Over time, we expect the world to get richer. Yes, there are disruptions and setbacks (and we have seen several large ones in the last few years) but the expectation is to see growth and an increase in material wealth. And yet for years, many countries around the world have seen stagnation or outright reversal — particularly once you exclude East Asia. On this episode of Odd Lots, we speak with Henry Williams and David Oks, the authors of a recent piece in the journal American Affairs about what they call The Long, Slow Death of Global Development. They argue that traditional development models, particularly those built around manufacturing, have failed much of the world, with little prospect of improvement anytime soon. This transcript has been lightly edited for clarity.
Key insights from the pod:
The death of global development — 3:40
What statistics conceal about economic progress — 5:08
What’s so special about manufacturing? — 6:58
Can countries leapfrog into services? — 10:56
Why the “birds in flight” model isn’t working — 14:51
The role of China in global development — 18:10
Is it all Paul Volcker’s fault? — 20:15
Dedollarization and deglobalization — 24:20
A different model for economic development? — 28:17
Political barriers to economic improvement — 30:48
Positive models of economic development — 38:54
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Joe: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy: (00:15)
And I'm Tracy Alloway.
Joe: (00:17)
Tracy, I think for all of our careers, probably all of our lives, it feels like there has been this story of developing emerging markets, getting better, emerging, maybe emerging markets becoming rich, you know, just this general view that you get these hiccups and de-globalization, whatever, but the arrows are all up
Tracy: (00:36)
In general, it's a steady line that kind of goes up over the long term.
Joe: (00:41)
What was the Viktor Shvets question at our recent trivia thing about, what did they call them in the sixties? In the eighties it was “underdeveloped markets and then “developing” and then “emerging.” And it's like increasing optimism about all these places around the world one day, capitalism and trade will be everywhere.
Tracy: (01:02)
There is definitely this line that okay, there might be problems and issues, but in general, you know, life expectancy is going up. People are wealthier than they were before. Maybe people aren't starving as much as they were in the middle ages. There is this narrative of progress.
Joe: (01:20)
Progress, yeah. Right. Progress, less disease, things like that. Fewer famines and stuff, but maybe it's not the case in the last several decades. A lot of people have come out of poverty globally, but a huge chunk of that is China specifically. And everyone knows there's sort of been this extraordinary boom in China and then it kind of seems like if you look ex-China, maybe it's not as good.
Tracy: (01:42)
I can already tell this is going to be one of those really uplifting episodes when we start questioning the narrative of economic progress. But I think it does raise this interesting question, which is throughout much of history there has been this one development model, which is, you know, usually you have a bunch of workers, you have a labor surplus, maybe they're willing to work for less than in more developed countries, economically.
And so you get this big manufacturing boom and then hopefully that leads to more education, more resources, and then you transition into some sort of services-oriented economy. But I think we all agree that as we enter this new economic period, is that manufacturing model actually going to be viable?
Joe: (02:26)
Right. And how many countries can really do that? Or are they going to be stuck of some sort of tourism or cheap commodity exports that don't really move up the value chain? And is anyone thinking about alternative growth models if, you know, these countries can't find a way up to do this sort of manufacturing path?
Anyway, we are going to be speaking about exactly this. We have two guests today. We are going to be speaking with Henry Williams, a student at Columbia University, and David Oks, a journalist. They have a recent article that came out last year in the American Affairs Journal called “The Long Slow Death of Global Development.” And they basically make the case that kind of, you should be pessimistic about all that stuff and that all of these stories about what's working do not actually work. Henry and David, thank you so much for coming on the podcast.
Henry: (03:18)
Thanks for having us Joe and Tracy. Longtime first time.
David: (03:21)
Yeah, pleasure to join.
Joe: (03:22)
So why did you write this? I mean, it's a very like long, detailed, pretty academic well-sighted piece, essentially laying out the case that much of what we assume about global progress is not in fact happening. So to start, why endeavor on this? What inspired you to write this?
Henry: (03:40)
Write this? I think the story that you just laid out has really dominated the 21st century so far. It's a story that I think people sometimes derisively call the “line go up story.” Basically when you look at just the quantitative measures, it is undoubtable that global poverty has been decreasing, that global growth has been pretty strong. And with the headwinds of globalization, the entrance of China into the world economy and the demographic push of the last 30 years, there were a lot of reasons for optimism and obviously there has been a lot of growth.
But what we think is that when you dig past just the quantitative numbers on the surface and look at the qualitative and structural factors in the world economy, both that which drove the growth and rise of China, but also you have to look at the next countries on the list. There's this idea of the “birds in flight” model. Basically as countries develop, they pass lower value added services down the line to the next country. But that's not just an automatic process. That requires a lot of economic, political, structural adaptation. And we think there are some very deep reasons why that hasn't been happening in the rest of the world.
