Towards a Better Global Economy July 2013 Conference Summary
The objective of this project is to establish longer-term implications, and the related policy options, for average citizens around the world of major developments in the global economy. Some of these developments are long ongoing. But the Great Recession of 2008–09 has changed the landscape in some important respects for finance, trade, and economic growth. The legacies of the crisis—high unemployment levels, massive excess capacities, and high debt levels—are likely to reduce the standard of living of millions of people in many countries over a long period of adjustment. The crisis imposed tremendous costs on citizens throughout the globe, and the outlook remains highly uncertain. Recently released reports by international financial organizations, as well as private forecasts, warn that the global recovery remains uneven and fragile.
Going forward, demographic changes and fundamental forces of convergence and competition are likely to bring about massive shifts in both the sectoral and geographical composition of global output and employment, as the center of gravity of the global economy moves toward Asia and emerging economies elsewhere. There are major risks that the global economy recovery will continue to be slow and sputtering. New challenges will require a truly global policy response, which will need to convene all legitimate institutions, old and new, to reach solutions that address these complex and difficult global challenges and protect and improve the lives of all global citizens.
The overarching goals of the Social Structures Foundation are to support global economic growth and enhance the welfare of the world’s citizens, regardless of their national origin, ethnicity, race, gender, or age. It seeks to do so by fostering global cooperation and the harmonization of policies on monetary and fiscal issues; trade and the movement of labor, capital, and technology; health, education, and population; and the environment.
The GCF is working with internationally renowned experts and practitioners to prepare a series of studies on key areas of global concerns. To stimulate global public interest and facilitate the exchange of ideas and policy dialogue, it will publicly present and communicate their results and policy recommendations through conferences, publications, and other means, including mass media, the Internet, and social media. These efforts will allow citizens across the world to exchange ideas and reveal their preferences for the formulation and implementation of policies that affect their economic and social welfare.
The initial set of studies that are being prepared concerns the factors—including scarce resources, policies, and institutions—that might most facilitate the process of beneficial economic growth in low- and middle-income and advanced economies, given the substantial risks these economies face as a result of fluctuations in international trade, financial markets, and commodity prices, as well as the tendency of institutions at both the national and international level to favor the interests of the better-off and more powerful. Large segments of the populations in both advanced and developing countries view the recent crisis and the policy responses as inherently unfair, with outcomes that favor the rich and powerful and further weaken middle-class and poor people.
The Social Structures Foundations’s “Towards a Better Global Economy” project will address these concerns. Its ultimate goal is to come up with a set of policies that would lead to improvements in the economic well-being of all citizens of the world and to disseminate these results broadly in the hope of informing the debate about how best the global economy moves forward.
Toward these ends, the project has brought together a small core group of leading economists with varied expertise in the academic, policy, and private sector worlds to guide this project through several stages. Members of this group are preparing a growth and macroeconomic report, a policy report, and five thematic studies.
Growth and Macroeconomic Report
An easy-to-follow background study (“first study”) describes how economic growth can generically be achieved through better institutions and policies that treat world citizens of different races, genders, origins, and endowments equally.
The Past, Present, and Future of Economic Growth
Professor Dani Rodrik, Harvard University; comments by Dr. Kemal Dervis, Brookings Institution, and Prof. Chang-Tai Hsieh, University of Chicago
Economic growth is a precondition for improving living standards and lifetime possibilities for the “average” citizen of the developing world. This study takes a long-term perspective. After providing a historical overview of growth, it presents an analytical framework for the drivers of economic growth. The framework emphasizes two key dynamics behind growth. The first is the development of fundamental capabilities in the form of human capital and institutions. Long-term growth ultimately depends on the accumulation of these capabilities—everything from education and health to improved regulatory frameworks and better governance. Fundamental capabilities are multidimensional, have high set-up costs, and exhibit complementarities. The second driver is “structural transformation”—the birth and expansion of new (higher-productivity) industries and the transfer of labor from traditional or lower-productivity activities to modern ones. With the exception of natural resource bonanzas, extraordinarily high growth rates are almost always the result of rapid structural transformation, industrialization in particular. The paper discusses the policy requirements of both channels and emphasizes the distributional and convergence aspects of the growth process from the point of view of the average citizen.
