Monday, October 30, 2017

Nationalism as an infantile disease

I was a young economist at the International Monetary Fund in the mid-1980s, working on the IMF’s Spanish economic team. A group of us would travel to Madrid periodically to consult with the government on their economic policies and to issue reports that identified the main economic challenges facing the authorities and to take a thorough look at what was being done to address them. The early part of that decade had not been an easy period for Spain. Major sectors of the economy (e.g. steel, shipbuilding) were in crisis due to the emergence of lower cost producers in other parts of the world. Economic growth had been anemic and the rate of unemployment was one of the highest in Europe. By the time I joined the Spanish team in 1985 there was a serious program of economic reforms underway that sought to prepare the Spanish economy for its forthcoming entry into the European Community, as it was then called. What impressed me the most during these visits was the extent to which the prospect of entry into the EU was forcing the government to extend the focus of economic policies well beyond issues of macroeconomic stability to the entire range of sectoral and institutional reforms, the aim of which seemed to be the wholesale modernization of the Spanish economy. I remember, in particular, reforms aimed at liberalizing the inflow of foreign direct investment to facilitate the integration of the Spanish economy with the rest of Europe and, indeed, the world. I understood that, done well, this would lead not only to massive inflows of non-debt capital, but also to the arrival of know-how that would transform the country’s ageing productive apparatus. Coming from Latin America, then in the middle of a fearsome external debt crisis which led to a lost decade of virtually no economic growth, I remember thinking how fortunate the Spanish were: they would join a rich-country club firmly committed to democratic principles and willing to help them make that transition successfully.

Spain joined the EU on January 1, 1986 and over the next two decades it was one of the best performing economies in Europe. In the years following entry into the EU Spain not only received massive inflows of foreign capital as foreign firms sought to benefit from Spain’s lower labor costs and free access to the large European market, but was also the recipient of large and generous transfers from the EU budget, to finance regional development, including an upgrading of the country’s then decrepit physical infrastructure. Needless to say, these transformations affected, to a greater or lesser extent, all the regions of the country including, of course, Catalonia. Implicit in all of this was the exercise of an important principle embedded in EU law: the richer member states transfer resources to the poorer members as part of a process of narrowing the income divide among countries and as a result of which intra-country inequality in the EU was reduced in a significant way.   By the late 1990s I had left the IMF but continued to follow developments in Spain with keen interest and visited the country and its many beautiful regions on multiple occasions. For me the main lesson from joining Europe was more political and psychological than economic. It was the idea that Spain’s membership in the EU magnified its international influence, resulted in major gains in efficiency and was gradually leading to a change in people’s mental framework and psychological reflexes; the government in Madrid and major portions of the Spanish population seemed to be increasingly comfortable with the idea that their country was firmly embedded in the democratic traditions of its EU partners, including respect for the rule law and a fledging sense of European citizenship as a primary form of identification.

Albert Einstein, who had a visceral dislike for the deep-seated nationalisms that had caused such grievous damage during the 20th century, once said that nationalism was an “infantile disease”, the “measles of mankind.” It was undesirable and fundamentally a sign of immaturity. He agreed with Isaiah Berlin, who believed that it was “a passing phase due to the exacerbation of national consciousness held down and forcibly repressed by despotic leaders” and that like a “pathological inflammation” it would in time abate as the oppression that had induced it in the first place would itself disappear. On many visits to Barcelona over the years I often felt the fundamental incongruity of yearnings for “independence” in certain segments of the population, at a time when the region was very much part of the most ambitious and imaginative project of economic and political integration in the world: the European Union. Having benefitted from the generosity of German and Swedish and other wealthy member taxpayers which had helped turn Catalonia into a dynamic corner of the Spanish economy, these same people resented the fact that, in reflection of their new found prosperity, they were contributing budgetary resources to some of Spain’s poorer regions. But, more importantly, I had the sense that those who argued for leaving Spain and becoming an independent republic suffered from an unduly enhanced sense of victimhood, the idea that the interests of the region, to paraphrase Berlin, must rise to the supreme value “before which all other considerations must yield at all times.” I could not help thinking: in what century are these people living!
The psychologist Erich Fromm referred to nationalism as a form of incest, idolatry and insanity. Bertrand Russell, who thought of nationalism as the manifestation of herd instinct once wrote:

“It is rather odd that emphasis upon the merits of one’s own nation should be considered a virtue. What should we think of an individual who proclaimed: ‘I am morally and intellectually superior to all other individuals, and, because of this superiority I have a right to ignore all interests except my own?’ There are, no doubt, plenty of people who feel this way, but if they proclaim their feeling too openly, and act upon it too blatantly, they are thought ill of. When, however, a number of such individuals, constituting the population of some area, collectively make such a declaration about themselves, they are thought noble and splendid and spirited. They put up statues to each other and teach schoolchildren to admire the most blatant advocates of the national conceit.”

