Michael Spence, a Nobel-winning economist, chaired a Commission on Growth and Development piloted by the World Bank from 2006 to 2010. This book grew out of his involvement with this expert committee, and collects his thoughts on the topic of growth and economic convergence in a non-academic and accessible format. It is not the first book that stems from a prominent economist's engagement with an international expert group. Joseph Stiglitz recently published Mismeasuring Our Lives after President Nicolas Sarkozy tasked him and a few colleagues to study whether Gross Domestic Product is a reliable indicator of economic and social progress. Before reaching academic stardom status, Jeffrey Sachs chaired an expert commission on macroeconomics and health sponsored by the World Health Organization, in which he honed some of the arguments presented in The End of Poverty. Nicholas Stern wrote the 700-pages long Stern Review on the Economics of Climate Change for the UK Government, and then the follow-up book Blueprint for a Safe Planet, reduced to a more palatable 250 pages.
The work of these international commissions usually follows a similar pattern. An international organization, with the financial support of rich member states and private foundations, gathers a group of prominent persons to look at a particular issue and come up with recommendations. The commission members are picked up from a limited roster of global public figures: distinguished practitioners from government, the private sector, and academia, whose names crop up in various venues, as the composition of these advisory commissions largely overlaps. The role of the eminent persons is not to write the commission report--an anonymous team of experts usually does that, as well as much of the preparatory work. Rather, the role of the commissioners is to provide advice and guidance to the preparation of the final report, which they ultimately endorse. In practical terms, they meet several times in various locations, with expenses paid by the sponsoring organization, and discuss various versions of the chapters that will ultimately form the final report, with inputs provided by expert hearings and case studies.
International commissions leave a heavy paper trail. In the case of the Commission on Growth and Development, no less than 67 working papers were commissioned, five thematic volumes were published, one special report on post-crisis growth was assembled after the Great Recession of 2008-09, and the final report, 150-pages long, was published in several languages and disseminated through various public events. Very few people read these reports in full (I confess I haven't) and decision makers, towards whom the message is ostensibly targeted, usually contend themselves with an executive summary. The book version then gives the commission chairman a second chance to influence public debates, by reaching a different audience and speaking out in his own capacity. It is usually written in a livelier style than the bland statements of official reports. Considering the amount of effort put in the commission's travails, one wonders why the chairperson didn't publish his book directly, with background articles submitted to the usual peer review process.
These commissions nonetheless play a useful role in global governance. They give the sponsoring organizations a focus and a sense of purpose. They make explicit an emerging consensus on the issues at hand, and disseminate knowledge across informational silos. They allow for the sharing of experience and viewpoints, giving their policy-making members some exposure to recent academic knowledge and bringing participating academics out of their ivory tower. They are less costly than United Nations' conferences and world summits, and are usually more innovative in their diagnostics and recommendations. They pay due respect to the genuine originators of new ideas: people who are co-opted or auditioned in these expert commissions usually have minds of the first caliber, and they can bring real value added to current debates. After all, what better role for a Nobel prize than to help shape the international agenda? Sparks of knowledge can ignite a fire of policy reform and economic performance. As an example, Spence reproduces a piece of World Bank lore that has Deng Xiaoping request the Washington institution for help in explaining the market economy. A small group of experts brought academics and experienced policy people from around the world to give lectures on how market economies work and how policy should be set, consolidating the Chinese reform team and providing fresh ideas at a critical juncture in China's transition. Maybe expert commissions and their intellectual output can provide the same impetus.
Although I haven't read the final report of the Commission on Growth and Development (I intend to do so at some point in the future), I am sure that Michael Spence's book is a very different product. It is quite personal in style and content: it presents the viewpoint of a particular individual, not the result of a collective meeting of minds. Surprisingly for an economist, the author is clear on his own limitations and, which is even less frequent, on the limitations of economics as a scientific discipline. Reflecting upon his work at the head of the Growth Commission ("the experience of a lifetime"), Michael Spence confesses: "It was startling to see how incomplete and imperfect were the frameworks and models available to guide policy choice in developing countries." But decision under incomplete information is something the author is very familiar with: he won the Nobel prize in 2001 for introducing the notion into standard economics.
The content of The Next Convergence is difficult to sum up. Perhaps the best way to start is by explaining the title and the book cover. The return of convergence refers to the process by which 60 percent of the world's population, beginning with China and India, are about to join the world's affluence and catch up with the 15 percent already living in developed countries. Convergence is no longer limited to a small set of countries which have run well ahead of the pack, creating big-time divergence with less advanced economies. Now nearly everyone has a chance to join the race, and the implications of this new convergence are profound and extensive. As for the book cover, the reader has to wait until page 244 to have an explanation of the illustration: "The scope and depth of the interdependencies in the global economy have run well ahead of global governance structures. Maybe the governance structure (the tortoise) will catch up with the economy (the hare). But it is not a done deal, not a sure thing."
