BookReviews

Fast flat world

Spreading wealth is the key to continuing economic prosperity, so says this Nobel laureate

Reviewed by Judith Sloan

I must admit to being a fan of this type of book—a sweeping and self-confident examination of long periods of economic history. Given the need for generalisation and simplification, the end-result is often a take-it-or-leave-it option for the reader. I particularly admired Gregory Clark’s A Farewell to Alms, which investigated both the timing and place of the Industrial Revolution. David Landes’s The Wealth and Poverty of Nations was also interesting and thought-provoking.

Michael Spence’s book, by contrast, contains some convincing analysis combined with assertions that are both puzzling and unpersuasive. While pointing to the powerful forces unleashed by the opening up of world trade, he places much store by the role of government in promoting economic growth. He is an advocate of global governance, including a central role for the G20, he worries about global trade imbalances and managed exchange rates, and he thinks there are options for global action on climate change.

Spence’s book is about the third century of the Industrial Revolution. He contrasts this period with the first two centuries, that lasted roughly between 1750 and 1950, when average income increased 20-fold in a limited number of countries. These countries made up only 15 per cent of the world’s population.

In the rest of the world, where for many, life was brutish and short, average incomes moved very little and, in some cases, went backwards—in China, for example. Inequality was high, with a small number of people rich and powerful and the remaining members of the population enduring a meagre existence.

The principal focus of this book is the next convergence (the previous one was pre-1750 when the entire world’s population was poor). In Spence’s words: “The huge asymmetries between advanced and developing countries have not disappeared, but they are declining, and the pattern for the first time in 250 years is convergence rather than divergence.”

One of the interesting features of the next convergence is its sheer pace. While the annual growth of those countries that benefited from the Industrial Revolution that commenced in the mid-18th century was typically 1 to 2 per cent per year—which, of course, cumulatively made a big difference—the new convergence has been characterised by growth rates of 6, 7 or even 10, 11 or 12 per cent per year in a number of countries. And Spence helpfully reminds us that growth of 7 per cent a year leads to a doubling of income in a decade. With 12 per cent per annum growth, incomes are doubled in six years.

So what are the factors that are driving this new convergence? According to Spence, they include the opening up of the global economy, the transferability and declining cost of new technologies, superior and lower cost transportation, and global demand for the products produced by developing economies. Markets and incentives are seen as important, as well as high rates of investment (aligned with high rates of saving) and acceptance of structural change. Spence emphasises the role of government investment in education and infrastructure as ingredients of high rates of economic growth.

Working on the premise that people care about the fate of their children and grandchildren, the author argues that policies that promote inclusiveness and equity play a role in explaining the convergence, because people need to be assured that the benefits will be widely spread if sacrifices are required. This contention is offered without evidence; it may be that less inequality is the consequence of high rates of economic growth rather than the cause.

There are, of course, quite a lot of unanswered questions in the context of this explanation of the convergence, which has been neither universal nor continuous over the past 50 years. For example, Brazil, on which there is a short chapter, managed to achieve middle-income status in the 1960s, stalled, went backwards, and has since surged in terms of income growth. And income growth in many African countries has been sluggish or non-existent notwithstanding the fact that many are resource-rich—which Spence considers, on balance, to be a curse.

Perhaps one of the most interesting conundrums is the contrast between China and India. While it is true that China was able to achieve a high-income growth trajectory earlier than India, both countries are now experiencing very high rates of growth. But one country remains a non-democratic country with very high rates of public ownership and the other is a rather shambolic democracy, albeit with a leadership committed to open and competitive markets.

There is a very odd chapter on the challenge of climate change and developing country growth. The author argues the case for an international carbon trading system but with an exemption for developing countries, in part because it is too difficult to establish their initial entitlement of permits. While acknowledging the problem of carbon leakage—“there will be an incentive for mobile carbon-intensive industries to migrate to developing countries”—his suggestion is that ultimately there needs to be a global carbon tax on the output of such industries regardless of location. On any realistic assessment, the prospect of this outcome is extremely remote.

On the issue of energy security (free market economists, beware when reading the word ‘security’), Spence argues, “It is time for the laissez-faire approach to energy in the United States to change.” And on the Washington Consensus, “There is an implicit assumption that the answers will be determined in the private sector… It just isn’t so.”

While there is much to admire in this book, the style is flat and jerky—it is just under 300 pages and there are 41 chapters in total, some extremely short. There is more assertion than evidence. There is also a liberal sprinkling of the author’s personal views on a range of topics not closely connected to the convergence thesis. A Nobel laureate, Spence has a bob-each-way on many topics. While seemingly committed to markets and incentives as a core driving force of economic growth, he is strangely suspicious of markets and enthralled by the power of governments.