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Sir Richard Lambert's speech

Lecture 1
 
Lecture 2
 
Lecture 3
 
Lecture 4
 
Lecture 4
 
Lecture 5
 
Lecture 5

The Great Convergence: why some low income countries will continue to catch up with the rich developed economies of the West, and some will fail.

It’s a ridiculously ambitious title for a 40 minute talk. So in a bid to break it down into manageable chunks, I’ve decided to pose – and try to answer – five big questions.

  • What’s happening?
  • Why is it happening?
  • How sustainable is this big trend?
  • What can we learn from Singapore's remarkable story about the ways in which societies can transform themselves within the space of a very few decades?
  • And then derived from all this, what are the determinants more broadly of a country's economic success or failure over the long term?

Of course not all the lessons from Singapore will turn out to be relevant on a larger stage. What works for a city state of around 5m people might be hopelessly impractical in a country with 100 million citizens.

Yet its example is too striking too ignore. After all, those people of my generation who happened to be brought up in Singapore in the 1950s and 1960s will remember somewhere that was “a typical third world city”.

Those are the words of Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, and he goes on:

Our per capita income was the same as Ghana’s. We had no flush toilets, some malnutrition, ethnic riots and, most importantly of all, no sense of hope for the future…No one believed that Singapore could become as prosperous as London. Yet the unthinkable happened.

You only have to look around you to see the consequences. By most measures, Singapore is now more prosperous than the UK. Ghana, for its part, has done pretty well in recent years. But its gross national income per head today is less than one twenty-fifth of Singapore’s. So I’d like to discuss with you the qualities that have made this story possible.

You’ll already have noticed some big omissions from my list of questions. For instance, I’m not planning to discuss the implications for global governance of the economic upheaval that is now shaking the world. Kishore Mahbubani, whose book The Great Convergence was published earlier this year and from which I have already quoted, has much of importance to say on this theme. And I’m not going to talk either about the environmental consequences of these same trends. These, too, are hugely important - but we don’t want to be here all night.

So I will start right off with the first question: what’s happening? I guess that most of us are familiar with the numbers. In the five years to 2012, the advanced economies of the West taken together generated growth of only about 3 per cent.

Emerging Asia grew by nearly 50 per cent over the same period. Rapid growth has been the story for an increasing number of poor countries, where incomes have started from a very low base to catch up with those of the rich countries of the West.

And this isn’t only a story about Asia. According to the OECD, just 12 countries around the world generated growth in incomes per head during the 1990s that was more than twice the OECD average. In the first decade of this century, that number jumped from 12 to 83, with some of the most remarkable performances coming from countries that had completely missed out on global growth in the previous three decades, most notably in Sub- Saharan Africa.

As recently as 2005, the combined output of eight major developing countries – Argentina, Brazil, China, India, Indonesia, Mexico, South Africa and Turkey – amounted to barely half that of the United States. Today, by contrast, their combined output roughly matches that of the US – and this big shift has much further to go.

Lives are being changed as a result. The proportion of people living in extreme poverty in the world fell from over 43 per cent in 1990 to 22.4 per cent and falling in 2008. More than 500 million people have been lifted out of poverty in China alone.

The first Millennium Development Goal – that of halving the proportion of people living on less than $1.25 a day relative to 1990 - has already been met three years before the target date. Meanwhile, the middle classes are growing in number almost everywhere. On one estimate, the developing economies of the South will account for three fifths of the 1 billion households that will be earning more than $20,000 a year by 2025. And this is not just a story about wealth and economic output.

The United Nations publishes a Human Development Index – a composite measure of indicators covering life expectancy, educational attainment, and command over the resources that are needed for a decent living: the latest edition came out just last month. This showed that between 1990 and 2012, nearly every country in the world improved its human development performance, often by a significant amount.

Of the 132 countries covered, only Lesotho and Zimbabwe ended up in a worse place than they had started 22 years earlier. Big gains were registered in countries as diverse as Ghana, Rwanda and Uganda in Sub-Saharan Africa; Bangladesh and India in South Asia; Tunisia in the Arab states; China, Lao PDR and Vietnam in East Asia; and Brazil, Chile and Mexico in Latin America.