Tracy: (04:40)
So one thing I was wondering as I was reading this article, how much of this is actually a data story, this idea that we tend to look at the line and because the line is an amalgamation of all these different countries, it's sort of hiding disparities. And I know Joe mentioned in the intro this idea that China has actually been the big driver of a lot of economic development in the 20th century. So how much of it is about the data and the aggregation going on there?
David: (05:08)
Yeah, a core part of our argument is basically that you have this kind of statistical compensation going on where if you actually look, everyone agrees that kind of incomes have risen across the world, poverty has decreased. But if you look, pretty much all of that, depending on the threshold that’s used for poverty, of course pretty much all of that has been in East Asia basically between 50% to 75% basically.
So then when you look at kind of the world beyond China, when you look at South Asia, the Middle East, Africa, Latin America, you get a much more complicated and pessimistic picture. And you have to realize that basically China, East Asia, they've done well because they've basically, they've industrialized. When you look beyond that and this is when you have to move beyond statistics to kind of a sort of a structural historical approach, they have been either de-industrializing and oftentimes deagrarianizing as well.
Henry: (05:59)
Yeah. And talking about what those numbers really mean in terms of global trade, Chinese demand for commodities has been so extreme in the sort of commodity supercycle of 2000 to 2015, and even through the present, that it has actually exerted a distorting influence on the rest of the world's economies.
It means that a lot of economies that had been partially industrializing, places like Brazil, India, Africa, Latin America, have actually moved more towards commodity exporters -- essentially moved down the value chain as commodity prices have risen.
And as there's been this huge demand sink in China soaking it all up, which means that even though their growth has been better and they've been doing better in global trade, it also means that they're not necessarily developing domestic manufacturing industrial sectors. And even those that did have it have been experiencing something of a phenomenon of what people will call premature de-industrialization. Basically the manufacturing share of employment and GDP is going down before they've really moved up the value chain into higher value-added economic activities like services.
Joe: (06:58)
I hadn't thought about that dynamic at all, that it's like, okay, here’s this absolute, you know, avalanche of money coming out of China, the demand for goods. So it's like, okay, maybe it's not the most high value growth, but you’ve got to take it. But then as you say, it has this distortionary effect. What is special though about manufacturing? Because we even have this debate in the US right? Where people [are] like, “okay, we’ve got to bring manufacturing back.” And some people will say, “oh no, you're just clinging to centuries-old ideas of what a robust economy looks like. This is just nostalgia,” or something like that. What is it about manufacturing specifically that in theory makes it the path towards wealth?
Henry: (07:43)
Yeah. The economist Dani Rodrik talks about a set of stylized facts related to manufacturing, specifically, of which by far the most important is the idea that it exhibits unconditional productivity convergence between all countries. Basically when you start manufacturing, you enter a process where long term your manufacturing productivity is going to converge with the global average and with the rest of the world.
And so what that means is that manufacturing can really increase your national economic productivity. But in addition to that, it also absorbs a lot of surplus labor and it drives a broader process of economic complexification density and urbanization. That means that you get these economic cores that then create richer citizens. And this is sort of a classic, just so story about the American economy. People will talk about Ford and the Model T, that once you have sort of well-paid industrial workers, they can suddenly become the consumers of the services, they have a need for housing, they move into cities, and that this drives the process of economic growth going forward.
So there's something about manufacturing as being a path through to more complex forms of economic activity. The other thing is that it has more to do really with global tradeable goods than just manufacturing, specifically. There's the idea of things that world trade consists of both durable manufactured goods, but also high value-added services like finance, consulting, technology, the sorts of things that the US economy is based on today.
And actually getting to that stage requires participation in competitive global markets and becoming genuinely competitive on those markets. And one thing that has driven a lot of the sort of booms and busts of development in the past has been overly manufacturing-focused policy that basically uses tariffs and autarchy to try to raise the manufacturing share domestically without becoming authentically globally competitive. And so what you get are these uncompetitive sort of lost industrial sectors, and these are sort of the global rust belts all over the world. These places have de-industrialized because the industry itself was not globally competitive.
David: (09:37)
And so you have these kind of stylized facts from, I mean, Rodrik, Nicholas Kaldor before him. And then if you look kind of at the sort of empirical historical experience of countries that have moved, you know, in one way or the other from poor to rich, basically almost all of them either have had a manufacturing share of employment, you know, at a certain level. You know, people say 18 to 20, sometimes higher, sometimes a bit lower, for an extended period of time.
And then they've kind of transitioned from that usually into some sort of high wage service economy. Or you know, more rarely they've been kind of like Norway or Saudi Arabia, something like that, where they've just been kind of blessed by a huge excess of natural resources. Of course that model, you know, has a lot of failures. You know, Angola, Iraq, etc. And it's kind of a much riskier bet.
