December 20, 2006
A glimpse of a prosperous 2030
What might the world economy look like in 2030? Nobody knows. But we can consider where present trends are taking us. We can assess, too, some of the dangers and opportunities. That is what the World Bank’s latest Global Economic Prospects report does*. This report does more than help organise our thinking. It should also cheer us up and spur us to do better. The past quarter of a century has been a time of unprecedented integration of the world economy, as technology advanced and the socialist sandcastles crumbled under the tide of economic liberalisation. As the report also notes: “Global income has doubled since 1980, 450m have been lifted out of extreme poverty since 1990 and life expectancy in developing countries is now 65 on average.” Globalisation has also proceeded apace: between 1970 and 2004, exports as a proportion of world output doubled to more than 25 per cent; new technologies have diffused rapidly across the globe; and total private financing of developing countries reached nearly $1,000bn in 2004. The persistence of these trends is striking. Moreover, among the encouraging recent features is the acceleration in the growth of incomes per head in the developing world (see chart), as south Asian growth rates and east Asian weights in the total both rose. So what might the world look like in 2030? The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free - click ‘Comments’ below
Robert Wade: Martin says (’Glimpse of a prosperous 2030′, 19 Dec 06) that the World Bank’s projections to 2030 ’should … cheer us up and spur us to do better’. I have not read the Bank’s latest Global Economic Prospects (the source of the projections), and I’ll comment on Martin’s take on it.
First, Martin cites evidence of the world economy becoming more inclusive since the 1970s, the onset of the current phase of globalization. Much of the evidence–eg the acceleration of growth of income per head in the developing world, the fall in the number of people living on less than $PPP 1-a-day — is actually evidence of progress in one country, China. The picture would look quite different if we took medians rather than (population-weighted) means. For example, the fall in the number of people in extreme poverty since the early 1980s is entirely (at least till early 2000s) a story of China. Take out China and the number increased. China’s success is partly a globalization/export-led growth/market liberalization story; but not mainly, because the main story is about building domestic capitalists and domestic demand. Moreover, plausible figures on world poverty using a poverty line less arbitrary than the Bank’s (eg one defined by demographic characteristics and calorific requirements) suggest extreme poverty rates two to three times higher than those reported by the Bank (eg ECLA estimates for Latin America). In short, the evidence that a general process of globalization has been driving a general widening of the circle of prosperity is not as good as Martin thinks. (See Wade, ‘Globalization, poverty and inequality’, in John Ravenhill (ed), Global Political Economy, OUP, 2005.)
Second, Martin says that ‘the obvious threats [include] a protectionist backlash…’. He suggests, though, that a prosperity-eroding protectionist backlash is not very likely, partly because the fast growth of China and India will create new opportunities for exports to their markets. On the contrary, I think that a move away from a global norm of free trade is quite likely, but I do not see such a move as necessarily a bad thing. At least two sets of dynamics suggest a move away from free trade (and free markets more generally).
One relates to the populations of the affluent countries. There is quite a lot of evidence that beyond a certain point of affluence (nationally and individually), further affluence undermines people’s capacity to enjoy the affluence; and that beyond a certain point of affluence, further high-ish rates of economic growth generate so much change as to erode norms and commitment devices that underpin social cohesion, further eroding people’s capacity to enjoy the material benefits of fast growth. In Britain, for example, measures of ‘psychological ill-health’ have been rising; GHQ scores show rising psychological distress levels between 1991-2004. And throughout the West, rates of over-eating, family breakdown, and addictive behaviors are rising. (Some of the evidence is gathered in Avner Offer’s The Challenge of Affluence, 2006. Offer’s theory is re-interpreted by Andrew Oswald and Nattavudh Powdthavee, ‘Obesity, unhappiness and Offer’s The Challenge of Affluence’, Department of Economics, Warwick University, December 2006.) It is possible that western electorates will respond by seeking to ‘embed’ certain markets more firmly in a framework of political controls, even at the cost of faster economic growth; especially if rising affluence is punctuated by periodic financial crises. This is the response that Karl Polanyi analysed historically in The Great Transformation.
The other ‘protectionist’ dynamic relates to development economics and the prescriptions for development policy. As is well-known, global norms shifted dramatically away from import substitution to export-led growth in the late 1970s and early 1980s, and we have been in the paradigm of export-led growth ever since. The problem is that the export-led growth paradigm has not delivered the goods, except in spots. Where it has worked–eg in East Asia, it worked in conjunction with heavy state investment, much of it initially for import substitution prior to exports, and with sectorally-targeted protection as a key instrument; which does not fit well with the antipathy to state intervention at the core of liberal economics. Elsewhere the focus on exports has generated intense competition between developing country producers to lower costs, including labour costs, environmental costs, and the exchange rate.