To pluck just one piece of data at random out of a whole series of numbers, Africa is now experiencing some of biggest falls in child mortality ever seen, anywhere. In a sentence, global wealth and welfare is shifting at a pace and on a scale which has never been seen before in human history.

Driven by the Industrial Revolution, Great Britain took 150 years to double output per head. The US, which industrialized later, took 50 years. China and India have taken less than 20 to make the same transformation, and their vastly larger population means that the change has impacted a hundred times as many people as did the industrial revolution. So it’s an exciting time to be alive.

On to question two: what’s driving the change? Here, the answer gets more complicated. For me, it starts with what happened to the global marketplace after the opening of China, India, the former Soviet Union and large part of Latin America to international trade. In the space of less than three decades, the size of the global labour market roughly quadrupled. This, together with rapid advances in technology and falling transportation costs,transformed global supply chains.

For the first time, the different processes of manufacturing and service sector industries could be separated apart, and located wherever in the world they could be completed most efficiently and effectively. The result has been a massive increase in the volume of world trade. which by 2011 was equivalent to three fifths of global output. Emerging economies have played a big part in this process, increasing their share of world merchandise trade from 25 to 47 per cent between 1980 and 2010, and powering up their own economies in the process.

China’s huge demand for the commodities of all kinds that it needs to support its economic expansion has been an important part of the story. Its trade with Sub-Saharan Africa amounted to just $1bn in 1992. By 2011, this figure had jumped to more than $140bn.

Resource rich countries have benefited enormously from volume and price increases in Africa’s main commodity exports, such as gas, oil, minerals and agricultural products. But other countries in the region have done well too, including the likes of Ethiopia, Rwanda and Uganda, which are actually net commodity importers.

So the Great Convergence has been powered by much more than rising raw material prices. How have such a diverse range of countries managed to achieve such a transformation? It’s not been through the collectivist, centrally managed systems of the old socialist states. But nor has it been the result of the unfettered liberalization which was for so long promoted by the so-called Washington consensus.

The UN Human Development Report suggests a number of explanations. First, it emphasizes the importance of a proactive development state. There isn’t a single formula for success. But the qualities that are required includes long term vision and leadership, shared values, and rules and institutions that build trust and leadership. In two words, better governance.

To take one practical example of what this means, look what’s happened to the infant mortality rate in Bangladesh. In 1990, the rate there was 16 per cent higher than in India. By 2004, the rate had dropped steeply in both countries, but the figure in Bangladesh was now a fifth lower than that in India. Explanations include big improvements in health services and the promotion of healthy living, a higher participation of girls in formal education, and the greater economic empowerment of women brought about by rising employment opportunities and improved access to credit.

These are just some of the things a state can do to improve its citizens’ wellbeing. Another big driver of convergence has been the efforts by countries everywhere to tap into what have become much bigger global markets. Thailand is an interesting example. Back in the mid-1990s, it had around 10 trading partners to which it exported goods to the value of more than $1bn a year. Fifteen years later, that number had multiplied threefold, and its big markets were spread across a much wider range of countries, located all over the globe.

Social policy innovation, albeit taking many different forms, has been a third key driver of convergence, according to the UN study. Improvements in education, health care, social protection, legal empowerment and social organization all help poor people to take part in and benefit from economic growth.

Of course, there are still shocking differences both between and within economies on all sorts of measures. Nearly a fifth of children under are still deemed to be underweight in Indonesia; and if that looks bad, think about the proportion in India which is around twice that. Even within individual countries, there are huge disparities in the numbers thrown up by the Human Development Index.

For example, the US taken as a whole ranks number 3 in the world, behind only Norway and Australia. But the average HDI value for an African American living in Louisiana is roughly comparable to that of a citizen of Nigeria, which comes in at number 153 on the UN list. So for all the overall progress that has been made in the past 20 years, cruel inequalities are to be found everywhere. But at least the trend in nearly all countries around the world is moving in the right direction- and nowhere more rapidly than in those countries that are starting off from a relatively low base.