Tracy: (10:23)
Well, I was going to ask, and again Joe kind of alluded to this idea, that we do want to bring manufacturing back to the US, or at least that's a line that gets trotted out quite a lot. But at the same time, you know, manufacturing, in some respects, maybe people view it as old fashioned. So why couldn't a developing country or an emerging economy, why couldn't they just leapfrog from manufacturing into more of a services-oriented economy? And I know some places, I guess India springs to mind, have kind of done that
Joe: (10:54)
Philippines, you often hear about.
David: (10:54)
India, Philippines, I mean in Rwanda.
Henry: (10:56)
Right, right. But, you know, I think there's two sides of that story that are really important to address. You know, one is this idea that you just brought up that, okay, we want to bring the manufacturing share back in the US, that we want to start manufacturing here again. But the basic model, and you actually saw just the other day, Donald Trump saying that as president, he would essentially start a global trade war and require an end to trade with China in four years. A massive escalation. You know, world war trade, right?
And this would actually be the absolute worst thing for the developing world. You know, there's a real question of are we simply going to use regressive tariffs to try to raise the amount of manufacturing that happens in the US if it's not globally competitive, if it's not actually cutting edge? And if what that does in general is lower global productivity and actually lower growth overall.
You know, if you look at places in Africa, officials will say, “we don't want less globalization, we want more, we need more globalization.” The question is on what terms that globalization can happen? But the other side of the story, which is to say, can you just skip to services? And this has been I think one of the possible narratives in the 21st century that India is going to become an IT power instead. But the reality is that since 2000, 90% of the growth in in service jobs in India, have been in the informal sector, not in IT or high value added services. And what that means is basically people working doing odd jobs.
David: (12:17)
Yeah. So basically when you look at kind of the reality of service work in these poor economies -- India, Rwanda, etc. -- most of it is not the sort of high value added stuff like IT. Most of it is stuff that you see kind of ubiquitous if you go to like a poor world city. So, you know, random jobbers, domestic workers, fruit peddlers, stuff like that. So that's kind of the reality of, you know, service work in the poor world.
Henry: (12:44)
Right, right. It's low value added. It doesn't catalyze a process of economic growth and development. And just to get that fact right, it's 90% of jobs created in India since liberalization in 1991, have been in the informal sector rather than in IT. And in general, those are also not internationally traded and don't have to be internationally competitive, meaning that they're trapped in a low productivity space.
Joe: (13:03)
It's funny you mentioned, I hadn't thought about it in years, these global rust belts. When I was a kid, I lived in Malaysia for a year, and there was a local car company. The Proton saga was this manufactured Malaysian car. And I don't think I've ever like heard of one being sold internationally, and now I'm really curious. I'm imagining their fate was not particularly good…
David: (13:26)
That's the thing. When we think of deindustrialization, we tend to think of basically an American or European phenomenon, you know, the north of France, the American Midwest, etc. But really, I mean, outside of East Asia you had a lot of economies, I mean Brazil, Iran, India to a lesser extent, that had a quite high degree of industrialization. And since the 1970s, 1980s, you know, manufacturing has fallen as a share of employment, services have risen, agriculture has also fallen. You've had this kind of global premature you know, global deindustrialization at a lower rate of manufacturing employment and at a lower rate of per capita GDP than you're kind of ‘supposed’ to have.
Joe: (14:26)
You mentioned the sort of like, what was it, the birds? Birds in flight metaphor? So why isn't that process happening? It's like everyone's talking about, okay, labor costs in China have definitely gone up over the years. And so the labor arbitrage element of China, you would assume that there are then other markets where they're less productive, but significantly cheaper labor. Why isn't that model extending out? Like where is it breaking down?
Henry: (14:51)
Yeah, absolutely. I mean, as we said before, and this is one thing about the quantitative measures that can really mislead you, it's not an automatic process. You know, I think something about that story makes it seem natural, automatic, part of the world. But if you go back to 1983, there's a fascinating World Bank report about China, basically post-Mao era China. And you would think there would not be a lot of reason for optimism after the great famine, after the culture revolution, extraordinary levels of political dysfunction.
But one of the interesting things is that China actually had surprisingly good social development metrics. They'd had surprisingly good primary education, which they invested in heavily. It had surprisingly good health outcomes in life expectancy. And so even though it was pretty much exactly as poor as India at the time, it actually had far better social development metrics.
And in certain ways it's been revealed that it had more functional institutions. So in the time since then, obviously China has exploded and India has not, even though they were starting from the same baseline in the early eighties. One of the interesting things about this, it kind of shows that there are these real pre-market structural questions about human capital. Basically how educated are people, how literate are they? But also these skills that we don't think about.
You know, people sometimes say, “well, there's no such thing as unskilled labor.” And there is something about manufacturing where there's a lot of tacit skills that you pick up. It's not necessarily that you have a formal education, but for example, I mean since 2008, this was just in the Financial Times, Apple has trained 23 million workers at their facilities and plants, you know, those are people with skills.