Nationalisms will gradually die because, faced with a range of serious global problems, from climate change to nuclear proliferation to poverty and inequality, in coming years we will be forced to strengthen our mechanisms of international cooperation and to learn to think, in an increasingly interdependent world, about the interests of the whole world, not this or that particular nation or region. Our ability to find solutions to these problems will be based on a growing acceptance of the oneness of mankind, of our coming together to act with a unity of purpose. We can choose to be part of this inevitable process of global economic and political integration, or to yearn in vain for a world of limited loyalties that is rapidly disappearing. Hopefully sooner rather than later our Catalan brothers and sisters will have to awaken to this fact.

Monday, May 29, 2017

Jonathan Schell and the End of the Cold War

A few months ago, in the course of trying to reestablish contact with a dear friend, Jonathan Schell, I learned, to my consternation, that he had passed away.  It was more than a shock, after the many years of silence that had intervened between us.  It felt like an immeasurable loss, not just to me personally but to the world.

I first met Jonathan in 1986 when I invited him to the International Monetary Fund to speak to a group of about twenty colleagues about his brilliant book The Fate of the Earth. I had read it years before and had been impressed not only with the content—a clinical analysis of the after-effects of a limited nuclear war between the two major powers— but also by the elegance of the writing, the beauty of the logic, and the power of Jonathan’s arguments. He combined an incisive mind with an exceptionally articulate pen.

 “Usually, people wait for things to occur before trying to describe them,” he writes in the book’s opening section. “But since we cannot afford under any circumstances to let a holocaust occur, we are forced in this one case to become the historians of the future — to chronicle and commit to memory an event that we have never experienced and must never experience.”

Jonathan made a deep impression on us during that 1986 visit.  We were bowled over by his luminous mind, and his wholly unpretentious character which seemed impervious to the dangers of self.  We invited him back in 1988 and once more in 1990, in order to listen to him expand upon the themes he had first touched upon in The Fate of the Earth.  On each occasion his words moved us as being entirely free of the usual egoism to which the famous often fall prey.

The next time I saw Jonathan was in 1993, in Moscow, where I had been posted as resident representative for the International Monetary Fund. My wife, Mirta, and I together with our two teenage children, Olivia and Sebastian, had moved to Russia a few months after the collapse of the Soviet Union in early 1992 and Jonathan came and stayed with us there on two occasions. The issue which seemed to occupy his mind most during his Moscow meetings—some of which I had the privilege to attend—was what had led to the demise of the Soviet Union.  What were the factors, what were the reasons, what were the forces and influences and conditions that had brought about the extraordinary collapse of a seemingly solid system of governance?

One night, during that first visit, we organized a special gathering at home, so that Jonathan could speak to a select group of prominent Russian thinkers and experts, including several who had been closely associated with and supportive of Mikhail Gorbachev’s policy of glasnost or “opening up.” It was a memorable evening, not only for the quality of the discussion, but also for the warmth and deep respect shown to Jonathan by the group. In the course of the evening, two of the most eminent Russians among them shared some particularly poignant memories with us.  One was a leading Dostoevsky scholar and former member of the Supreme Soviet (the highest legislative authority during the time of the Soviet Union); the other was a senior member of the Duma (the Russian parliament), a former ambassador and significant figure in Russia’s foreign policy establishment.