And there is one other big difference. Back in the 1980s, the epicentre of the world’s financial shocks lay in the countries of Latin America. In the late 1990s, it was Asia’s turn for big trouble. In the past five years, though, the earthquake mainly hit the developed countries of Western Europe and the US, and their economies have still not recovered from its impact. The emerging markets have emerged relatively unscathed – and as the IMF showed us last week, have turned into the main engine of global growth. So this process of convergence truly is something new.

On to question number three, which is – is the great convergence sustainable? Kishore Mahbubani is convinced that it is. He writes:

The great convergence that our world is experiencing is now irreversible. Too many forces have been unleashed to shrink the world. They will only gain momentum in the coming decades. And if we look at our lives carefully, no matter where we live, we can clearly begin to see that our lives are being affected daily by events or decisions made all over the planet.

Among other things, he cites the global reach of social networks and the vast increases in connectivity between and within different countries. He talks about the way the financial system has become integrated across the globe. He discusses the way in which students are studying in different institutions around the world, sharing ideas and values. His list goes on.

Other writers take a different view. For example, Ruchir Sharma argues in his book Breakout Nations that “scores of ‘emerging’ nations have been emerging for many decades now. They have failed to gain any momentum for sustained growth, or their progress has begun to stall since they became middle income countries.”

He gives many examples – Malaysia, which appeared to be on course to emerge as a rich nation until the financial meltdown of the late 1990s; the Philippines and Sri Lanka, which were billed as East Asian tigers back in the 1960s only to see their growth falter badly well before they reached middle income levels. In short, he concludes glumly, “Failure to sustain growth is the general rule, and that rule is likely to reassert itself in the coming decade.” So who is right?

I’m not bold enough to come up with an answer. But I have been around long enough to know that trends don’t usually last forever. And I could imagine circumstance in which the convergence story of the past decade or two could be checked, if not reversed. One obvious example is the way the international financial system now seems to be fragmenting, with banks almost everywhere retreating to their home bases in the wake of the financial crash in the West.

The rules are changing too. For instance, regulators in the US are requiring that foreign banks hold much higher levels of capital in their jurisdiction than in the past. An EU Commissioner warned this week that these plans were a threat to harmonious global regulation, and could trigger a protectionist backlash. So it looks like global financial integration is on the wane, at least for the time being, reducing the diversity of the system as well as its financial capacity.

At the same time, the central banks of the United States, the Eurozone, the United Kingdom and now most recently Japan are now conducting the most extraordinary monetary experiment in financial history. In a bid to boost demand and lean against fiscal austerity, they have been buying bonds, mainly from their governments, on a truly astonishing scale. We don't know how successful they will be in unwinding their enormous bond holdings in a timely and orderly manner when the moment comes.

But we do know that markets have a tendency to overreact, and could get very jumpy at the first sign of interest rates rising from levels which haven’t been seen before in the modern era. And we must worry that all this quantitative easing could have implications for inflation, and even for competitive devaluations, with adverse consequences for global trade.

Let me emphasise that I'm not suggesting that this will happen. But I do believe that the international economy is still in a dangerous and unstable phase, and that it’s too soon to think we are out of the woods. There are other possible risks we could discuss later, like the stresses and strains that continue to grind away within the Eurozone, or the possibility of a marked slowdown in China. Enough to suggest that the Great Convergence could be seriously tested in the years ahead, and that it therefore makes sense to look for the qualities that will make the difference between success and potential failure in countries around the world.

And this is where I turn to the Singapore story. I do this with real hesitation. I know that as a complete outsider, I could make some spectacular gaffes. But the challenge in this context is irresistible. So here goes.

To start with, it’s obvious that geography matters. In his book The Bottom Billion, Paul Collier writes about the plight of those people who have missed out on the benefits of globalization. He argues that they tend to live in countries which have a number of common features. One of the most important is that some of the poorest countries in the world are landlocked, and have bad neighbours.