And it forms what sometimes people call an industrial ecology. It's an entire universe of people with skills, of firms with specialized roles. And that altogether allows you to take on higher value added products.
But if you look at the countries that are sort of next in line today -- Latin America, India, Brazil -- they don't have very good social development metrics. They're still really lacking when it comes to primary education, hygiene, health. Places like India have invested huge amounts in tertiary education in the IITs in colleges, but not in primary education, which is still lacking and really regionally differential.
So those kinds of things mean that some of the basic human and social prerequisites as well as the institutional ones, endemic corruption, really prevent either good policy making or simply having the sort of human capital necessary to do manufacturing in a meaningful way.
David: (17:08)
And so the one place where you really have seen a sort of strong, you know, flying geese dynamic is definitely Southeast Asia. I mean people call Vietnam, you know, “China's China.” And Vietnam kind of has followed a sort of Chinese model. You see this in a lot of post-communist states. Basically they get good social, you know, good kind of health outcomes, good education outcomes before entering the market. And so they're kind of very well-suited. Obviously they have, you know, people who are quite healthy, quite educated, but also very poor. So when they enter the global economy, they are kind of the ideal factory workers. But then, yeah, you look at India, a lot of sub-Saharan Africa, you just don't have that dynamic.
Tracy: (17:46)
So this kind of leads into something else that I wanted to ask, ask you, which is, if you think of China as a sort of fulcrum for a lot of global development or global progress, and if you think of China as sort of driving this commodity supercycle and maybe driving some of the commodities demand in other countries, what happens as Chinese growth presumably starts to slow?
David: (18:10)
So basically, yeah, you have from roughly 1984 to 2007, you have this incredible period of Chinese growth, and then you have, even though kind of a lot of poor countries in Latin America, South Asia, etc., even as they're deindustrializing, even as their own industrial economies are beginning to falter, they're kind of boosted by strong Chinese demand for commodities, which kind of does sort of lead to this process of decomplexification. I mean, you see that in Brazil, a lot of Latin America, a lot of countries kind of at that level of income.
But then around, you know, kind of the late 2000s, Chinese growth starts to taper off a little bit. And then after 2014 is when you have a real decline. And when you see that, you kind of see, you know, the commodity supercycle turns and you see that's kind of the negative side of sort of the boom-bust dynamic. Where 2014, 2015, you see huge crises in all the sort of commodity dependent economies. I mean, Nigeria and Iraq, they were totally dependent on oil exports, oil prices collapse.
They have these huge, really destructive insurgencies. Brazil, Venezuela, they have these, you know, huge periods of political crisis. And so you have this kind of, you know, when you're totally dependent on one sort of engine of global growth, you know, through the demand for commodities, what you risk is that when inevitably that growth starts to taper off, you have, you know, everything kind of falls apart.
Henry: (19:38)
Right, right, right. And you know, in November of last year, the World Bank actually put out a report basically talking about the crisis facing development. And they were thinking also about the wake of the coronavirus crisis and the coronavirus crisis, and the coronavirus recession, but also something that people have called a polycrisis, a sort of multi-sided global crisis where different issues -- global health, climate change, climactic shifts and demographic shifts feed into each other and accelerate each other.
And all of those would certainly make a more and more pessimistic case, particularly if you see a slowdown, an increasing slowdown in Chinese growth or a Chinese economic lost decade like we saw in Japan in the nineties.
Joe: (20:15)
Well, you know, the other big thing that's happening right now is rich countries, but the US in particular, is in a major hiking cycle and trying to fight inflation. And one of the things that, and again, I sort of keep going back to some of the things that Viktor Shvets talked about, but he is very critical of this sort of Volcker legacy, and what it did to the entire world. You know, this sort of world of debt, as you said, and this sort of original sin is the Volcker shock and what it did. Right. And so in the broader story of EM development, from your perspective, how big of a deal historically is that? Since we're, you know, trying to understand analogies, that Volcker period?
David: (20:57)
No, it's a core, core thing is that, you know, we kind of offer something of a periodization of growth in kind of the poor world where from, you know, roughly 1950 to 1980, you have this kind of golden age where a lot of countries that, you know, you wouldn't think of today as economic powerhouses or growth success stories -- places like the Ivory Coast -- were growing at a huge, huge rate. The Ivory Coast, actually they called it the Ivorian Miracle, had some of the most impressive growth,
Henry: (21:23)
You know, at a White House speech in 1967, LBJ actually said “To those Cassandras who question global development, I say, look at the Ivory Coast,” which today has I think a smaller economy than it did.
David: (21:34)
Right. Actually, the Ivory Coast, median income is lower today than it was when the World Bank started recording income. But then basically, 1980 Volcker’s, a key part of it. The commodity supercycle turns, you know, commodity prices fall quite precipitously. And that means huge, huge crisis, across the developing world. It leads to this kind of cycle of debt crises.