They told the assembled guests that when The Fate of the Earth had been published in the West in 1982, the Central Committee of the Communist Party of the Soviet Union had ordered the book to be translated.  One hundred, carefully numbered, top-secret copies were then printed and circulated, on a strictly “need-to-know” basis, among leading members of the Soviet political and military establishment. These two gentlemen managed to get hold of a copy from a friend who had temporary access to it, and locked themselves up for a weekend in a dacha outside Moscow to read it from cover to cover. It was an experience they described as being utterly mind-expanding and soul-stirring. They told us that in the years immediately following, these one hundred copies as they made the rounds, contributed to an unprecedented degree in transforming the mindset of top policymakers. They were read by the top echelons of Soviet power, many of whom began to recognize as a result the futility of the arms race and the extent to which a Soviet economy based on an oversized military industrial complex was unsustainable. Jonathan’s arguments made them see that even in the best of circumstances, the arms race was a recipe for continued economic misery and, at worst, it would lead to the nuclear annihilation of mankind.

Jonathan visited us in Moscow for a second time in 1996 and my wife and daughter were guests at the Schells’ home in New York several years later, when Mirta was representing the Baha’i International Community at a gathering of the United Nations Commission on the Status of Women. And that was the last time we were to have the privilege of meeting this great man before he died of cancer in 2014, aged 70.  Margalit Fox in her obituary written for the New York Times on March 26 of 2014, spoke for many of us when she said:
“With The Fate of the Earth Mr. Schell was widely credited with helping rally ordinary citizens around the world to the cause of nuclear disarmament. The book, based on his extensive interviews with members of the scientific community, outlines the likely aftermath of a nuclear war and deconstructs the United States’ long-held rationale for nuclear buildup as a deterrent.”
While I regard our friendship as one of our family’s blessings and while he will always remain in my mind as an exemplar of the very best of America——I do have one regret. Jonathan deserved greater, world-wide recognition than he was given. He was worthy of the Nobel Peace Prize. And had I been in a position to do so I should have moved (as we say in Spanish) “earth and heaven” to bring his writings to the attention of the Committee in Oslo. In the minds of those of us assembled in Moscow that night in 1993, few deserved such recognition more than Jonathan. At that moment of history, at any rate, he played his part in saving us from collective disaster.  Let us pray that we will not regret our collective failure to heed his warnings in the future.
“We have organizations for the preservation of almost everything in life that we want but no organization for the preservation of mankind. People seem to have decided that our collective will is too weak or flawed to rise to this occasion. They see the violence that has saturated human history, and conclude that to practice violence is innate to our species. They find the perennial hope that peace can be brought to the earth once and for all a delusion of the well-meaning who have refused to face the “harsh realities” of international life—the realities of self-interest, fear, hatred, and aggression. They have concluded that these realities are eternal ones, and this conclusion defeats at the outset any hope of taking the actions necessary for survival.”
Jonathan Schell, The Fate of the Earth*

*Schell, Jonathan. 1982. The Fate of the Earth, Jonathan Cape, London, p. 185.

Thursday, March 16, 2017

Equal Opportunity, Equal Outcomes?

Understandably, the literature has often seen gender inequality as a human rights issue. Article 7 of the Universal Declaration of Human Rights introduces the concept of equal protection under the law. When governments use the law to discriminate against women in some way, to create a legal environment that places her at a disadvantage with respect to men, they are clearly in violation of the letter and the spirit of the Declaration.

However, gender inequality obviously has an economic dimension as well. The Women, Business and the Law project (WBL) at the World Bank has, over the years, built up an impressive database that identifies the restrictions faced by women embedded in the law (the Constitution, the Civil Code, family law and other legal instruments) in 173 countries. From this data we have learned, for instance, that the higher the number of such restrictions in a country, the lower the secondary school enrolment rate of girls relative to boys; the bigger the wage gap between women and men; the lower the share of women-owned businesses in the formal private sector; and the lower the labor force participation rate of women relative to that of men.

This latter observation is particularly important because a key driver of economic growth associated with the narrowing of employment gender gaps has to do with bargaining power within families. Not surprisingly, when women work and earn income, they will be more empowered within the home. Beyond the direct personal benefits to her, the economics literature has identified a number of other favorable effects such as higher savings, more productive investments and better use and repayment of credit, all of which are beneficial for economic growth.

Other studies have shown that with greater female power within the household there will be higher investments in the health and education of children, thereby planting the seeds for the accumulation of human capital in the next generation.

One area that has received increasing attention in recent years has to do with the economic dimensions of violence against women. Quite aside from the physical, emotional and psychological costs, violence can also have tangible economic consequences, ranging from women’s reduced capacity to function in society, from permanent disabilities and trauma costs to lower economic productivity and the increased fiscal burden placed on public services and employers. Data from a large number of countries indicate that the economic cost of intimate partner violence is typically between 1 to 2 percent of GDP.