And indeed a significant number of countries right at the bottom of the UN league table come into this category – no access to the sea or to international trade routes, and neighbours from hell. The opposite is true as well, as Singapore has demonstrated. It's used its prime location on the planet to turn itself into an international entrepot on an almost unparalleled scale. Expressed as a proportion of its gross domestic product, its exports of merchandise goods are more than twice the size of its nearest rival, and its exports of services also top the global league table when measured in the same way.

Of course that’s not just the result of an accident of geography. Strong governance and strong institutions are the key, and most of them are summed up in a series of interviews with Mr. Lee Kuan Yew published two years ago under the title Hard Truths to Keep Singapore Going. Let me pick out just a few quotes that caught my eye, and which might be relevant in other societies. How, he is asked, do you have a strong economy? He answers:

By maximizing your human resources. Your people, the way they are trained, organized, educated to serve the world’s needs, which means infrastructure, connections, linkages with those parts of the world which will add value to our lives. Second, we leapfrogged the region because they wanted to squeeze us. We brought in multinationals.

I looked around for some data to support these claims. Here are some of the things I found. In a league table of Asian Universities published in the Times Higher Education supplement a couple of weeks ago, little Singapore had two universities in the top twelve: the National University of Singapore came second only to the University of Tokyo.

For comparison, giant India has only three institutions in the Asian top hundred, and all are highly specialised. The Indian Institute of Technology at Khragpur is the highest placed, standing at number 30. When it comes to the performance of 15-year old students in reading, mathematics and science, Singapore again compares with the best of the world, well ahead of the likes of Germany or the US.

As for bringing in the multinationals, foreign direct inflows between 2007 and 2011 worked out at 18 per cent of GDP, which was not as high a proportion as in Hong Kong but well ahead of most other economies in the world. A strong emphasis on the quality of government and high standards of governance are other recurring themes of the Lee Kuan Yew interviews: he argues repeatedly that they have been the foundation of Singapore’s growth and transformation. There’s also a focus on merit – as he puts it, “not equality of rewards but equality of opportunity in education, housing, health and so on. And a system based on meritocracy. That’s the basis on which we have had intercommunal harmony and interreligious tolerance.”

It’s certainly had an impact on the wellbeing of this city state. Singapore now stands at number 18 on the UN’s Human Development Index, having climbed a full 7 places in the rankings since 2007. For comparison, France is in at number 20, and the UK – which has also risen in recent years – at number 26.

And there’s another thing that comes through strongly in the interviews – a sense of real anxiety, a worry that citizens might become complacent in their relative prosperity, and forget the qualities that have turned the country round. He says his greatest fear is “a leadership and a people that have forgotten, that have lost their bearings and do not understand the constraints that we face.”

Strong investment in human and physical capital. Sound governance, and an economy in which everyone can aspire to have a stake. An openness to international capital and trade. Concern for the future. These appear to be some of the key ingredients of Singapore’s success.

So let’s take all this and try to answer my fifth and most challenging question, which is: what is it that makes some countries succeed and others fail over the long term? My idea is to scan the future of different countries through a series of filters that are intended to pick out the qualities of success. They are – the strength and weakness of political institutions and the rule of law. Openness to trade and to the movement of people and ideas. The depth of human capital and of social cohesion.

And finally, demographic trends. Let me explain my choice of filters. The nice thing about them all is that they throw up pictures you can analyse, and ones that don’t change overnight. For example, absent war or plague, demographic trends in a country take a long time to shift. Right now, explosive population growth is under way in many – though not all – of the emerging economies.

At the extreme, the population of many African countries could double by 2050. If that could be combined with rising output per head, then the scale of their economies would be transformed. But this is not a uniform picture. Among the BRIC countries (Brazil, Russia, India and China) Russia is faced with population declines of a third by 2050, and China’s one-child policy means that its working population will soon start to shrink visibly, with an eventual impact on its growth rates.

Countries with shrinking, ageing populations will struggle to sustain their economic performance over time. As the numbers of workers relative to retirees declines, the tax burden of supporting those senior citizens increases. So countries like Japan and Germany, where the working age population could fall by roughly a third by 2050, will face growth problems and fiscal pressures.