And then the 1980s, you really have to understand, you know, in the US, Europe, it kind of has this sort of cultural legacy of like strong economic growth. But the 1980s and then kind of bleeding into 1990s was this huge period of, you know, the sort of mass tragedy, where you have economic collapse in Latin America, Africa, South Asia, Middle East, and then that sort of leads to social and political crisis. And you have these civil wars, huge, I mean, huge bloodshed. And you know, people don't really think of these sort of eighties, nineties period as a sort of mass, you know, economic and then social political tragedy. But it really was.
Henry: (22:35)
Yeah. And it's worth just saying that monetary policy affects these countries everywhere in every way. It weakens global demand and demand from the developed world, but it also means that their debt servicing costs are higher. It means that it's a lot harder for them to get new debt issued. It means that there's potentially greater financial instability.
It also means, and from their perspective, this is one of the really big problems, that when it comes to the global commodity supercycle and global commodity prices that they might reverse. And even going into the nineties, prior to China's growth really taking off, globalization -- the first waves of globalization -- actually brought agricultural prices down all over the world. And a lot of the early anti-globalization movement came from farmers in Latin America and the poor world who were really brutally affected by the liberalization of prices and the sort of first waves of globalization, especially in agriculture.
Joe: (23:22)
Yeah. I know it's not the point, but it is kind of funny, and you pointed out in the article that Cassandra was right. And so it's funny, it feels like you should never criticize and call your point “Cassandra” because you're telling them they're going to be the ones who are wrong.
Tracy: (23:34)
Well, Cassandra will always eventually be right. Actually, just on that note, I mean one of the themes that we talk a lot about now and others talk a lot about now is this idea of a multi-polar world. And you know, speaking of monetary policy, the rest of the world is deeply tied to the fate of US policy vis the dollar and things like that. But if we are moving towards more of a fractured global financial system, and you know, that's a big if, and I realize there's a massive debate over it. But if for instance, there's more room for China or maybe Russia to develop this new maybe BRICS contingent, what does that mean for global development? Is that a bigger opportunity or are we just sort of reviving the same problems?
Henry: (24:20)
Well, you know, I want to be very careful about not necessarily wading into the entire debate, but talking about the present, if you look at the developing world, they say “decoupling? What decoupling?” You know, you see a lot of this in Latin America and you see it as well with their position on the war in Ukraine.
A lot of these countries say, ”listen, what matters to us is still development. And what we need for development is a robust global economy and is the structure of global trade that we built in the nineties.” You know, obviously they'd like globalization on different terms, but they definitely don't want a world of anarchic trade blocks. And this is one thing that the US I think threatens to do at this point in time, which is, you know, you see it in the things that Trump is saying right now, that there is a sort of vision of an autarkic closed American economy of trade blocks. That's not really good for anyone, but it certainly isn't good for these developing world countries.
You know, the other side of it, with respect to a new global system, obviously there was a lot of hot air about Chinese investment in Africa and the developing world in the last 10 years. The Belt and Road Initiative and all of the infrastructure development. But one of the big question marks here, one is how much of that investment actually failed? I think debt trap diplomacy is a really flawed framework because the reality is nobody wants ports and bridges in economies that are broken and that aren't being used.
You don't want a port if there's not trade going through it. You would rather that they pay off their debts. You don't necessarily want the infrastructure in countries that can't actually utilize it well, but one thing about Belt and Road, not only has it led to a cutoff in Chinese investment, but we're not seeing investment from, certainly not from states in the rich world.
And this is I think one of the real crises right now with respect to climate change. You know, all of these developing countries face a real paradox, which is that as part of industrializing you need electricity and energy. And the story behind that has been coal. Coal and oil and to some extent natural gas have driven the industrialization of the world. When you go back to the first industrialized places on earth in the rural valley, in Britain, in parts of Pennsylvania, they're the places where the coal fields were.
The story is though, you know, India is on the front lines of climate change. So every incremental amount more coal it burns in order to industrialize it may suffer back in the form of worse floods and droughts and extreme heat in the future. So what they need is a development path that does involve a kind of leapfrogging over fossil fuels.
And what that requires is infrastructure of global finance that simply hasn't been there. You know, the rich world really hasn't even met its state level commitments of around a hundred billion dollars. And they're saying, “well, private finance will step in and do it,” but what that actually requires is this de-risking process where you need developing world countries to essentially take on the risks for global investors because they say, “no, no, it's too risky for us right now.”
You essentially have to be the ones holding the bag if you want our money in the first place. Which means that these countries face really a sort of devil's bargain to get the money that they need in order to build green energy in the first place. And what I think you're seeing in the status quo is places like the Congo loosening restrictions on coal mining and sort of international agreements that have kept coal and oil in the ground are starting to be torn up when energy prices go up. And unless there's a real answer to that from the international community and an answer to obviously the failures of Belt and Road in the last 10 years, but a real program of state level investment, you know, you really won't see the money you need for green development and leapfrogging.
