Security and Economic Growth

1
Security and Economic Growth
Michael Spence Brisbane January2008
2
Outline

• The Commission
• The Key Ingredients in Sustained High Growth
  Dynamics
• The Role of Government
• Critical policy and investment priorities
• The Multiple dimensions of security
• Security as input and output
• Political and Economic Channels through which the
  interaction between security and economic
  performance occur

3
Origins

• Economic Growth in the 1990s Gobind Nankani
• Concern that what were thought to be necessary
  and sufficient conditions were just necessary
• Advanced versus developing economies
• Accumulation of relevant experience in many
  countries both high growth and low
• Loss of visibility of growth
• Not as ultimate objective but powerful instrument
• In poverty reduction in particular
• MDGs
• Divergence between policy advice and behavior in
  high growth cases
•  

4
Sustained Growth Time Horizons
5
Mandate of the Commission

• The focus is sustained high inclusive growth and
  the policies, investments and political
  underpinnings that support it
• Goal help increase the number and sustainability
  of growth accelerations
• Sustained means over several decades
• Inclusive is meant to capture more than income
  opportunity, productive employment, access to
  services
• Primary target audience political and policy
  leaders in developing countries with
  responsibility for strategies and policies for
  growth
• We understand (and are explicit) that growth is
  not the end goal but a means to several ends
  poverty reduction, human development, health,
  safety, the opportunity to work and to be
  creative

6
Sustained High Growth is Difficult to Achieve

• Some of the literature gives the impression
  that it is after all pretty easy to increase the
  long-run growth rate. Just reduce a tax on
  capital here or eliminate an inefficient
  regulation there, and the reward is fabulous, a
  higher growth rate forever, which is surely more
  valuable than any lingering bleeding-heart
  reservations about the policy itself. But in real
  life it is very hard to move the permanent growth
  rate and when it happens, as perhaps in the USA
  in the later 1990s, the source can be a bit
  mysterious even after the fact.

(Bob Solow, 2007, Oxford Review of Economic
Policy) On the 50th anniversary of the Solow Model
7
Growth Dynamics

• 12 cases of sustained high growth (7 or more for
  25 years or more)
• Botswana, China, Hong Kong, Indonesia, Japan,
  Korea, Malaysia, Malta, Oman, Singapore, Taiwan
  and Thailand
• India and Vietnam are close because of growth
  accelerations in the past 10-15 years
• There may be others because of recent growth
  accelerations (in part dues to upward shift in
  the relative price of energy, commodities and
  food. Demand induced
• The jury is out on whether these initial growth
  accelerations can be transformed into sustainable
  growth dynamics rapid employment creation and
  structural diversification

8
Common Ingredients

• Leveraging global economy demand and knowledge
• Market incentives and decentralization
• High levels (and effectiveness) of savings and
  public and private investment
• Rapid diversification and incremental productive
  employment
• Structural transformation
• Resource mobility especially labor across
  sectors and
• Rapid urbanization

9

• Stable and functional investment environment
• Political leadership and effective, pragmatic and
  when needed activist government
• Multi decade process
• strategies, priorities and role of government
  evolves
• Pragmatism and willingness to experiment
• A focus on inclusive growth combined with
  persistence and determination
• Government that acts in the interests of all the
  citizens of the country as opposed to itself or
  subgroups

10
China GDP per capita and Poverty Reduction
11
(No Transcript)
12
Saving and Investment
13
Leveraging the Global Economy
14
(No Transcript)
15
Income Inequality
16
The Role of Government

• Stabilize, liberalize and privatize
• Is often an important part of the story
• Undoing an overly intrusive or oversized
  government
• But it is more complicated than that
• Better government rather than less government is
  another part of the story
• Role of government evolves over time (the China
  case)
• as the economy matures , expands its capabilities
  and integrates into the global economy
• Dealing with bottle necks
• Investor with long time horizon (education and
  infrastructure)
• Model uncertainty and institutional development
• Getting the model or strategy right
• Leadership, vision, communication, consensus
  building

17
Necessary and Sufficient Conditions

• A this stage of our understanding of economic
  development, no one knows with a sufficient
  degree of conviction, the necessary and
  sufficient conditions for growth.
• It would be preferable if it were otherwise.
• Focusing on the critical policies and
  investments, with suitable adjustments for
  initial conditions across countries and time,
  will materially increase the likelihood of
  elevating growth.

18
Key Policy Priorities and Challenges

• The following are the focus of much or our
  ongoing discussion
• Also areas of widespread under performance
• Leadership
• Equity and equality of opportunity and
  inclusiveness
• Access to the market economy, finance, and the
  legal system
• Public sector investment
• Data poor and investment levels on average way
  below high growth levels
• You get what you measure
• Environmental aspects of growth
• Health
• Education

19
Policy Priorities Continued

• Competition and structural change
• The dynamics of productivity growth
• Entry and exit (firms and sectors)
• Industrial Policies and Export Promotion and the
  Role of Government in the Dynamics of Comparative
  Advantage
• Exchange Rates
• Open economy capital account management
• Cost of capital and risk management
• Pace and sequencing of the opening of the current
  and capital account