 So violence against women is not only a serious crime, but a critical factor influencing a woman’s financial autonomy and agency; it has a direct impact on her ability to seek economic opportunities and stand on a par with men in society. Beyond the human rights perspective, there is strong social and economic rationale for ensuring that women are protected from this pervasive historical form of inequality. In recent years the WBL project has expanded its database to include data on domestic violence and sexual harassment and other forms of abuse. A review of this data suggests at least three important insights:

•    Life expectancy for women is higher where they are legally protected from domestic violence. Considering that as recently as 1990 there were only a handful of countries in the world where such legislation existed, one cannot help but think about a century of premature mortality of women associated with the lack of elemental legal protections, most often from intimate partners. A recent paper attempts to quantify the extent of excess mortality associated with the absence of laws addressing domestic violence against women and the results suggest millions of casualties for 95 economies between 1990 and 2012.

•    Over the past 25 years the number of countries introducing laws addressing domestic violence has risen rapidly from close to zero to 127 today. Significantly, this increase has been encouraged by international and regional human rights conventions and campaigns. This is encouraging, as there is at times skepticism about the real world impact of UN declarations or other multilateral initiatives. The WBL data clearly shows, for instance, that within 5 years following the adoption of CEDAW (Convention on the Elimination of all forms of Discrimination Against Women) in a particular country there is a significant reduction in the number of restrictions embedded in the law against women.

•    There is much that remains to be done. There are at least 46 countries that have no laws on domestic violence (e.g., Iran, Egypt, Afghanistan, Russia, Tanzania), many of them in Sub-Saharan Africa and the Middle East and North Africa regions. Furthermore, there are various forms of domestic violence (physical, emotional, sexual, financial/economic) and coverage of the legislation, where it exists, is spotty. Economic violence, for instance, is rarely covered.

Despite the above progress and the growing recognition that societies pay a heavy price for the absence of laws protecting women from violence--from direct costs in terms of health care, social services, police deployment, court and incarceration expenses, to indirect costs in terms of time lost from paid work, second generation effects of violence on children, as well as lost income from premature deaths—there is resistance in many countries to move more aggressively in extending such protections to women. Women’s lack of political empowerment in many countries, for instance, has sometimes led to weak implementation of existing legislation or resistance to the introduction of new legislation due to low levels of female representation in legislative bodies. A recent example of a setback in this area is the adoption by the Russian parliament of a provision which de-criminalizes physical abuse within the family against intimate partners, making domestic violence an administrative offense and reducing the penalty for domestic violence for first time offenders to an administrative punishment.

Nevertheless, there is a shift underway in the debate and the attitudes about the consequences of gender inequality. In particular, we have begun to move away from an emphasis on the desirability of equality of opportunities (e.g, the removal of barriers preventing women to vote) to the need to ensure equality of outcomes (e.g. the speedier elimination of the multiple hidden barriers which have curtailed women’s political empowerment). Accordingly, the Women, Business and the Law project has moved beyond simply documenting the legal restrictions women face by exploring how such restrictions have disempowered women as evident in the 2016 report. Along the way, more and more people have come to realize that gender equality need not be a zero-sum game implying loss for men, but rather that gender equality is about moving to a stage in human evolution where being born a boy or a girl does not determine anymore one’s rights and opportunities to develop one’s human potential.

Monday, November 14, 2016

International cooperation, ethics and climate change

In pursuing meaningful sustainable development, and investing in conservation and redressing the environmental damage caused by decades of neglect, we need to better explore and understand the role of international cooperation and why human values and ethics are central to this debate.

International cooperation. A key ingredient for generating a sustainable development path will have to be a significant strengthening of the current mechanisms of international cooperation, which have turned out to be insufficient to meet the global challenges that we face. The process of globalization is unfolding in the absence of equivalent international institutions to support it and harness its potential for good.

There is no global environmental authority, for instance. Policy on the climate change front is being done via ad-hoc approaches involving elements of international cooperation, voluntary compliance, and large doses of hope. In the absence of a body having jurisdiction over the global environment with corresponding legal enforcement authority, the international community has, de facto, abdicated management of the world’s environment to chance and the actions of well-meaning states. Even the 2015 Paris Agreement, bringing together 175 countries pledging reductions in emissions, if implemented in full, will not prevent a warming in excess of 2°C, the threshold recognized by climate scientists as necessary to avoid “potentially devastating consequences” (Stern 2016).