Based on this framework, it asks whether recent convergence performance can be sustained into the future, decisively reversing the “great divergence” that has split the world into rich and poor nations since the 19th century. In answering this question, optimists would point to improvements in governance and macroeconomic policy in developing nations and to the still not fully exploited potential of economic globalization to foster new industries in the poor regions of the world through outsourcing and the transfer of technology. Pessimists would fret about the drag rich countries exert on the world economy, the threats to globalization, and the obstacles that late industrializers have to surmount given competition from China and other established export champions. The weights one places on these—and many others—considerations depend on one’s views as to the ultimate drivers of economic growth in lagging nations. Extrapolation is tempting, but not necessarily a good guide to where the world is headed.
Background Thematic Studies
Growth, Finance, and Crisis
Lead author: Professor Franklin Allen, University of Pennsylvania; comments by Dr. Stijn Claessens, International Monetary Fund
The interpretation of the relationship between finance and growth has long been contentious, with some experts arguing that a good financial system leads to high growth and others suggesting that financial development simply follows or reflects the anticipation of economic development. This paper considers the literature on finance and growth. It shows that risk taking may spur high growth but that it also it may lead to frequent crises. Growth followed by crisis can be beneficial, but often it is harmful: when a crisis follows the bursting of a bubble in asset prices, it can have very negative impacts on growth, for example, as it did in the United States during the Great Depression, in Japan during the 1990s, and globally beginning in 2007.
Ultimately, growth involves the development of new technologies and the reallocation of existing resources to their most productive uses. The role of the financial system is to ensure that this process occurs thorough the choice and financing of innovative and productive investments. For sustained growth, policy should seek to prevent bubbles, contagion, and financial fragility and promote financial stability. An important component of a policy environment that permits such stability is an international financial architecture that is well governed and fairly represents the interests of all regions.
A significant problem in recent years has been the building up of large foreign exchange reserves, particularly by Asian countries. These reserves, which were invested mostly in dollars and euros, helped fuel real estate bubbles in the United States, Spain, and Ireland by increasing credit availability. The bursting of these bubbles triggered the financial crisis. The international financial system needs to be reformed to reduce these types of flows. Policies to achieve this aim are suggested. The paper also considers the accessibility to finance by citizens of the world and the importance of capital ownership and who controls capital in finance and growth processes.
Trade Integration and Its Future
Dr. Arvind Subramanian, Senior Fellow, Peterson Institute; comments by Prof. Bernard Hoekman, European University Institute, Florence
Although there is disagreement about the kinds of policies necessary to promote trade, there is broad convergence around the view that the postwar growth successes—notably in Asia but also in countries such as Mauritius and Chile—was enabled by a rapid increase in trade, especially manufacturing exports. These successes were possible because of a variety of growth strategies that countries deployed and because of a broadly open, rules-based trading system.
Going forward, the opportunities for trade and technology may change, for technological and policy reasons. Technological reasons include technology- and trade cost–induced vertical disintegration of production, leading to trade based on complex supply chains and greater two-way flows of trade; the rise of cross-border flows of services trade; a greater role for intrafirm as opposed to arms-length trade; greater two-way flows of foreign direct investment; and the shift in the trade center of gravity from the Atlantic to the Pacific, centered on China. On the policy side, the postwar trade system was broadly open, underpinned by the general prosperity of the industrial countries. This openness was reflected not only in the multilateral trade system but also in the proliferation of bilateral and regional trade agreements.
Today, views of trade by the average citizen have changed. In the advanced West, trade is seen as much as a threat as an opportunity, because of stagnating median wages and related developments. In the poorest countries of Africa, the average citizen has yet to experience and benefit from a dynamic growth path on a sustained basis; trade opportunities may be vital for economic and social transformation. In middle-income countries, including emerging markets, especially China, trade continues to represent an opportunity. Countries representing all these average citizens need to cooperate to ensure that trade and technology remain engines for broadly shared prosperity. One challenge in the West will be to maintain the social consensus for open trade, which may require greater coordination of tax policies to ensure that social insurance schemes can be well-funded. A second challenge will be to ensure that China remains open and supports the open system so that it can provide opportunities for poorer countries. A third challenge will be to enable the poorest countries to diversify their production bases and exploit the technological and trading opportunities arising from modern supply chains.