These two ideas, convergence and interdependence, form the leitmotiv of the book. Together, they amount to a major reboot of the world economy, a process that the global financial crisis of 2008-09 has even accelerated. Think about it: "The high-growth developing countries include more than half the world's population. By mid-century or shortly thereafter, many will be approaching advanced-country levels of income with associated patterns of consumption, energy use, and carbon emissions." At the endpoint of the convergence process, say in about forty years, China and India on the one side and the U.S. and Europe on the other side will have traded places. The former will represent almost 60 percent of the world's advanced countries' income, whereas the United States and the European Union's share will be reduced to about 10 percent each. Are we ready to consider a world where the size and perhaps the role of these two blocs of countries will be reversed? Where China's voice will count more than the United States', and where Europe has to give way to India's priorities?
The problem is compounded by the fact that China and India, as well as the other emerging giants, will become large and influential in the global economy while still having relatively low per capita incomes. They will have to assume growing global responsibilities at a point where most countries could be excused for maintaining a largely domestic focus. The time has passed when the impact of emerging countries on global economic, financial and environmental balances were small enough to ignore. Now China has global impacts and must assume global responsibilities for the maintenance and stability of the world economic system, though its income levels are still low by advanced country standards. China is entering upon a complex set of transitions that will build the base for its path to advanced-country status in the next twenty-five years. India, the author notes, is about fourteen years behind China. India's per capita income is presently about one-third that of China. But with a lag of fourteen years or so, the pattern in India should be about the same as what we have seen in China. And it is not just China and India: at least thirteen emerging economies have been growing at an average of seven percent during the last quarter century.
So far, the global economy seems to have accommodated the growth of China, and of India following behind, without hitting a wall in terms of absorptive capacity. But the increasing interconnectedness in the global economy has not been matched by similar reforms in the system of global governance. To be sure, the advanced country group, the G7/G8 (with partial participation of Russia) has been supplanted by the G20, which includes all major economies. This change occurred literally overnight and with next to no debate or dissent, demonstrating the role of a major economic crisis in shifting old patterns of thought and interaction. But already nation-states are falling back to uncooperative behavior and non-coordination of national policies. For the author, it is increasingly clear that there are limits to globalization in the context of a governance structure that is largely nation-centric and that has not adapted to the current level of economic interdependence. He anticipates "a bumpy journey to a new normal." Anticipating periodic bouts of instability, nations will take actions to limit their exposure. "It will take many forms: reserve currency holdings, fiscal dry powder, limiting the openness and exposure of the financial system, probably increasing stores of food and fuel." All of them can be thought of as different forms of self-insurance. They are individually rational, but collectively produce only a second-best outcome compared to the optimum of global cooperation.
Although the book is not a textbook, and doesn't develop formal models, it provides useful snipets of knowledge. In particular, Michael Spence introduces to the reader some simple rules of growth arithmetic. One such simple but powerful rule is called by economists and statisticians 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. An economy growing at a one percent rate, or a capital yielding a one percent interest rate, will double in size in 72 years. At seven percent growth, incomes and output double every ten years. As noted, there are at least 13 developing countries that have managed to grow for 25 years or more at an average of 7 percent or more. Observing these high-growth economies reveals some regularities and benchmarks. In particular, it appears that investment needs to be in excess of 25 percent of total output or GDP, and public-sector investment in the range of 5 to 7 percent of GDP.
Growth arithmetic also reveals the discrepancy between geometric progressions--high-growth economies doubling size every ten years--and revenue scale ranking--with that crucial threshold associated with middle-income status when a country's per capita income gets into the range of $5,000 to $10,000. It takes a lot of doubling and decades of growth to reach that size when a country starts with very low per capita levels. Once it has been reached, however, it takes only one jump of maybe fifteen years for a high-growth developing economy to reach a per capita income similar to those in the advanced countries. This last transition turns out to be very problematic however: it is sometimes referred to as the middle-income trap, and it is characterized by a strong tendency to try to hold on to the known successes. Indeed, one of the most significant mistakes in growth-oriented policies is to find a formula that works and then to stay with it for too long. As Spence notes, "the techniques for resisting the structural evolution are many: subsidies, increased protection in the form of tariffs, management of the exchange rate so as to keep the cost of exports down, and the like." Nevertheless countries like Korea have succeeded in graduating from middle-income to high-income, and there is no reason why China and the other emerging economies could not do it.
To conclude, The Next Convergence is a comprehensive survey that covers the main challenges faced by major economies that are trying to adapt to a multispeed world. It is divided into short, bite-sized chapters that take the reader through a step-by-step course in global macroeconomics. Basic notions such as savings, investment, or current account deficit are explained in simple terms, and some more complex notions are also introduced in a very accessible manner. At no point will even readers with no formal training in economics feel lost or distanced. The long-term perspective stretches the attention towards issues of broad significance, but short-term issues such as the post-crisis recovery are also covered. The book encourages policy-makers to adopt a strategic mindset and devise their moves while taking into account the reaction function of other players by learning to see the world through their eyes. Advanced economies such as the United States could also learn a thing or two from the rulebook of emerging countries: in particular, they could try to chart their course amid great uncertainty by adopting some kind of long-range planning or growth strategy. According to Michael Spence, such strategies could help solve coordination problems and provide the pieces to the giant cooperative game that world economic players are trying to learn how to play.