Whether we focus our attention on climate change or other global challenges, the fact is that major planetary problems are being neglected because we do not have the mechanisms and institutions strong enough to deal with them.

Effective, credible mechanisms of international cooperation, that are perceived to be legitimate, and capable of acting on behalf of the interests of humanity—rather than those of a particular set of countries—are essential if the world is to meet the challenge of striking the correct balance between concern for the environment and the policies that must underpin such concern, on the one hand, and the need to ensure that the global economy develops in a way that provides opportunities for all, particularly the poor and the disadvantaged, on the other.

It is an open question whether the existing system of sovereign nation states is capable of achieving this level of cooperation, or if such a system will require a more fundamental restructuring involving greater levels of national accountability to ensure outcomes that will better serve present and future generations.

Ethics and human values. Finally, no strategy aimed at fostering the emergence of a sustainable development path would be complete without a fundamental rethinking of the human values that have driven much of the development process during the past century. A considerable body of academic research in recent years has examined the issue of the correlation between growing income and human happiness. The question itself might have appeared slightly quaint a couple of decades ago, when economists in academia and policymakers in government and international financial organizations more or less accepted as an article of faith that higher growth and income would always be desirable and would increase human welfare, and along with it, happiness.

Several insights, however, have contributed to a gradual change of perspective. First, the realization that, however beneficial might have been the several decades of robust post-war economic growth in improving living standards, the global economy was beginning to run up against environmental constraints which could actually be measured.

Second, psychologists, newly empowered with analytical tools developed in other sciences, were able to show that human happiness was correlated with income only up to a certain level. Money seemed to be crucially important for happiness when basic material needs had not been met. But once these had been satisfied, the sources of happiness shifted to other concerns, reflecting deeper spiritual aspirations, including friendship, relationships, a sense of purpose in life, security, among others.

The above observations suggest the need to broaden the definition of what constitutes “well-being” and investigate more closely the relationship between increasing market activity and the welfare of the people participating in the economic system. One starting point would be to establish a clearer mental demarcation between the concepts of “growth” and “development.”

The first is essentially a quantitative concept which captures the expansion in the scale of the economic system, while the latter refers to qualitative changes in this system and in its relationships with the environment and other aspects of life in the community. Properly understood, economics should concern itself less with how to add to the physical dimension of the economic system and more with the long-term welfare of the community whose interests the “system” is ultimately intended to serve.

Monday, August 1, 2016

Ensuring a sustainable development path

I’ve suggested recently that although high economic growth in recent decades has greatly improved average life expectancy, infant mortality, and other leading indicators policymakers and development practitioners were still worried about the sustainability of these trends and whether people in developing countries would eventually enjoy the high standards of living of high-income countries. This, against the background of a planet under increasing stress, particularly as a result of climate change. In this blog, I explore some of the actions needed to sustain our global economy.

Climate change risks. A key finding of the latest scientific work on climate change is that the annual cost of introducing control measures for greenhouse gases is far smaller than the potential cost of uncontrolled climate change. Duly aware of the margins of uncertainty associated with such calculations, the UN’s Intergovernmental Panel on Climate Change (IPCC) has, in the past, provided estimates suggesting that stabilizing greenhouse gases by 2030 would slow global economic growth by slightly more than 0.1 percentage points per year.

The risks of inaction, however, are huge. It has proved difficult for computer models to deliver robust cost estimates for scenarios that lie outside the range of recent human experience. A rise in temperatures of 3°C with respect to pre-industrial levels, for instance, has not been seen on the planet in the last 1 million years, though this is the envisaged increase consistent with the pledges made by 175 countries in Paris in 2016.

So, one central element of the solution will be implementing a transition to a low carbon economy that will involve the use of cleaner fuels, including solar-photovoltaic and onshore-wind technologies, which have become increasingly competitive and which will have a number of other collateral benefits, such as preventing 2 million premature deaths in India and China every year linked to air pollution.

We will also need to invest in energy infrastructure, to replace aging capacity, and meet growing global energy demand, but also to boost efficiency. More generally, it is estimated that over the next 20 years global investment in infrastructure will be in the region of $5-6 trillion per year, three quarters of which will be new infrastructure in the developing world. Since well over half of total greenhouse emissions stem from investment in and use of various infrastructures, there is an overwhelming need, going forward, for all new such investments to be clean and green, as called for by Stern (2016) and others.