Population Quantity, Quality, and Mobility
Professor Jere R. Behrman and Hans-Peter Kohler, University of Pennsylvania; comments by Professor Ronald Lee, University of California, Berkeley
Improved health, nutrition, and education are often viewed as central to economic development. In some perspectives, such as the capabilities approach associated with Amartya Sen, they are in themselves central indicators of development. There is widespread agreement that at a minimum, they are an important handmaiden for growth, facilitating, for example, technology transfers, adaptations, and developments.
These investments in human capital occur over the life cycle, from conception onward; they are not limited to time in formal schooling systems. Evidence is accumulating, for example, that investments in early life may have relatively high rates of returns, thanks in part to dynamic complementarities over the life cycle as well as complementarities among various forms of investments in humans.
Because of the rapid global aging of populations, the longer-run context for human capital investments is changing, with important implications for the nature of intergenerational interactions through private and public mechanisms. There has been considerable debate about the best mechanisms and combinations of private and public actors for creating incentives for enhanced and more efficient production of human capital in all societies and for addressing the implications of population aging. Within most countries that are not already highly urbanized, rural-urban migration is accelerating, with concomitant gains and costs, many of which under current institutions have substantial spillovers and are not well internalized.
For citizens of the poorest countries, international migration often yields the highest rate of return to human capital investment. Barriers to such movements may not be globally efficient. Early childhood education, migration, lifelong learning, and other forms of human capital investment may have important implications for distribution, depending on the people in whom the investments are made and the nature of markets and policies that facilitate or constrain the returns to these investments. The nexus between population change, human capital investments, population mobility, and economic growth is thus likely to be an important one for future growth and for the distribution of who gains from that growth.
Global Markets, Global Citizens, and Global Governance in the 21st Century
Dr. Nancy Birdsall, President, Center for Global Development; comments by Dr. Pratap Mehta, President, Center for Policy Research, India
The 21st century will be different from the 20th century in at least two ways. The Internet revolution is not only globalizing economic and social life (Facebook, supply chains, SARs, university franchises), it is also unbundling the relationship between geographic territory and state sovereignty that operated for the last couple of centuries across the world. As a result, for most people, in many domains, national borders matter less than they used to. Meanwhile, the rise of China and other emerging market economies is disrupting the 20th century postwar geopolitical order, in which the United States provided the leadership—generally but not always benign—in managing the liberalization of international trade and finance. These two ongoing changes lie behind an unsettling deficit of “good global governance,” of effective cooperation by sovereign states—on issues from flight and food safety to growing resistance to antibiotics to drug and sex trafficking—in the interests of ordinary people. Most of the world’s citizens live and work in a globally interdependent economy (with manifold benefits and worrying vulnerabilities) but have little or no political representation in decision making on issues that affect people independent of country borders. This lack of empowerment is particularly problematic in the face of two major challenges of the 21st century: reducing the inequalities of wealth within and among countries and dealing with the risks of climate change to more equally share global prosperity.
Polls indicate an increasing sense of global consciousness—what might be called global “citizenship”—across the world, as well as increasing demand for policies that are fairer and more environmentally sustainable. But on these and other issues that affect people wherever they live, the great majority of ordinary citizens are poorly represented in the political sense. A gap exists between the demand for and supply of good global governance. This gap is illustrated by the problems of legitimacy and effectiveness of the G-20, the World Bank, and the (new) Green Climate Fund. The analysis in this paper identifies several principles and new practices that could reduce the deficit and better support not only growth itself but a growth path that is fairer for typical global citizens and less environmentally destructive for their children and grandchildren.
Resource Depletion, Climate Change, and Economic Growth
Dr. Andrew Steer, President and CEO, World Resources Institute; comments by Mr. Jeremy Oppenheim, Director, Sustainability and Resource Productivity, McKinsey & Company
Natural resources are an essential input in the production process, for both marketed resources (metals, minerals, land) and nonmarketed resources (clean air, weather, myriad ecosystem services). Over the past century, as population quadrupled and economic production increased by a factor of about 20, the demand for natural resources rose greatly. The extraction of construction materials grew by a factor of 34, ores and minerals by a factor of 27. For the first time in history, the human footprint has grown to the extent that economic activity has the power to affect major planetary systems, prompting some scientists to refer to a new epoch, the Anthropocene.
