valley (a region, not a city); Research Triangle (N. Carolina); Cambridge, UK, and so on.

Will Paul Romer change the thinking of that Old Lady, World Bank, with its old-fashioned stodgy theories? Will he leverage the World Bank’s lending power to foster entrepreneurship in poorer nations?

Stay tuned!

 

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How (and Why) You Should Prepare for a World of Very Slow Economic Growth

By Shlomo Maital

Slow growth ahead

 It is becoming more and more clear that in the next 50 years, the world economy (and probably, the economy in which you live and work) will grow more slowly than in the past.   What was perceived as a temporary correction, due to the global financial crash of 2008, is now becoming chronic.

   Why?

   A study by McKinsey Global Research, “Global Growth: Can Productivity Save the Day in an Aging World”  (available from McKinsey’s website)  notes that “GDP growth was exceptionally brisk over the past 50 years, fueled by rapid growth in the number of workers and in their productivity.”  But now, employment growth, which averaged 1.7 per cent yearly between 1964 and 2014, is set to drop to just 0.3 per cent a year. 

   And productivity growth is slowing too.  “Even if productivity were to grow at the (rapid) 1.8 per cent annual rate of the past 50 years, GDP growth would decline by 40 per cent in the next 50 years – slower than the past five years of recovery from recession”.   But productivity growth has declined and does not look like it will recover much.  China’s economy is slowing. Europe and America grow slowly.  Japan has slow growth.  Looks like it’s chronic.

   What can be done?    “Catching up to best practice”, says McKinsey. In other words, if we all benchmarked the world and defined and captured ‘best practice’, productivity growth could nearly make up for the declining growth in workers. 

   Here are McKinsey’s 10 key “enablers of growth”.  Can each of us look at this list closely, and figure out,  what is my role?  How can I become really skilled, expert, at one or more of these enablers?  If McKinsey is right,  and if you can, you will be in great demand – and create value for the world. 

   Here is the list.  Which of thee suits you?  What must you do, in order to become a true enabler?

  • Remove barriers to competition in service sectors. 2. Focus on public and regulated sector efficiency. 3. Invest in physical and digital infrastructure. 4.       Foster R&D demand and investment. 5. Exploit data to identify transformational improvement opportunities. 6. Improve eduation and skill matching and labor market flexibility. 7. Open up economies to cross-border economic flows. 8. Boost labor force participation among women, young people, and older people. 9.       Harness the power of new actors through digital platforms and open data. 10. Craft regulatory environment, incentivizing productivity and innovation.

 

   

 Why Economies Don’t Grow

By Shlomo Maital    

stagnation1

 Michael Spence is a Nobel Laureate in Economics, pioneer in the economics of information, and has recently published an article explaining why Western economies simply don’t grow.  He notes that there are five reasons. He also notes that growth forecasts have consistently been overoptimistic, ruining whatever little credibility remains for economists.  I think his insights help us understand better our current state of stagnation in much of the Western world.

  1. Too little fiscal policy: Traditionally governments evaluate debt by looking at the debt/GDP ratio.  They have slashed spending as a result.  But they would do better, as economist Frank Newman argues in Freedom from National Debt, to look at the aggregate balance sheet, because “a productive public sector investment can more than pay for itself”.  In other words: If governments spend wisely, the resulting assets more than pay off the resulting debt. Simple? Obvious?  But…alas, overlooked.
  2. The impact of fiscal policy (“multipliers”) is much higher than previously thought, because there is so much excess capacity (i.e. idle labor and capital) lying around.
  3. Capital markets are disconnected from GDP. Because central banks have printed so much money, and because the money found its way into bond and stock markets, asset prices have risen a lot… but, not because the underlying economy is strong. This has simply created a lot of wealth for a few millionaires or billionaires, but hasn’t helped ordinary people, and hasn’t helped the economy.
  4. Governments have been badly led and run, and greatly favoured the wealthy, who buy influence with political contributions.
  5. Incomes in the bottom 75% of the distribution have stagnated, leading to a lack of aggregate demand. This drop has been “greater than expected”.

  These five factors are chronic, and may last longer than we thought.  Spence thinks we need to redistribute income and expand public services.  We need to invest in key areas, like education, health care and infrastructure.

   Under economic stagnation, isn’t this solution obvious?  Apparently, not to many economists and political leaders. I wish more of them would read Spence’s short piece carefully.

     

China’s Miracle

By Shlomo  Maital  

         China

                                                                            1970                        2001

CHINA adjusted for inflation   (rmb b.)                  

Gross domestic product (GDP)    Q           225.3                        9,593

   Exports of goods and services   X            4.1                          2,478

   Imports of goods and services  IM         4.2                          2,246

   Household consumption expenditure   C  142.6                  4,409

   General government consumption expenditure   17.5       1,314

   Gross capital formation  Ig                            65.4                          3,638

 

  I’ve been reviewing macroeconomic data for China, 1970-2001.  And the numbers are astounding.  The world’s most populous nation has moved from a country disconnected from world trade, with almost no exports or imports, and abysmal poverty, a Cultural Revolution in which millions starved, in which backyard furnaces tried and failed to make steel – to a nation that has grown by an average of 10% yearly.  GDP has risen by almost 45 times, doubling five times..and then some.  Exports have risen by 600 times, which is 8 doublings!   And investment (capital formation)?   That rose almost 60 times, or almost 8 doublings!

   This has never happened in history. No country has come close, let alone with the world’s most populous country. 

   How did all this happen?  A leader named Deng Xiao Ping was placed under house arrest, during the Cultural Revolution, and had a lot of time on his hands.  He looked around the world, saw countries that were rich and growing, and countries that were poor and stagnant – and decided that ‘rich’ was better than ‘ideology’.  The rest is history.

   Lots of people seem to believe the ‘bubble’ will burst, and even wish it would, complaining about civil rights, human rights, etc.  China will soon be the world’s biggest economy. We all should wish China well – because if China’s growth slows, so will all of Asia, and then all of the world.  Ask not for whom the bell tolls…..

Blog entries written by Prof. Shlomo Maital

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