Conservation. We will also have to invest in conservation and in redressing some of the damage done to the environment through decades of neglect.  According to the Earth Policy Institute something like US$100 billion should be spent annually to protect topsoil in croplands, to stabilize water tables, to restore fisheries, and protect biological diversity. This sum of money is small in relation to the size of the global economy and it is certainly very small in relation to the trillions made available by governments in some of the largest countries to deal with the short-term effects of the last global financial crisis.

Energy subsidies. Another key dimension of this debate concerns the need for better utilization of existing resources, to promote opportunity and shared prosperity, particularly in the developing world, rather than to create distortions and worsen income distribution. An eloquent example of this is provided by a recent IMF study (2015), which factors in the cost of negative externalities from energy consumption (e.g.,  global warming, pollution) according to which energy subsidies (for petroleum, electricity, natural gas and coal) amount to some $5.3 trillion per year.  This astronomical sum is equivalent to about 6.5 percent of global GDP or somewhere between 5-35% of total government revenues, depending on the region.

The benefits of gasoline subsidies are the most regressively distributed in the world, with over 60 percent of the total accruing to the richest 20 percent of households.  If such subsidies were removed, the authors of the IMF study estimate that it could lead to a 21 percent reduction in CO2 emissions.  It could also generate positive spillover effects by reducing global energy demand and thus have a tangible impact on mitigating the effects of climate change.  Indeed, it would be difficult to come up with a public policy that is more socially and environmentally destructive than subsidizing energy consumption.

Technology. Obviously, technology can also play a key role. More efficient use of energy has reduced the size of energy consumption in global GDP by more than 30 percent in the past 25 years. Much more can be done in this area, particularly by resort to new technologies of energy conservation and renewable energy, including—as noted earlier—greater use of solar power, wind, and alternative fuels.

Simultaneously, a number of studies are underway in leading research centers to identify a range of human interventions which could either remove CO2 from the atmosphere or reduce the amount of sunlight that comes to the earth, under the general heading of “geo-engineering.” Some scientists think that, over the longer term, they could play a necessary, complementary role to other measures aimed at precipitating the necessary changes in human behavior which have been too slow in coming. For now, however, the consensus seems to be that putting too much emphasis on “technological fixes” could result in complacency, since politicians will always be receptive to solutions which do not, in the end, involve sacrifices on the part of voters, such as, for instance, higher carbon taxes or—God forbid—changes in patterns of consumption or lifestyles.

While this technological potential undoubtedly exists in the long term, its development will require global institutional arrangements, efficiencies of governance, financial resources and a culture of change in political and social systems, all of which are lacking at the present time. The immediate issue for sustainability is less one of ultimate limits and technological possibilities, but rather our present slow pace of change when faced with growing social and environmental challenges.

We have technological solutions for most our environmental problems, but are not applying them at anywhere near the speed necessary to avoid future crises. In the next (and last) blog on the sustainability of our development path I will address two important issues: the role of international cooperation and why human values and ethics are central to this debate.

Monday, June 27, 2016

Are we travelling on a sustainable development path?

Global development as a universal objective to improve people’s social and economic wellbeing is a relatively recent concept.

It was first embodied in the United Nations Charter, signed in San Francisco 71 years ago this week, which stated: “the United Nations shall promote higher standards of living, full employment, and conditions of economic and social progress and development.” In time, at least among practicing economists in academia and policymakers in government, “development” came to be seen as improved economic opportunity through the accumulation of capital and rising productivity.

The implicit assumption here was that economic growth would lead to rising living standards, increases in life expectancy, reduced mortality, and a reduction in the incidence of poverty.

And so, between 1950 and 2014, as world GDP per capita expanded at an annual average rate of 2.1 percent, this trend was associated with a remarkable evolution in three key indicators of human welfare. In the half-century between 1960 and 2014, infant mortality fell from 121 to 34 per 1000 live births; average life expectancy at birth rose from 52 to 71 years, a 36 percent increase which is nothing short of spectacular; and adult illiteracy fell from 53 to 16 percent. Equally impressive was the sharp drop in the incidence of poverty: data show that between 1990 and 2015 the number of people living in extreme poverty fell from about 2 billion to slightly over 700 million.

