THE PERFORMANCE OF NATIONS AND THE LEADERS

OF TOMORROWJoseph Stiglitz

Athens

March 2006

NEW GLOBAL LANDSCAPE

• INTEGRATION OF 2.5 BILLION PEOPLE IN INDIA, CHINA, AND ELSEWHERE IN ASIA– Who were formerly excluded and

marginalized, legacy of colonialism

• INTO GLOBAL ECONOMY IS AN EVENT OF HISTORICAL PROPORTIONS

• AND SO IS THEIR UNPRECEDENTED SUCCESS

Global success

– Previous economic revolutions—like the industrial revolution of the nineteenth century—had seen growth rates peak at around 2 to 3%

– The golden age of growth in America in the fifties and sixties saw similar growth rates

– China’s growth has been three times these numbers• Even faster than Asia miracle countries

– Success not only in increasing GDP• The fraction of the Chinese population living on less than $1

a day has fallen from 63.8% in 1981 to 16.6% twenty years later

• What has led to such unprecedented success?

BUT CHINA IS NOT ALONE

• India’s enormous success

• More than two decades of growth of 5 to 6%, now approaching 8%

• Outsourcing of high tech jobs to India

• Recognition of new global landscape– What does this new global landscape look

like?– And again how do we explain this success

There are other successes…

• Ireland

• Botswana

• Viet nam

But there are many more failures

• Russia and the other countries – In spite of the fact that the transition was supposed to

bring unprecedented prosperity– Instead it brought unprecedented poverty

• Latin America– Where reforms were supposed to enhance growth– But instead lead to growth half of what it had been in

earlier decades

• And Africa– which has seen incomes decline

Narrowing of disparity between successes and advanced industrial countries

But growing disparities between failures and advanced industrial countries

• Even after NAFTA, gap between Mexico and U.S. has increase

Again, key question, explaining successes and interpreting new global landscape

Changing Global Landscape• Thomas Friedman has suggested that “the world is flat”—for first

time in human history, poor countries are competing on a level playing field

• But the world is not flat– Disparities between the haves and have nots have increased– Power of entrenched monopolies, like Micro-soft, is probably

greater than ever before– Importance of research gives enormous advantage to those who

have the resources and skills to undertake it– The Uruguay Round made the world less flat

• Especially TRIPs• But the nature of competition is enormously changed

– Cannot simply rest on laurels• And there may be a high price for success• THESE CHANGES WILL AFFECT EVERYONE

India’s success

• In spite of weaknesses in infrastructure– Including electricity– Better infrastructure would have led to even more

growth

• In spite of absence of natural resources– Or perhaps because

• The “natural resource curse”

• Growth occurred before trade liberalization• And, like China, there is still not full capital

market liberalization

China’s success• IN SPITE OF IT NOT FOLLOWING MOST OF DICTATES

OF “CONVENTIONAL WISDOM” (WASHINGTON CONSENSUS)– Not even clear property rights

• But clearer property rights might have led to even more impressive growth!

– Large role of government• Including Industrial policy

– No free trade in earlier high growth period– No free capital market liberalization—even today

• SUCCESS BECAUSE THEY FOLLOWED A DIFFERENT AGENDA– Appropriate to their circumstances and history

• MUCH OF CONVENTIONAL WISDOM IF OFF THE MARK

THE MEANING OF SUCCESS

We need to be careful in assessing what we mean by success

• US: GDP increasing, but– Increased poverty– And even those in the middle worse off—as real

median incomes falling– Real wages stagnating—incomes would have fallen

even more were it not that Americans are working more and more

• Imposing costs to the family• Huge social costs• Perhaps partially reflected in high level of violence

and crime—ten times higher

Meaning of success (2)– Poor performance in other indicators—health

• Spends more, poorer results• Lower ranking on HDI

– Growing problem: rich countries with poor people?• U.S. and elsewhere, GDP increasing, but environment

worsening– Will growth be sustainable?– Not only environmentally, but socially and economically– Especially with huge deficits

• Important not to be misled by using wrong measures of success– What we measure affects behavior– Importance of information systems, accounting

Key Ingredients of Success

• Technology and education

• Leadership

• Broader concerns for society/organization

1. Technology and education

• SUCCESS OF CHINA IN MANUFACTURING AND INDIA IN SOFTWARE NOT JUST A MATTER OF UNSKILLED LABOR– Combining skilled and unskilled– Even in textiles and automobile assembly– Labor costs in textiles actually higher than many other

developing countries– Chengdu becoming software center– Jilin, Wuhan –example of how to deal with “rust belt

problems

• Changes the competitive position of the United States and EU– MODERN ECONOMY BASED ON

TECHNOLOGY– BUT NUMBER OF GRADUATES IN

SCIENCE AND ENGINEERING NOW DWARFED BY THOSE IN ASIA

SOME STATISTICS

– Of 2.8 1st university degrees in science and engineering

• 1.2 million in Asia• 830,000 in Europe• 400,000 in U.S.

– In engineering, Asia produces 8 times U.S.– since 1993, the number of American citizens in

graduate science programs has fallen from 55,000 to under 42,000 while the global supply of Ph.D. in science has increased by 25%--mostly in Asia

– Just under half of all doctorate degrees in engineering and computer science in the United States are earned by foreign students

• Serious visa problems since 9/11

PROBLEMS START EARLIER

• PROBLEMS START EARLIER IN ELEMENTARY AND SECONDARY SCHOOLS– EVIDENCED BY PERFORMANCE IN

STANDARDIZED TESTS IN SCIENCE AND MATH. For example, at 8th grade

• 44% of Singapore performed at highest level• 38% of Taiwan• 7% U.S.

