Michael Spence won the 2001 Nobel Prize in economics with Joseph Stiglitz and George Akerlof for their work on information flows and market development. Spence just published The Next Convergence: The Future of Economic Growth where he examines how emerging economies are reshaping the international order. I sat down with Spence to get his take on China's economic rise and the future of the global economy.
Amar C. Bakshi: What are the key points you want people to take away from your new book, The Next Convergence: The Future of Economic Growth?
Michael Spence: Emerging economies are very impactful. Their systemic effects are large and that is going to require adjustment on everybody’s part - from international institutions to the domestic policies of advanced countries.
We are on a dynamic journey this century. This book is meant to help people better understand where we’re going.
What are some challenges you see on the horizon?
We have a serious employment and distribution problem in most of the advanced economies. The middle class is getting squeezed while highly educated people in competitive sectors experience lots of growth and opportunity.
Asia is going to make up a very large fraction of global growth in the second half of this century. In a 20-year period, global GDP is going to increase by a factor of three or four.
The next question is: Can you actually run a global economy on that side (Asia) the same way we run the global economy on this side (the West) in terms of energy intensity? What would the environmental impact be over time? The old model of global growth just doesn’t scale.
Increasingly, Asia shares this view. They recognize this is an issue for them because if it doesn’t scale, they can't complete their journey to advanced-country status
America needs to adjust too. Now is a good time to have a real energy policy in the United States that prepares us to become a less energy-intensive economy. It’ll take a long time. We can't rebuild all the cities and the transportation systems overnight.
In some ways, the emerging economies have an advantage over us because they don’t have to tear old systems down before building next generation systems.
Do you think that China can successfully transition from middle income to developed country status?
Yes, I do.
But if you wanted to argue against that proposition, you’d say China has complex structural transitions they need to engineer first. Most notably, they need growth driven by the private sector. They have to let the market decide more and the government and the state decide less. They also need to become an innovation-led, entrepreneurial economy. That doesn’t necessarily correspond with the way they think about the world.
Only five economies have sustained their growth rates going from middle income to advanced economy status: Japan, Korean, Taiwan, Singapore and Hong Kong. It’s never been done at China’s scale before. So there are lots of reasons to argue that China’s movement to advanced economy status is not a done deal.
I’m rather fairly optimistic that it will occur, however. I have been involved in trying to be helpful in providing international experience and input for China’s policy choices, including its five-year plan. I think they’ve got the moving parts in focus and if they implement well –and that’s not a trivial challenge - they actually can pull this off.
On the global economy, are we at risk of another 2008-type of crisis in the in the near- or medium-term future?
Things are getting better. There’s an awareness that there has to be some homogeneity in basic financial regulatory principles around the world in order to avoid arbitrage - or sinking to the lowest level - on basic things like dangerous levels of leverage and debt.
On the other hand, I don’t think we’re progressing on all the needed fronts. The international monetary and exchange rate system has to be fundamentally changed. That will take an international process and an agreement.
The current system is left over from a period in which the emerging economies basically didn't follow the rules that were set out in the post-Bretton Woods era. It didn't really matter because they were pursuing their domestic growth and development agenda and the systemic impacts weren't big enough to destabilize the system.
Now these emerging economies are systemically significant - individually in the case of China and collectively.