In parallel to the encouraging trends in development, a growing number of economists and scientists began to ask if the processes and policies underlying our development path were sustainable. Among environmentalists, in particular, the focus has been on climate change, biodiversity loss and pollution. That the earth has self-correcting mechanisms, that the physical processes underpinning changes in the environment have huge inertia, has not hidden the growing consensus in the scientific community that current trends are not sustainable.

Let me suggest several examples: global carbon dioxide emissions from fossil fuels have sharply accelerated over the last several decades, reflecting a quickening in the pace of growth of the global economy, a sharp rise in energy consumption in China and the weakening of natural carbon sinks, such as forests and seas. Not surprisingly, large volumes of the Arctic ice have melted along with parts of the Greenland glaciers contributing to a rise in sea levels. Satellite observations of the Arctic ice cap show a significant reduction in the ice cover, with a record reduction in 2012 to less than half the area typically occupied four decades ago. In 1996, the volume of ice melted in Greenland was 92 cubic kilometres. By 2005, this figure had risen to 221 cubic kilometres and the latest figures show 373 cubic kilometres per year.

Even when world economic growth came to a halt in 2009 because of the global financial crisis, these perturbing trends were not reversed, as world economic growth quickly resumed. But even beyond purely environmental concerns, there are other forces at work which are already having a major impact on our system’s institutional underpinnings, and which have been at the center of the progress achieved during the past half century. Key among these are population growth and the corresponding pressures on resources. According to the International Energy Agency, energy demand will grow by a third by 2035, reflecting the addition of some 2 billion people to the world's population and the corresponding needs for housing, transportation, heating, illumination, food production, waste disposal, and the push for sustained increases in the standards of living. Because the mothers that will bear these 2 billion children are already alive today, this expected increase in the world’s population—barring some unexpected calamity—will materialize and will be largely concentrated in urban environments in developing countries.

Beyond the inevitable pressures on resources, rapid population growth in the next couple of decades will lead to a broad range of challenges for governments, businesses, and civil society. For instance, in the Middle East and North Africa, high fertility rates and the highest rates of population growth in the world will put enormous strains on labor markets. These countries already suffer from the highest rates of unemployment in the world.  Simply to prevent these rates from rising further it will be necessary to create well over 100 million new jobs within the next decade and a half, an extremely tall order. The failure to do so has already led to political and social instability in the region. In sharp contrast, the populations of countries such as Italy, Russia, Japan, and others in the industrial world will continue to shrink, a demographic trend which, in turn, will put huge pressures on public finances.

Powerful demonstration effects are also at work: the spread of instant communication and the Internet have led billions of people in China, India, Latin America, and other parts of the developing world to aspire to lifestyles and patterns of consumption similar to those prevailing in the industrial world. Furthermore, these populations are often unwilling to postpone such aspirations and increasingly expect their governments to deliver rising levels of prosperity, implicitly pushing for a more equitable distribution of the world’s resources.

As if these demand pressures were not enough, there are emerging supply constraints as well. World cereal production per person has been on a downward trend since the late 1980s. It is estimated that by 2025 the number of people living in regions with absolute water scarcity will have risen to some 1.8 billion. Climate change, soil erosion, and overfishing are expected to dampen food production and will put upward pressures on food prices.

As a result, the fundamental development question which we now face is how to reconcile the legitimate aspirations of citizens in developing countries to recreate for themselves the high living standards that they see in the developed world, with all the challenges of an economic system and a global environment under severe stress as a result of the pressures put on it by the meteoric economic growth of the post-war years?

In my next blog, I will explore some practical answers to this fundamental question of whether we can sustain our current development pathway.

Wednesday, December 2, 2015

Why economic convergence matters in today’s globalized world

In his fine book The Upside of Down: Catastrophe, Creativity and the Renewal of Civilization, professor Thomas Homer-Dixon refers to the projected divergence in average income per capita between the rich and poor countries.

Even if one assumes that the low income countries grow for the foreseeable future at much higher rates than the high income countries, because the current gap in per capita income is so large, the gap widens for many decades to come before convergence finally sets in well into the next century, if not later.