The key analytical weakness of the export-led growth paradigm is its neglect of the demand side, on the implicit assumption that ’supply creates its own demand’ (to cite Say’s Law, still at the core of contemporary economics after more than 200 years. See Duncan Folley, Adam’s Fallacy, 2006). The neglect of the task of developing structures of demand goes with the neglect of issues of income distribution and of integration of the domestic economy. (The word ‘integration’ is almost always used to refer to integration between the national economy and the rest of the world.) Integration of the domestic economy takes us back to ‘import substitution’.
My expectation is that developing country governments and policy analysts will begin to give more approval to import substitution strategies as it becomes clearer that export-led growth is not delivering, regardless of efforts by the global economic multilaterals to hold them to the straight and narrow; hopefully with more emphasis on national and regional competition within the import substitution paradigm than was the case the first time around, from 1945 to the mid 1970s. Economic commentators in the West will misdescribe this shift in policy approach as a ‘protectionist backlash’, necessarily to be deplored. But as China, India, Brazil, South Africa and others become more influential in multilaterals like the World Bank (if it survives its current implosion), the Bank will–hopefully–lead the way in advising how to do import substitution well, consistent with cosmopolitan interests, rather than just less. (See further, Wade, ‘What strategies are viable for developing countries today?’, Rev. International Political Economy, 10, 4, 2003; Thomas Palley, ‘Developing the domestic market’, Challenge, Nov/Dec 2006.)
Third, Martin mentions war as something else that could go wrong: ‘War, including asymmetric warfare with nuclear or biological weaponry, seems a bigger threat [to a prosperous 2030]….But war is also a difficult threat to quantify’. True, it is difficult to quantify. But we know several things that take us beyond ‘it is difficult to quantify’. Again, two sets of dynamics.
First, the rise of major new economic states has almost always raised the level of conflict between them and the existing economically/politically dominant states. One needs a strong ‘bias for hope’ to think that the same will not happen this time, that the rise of China will not be attended by chronic tensions between it and the US, sometimes played out by proxies. It is quite likely that, once the ‘global war on terror’ is put into a ‘criminal’ rather than ‘war’ frame, the US will seek to reassert a hierarchical interstate order under US leadership by invoking China and perhaps Russia –buttressed by Iran and North Korea and other bad guys — as a threat far beyond their ‘real’ threat. Invoking an external threat to obtain acceptance of an existing order is the oldest sociological prescription in the book. In the International Relations literature the process by which leaders convince their population that a threat is real, serious, and must be mobilized against, is known by the ugly word ’securitization’; and ‘macro-securitization’ is the even uglier word for the process by which different threats are ordered into an overarching framework. The ‘global war on terror’ is the macro-securitization of lower order securitizations like ‘war on drugs’, ‘war on crime’, ‘anti-money laundering’, ‘anti-nuclear proliferation’. Macro-securitizing China and Russia to replace the global war on terror will be difficult for sure, because today, unlike in the Cold War, neither of them champions an alternative future for the world. Difficult, but we can expect all manner of efforts to be made to prompt China and Russia to react in a way that allows them to be socially constructed as macro threats, for the need is great.
Second, the dynamic of conflict from the ‘rise of major new economic powers’ is reinforced by the dynamic of conflict from the tendency towards surplus production capacity — the general tendency for supply capacity to run ahead of demand, and for the rate of profit to fall. The ’solutions’ have included periodic financial crises, which help to devalue assets and reduce surplus capacity; and big pushes for market liberalization and infrastructure investment, which help to expand demand by bringing in more consumers and producers. But at these times of change conflict is likely to erupt over the ownership of the newly devalued-and cheap-assets, and over whose firms get to profit from the new sources of demand. We saw western companies buying up bankrupted Asian companies at rock-bottom prices after the Asian financial crisis of 1997-99, prompting a strong anti-western reaction. And we see a slow-gathering reaction against the relentlessly market opening drive of western states through the WTO and through preferential trade agreements (that is, against the drive to open the markets of developing countries, while retaining mercantilist controls on access to their own). The emergence of East Asia as a major generator of production capacity only adds to the tendency for supply capacity to run ahead of demand. In short, the conflicts generated by responses to the general tendency towards over-investment in relation to demand may amplify the prosperity-reducing effects of the US’s attempts to maintain its hegemony in the face of emerging rival states. (See David Harvey, The New Imperialism, 2003.)