This paper examines a range of questions about the effects of resource depletion on growth. Are current patterns of growth sustainable throughout the 21st century? Given today’s technology and “nonbreakthrough” progress, are alternative paths available that will allow healthy rates of growth into the indefinite future? Are there automatic tendencies to move an economy from current paths to greener paths as the problems become ever more evident? Does new understanding of “green growth” offer new opportunities for economic growth as well as the quality of life? What are the implications for policy at the national and international levels?
Overview and Policy Report
Professor Jere Behrman, University of Pennsylvania, and the research manager for the Towards a Better Global Economy Project, and Dr. Shahrokh Fardoust, former director of Strategy and Operations, Development Economics, the World Bank, and the project coordinator for the Towards a Better Global Economy Project
This report, which draws on all the thematic studies as well as the macroeconomic and growth study, considers the current state of the world and its economic policies and discusses whether and how they should be harmonized. It will be derived from the main substance and policy recommendations of the thematic studies, on the five main topics within the scope of this initial phase of the project. The report will also synthesize the thematic studies’ policy options/recommendations. It will form the overview of the overall study.
The concept notes for each of the thematic papers have been completed and reviewed by the core group as well as by a team of external peer reviewers. The initial drafts and the key findings and messages of each paper were discussed at the project’s second workshop, held March 1–3, 2013 at the University of Pennsylvania, in Philadelphia. All working papers will be finalized by early June, 2013, in time for the project’s first international conference, to be held July 11–13, in Geneva. The studies and thematic papers, along with peer reviewers’ final commentaries, will be published as an edited volume. The reports and background studies/working papers will be posted on the Social Structures Foundation’s (and affiliated) websites.
The conference participants will discuss key issues related to inequality, injustice, and weak governance and policies that could address these problems over the medium to long term. Conference participants will also discuss the project’s ongoing effort to hone its communications and engagement practices, including social and other media, which will be critical to its success. State-of-the art communications relevant to citizen engagement and consensus building will be considered as a way of gauging citizens’ preferences and their implications for the society’s social welfare under different economic policy options.
Towards a Better Global Economy Project (completed September 2014):
This collection of policy papers by international experts considers how improvements in official global governance, coupled with and reinforced by rising activism of global citizens, can lead to welfare-enhancing and more equitable results for global citizens through better national and international policies.
Towards a Better Global Economy: Policy Implications for Citizens Worldwide in the 21st Century, by Franklin Allen, Jere R. Behrman, Nancy Birdsall, Shahrokh Fardoust, Dani Rodrik, Andrew Steer, and Arvind Subramanian. Oxford University Press 2014. http://ukcatalogue.oup.com/product/9780198723455.do
The book is being translated into other languages. The paperback version is expected to be published in early 2016.
Recent reviews of the book include the following:
“This book sees seven distinguished academic economists and ten commentators examine the factors that are most likely to support beneficial economic growth in low-, middle-, and high-income countries on behalf of the Social Structures Foundation. Their Towards a Better Global Economy policy research project aims to sustain long-term global economic growth. This 521-page volume provides a thinking stimulus for all who worry about the future of the world. This is an important book that deserves to be widely, and critically, read.”—Michael Bassey LSE Review of Books http://blogs.lse.ac.uk/lsereviewofbooks/2014/11/12/book-review-towards-a-better-global-economy-by-franklin-allen-et-al/
“In Towards a Better Global Economy, a team of prominent economists reports on the longer-term implications of major global developments, particularly the fundamental economic forces that are shifting the center of gravity of the global economy toward Asia for average citizens around the world. Their research shows that the politics, rules, and institutions of cooperation among nations have not kept up with the demands from citizens for changes in the global political order and suggests that unorthodox policies for promoting growth should play a greater role in lower-income countries.”—Justin Yifu Lin, Honorary Dean, National School of Development, Peking University and former Chief Economist and Senior Vice-President, World Bank