Joe: (27:33)
Can I ask a sort of devil's advocate question because as you point out, like the last thing that a lot of these poor economies need is for the rich economies to go into autarchy mode, but we just spent the first 20 minutes of this conversation talking about how this status quo wasn't working or wasn't actually contributing to a sort of steady wealth advance. So is there a different model?
I mean, and it's not even just the poorer countries, I mean Europe is complaining too about our trade policies here, particularly with the Inflation Reduction Act, but why necessarily fear this sort of inward turn if the sort of outward turn was not actually delivering on growing wealth for so much of the world and could there be a different path?
Henry: (28:17)
Yeah, I mean I think there are different paths in terms of policy, but the hard parts are politics, you know, domestic political economy and international geopolitics. And what that means is that rebalancing domestically in China, for example, rebalancing to a larger household share of income, more domestic consumption, potentially a more balanced form of growth. Or on the other hand, more balanced infrastructure investment in places like India where it's been heavily driven by these very top heavy firms that have bad construction practices, have cronyistic deals with the state, corruption.
These are political problems. They're political problems in the US too, by the way. I mean, you talk about this is a developed country, but it's very difficult to build new housing or transit or infrastructure. And our infrastructure is certainly not first rate or cutting edge in any sense. So the technology is there. I mean we have cutting edge infrastructure, we have, you know, renewable energy, but getting the financing for it and creating political deals that allow you to build it domestically in a way that doesn't end up a cronyistic or inefficient, that's a lot of the hard part.
The other thing is, you know, in terms of the last 20, 30 years not working, we tried a different answer before that and there was an era of modernization where there were a lot of tariffs and there was a lot of domestic infant industry protection. You talked about Malaysian car companies, you know, that really was its own era.
The problem there is until you have strong institutions that can actually practice export discipline, as in your companies are actually competitive on the world market, all that you get is cronyism and domestic inefficiency. You know, there's a sort of story about this that South Korea, it's not that it produces automobiles, it produces Hyundai and Samsung. You know, it has brands that are high on the value chain, cultural exports, brands and
Tracy (29:52):
Cultural exports.
Joe: (29:54)
The K-pop bands.
Henry: (29:55)
Right. There's no solution other than to build a competitive and robust economy that's competitive in world markets. I mean, there's sort of no shortcuts. That's the hard part. And there are a lot of political barriers to that. And there's also certainly too little state level investment both in rich countries, but also between countries in general.
Tracy: (30:11)
So just on that note, this might be a slightly unfair question, but I completely agree that politics is the constraint here and the barrier here. And we see that, for instance, in China quite a lot, there is a recognition within China that they should be aiming for a more balanced economy. But then what tends to happen is that when growth slows to a sort of troublesome level politically, they start to roll back some of the rebalancing act and, you know, they open the floodgates of credit, everything goes back into housing and unproductive sectors of the economy. So how do you actually get past those political barriers and constraints?
David: (30:48)
I mean, when you look historically at countries that have successfully done it -- I mean China, South Korea, Japan are three of the most famous. You need sort of hegemonic state of sort of, you know, elite reformers basically. And a lot of the time what you have in, I mean sub-Saharan Africa, South Asia is instead a sort of hegemony of a sort of a rentier class that have no real sort of developmental interest.
Joe: (31:12)
Well I was going to say, it kind of feels like we're in like Klein-Pettis “Trade Wars Are Class Wars” territory here, where I mean the people saying like, “no, don't roll back globalization, don't do autarchy,” are presumably that slice of the elite, the rentier class within these poorer countries that have done, and probably many of them have accumulated extraordinary wealth even while their economies have stagnated. But again, I mean devil's advocate, could it be that if you sort of like break that globalization model, then that, you know, becomes a forcing mechanism for domestic political change?
Henry: (31:48)
Right, right. Well you know, I think, I think Klein-Pettis, I think they'd probably be among the first to say they know it's difficult that China's for sure struggling with it. It is certainly true though that domestic and global imbalances are related and that domestic inequality, which has also been the condition of growth in the last 30, 40 years, there’s been huge amounts of domestic inequality and relatively weak investment in social programs.
I mean a lot of the improvements in health outcomes at the bottom end have been from international aid and charity in the worst off parts of the world, not from strong state-led social development programs. But I think the other side of this is with respect to how difficult it is to do this rebalancing, is that you really do need a sort of developmental coalition. You need one that sort of recognizes the interests and you talked, you know, there's different interests. Different groups are going to have necessarily different interests internally, politically.