And this is a challenge for Singapore too, as it must be with its fertility rate among the world’s lowest at 1.2 compared with a replacement level of 2.1. This is a politically sensitive subject, and not one I am going to charge into. But as Mr. Lee Kuan Yew put it in his interviews: “Look down the road 15, 20 years, and we got an old age problem. It’s a serious problem. If we don’t have the economy going, the burden on Singaporeans who are working will be so heavy that many of the most talented will migrate.”

But population growth isn’t destiny. Take a country like Afghanistan, with very high fertility rates and an average age of 18 – but very weak institutions and a literacy rate of just 28 per cent. That doesn’t sound like a recipe for a stable and prosperous future. And growth may not be sustainable without popular support for the policies that make it possible. The OECD publishes a chart showing changes in life satisfaction, education and growth performance across a range of countries in the first decade of this century. In countries like China and Brazil, rapid growth coincided with gains in measures of life satisfaction – unlike in India, where life satisfaction has declined a bit. But two countries where the contrast between growth on the upside and life satisfaction on the downside were at their most sharp were Thailand and Tunisia. Perhaps we should not have been too surprised at the civil unrest that followed.

Human capital – the education and skills of a country’s workforce – is another key indicator of a country’s likely long term success. Here, the patterns vary enormously, both across and within particular countries.

For example, the Indian education is like a steep pyramid, producing high quality professionals at the top but excluding most of the population at the bottom. The illiteracy rate for rural population at secondary school level is put at around 70 per cent. By contrast, the aggregate illiteracy level in China is thought to be less than 10 per cent. A couple of years ago, Shanghai was included for the first time in the OECD's tests that I’ve already mentioned of 15-year old kids in reading, maths and science. Shanghai easily led the list in all three categories, whereas the US didn't get into the top In the words of President Obama, “This is our generation’s sputnik moment.”

In the high cost mature economies, the benchmarks get higher. There you need to build a strong base of intermediate skills, an excellent science base, and some great universities if you are going to stand out from the crowd. You can't compete on labour costs. Social cohesion is a vaguer but nonetheless important concept. What I mean by that is whether conditions exist that allow citizens to think that one way or another they are getting a reasonable deal from the society in which they live. If they do, they are likely to pay their taxes and put up with tough times for quite a while. But if they think they are getting a raw deal, they may push back – as they did in Tunisia and Thailand.

And it’s not just in the emerging economies these these patterns matter. The lights are also flashing amber in a number of mature economies in this respect. Some of the most obvious examples are in the southern periphery of the European Union, whose economies have become seriously uncompetitive in the past decade. In a currency union with limited movement of people and only modest fiscal transfers, the only way to address this is through the labour market and a fierce squeeze on real wages.

That’s the background to the austerity policies that are now squeezing hard in Spain, Greece, Portugal and elsewhere. But as European Commission President Barroso said this week, Europe may have hit the political limit of how far it can go with these policies. One worrying trend is the rising level of income inequality that have been increasingly evident in large parts of the world in the past two decades. That’s another theme we may want to discuss later. It’s certainly relevant both in Singapore and in the UK.

My other filter for scanning the future aims to picks out a country’s openness to trade, and to the flow of people, ideas and money. Among other things, high trade barriers are a main source of corruption. In The Bottom Billion, Paul Collier observes that becoming a customs officer is one of the best jobs you can possibly get in some of the poorest countries in Africa.

A customs officer in Madagascar, for example, must first go to the school that trains them. The bribe to get into the place is about fifty times the country’s per capita annual income, which tells you all you need to know about how the system works. The World Bank has produced a rather wonderful map of the world, in which the thickness of a country’s borders, delineated in red ink, is determined by the restrictions which it places on the flow of goods and capital. Africa and large parts of South East Asia are a sea of red splodges. By contrast, Europe, North America and large swathes of Latin America seem to be almost border free. From the perspective of a multinational company, it makes much more sense to locate your activities in a place where you have easy access to large bodies of customers, with a minimum number of borders between you and them.

