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A Step Forward for Economics
, December 26, 2011
In this book, Nobel Prize winner Michael Spence delivers his reflection on the global environment today and the value of applied microeconomic theory to interpret economic development. This is "the result of [a] learning process from the past fifteen years". From the outset, the reader must acknowledge that it is a challenge for the average economist to address development economics where the world of perfect equilibriums meet complexity, a reality marked by rapid population growth, extreme food challenges and weak legal institutions.
In this, Spence offers essential lessons to economists and the general reader:
1) "As we get older, [w]e start to appreciate historians more, those whose job is in part to help us understand that things change, as well as how and why". This is a book that views economics outside of the typical world of the economist, and for this the author must be commended.
2) Those who cannot change their minds cannot change anything (quoting G.Bernard Shaw)
3) The openness of the global economy has been key to the success of catch-up growth in Asia.
4) Public investment in education "is the crucial foundation of the learning process that underlies catch-up growth" (79).
5) Markets require regulation to improve performance (71). This work goes beyond the belief that unregulated markets are optimal and self-regulating.
6) It was "never intended that the Washington Consensus become an ideology whose central tenant was that governments always screw things up and that the proper approach was to limit government activity to a bare minimum." (95)
The author acknowledges the importance of understanding history and the role of government to explain "convergence", a process of catch-up growth by developing economies. There is still, however, a remnant of Cold War economics in the reflections of the author; the Cold War was a time when Freedom was equated with the Private Sector, and where the role of the public (i.e. the common) was pushed to the side in a sharp criticism of the Soviet model. At times, while the author argues that governments play a crucial role in today's global economy, this is most often qualified by saying that this role is for "investments that do not lend themselves to private-sector investments." And in the end the role of government is reduced to, principally "education and infrastructure."
This leaves a gap to understand the objective role of governments in growth, particularly for a book addressing development and catch-up growth. Namely, governments play an essential role in providing the miminal certainty required for investments to take place; in creating the legal framework for that certainty to prevail (although IP rights are mentioned in the book); in helping solve the information gap that would prevent engineers from becoming investors; and in securing early investment in the most pressing industries. In this sense, the book could well be complemented by the work of gifted economist Dani Rodrick (whose writing is unfortunately too complicated to be in the same category as Spence's work).
Spence's reflections hint at the role of government for catch-up growth in various late chapters of the work: "Late starters can compete, but public-sector investment is required to make them more competitive." (124) Today, the "importance of reserves as a defensive weapon [ensuring certainty, is] elevated" (133). Yet, the author does not acknowledge the conflictive choice facing governments between avoiding protecting domestic industries versus creating certainty and stability for investments to take place (i.e. why would governements save car companies? Because the uncertainty that would result from their bankruptcy would have created a decade-long crisis, impeding investment and innovation further.). Growth is more complex than a simple separation of the public versus the private, few nobel prize economists (except maybe Douglas North) have acknowledged it.
Nonetheless, this book does a great job at taking the theoretical economist in the right direction, and as such this is a refreshing work.
What I would like, from an author who is expert in questions related to information asymetries, would be a focus on how information technologies help resolve the market asymetries that have prevented growth in many countries. Overall, only one chapter addresses this dynamic: "It may turn out that the most important long-run human impact of the constrant drumbeat of Moore's law [which argues that computer power doubles every two years] will be a form of inclusiveness" because computer give access to information. If governments or markets addressed this, then maybe the coffee grower would find out what the price of coffee really is and would learn to avoid intermediaries. That is when change and convergence would happen. When IT and computers will reach the streets of Mexico, maybe then Carlos Sim's fortune will start sipping down to the Spanish new world and convergence will happen.