David: (32:33)
Yeah. And you know, a core question for us is how do you strengthen the state in very poor countries? Because the reality of the last few decades is that a lot of countries that kind of used to have functional regimes, even if kind of corrupt, you know, a lot of issues, that used to have kind of functional governments -- no longer have that. I mean Haiti, a lot of countries in the Sahel in Africa, you know, it is a core thing is you cannot do any of this if the state does not have, you know, monopoly on violence, stuff like that.
Henry: (33:01)
Yeah. And there has been this decline and decomplexification as well that we talked about that I think is one of the problems in more sophisticated institutions. And then the last thing that I would say is that this idea that we can just crash out of the current system. We did try this in the 1920s and thirties and it was the Great Depression.
The Great Depression was very much linked to a breakdown of the international monetary order as people like Perry Mehrling have talked about, and a breakdown of global trade. But it was also driven by pretty robust and dynamic political coalitions and rising powers all over the world, including rising fascist powers, that had an idea which was that we're going to crash out of the global system and build something different. So I think it is really a cautionary tale to say, “well, we can merely go it alone.” Whereas what I think the hope is, is a new type of global order that we participate in collectively.
Tracy: (34:06)
So the name of your article was “The Long Slow Death of Global Development.” And of course when we think and talk about global development, there is a huge sort of industry around development or you know, academia/whole collection of global institutions, you know, places like the World Bank, the International Monetary Fund, things like that. To what extent do you think that ecosystem is grasping the crux of this problem and adapting to it?
David: (34:37)
Yeah, I mean, I think basically the irony is that they're still very powerful. If you look at, you know, very poor countries, a lot of government functions are basically exported to them, to the aid industry, to people like that. And yet poor countries today are just, you know, even though their incomes tend to be higher, they are structurally in a worse position than they were a few decades ago.
They're in a worse position for a sort of industrial takeoff. They are much worse positioned to eventually become, you know, wealthy or even kind of middle income, whatever. And so, yeah, I think that they kind of, and sometimes they'll admit this themselves, that they don't really have an answer and that they're kind of grasping at straws. You know, there have been real improvements, I mean in health outcomes, in educational outcomes. And that's very encouraging because that does kind of set the stage for, you know, long-term growth.
Henry: (35:26)
Yeah. And some of the good trends have been, I think the end to a certain post-2008 Reinhart-Rogoff obsession with the debt level, the sort of most austerity-focused initiatives of the last 10, 20 years. I think a lot of that has died, which is good. The hard part is yeah, politics. You know, even when development scholars I think grasp this stuff, there's not a ton that can be done from just the UN or development agencies. And you need political forcing functions internal to the domestic politics of the rich world, one of which will inevitably be migration and global refugee flows.
Joe: (35:57)
Could we talk a little bit about commodity exporters that aren't doing completely terribly and, you know, I'm thinking of like Indonesia, I don't think it's having an incredible boom, but I also don't get the impression it's like massively backsliding. They seem to be doing interesting things policy-wise in terms of like, “oh, if you want to mine our nickel, you have to refine it domestically so that we sort of have a knowledge transfer value chain, move up the value chain.” Chile, I think similar stories like that, like okay, maybe like not as rich, maybe as some had hoped 20 years ago, but seems to have made some progress. It seems like there are parts of the story that are not all bad. Or maybe countries are figuring out a way to move up the value chain from the commodity side.
David: (36:43)
Indonesia and a lot of Southeast Asia, Indonesia is definitely kind of globally outside of China, the most positive picture. What Indonesia's doing now, I mean they're taking a very conscious sort of industrial policy and you know, Indonesia in terms of demographics is quite well situated for, you know, quite significant economic growth and not just kind of the empty growth that sort of a lot of commodity exporters have, but kind of a real durable higher-quality growth.
Henry: (37:09)
Yeah. And I think you got the idea exactly, which is that you need reinvestment, you need to capture that surplus and you need to drive it into making the economy more complex, but also into social development. And I think that's actually the hard part in Indonesia and elsewhere, you need a developmental coalition that is also not just self-interested business elites, right?
Because one thing you really need is social development. And that does entail a large degree of redistribution. You need social programs that develop the educational health basis for the economy. And that can supercharge what sometimes people call sort of an industrious revolution where people essentially become better workers, have better habits, and all those things actually drive the productivity of their labor and allow them to integrate in the world economy better.
You know, things also like thermal load from climate change, really hot places on earth are actually harder to work. And so people are lower productivity. So even if their labor costs are lower, the cost of hiring an additional worker and the actual productivity of that labor is not necessarily the highest. And so that's kind of the question mark, right? Maybe you can have industrial investment, maybe you can have industrial policy, but if you don't make basic investments in your population, and this is I think the question for a country like Indonesia, you're not really going to be able to make it higher up the value chain.
David: (38:19)
Right. And with Indonesia, you do have kind of the looming sort of ecological question because, yeah, climate-wise, you, you're going to have a huge number of days with lethal heat in Indonesia by, you know, 2050, then later on 2100. And that will, you know, be a destabilizing factor even if, you know, Jokowi is doing, you know, interesting industrial policy things.