In other words, by 2015 the rich countries are so far ahead of the rest of the world that, except for a handful of countries with incomes very close to the income of the poorest rich country, no one else has a realistic chance of converging, as Taiwan (China) and South Korea did during the post-World War II period. This phenomenon, of widening income gaps in the future notwithstanding the presence of higher growth rates in the poor countries today is what Homer-Dixon (p. 189) calls “the dirty little secret of development economics.”

There are several problems with such widening gaps. A first obvious one is that the larger the gap, the more difficult it is to make the jump. Taiwan (China), Singapore and Korea did it and Chile has been admitted to the OECD—but these cases of upward mobility are few and far between. Landes (1990) thinks that an important constraint is knowledge and know-how, which cannot be easily acquired.

The development of Taiwan’s human capital during its transition into the rich economy club was an extremely complex process. Although seemingly a disadvantage at the time, the brain drain of the 1960s and 1970s—when some 50,000 of the brightest young Taiwanese went overseas (principally to the United States) for university and advanced studies—allowed Taiwan to build a large pool of qualified and experienced people before its economy was ready to absorb them.

From 1985 onwards, incentives drew them back to Taiwan as entrepreneurs, to create start-ups in the science parks, or to take up research, academic, and management positions, bringing not only their knowledge and experience, but also their networks of contacts and working relationships with leading international companies, and enabling today’s Taiwanese universities to educate its own manpower for continuing expansion at home.

These informal networks, supplemented by overseas offices of various institutes and research centers, have facilitated technology transfer, innovation, and strong entrepreneurial relationships. In other economies, the story of training and higher education has often been, as noted by Landes, “the permanent loss of talent.”[1]

Being far behind creates a difficult context for the implementation of sound policies. The populations of poor countries can readily and accurately estimate—because of the power of communications technologies—how far back they are vis-à-vis the rest of the world, particularly the rich economies of the industrial world. This is likely to create unrealistic expectations of catchup and, in turn, force governments to favor a populist path, instead of the deliberate, gradual and at times difficult path chosen by the few successful cases of upward mobility.

When the gap is so wide that the possibility of catching up within a generation or two is no more than a pipe dream, governments may find it difficult to engage the public in the pursuit of cautious, coherent policies. “Lateness is the parent of bad government” [2] is how Landes puts it, where he uses the noun “late” to mean late entry into the development process, captured by a low per capita income.

Furthermore, the combination of widening income gaps between countries and the globalization of ideas, knowledge, access to information and awareness of others’ living standards provides powerful incentives for the movement of people across international boundaries.

If to this we add the likely future effects of climate change on vulnerable populations (developing economies are far more dependent on agriculture, which will be hard hit by climate change) and the sort of chaos and generalized upheavals we have seen in recent years in a growing number of countries (e.g., Syria, Iraq, Yemen, Afghanistan, Mali, Venezuela, to name a few), then those incentives are magnified and migration risks becoming an even bigger challenge.

Some economists (e.g., Paul Collier) have highlighted some of the difficulties associated with a segmentation of the world into two broad regions, one characterized by either high income or at least positive economic growth and another where some 60 countries with a combined population in excess of 1 billion are not only falling behind but often falling apart, becoming exporters of “violence and people instead of goods and services,” [3] thereby beginning to pose a security threat to the rest of the world.

Collier argues that economic development is very much about giving ordinary people the hope that, at some point in the not too distant future, their children will have access to the same opportunities available to children in Germany and Sweden and other rich countries. The notion of convergence is very much at the heart of much of what we do at the World Bank, the idea that we will gradually see in the developing world the unfoldment of the policies and institutions that have propelled the rich countries to levels of wealth and prosperity never before reached in the last several thousand years of recorded history. In the absence of that hope, smart, motivated people will seek to escape from their societies and try to look for those opportunities elsewhere.

This creates a huge challenge for the recipient countries if the numbers are large enough to put strains on rich country budgets and infrastructures and it can deprive the sending countries of essential human capital. Hence the central importance of the World Bank’s current focus on shared prosperity; it matters not only for development outcomes, but it also clearly has a security and political dimension that goes far beyond a narrowing of income differentials.

[1] Landes, David S. 1990. “Why Are We So Rich and They So Poor?”, American Economic Review, Vol 80, No. 2, Papers and Proceedings of the Hundred and Second Annual Meeting of the American Economic Association, p. 1-13.
[2] Landes (1990), p. 12.
[3] Collier, Paul. 2007. The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It, Oxford University Press, p. 12.