Finance and Development, December 2016


Finance and Development, December 2016

Holiday Cheer

Jonathan Tepperman

The Fix

How Nations Survive and Thrive in a World in Decline

Tim Duggan Books/Crown, New York, 2016, 320 pp., $28 (hardcover).

We live in a moment of global trepidation, beset by economic, political, and social problems that are perceived as insurmountable. We see severe inequality everywhere and frequently getting worse over time. Extremists of various kinds prove persistent and very dangerous. And sustainable economic development proves frustrat-ingly elusive.

Jonathan Tepperman provides a refreshing and timely challenge to the idea that any of these problems are insurmountable. In a wide-ranging and detailed analysis, he reviews 10 situations in which strong leaders were able to address specific issues— such as corruption in Singapore, immigration in Canada, poverty in Brazil, and many more—with impressive and lasting results.

These are important stories and Tepperman tells them well. As managing editor of Foreign Affairs magazine, the author has access to high-profile figures and has dug deep into both the news coverage and the underlying research (full disclosure: he cites some of my work). The book is easy to read and each chapter is thought provoking. I teach a course at the Massachusetts Institute of Technology on the future of the global economy, and I plan to use some of this material in future years. This is also a great book to give to friends and relatives during the holiday season—if you would like to be seen as an encouraging, yet realistic, member of your social network.

As part of that conversation— and not to disparage Tepperman’s research or his eloquence—I would suggest three themes around which we should all become more engaged.

First, The Fix highlights three lasting economic success stories—countries that have dramatically improved incomes per capita over the past 50 years: Singapore, South Korea, and Botswana. These are salient and instructive examples. But how well do these models travel across countries? What other country can have Singapore’s combination of highly paid civil servants and essentially no corruption? Would you really recommend to any country that it follow South Korea in encouraging—and arguably subsidizing—the formation of relatively few tightly held powerful family conglomerates? And is Botswana’s handling of diamonds a beacon of policy clarity for everyone facing a bonanza of natural resources, or is it just the exception that proves the rule?

Second, given Tepperman’s global reach, the limited number of unambiguous successes is a bit sobering. The politics of the poverty-reduction Bolsa Familia program in Brazil are compelling, as is the way in which Canada has remained open to immigrants even while other countries talk about slamming the doors. Some of the other examples are more novel, but also less convincing. Has New York created its own de facto national defense equivalent—or is that something that can only be done at the country level? Has Mexico really turned around its economics and politics? Has Indonesia figured out how to deal with Islamic extremists? And has Rwanda built an economy and a social peace that will outlast the leadership that created it?

Third, perhaps we should push back further on the overall premise here. To be sure, there is a great deal of angst and political smoke around globalization and its implications. But the bigger picture—as emphasized by Arvind Subramanian, formerly of the IMF and currently chief economic advisor to the Indian government—is different and much more positive. The world diverged dramatically, in terms of income levels and living conditions, at the time of the Industrial Revolution in the early and mid-19th century. And these gaps between better-off and worse-off nations did not close during the wars, decolonization, and boom-bust cycles of the 20th century. But the past 20 to 30 years—that is, the most recent period of globalization—have brought not only the rise of China but also the benefits of economic reform and trade across a wide range of countries. Poorer places are continuing to converge on the income levels of richer countries. Globalization definitely brings discontent, but in many situations it has also brought great benefits to hundreds of millions (and perhaps billions) of people.

We see severe inequality everywhere.

Tepperman is right to focus on charismatic individuals and their contributions. It makes for a readable and fascinating book. But is history—and economic development— more about great men (and they are almost all men in Tepperman’s account), or is it primarily about the broader processes that create a middle class, allow democracy to take hold, and encourage the development of stronger, more protective, and inclusive human rights?

Simon Johnson

Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management; Senior Fellow, Peterson Institute for International Economics

The Long View

Eswar S. Prasad

Gaining Currency

The Rise of the Renminbi

Oxford University Press, 2016, 344 pp, $29.95 (hardcover).

What’s not to like about a book that runs the gamut from Kublai Khan to Mao Zedong to Donald Trump?

Such is the scope and range of Eswar Prasad’s new book Gaining Currency: The Rise of the Renminbi. In it, the author capitalizes on the current fascination with all things China to spin a yarn of how the renminbi rose to global prominence and the future challenges facing China as it evolves into a market-based economy that is fully integrated into the global system.

So far, China has forged a remarkable and unique path in making the renminbi a global currency. This becomes clear in Prasad’s description of how it eschewed the typical route of capital account liberalization and, instead, punched discrete and controlled holes in its capital controls to allow money to flow in and out. China’s unique path is again evident in the recent inclusion of the renminbi in the basket of currencies that make up the IMF’s Special Drawing Rights (SDRs); in China’s efforts to establish new institutions for international financial cooperation such as the Asian Infrastructure Investment Bank; and in China’s expansion of political and economic interest through cross-border financial support. Finally, Prasad captures an even bigger picture of Chinese exceptionalism as he describes the country’s unprecedented attempt to implement a liberal, market-based economic system while preserving “one-party rule.. .[with] neither an open political system nor an independent judiciary.”

Prasad comprehensively guides us through the various twists and turns as China ascends to its place in the global system, one that corresponds with its economic size. He paints a picture of both missteps and successes from an administration in Beijing that takes the long view and shrewdly exploits opportunities to further China’s national interests. The book carefully cuts through the cloudy rhetoric of reform to pinpoint what is happening on the ground, beyond what is being written on paper.