I presume that none of these less-than-rosy dynamics featured in the World Bank’s projections to 2030. But we only have to look at the invasion of Iraq to see them in play on our doorstep.
Posted by: Robert Wade | December 22nd, 2006 at 11:46 am | Report this commentMartin Wolf: I apologise for not having responded sooner to Robert’s lengthy and thoughtful discussion of the future of globalisation. Holidays intervened.
First, Robert questions the evidence on rising growth rates in the developing countries and falling incidence of extreme poverty. It is true that the decline in the number of people in extreme poverty is dominated by China. So what, given the extraordinary importance of this country? But India, too, has experienced significant falls in the proportion of the population in extreme poverty. India has a faster population growth rate than China, which has reduced the impact of declining proportions in extreme poverty on the numbers. Moreover, India’s economy remains grievously distorted in ways that Robert might commend (preserving customary social positions and so forth), but have drastically reduced the potential growth of employment in the modern sector. Africa is an extreme version of the demographic story: proportions of people in extreme poverty have remained roughly unchanged, but population has exploded. I know that the market can be blamed for everything, but I cannot see how it can be blamed for the failure to get to grips with fertility in these countries. (Incidentally I do not understand what he means here by medians: medians among countries or medians within countries?)
Second, Robert writes of a protectionist backlash approvingly. He thinks it would be good for the developed countries if they stopped growing and changing. (How that will help them accommodate the rising tide of exports from the developing world, I do not understand.) The Germans, French and Italians have gone quite a long way in this direction in recent years. It has not made them noticeably happier. I do not know what he means, precisely, by embedding markets in social controls: shooting entrepreneurs? Making innovation illegal? Compelling people to consume only products invented before 2000? Making labour markets as inflexible as in France, with the inevitable adverse results for employment, unemployment and racial harmony? But I agree with him on one thing: any folly is possible. The idea that prosperity is bad for (other) people is an old one. It is, of course, the new cry of the left, now that it has decisively lost the war on how to create prosperity. I have never found it persuasive.
Robert also argues that the world should be moving away from an over-emphasis on export-led growth. I agree with him on that. Exports are an aspect of trade, which is itself just one (important) aspect of a market economy. So I agree that the internal integration of countries (particularly large ones) is as important as their integration into the world economy. Yet this is not “either or”, but “both and”.
I don’t want to go over the history of east Asia yet again. Let me agree that the experience of Hong Kong, Korea, Singapore, Taiwan and now China can be looked at through several possible lenses. But the one thing they have all had in common is outward-oriented industrialisation. Growing trade has been a defining characteristic more or loss from the beginning of their fast growth and, by the way, a big part of their trade success did not build on prior import substitution.
I can only repeat what I have written in previous comments on state intervention: it is unscientific to ascribe the progress of the handful of outstandingly successful countries to this almost universally shared phenomenon. In the current state of global technology, the idea of a policy bias towards import substitution is, I believe, hopelessly misguided for most developing countries: they are too far behind to catch up, at least on their own. Moreover one of the points Robert misses is that this policy would hit inter-developing country trade hardest of all. Yet many small developing countries cannot grow on the basis of their tiny domestic markets. What Robert should be focusing on, instead, are policies that would make markets, technological innovation and so forth work better in developing countries, rather than trying to rekindle the ashes of failed policies.
I agree with Robert that the core of liberal economics is mistrust of state intervention. I find it impossible to understand how any intelligent person can look at today’s world and say: “yes, governments are wonderfully competent, honest and devoted institutions”. I recognise governments are vital. But I am surprised if governments in most developing countries perform their most basic tasks – supply of law and order, basic education, basic health and infrastructure - well. Running an economy is beyond the reach of most of them. Robert thinks I am a crazed believer in markets. I think he is a modestly crazed (though well-intentioned) believer in what I think of as the “fairy governmentmother”.
Finally, there is an area where Robert and I agree, at least partially. I don’t buy the reheated Leninism of his last paragraph (except that it underlines the cost of the over-investment he seems to recommend elsewhere), but I accept that the rise of new powers is a danger to a stable order and have, indeed, written on this on many occasions. But I would not, as Robert does, put all the blame on the incumbent. This is too one-sidedly anti-American for me. The tendency to use external threats as a tool of politics applies on all sides. Look at Russia’s policies towards its “near abroad” or China’s towards Japan. I repeat that we can’t quantify that threat. But we can recognise it and, as citizens and writers, do what we can to defuse it.
Posted by: FT Forum - Martin Wolf | January 2nd, 2007 at 5:16 pm | Report this comment