DECLINING RESEARCH

• EXPENDITURES ON RESEARCH DECLINING– As percent of GDP, 37% decline in federal

funding since 1970– Reflected in part in patents

• Since 1980, Japan’s share world wide increased from 12% to 21%, mostly at expense of U.S. (which has decline 8 percentage points)

CHINA AND INDIA UNDERSTAND…

• That what separates developed from less developed countries is not only a gap in resources but a gap in knowledge

• And are working hard—and successfully—to narrow that gap

• Education and technology also basis of success of Ireland and Brazil– Brazil’s Embraer airplane– Energy independence through research– Huge growth of exports

• Two weeks, China adopted its 11th 5 year plan– Comprehensive approach to development– Emphasis on problems of inequality, and especially in

the rural area– Emphasis on the environment– And emphasis on science and technology,

maintaining competitiveness• Including establishing global class universities• A basis of independent innovation

• Are Europe and America responding effectively?– America has squandered huge amounts on Iraq War,

with costs now CONSERVATIVELY estimated between $1 to 2 TRILLION

2. LEADERSHIP

• Sustained growth requires sustained leadership– Avoiding “cult of personality”– Recognizing fallibility of individuals

• Checks and balances• Reducing the dependence for success on

particular individuals– Importance of accountability

Leadership (2)

– Key role of succession• Without successful succession, gains can

easily be eroded• Knowing when to leave

– Pragmatism versus ideology• Recognizing that “one size fits all

prescriptions won’t work• Changing times require changing policies• What worked in the past may not work in

the future

Leadership (3)

• Setting goals and aspirations– Stretches– But attainable

• Examples– Clinton: creating 8 million new jobs in 4 years

• More than succeeded

– Fox (Mexico): 7% growth: unrealistic—actual growth 1%

• And by middle of term, seemed content with just 1 or 2%

– China—set high growth targets (7,8%)• But in every plan exceeded targets

Leadership (4)

• Consensus building– Participation in decision making– Even in China

• Inclusiveness and fairness– Countries cannot succeed if some are doing well, and others are

being left behind• Sense of unfairness behind unrest in France• Sense of cohesion behind success of Sweden, Finland,

Norway– Just as good growth

– Companies cannot succeed if some are doing well, and others being left behind

• Increasing problem in American style capitalism• Growing disparities between CEO and ordinary workers

3. A focus on broader concerns for society/organization

• Social cohesion– Especially difficult in new world of

globalization– Which is putting strong downward pressures

on wages, especially of unskilled workers• Reflected in increase in measures of inequality• Except in most of the most successful countries

– Reinforcing need for “upskilling,” education

A focus on the long run

• Beyond quarterly reports, or the next election cycle

• In U.S.—problems of environment and increasing indebtedness being ignored– Risk to long term living standards– And sustainability of growth

• Especially as debt is “crowding out” expenditures on research and education

Pragmatism and balance

• Success requires “balance”• For countries—a balanced role of government

and the market– Market is at the center of the economy– But in every successful economy the government has

played a large role• In science and technology (internet)• In making markets work (sound banking and securities

market regulation• In protecting the environment• In maintaining social cohesion (income distribution, safety

nets)

– Helps explain why Nordic countries have been so successful, not only in growth, but in broader measures of success

• Readjusted their “welfare state” model to new realities

• But still retained model—including high taxes• With better safety net, there can be more risk

taking, entrepreneurship• Success in modern technology based economies

requires risk taking

Has the rest of Europe achieved balance?

• Cannot have growth without Macro-balance, but– European Central Bank focuses exclusively on

inflation, not on growth or employment• Focus on “labor market flexibility”—increasing

insecurity– Without commensurate increases in safety nets, job

training programs, adequate investments in education, adequate job growth

– Need to accompany with a whole portfolio of micro-policies

– Productivity increases cannot offset large exchange rate changes

• For companies, a set of values– Not just a focus on the bottom line, shareholder value

• Even modern economic theory says that that is wrong

• Recognizing the companies are “communities” and are located in communities– Treat each other with respect– Concern for each others problems and concerns

• Reflected in growing important of movement for corporate social responsibility

Concluding Remarks

• There are huge differences in the performance of companies and countries

• It is important to learn the “lessons” of successes and failures

• Not simply a matter of imitating “best practices”– But understanding the principles that underlay

their success

SUCCESS IS NOT JUST A MATTER OF LUCK• BUT IT IS BASED ON THE EFFORTS AND CONTRIBUTIONS

OF INDIVIDUALS WORKING TOGETHER• THE WHOLE IS GREATER THAN THE SUM OF THE PARTS• THIS ENTAILS DESIGNING POLICIES AND PRACTICES

THAT ELICIT THE BEST AND MOST THOUGHTFUL EFFORTS OF ALL AND COORDINATING THOSE EFFORTS

• SUSTAINED LEADERSHIP IS ESSENTIALI HOPE I HAVE PROVIDED SOME INSIGHTS INTO WHAT IS

ENTAILED TO INCREASE THE LIKELIHOOD OF TRUE AND SUSTAINABLE SUCCESS—HIGH PERFORMANCE IN EVERY DIMENSION-- BOTH FOR COUNTRIES AND COMPANIES