Tracy: (38:40)
Just to try to end this on a happier note, can you give us an example of a place where you think, you know, the development policy is probably like close to an ideal or a positive example of where we want to get to?
David: (38:54)
Yeah, I mean Vietnam, outside of China, is probably the single most encouraging story. You know, before they industrialized really you've had very serious sort of investment in health and education outcomes kind of on a mass basis. And then when they did move into industry and you see this as early as the late nineties or two thousands, it was always in very high value added stuff.
Their industrial exports were always kind of had a very large share of high tech electronic stuff. And so Vietnam, even though per capita GDP remains quite low, in terms of life expectancy it does very, very well. And if you go to Vietnam, you know, we're big believers that if you want to really understand development picture in a country, you actually have to go there, experience it, you know, see what life is actually like apart from the statistics, Vietnam is an extremely peaceful, safe country even though per capita GDP remains quite low, it’s on a very good trajectory
Henry: (39:47)
Just to be a contrarian and to pick a different example than David, but also one that's I think desperately poor, but in some ways shows the power of institutions, is Botswana. You know, in Botswana, the actually functioning, high functioning meritocratic institutions of the state and the sort of investment in social development and in pretty robust institutional culture, I think has given the sort of baseline, especially for international investment. And their problem, its access to capital and finance. It's the ability to integrate with global corporations. It's the lack of, for example, port access.
You know, Vietnam is conveniently situated, it has good ports, it has a lot of natural endowments that not only do a lot of countries in Africa lack, but even the really good institutional stories like Botswana or even something like Rwanda, they don't really have. And so that's kind of the other tragedy here. Even when you get the institutional or policy mix right, sometimes you really have burdens of geography and sort of deeper structural factors that mean you're not in a great position either.
David: (40:42)
Yeah. And Botswana, yeah, a lot of the time you have countries that realistically are not going to industrialize. I mean, Botswana is landlocked, it has a huge amount of mineral resources that is basically the entire economy. But that's also a core thing, is like if you're going to become commodity dependent and a lot of countries just are permanently, basically, how can you kind of make the best of that?
Joe: (41:02)
Well, on that sort of, I guess moderately, moderately hopeful note that there are some interesting positive cases, Henry and David, thank you so much for coming on the podcast, fascinating research and way to think about the world.
Henry: (41:15)
Thank you so much for having us.
Joe: (41:30)
Tracy, I thought that was an absolutely fascinating conversation. You know, one of the dynamics -- setting aside the growth trajectory trends -- is this idea of like complexification of the economy as its own specific thing. And you know, I always think like, you know, in the East Village sometimes, I actually don't know if it's still there, but at one point there was this Hungarian bookstore and I was like, it's so amazing that a physical Hungarian bookstore can exist, but it can in a rich complex economy like New York City. And this idea that that's a sort of marker of development, to me is a really interesting thing to think about with these economies.
Tracy: (42:07)
My favorite bookstore emblem of complicated economies in the East Village is there's a used cookbook store and they only sell like vintage and historical cookbooks.
Joe: (42:18)
Yeah, right. It's amazing that like we can have an economy that supports some of these niche things, but beyond that, I mean I did find that to be a sobering conversation, obviously. And you know, I always see the charts of like line go up and this country is so much richer, etc. But I do think, to your point in the very beginning, a lot of these, when you sort of scratch behind the data, look a bit or look at how much was simply selling raw commodities not high on the value chain to China during this incredible boom, the story looks a bit worse.
Tracy: (42:52)
So that's definitely a theme that stood out to me. This idea of China, I think I used the word fulcrum, but China as a fulcrum of a lot of this economic progress that maybe isn't in an ideal form for a lot of economies. And then the other thing that really stood out to me was this birds in flight idea that both Henry and David mentioned. And also this idea that, I think historically people have always been looking for an economic model to copy. And it's like, oh, they see manufacturing works here, so let's do manufacturing or you know, commodities exports works here, let's do commodities exports. The Singapore model, I cannot tell you how many countries in the Middle East have tried to replicate the Singapore financial center model, but this idea that everyone's always looking for an easy sort of copycat solution.
Joe: (43:43)
Yeah. Well you know, the other thing about the birds in flight metaphor is that it gives the illusion of physics and science, right? And to their point, it's not physics. It's choices and it's politics. And there is not just like this sort of like natural phenomenon where one hands off to the another. It may look like that superficially historically, but actually it was a series of active choices. And if that political coalition, that growth coalition, that social investment coalition, that social investment impulse has gone, then what looked like a sort of physical process is actually not going to show up that this time.
Tracy: (44:19)
Totally. I think that's a really interesting point. Shall we leave it there?
Joe: (44:23)
Let’s leave it there.
You can follow Henry Williams and David Oks on Twitter at @humford and @davideoks.