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Accelerating Growth Recipes, Ingredients and the Global Context Michael Spence The Israel 2021 Conference January 12-13, 2011.

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Presentation on theme: "Accelerating Growth Recipes, Ingredients and the Global Context Michael Spence The Israel 2021 Conference January 12-13, 2011."— Presentation transcript:

1 Accelerating Growth Recipes, Ingredients and the Global Context Michael Spence The Israel 2021 Conference January 12-13, 2011

2 Reut Institute and the Marker Have initiated an import discussion of longer term economic and social goals and of policies that may help achieve them Learning from the experience of other countries, advanced and developing, is useful – But all edible recipes are country, context and time specific – And they cannot be created independent of the evolving external global environment The evolving global economy presents opportunities and challenges In my view, it is crucial to take these structural shifts into account in formulating strategies for inclusive growth and employment generation

3 Planning and Time Horizons There are 13 high growth developing countries (7%+ for 25+ years) Soon to be 15 (India and Vietnam) Despite differences in form of governance Shared certain characteristics (ingredients) – Long time horizons – Low revealed social discount rates – they invest at high rates – Agreement on objectives and focus in inclusive growth – Ongoing debate about strategy and policy with inputs from all sectors of society – That means a process that leads to a shared sense of direction – The effect is coherence of policy on a long voyage with imperfect charts – Engagement by government in the longer term agenda What are the five year plans in India and China? – Pragmatic, problem solving orientation and relatively little ideology

4 Israeli Economy Advanced (economically, technologically, human capital) Impressive development given resources required for security Per capita income around $30,000 Rank 25-30 (less with PPP adjustment) Advanced human capital and technology Small (7.3M people) – economically specialized – $200B economy Open (exposed globally with benefits and risk) – X+I about 80% of GDP Growth substantial – but so is populations growth Slow growth in advanced countries will help raise rank

5 Relative Income Distributions

6 Accelerated Growth Impressive crisis response and recovery Reasonable chance to accelerate and leapfrog Focus should be on human capital and employment opportunities in the middle income group This will require elevating public investment Also requires expanding institutional and technological base for diversification of the economy and the export sector – Reverse net exports of human capital Above average or trend growth requires structural change in the economy – This is clearly visible in the microeconomic dynamics of the high growth developing countries

7 Economic Diversification and Structural Change Porter, The Competitive Advantage of Nations (30 years ago) – Industries are not scattered randomly around the world – Economies diversify on different paths – Industries in the global competitive sector are concentrated geographically, though the supply chains are dispersing globally now Ricardo Hausmans work on export diversification patterns. – There are richer and less rich clusters – Defined by overlaps in the value added chains

8 Lessons from Emerging Economies – Recipes are not ingredients or lists of todos – More like strategies – There are common ingredients Openness and leveraging global economy markets and technology Hence the term catch-up growth High levels of investment on public and private sector sides Inclusiveness and management of the degree of inequality Competent macro management and macro stability – Otherwise investment subject to too much risk and is dampened

9 Growth Strategies and Supporting Policies Differ across countries and across time within countries Responsive to initial conditions Sequencing and political feasibility matter and depend on the political system and the composition of interest groups Willingness to trade off present consumption for future opportunity varies (for high growth it has to be tipped toward the future) – That is harder but not impossible in democratic systems Accept market incentives, decentralization, price signals and capitalist dynamics driven by private sector investment Government has several key roles – As investor (human capital and infrastructure) to increase the returns to private sector investment – Maintain stability and predictability

10 Leadership However hard to define, is crucial Consensus building among stakeholders around a vision and strategy Credible commitment to inclusiveness Adopting a workable model (there are lots of alternatives that do not work) Acting as a counterweight to the normal short term incentives inherent in democratic structures

11 Intent matters – the goal has to be making future generations better off in a reasonably equitable way Hence the term (from India) inclusive growth Persistence, pragmatism and a problem solving orientation You dont know the answers in advance – ideologues do but they are usually wrong Willingness to experiment, change course Use economic analysis and experience of other cases, as guides, but not doctrine or othodoxy

12 Evolving Structure of Global Economy Emerging economies are increasingly large and systemically important Also higher income and on supply side moving rapidly up the value chain, Increasing impact on the structure of the tradable sector in the advanced economies. Creates challenges for employment, growth and income distribution in the advanced economies Risk is the advanced economies get crowded into the a declining set of high value added components of global supply chains.

13 The Century of Convergence In 1750, 10% of the measured income inequality was due to inter country differences By 1950, the figure was 60% Post 1950, the pattern shifted – Hard to see at first Mid-point of a century at the end of which the vast majority (70% or more) will live in advanced economies The Next Convergence High speed growth in developing world, and the growing impact on the global economy In my view, in most advanced countries, way too little attention is paid to the these trends and the underlying driving forces The result is domestically and supply side focused – half the picture if you like

14 Efficiency and Distribution Global economy has powerful market forces It is highly efficient – Multinational companies go where the market and supply chain opportunities exist – it is a highly competitive, constantly shifting landscape – Global supply chains are decomposable and moveable Efficiency does not guarantee that outcomes in terms of distribution will be acceptable The ongoing challenge is to shift the market outcomes enough to achieve distributional objectives while keeping benefits of openness It is a challenge at the national level (in most countries) and internationally in the G20, to adapt the rules of engagement so that the distributional objectives can be met.

15 Structural Evolution Tradable and non tradable sectors Shifting boundary Components of the value added chain Project to collect similar data for G20 plus or a wide range of countries with MGI

16 USA Employment 16

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22 Value Added Does not Show the Same Pattern 22

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