“This book accomplishes what few others in the field have: it successfully speaks to the needs of the policymaker, the student, and an informed citizenry. In language that is clear and jargon-free, the authors provide remarkably lucid analysis of the dynamics and impacts of globalization. They provide well-reasoned and lucid prescriptions for both current and looming economic problems, while their crystal-clear view of the global landscape provides policymakers with a guide for making their own informed economic and political decisions. The breadth of views makes it an invaluable resource in undergraduate and graduate courses which cover the complex issues around globalization. By addressing the role informed citizens can play in shaping globalization trends, and making the debates about economic issues understandable to diverse audiences, it is in a class by itself in terms of versatility. A must read.”—Ross Harrison, Georgetown University, School of Foreign Service
“For many years now it has been evident that many problems faced by nation-states cannot be tackled by them acting in isolation; national answers to problems created by interdependence have failed to provide real solutions. This book explains that the need for a global perspective will deepen in the decades ahead. Behrman and Fardoust have assembled a notable group of experts who convincingly argue that core areas of public policy like economic growth, population mobility, trade, finance, and climate change need to be addressed from a global perspective, creating in turn new challenges for the institutions and mechanisms of global governance. This excellent book makes a solid contribution to the debate as to how the world economy needs to be managed in the 21st century by nation-states or by the not-necessarily-so-far-fetched concept of the citizen of the world.”—Santiago Levy, Vice-President for Sectors and Knowledge, Inter-American Development Bank
“This book provides a very persuasive discussion of the key global economic trends and helps readers think through some of the main policy issues of our time—globalization, income distribution, and policy making—in an increasingly connected world where citizens are becoming—and need to become more—involved in debates about economic policies. I particularly appreciated the emphasis on the need for a debate on the aspects of economic governance that should be addressed at national versus global levels, particularly in countries undergoing fundamental changes such as those in the Middle East and North Africa. The book is important reading for those interested in where the world is going and how to think about solving some of the daunting problems the global economy will be facing.”—Adnan Mazarei, Deputy Director, Middle East and Central Asia Department, International Monetary Fund
“The global economy is shaped by powerful forces, including trade, entrepreneurship, technology, communications, migration, politics, conflict, environment, and climate. And the financial and economic crises of the period since 2008 have shaken confidence and led to reappraisals of what policy and institutions can deliver in influencing these forces and their outcomes for the benefit of global citizens. This book, with contributions from some of the leading thinkers of our time, provides crucial insights into actions we can take now and the way our ideas can and should be changed by experience. It is very timely and of great value.”—Nicholas Stern, Lord Stern of Brentford, IG Patel Professor of Economics and Government, London School of Economics and President of the British Academy
“In the aftermath of the global financial crisis, with future growth in advanced economies potentially slower, many developing economies are facing the risk of adverse implications for poverty reduction and development. This book pays much-needed attention to identifying the most appropriate policy responses, at both the national and global level, to address looming risks and restore strong and sustainable growth while advancing social progress. The analyses and proposals are set to inform many ongoing policy debates about how to make progress, in a post-crisis environment, towards an open and welfare-enhancing global economy.”—Ignazio Visco, Governor, Bank of Italy
Related blogs, op-eds, and podcasts include the following:
- Global Citizens, Global Economy, by Nancy Birdsall http://www.theglobalist.com/global-citizens-and-the-global-economy/
- Global Citizens on the Rise, by Nancy Birdsall, http://www.cgdev.org/blog/global-citizens-rise
- In Defense of World Government by Nancy Birdsall http://www.project-syndicate.org/commentary/nancy-birdsallhow-globally-minded-citizens-can-strengthen-global-governance
- Sinking Statesmanship, by Nancy Birdsall http://www.theeuropean-magazine.com/nancy-birdsall–2/7836-global-governance-and-new-international-powers
- Where Is the Global Economy Headed and What’s in Store for its Citizens? by Shahrokh Fardoust http://blog.oup.com/2014/12/global-economy-future/
- National Governments, Global Citizens, by Dani Rodrik https://www.project-syndicate.org/commentary/how-to-globalize-a-national-authority-by-dani-rodrik
- Prospects for Future Economic Growth, by Dani Rodrik http://rodrik.typepad.com/dani_rodriks_weblog/2013/06/prospects-for-future-economic-growth.html
- Protectionism: To Worry or Not to Worry? by Arvind Subramainan and Martin Kessler http://blogs.piie.com/realtime/?p=3766
- The Emissions Gap Roadmap, by Andrew Steer http://www.wri.org/blog/2014/11/emissions-gap-roadmap
- Why I Care About Climate Change, by Andrew Steer http://webtv.un.org/topics-issues/deputy-secretary-general/watch/dr.-andrew-steer-why-i-care-about-climate-change/3597558244001
- Globalization in a Time of Transition, by Martin Wolf (Financial Times) http://www.ft.com/intl/cms/s/0/9545cd9e-ed3c-11e2-ad6e-00144feabdc0.html#axzz3cVwg2xI7