One particular strength of the book is that Prasad takes the time to carefully walk the reader through the ideas of what it means to be a reserve currency, what the “internationalization” of the renminbi is, and how these concepts relate to capital account openness. Perhaps it is a reflection of my own nerdy economist predilections, but as Prasad traces out this path I would have appreciated a few more charts to help elucidate that narrative.

The book is at its most interesting and enlightening when it tries to tease out from the smoke and mirrors the political motivations behind various policy choices. How were the decisions to peg and de-peg from the U.S. dollar made? Why did being part of the SDR become such an important milestone for China? What are the likely prospects for economic, judicial, and political reform? Prasad usefully highlights the conflict and schizophrenia of the Chinese political elites who want the freedom of choice inherent in a market economy but, at the same time, display a deeply held risk aversion that repeatedly leads them back to a central planning mind-set and the assertion of government control over outcomes (particularly when growth looks like it’s flagging). He also provides context by capturing the essence of international reactions to China’s actions, particularly on the complicated relationship with the United States over the dollar-renminbi exchange rate.

As outsiders, we never really know what’s going on.

My one minor criticism of the book is that it presents these behind-the-scenes perspectives on domestic political motivations as being a little too definitive. Chinese politics is labyrinthine and opaque. The Communist Party of China is remarkably nonmonolithic, with dissent and disagreement always hidden below the surface. And there is a vibrant competition of ideas within the administration amid continuously shifting patterns of internal alliances. All of these factors make it extraordinarily difficult to diagnose, dissect, interpret, and extrapolate on the political motivations underpinning policy choices. Any guess of what really drives these behind-the-curtain machinations should humbly accept that, as outsiders, we never really know what’s going on.

There is an old Chinese proverb that says those who are closely involved can be blind while bystanders can see clearly. That is certainly true of this book. Unencumbered by political ideology or national interest, Prasad is able to walk the reader through the complex geopolitical and economic challenges associated with the renminbi—and to do so with informative and engaging prose.

Nigel Chalk

Deputy Director, IMF Western Hemisphere Department

Revolution Evolution

Klaus Schwab

The Fourth Industrial Revolution

Crown Business, New York, 2017, 192 pp., $28 (hardcover).

In this admirably short and graceful book, Klaus Schwab takes us on a breathless tour of a technological, economic, and social revolution. The first industrial revolution moved us from muscle to mechanical power between 1760 and 1840, the second brought mass production in the late 19th and 20th centuries, and the third delivered mainframes, PCs, and the internet through the 1990s. The fourth, according to Schwab, builds on the third but is much broader and more significant. Machines are becoming smart and connected, contributing to a dynamic fusion of technologies in the physical, digital, and biological and leading to change “unlike anything humankind has experienced before.”

Discussion of the economic and social implications of the current technological revolution is now familiar. What is distinctive in this book is the “spirit of Davos.” Schwab is the founder and head of the World Economic Forum (WEF), an independent international NGO dedicated to improving the world and famous for its annual assembly in Davos of leaders from “business, government, civil society, faith, academia, and the young generation.” Schwab draws on his WEF contacts and a rich set of WEF reports to grapple with what this revolution means for businesses, governments, individuals, and society.

The book starts with a whirlwind tour through the “megatrends” of the ongoing revolution: artificial intelligence, robotics, the internet of things, autonomous vehicles, 3D printing, nanotechnology, biotechnology, and so on. Schwab emphasizes not the individual technologies but the overall sweep of change: the unprecedented diffusion of “disruptors” such as Airbnb, the iPhone, and now autonomous cars; and a reduced role for workers. The “big three” companies in Silicon Valley in 2014 had the same revenues as the big three Detroit car companies in 1990, three times the market capitalization, and one-tenth the workers.

Tremendous economic growth will ensue. Schwab looks past Robert Gordon’s deflating fact that, in the United States at least, we have seen not a takeoff but rather a slowdown in productivity growth since 1970, except for a brief internet-fueled boom in the 1990s. He argues that the payoff is not yet here, because, as his WEF contacts tell him, the fourth industrial revolution is just beginning, and leaders are struggling to enact what must be a revolution in economic and organization structures in order to benefit.

The rest of the book reviews a broad range of challenges and opportunities for businesses, national and global institutions, governments, society, and individuals. Will the revolution unleash new prosperity and give workers productive new jobs, or will mass unemployment ensue? To Schwab, “(h)istory shows that the outcome is likely to be somewhere in the middle,” and the key is to foster positive outcomes and help those caught in the middle.

Will the on-demand economy, à la Uber, and the flexibility and mobility of the global digital economy empower people or trigger a race to the bottom? For Schwab, “the challenge we face is to come up with new forms of social and employment contracts . . . [that] limit the downside . . . while neither curtailing the growth of the labor market nor preventing people from working in the manner they choose. . . . The choice is ours.”

What is distinctive in this book is the “spirit of Davos.”

The book is perhaps strongest when Schwab leverages his WEF contacts and context to emphasize the challenges for individual members of organizations facing the revolution. I came away with a renewed sense that—like the proverbial shark that must swim to survive—we must learn and change. “The ride will only get faster, and the journey will therefore require a hard and honest look at the ability of organizations to operate with speed and agility.”

It took me some time to grasp the thrust of many of the conclusions; I suppose I was looking for specific policy recommendations. However, to understand the purpose of this book, we must return to Davos and the idea that collaboration permits a “holistic perspective of what is going on . . . that is critical to develop and implement integrated ideas and solutions that will result in sustainable change.” This book seeks a holistic understanding of the fourth industrial revolution, but I worry, as I’m sure Schwab does too, that the collective understanding of the world’s elite is not enough to meet the challenges ahead.

Andrew Berg

Deputy Director IMF Institute for Capacity Development