More generally, the rising volume of south-south trade has been one of the main engines driving the Great Convergence in the past decade. Freer trade across African borders would help to accelerate the process. So what are the conclusions from this kind of approach? Few countries emerge with a clean sweep under every filter.

China looks good in most respect. Per capita GDP will still be a fraction of that in the US by 2030, so there will be plenty of room left for catch up even though its demographics will be deteriorating well before then.

For me, the big questions are political – and not just about the sustainability of the current institutional structures. How will China adapt to the strains of becoming the biggest economy in the world while remaining a relatively poor country? It shows few signs of wanting to take any kind of leadership role in global matters. But will it be prepared to leave a vacuum at the top of global economic and strategic governance?

India is a different story. It has great demographics, and is moving to the sweet spot where child dependency rates are falling and rising old age dependency is still many years away. Its challenges are more to do with widespread poverty, and the dead weight of corruption and petty regulations which hold down many forms of economic activity. With a further 200 million people or more entering the labour market in the next few years, failure to address these problems would have serious consequences.

Countries like Pakistan and the Philippines will see very rapid population growth in the years ahead. Pakistan’s weak government and fragile institutions could limit its scope for economic catch-up, and leave it a poor country.The Philippines may be a different story. Once dismissed as the sick man of Asia, its economy has grown at an average 5 per cent a year over the past decade. The reform minded government has got a grip on inflation and is spending on infrastructure. Its debt was uprated to investment grade just last month. And an analysis by HSBC suggested it could be the 16th largest economy in the world by 2050, 27 places higher than its position today.

What about sub Saharan Africa? It’s certainly the case that the attitude of large Western investors has warmed considerably over the past year or two. Growth has picked up from a low base, and so has the quality of governance. An article by two of the World Bank’s African economists in the latest issue of Foreign Affairs suggests that both the pessimists and the optimists have got it right. The obstacles to durable growth in the region are primarily political, they argue. That doesn’t mean they are easy to solve, but it does mean that they are not intractable, and the recent history of political reform is positive. The conclusion: believing in a more prosperous African future requires a healthy dose of optimism. but not a leap of faith.

By contrast, Russia does not come out at all well on this kind of analysis. Terrible demographics – its population could decline by around a third by 2050 – poor governance, rich but possibly depleting human capital. It also comes out badly on what Ruchir Sharma calls the Billionaires Index. The argument is that if a country is generating too many billionaires relative to the size of its economy, it’s off balance. It suggests a lack of competition, and – perhaps -a degree of cronyism. Russia is easily top of the Index, with the net worth of its billionaires representing 29 per cent of GDP.

Interestingly enough, Malaysia comes second on his index, with the wealth of its billionaires amounting to 20 per cent of the country’s GDP. Singapore doesn’t appear on the list. Then there’s the US. A large open market; very positive demographics, world leading innovation; lots of great businesses; the rule of law; and a political system that probably has too many rather than too few checks and balances. It also has what looks like the great good fortune of a vast new supply of domestic energy. Its potential growth rate looks sluggish compared with those on the other side of the Pacific. But for individual businesses, it surely remains a land of great opportunity.

The UK, too, has a great deal going for it over the medium to long term, especially compared to some of its continental European neighbours. Its demographic trends are very much healthier than those in say, Germany or Italy. It has strong institutions, an approach to free trade and open markets that’s embedded in its DNA, and a very strong science base built around some of the best universities in the world. Short term growth prospects are bleak: we'll hear today whether the economy dipped back into recession in the first quarter of this year. But according to an analysis by Goldman Sachs, its citizens will be the third richest in the world by the middle of this century – behind the US and Canada but ahead of its European neighbours and twice as well off as those in China. So that doesn't sound too bad.

So much for my five questions. The bottom line is that a country's long term success is partly to do with luck – for example, it can't choose its location. It's partly to do with history and culture, which are the foundation stones of institutions and a society's values. And it's above all to do with sound governance and a sense of purpose. That's why Singapore has succeeded so remarkably. The good news is that many other countries are now moving - often faltering and sometimes with backward steps - along the same path. And that in turn is why we should be optimistic about the future.