20
Enabling Diversification, Structural
Transformation and Growth

• Labor mobility
• Labor markets
• Urbanization
• Technology and Knowledge Transfer
• Policy levers wrt the speed of catch up
• Agricultures Place in the Strategy
• Effective Government and Implementation

21
Cases with Important Special Challenges

• Small States
• Lack of diversification and heightened exposure
  to economic and natural risks and shocks
• Governance overhead costs
• Resource Rich (or fairly rich) Countries
• Prone to conflict and governance problems
• Distortion of the political economy towards rents
• Challenge of economic diversification and
  expanding employment opportunity
• African countries in various categories
• Landlocked percentage vulnerability to weakness
  of neighbors
• Climate change
• Tribal and ethnic diversity incompletely
  mediated by the governance systems
• Middle income to high income transitions
• Perceived threat of loss of basis of
  competitiveness
• Shift policies and investment to facilitate the
  transition to human capital intensive basis for
  structural change and dynamic comparative
  advantage
• Evolution of interventions (industrial policy,
  exchange rate) used to jump start export
  diversification and growth, before they become
  distortionary and dysfunctional

22
Global Trends Opportunities and Challenges

• Rising income inequality and resistance to
  globalization
• Pew Report
• US elections
• Global Warming and Developing Countries
• The Growth of China and India
• Large long term shifts in relative prices labor
  intensive manufactured goods, energy and
  commodities
• It is a demand and a supply shock because of
  the scale
• Demographics, Aging and Migration
• Global Governance, Imbalances and the Rising
  Influence and Impact of Developing Countries
• The challenge of policy coordination with new
  important players

23
Security

• We will learn a great deal about security in the
  next three days
• Enormous range of issues and categories from
  getting to school safely, to conflict, crime,
  economic security in various dimensions, natural
  disasters, responses and insurance, and more
• Security in all its dimensions is highly valued
  individually and social (in groupings ranging
  from local to global)
• That and the better part of humanity, the empathy
  that underlies the concern, is the best
  justification for focusing on all of the issues
  of
• Causes
• Prevention
• Response when adversity strikes

24
Security and Growth

• Security and growth interact
• Like human development and fulfillment, security
  is one of the most important inputs to and
  outputs of growth
• On the output side, growth enhances security
  through a variety of channels
• Reduced vulnerability to economic shocks
• Capacity for adaptation in the case of global
  warming
• Movement away from the zero sum game and the
  political economy and conflict prone incentives
  that go with it
• Reduced dependence on some outside influences and
  agendas in determining economy trajectories
• Growing influence in global decision-making with
  local consequences
• Affordability of social safety nets and
  protections, investment in health, and enhanced
  capacity for self-insurance at the national level
• Youth unemployment and related adverse
  consequences in terms of crime, disaffection and
  political instability and conflict

25
The Vulnerable in Terms of Economic Security
26
(No Transcript)
27
The Effects of Security Problems on Growth

• Are very large and operate through multiple
  channel
• Here I repeat that adverse growth effects are not
  the main reason for serious attention to security
• But the effects are real they tend to operate
  on growth via investment channels
• Ongoing research is helping to understand the
  magnitudes and channels
• Much more needs to be done.

28
Cases Where The Effect is Large

• To the point that it deserves a high priority on
  a growth policy agenda
• Early childhood nutrition
• Large and very long terms adverse affects on
  cognitive and non-cognitive skills agenda
• Increasing the economic and other risks of
  investment (domestic and foreign)
• The latter is closely related to inbound
  knowledge transfer a key driver of sustained
  high growth
• Dramatic reductions in longevity reduce
  incentives and investment in human capital and
  other assets where the payback period is long
• Economic security, equality of opportunity and
  outcomes, and protection against the downside
  risks of exposure to the global economy
• Affects the ability to sustain growth oriented
  policies and investments in the face of political
  headwinds

29
Energy Security, Global Warming and Conflict

• Right now the legitimate concern seems to be
  rising energy and commodity prices on poorer
  countries
• The fraction of household income going to energy
  and food is much higher in poorer countries and
  communities and families
• But the problem is much larger
• There is a clear scramble for energy security
  with a kind of prisoners dilemma incentive
  structure
• Except for the adverse distributional effects,
  agreeing on the high prices and its attendant
  positive incentives (energy efficiency, new
  technology) is clearly better but it takes
  cooperation at a high level
• Potential for conflict is real.
• Add global warming targets that are safe (but may
  be costly and highly constraining) and we are
  moving back toward an environment that is closer
  to zero sum (Martin Wolfe, FT late December)

30
One bit of good news
31
(No Transcript)
32
Final Thoughts

• From a growth perspective, security and risk
  management in multiple dimensions is a critical
  ingredient
• And the reverse is true security problems and
  vulnerabilities lower growth potential and
  therefore impair the achievement of many
  important objectives
• There is much research to be done on causes,
  effective interventions and responses, insurance
  and risk spreading
• We may be entering a period in which natural
  disasters and very large shifts in the
  configuration of the global economy are the main
  sources of security challenges
• At the moment, we are probably collectively not
  very well prepared to deal with them.

33
(No Transcript)
34
Gini Coefficients