Ideas Untrapped – Détails, épisodes et analyse

In this episode of Ideas Untrapped we discussed the challenges and complexities of education, economic growth, and public health systems in developing countries with two brilliant guests James Habyarimana and Jishnu Das. We started off with an example on the rapid expansion of tertiary education in India and its unmet promise of better jobs, which led to discussions on similar dynamics in African contexts. The conversation explored the balance between market-driven growth and government intervention, emphasizing the need for robust processes and inclusive dialogues to address inequality, improve infrastructure, and shape a collective vision for the future. James Habyarimana is the Provost Distinguished Associate Professor at the McCourt School of Public Policy. His research is focused on identifying low-cost strategies to address barriers to better health and education outcomes in developing countries. Jishnu Das is a distinguished professor of public policy at the McCourt School of Public Policy and the Walsh School of Foreign Service at Georgetown University. Jishnu’s work focuses on health and education in low and middle-income countries.

Transcript

Tobi: Welcome to both of you. This is actually the first time on the podcast that i'll be hosting two guests at the same time and i feel so lucky that it's both of you, so welcome to Ideas Untrapped it's fantastic talking to you.

Jishnu: Great to be here, Tobi. Glad we're doing this.

James: I feel privileged to be sharing this time with both of you.

Tobi: Okay, thank you. You can take turn to answer as you choose. What inspired me to do this episode primarily was a very powerful article by Jishnu talking about

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college education and how young people may have been shortchanged by the promises

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and what the evidence suggests.

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So briefly,

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if you can just summarise for us,

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Jishnu,

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what inspired you to write that piece and what were the major findings?

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Jishnu: Yeah, sure, Tobi.

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And I'll ask James to talk about the African context.

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I mean, I know India fairly well.

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And one of the things that's so surprising and, you know, when people in the U.S.

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or people elsewhere hear it,

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they don't realise just how fast college education and college enrolment has

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increased in the country.

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Right.

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So one of the statistics that I got wrong because I couldn't believe it is between 2003 and 2016,

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India was building a new college every eight hours, right?

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And you think about a number like that and you say, what happened here, right?

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It's completely out of the experience that any of us has ever seen.

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There's a real, real thirst for education among young people.

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And it's not just a certain group.

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We are seeing it in all kinds of socioeconomic status, girls, boys, men, women.

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And it's interesting,

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like in a country like Pakistan,

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which is traditionally thought to be very patriarchal than it is,

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there are more women in college now than men.

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So there's this huge upsurge,

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maybe a huge demand for college education that's being met by all kinds of places.

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And, you know, education is a bit like looking at the stars.

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You're going to see what happened in the past in terms of, OK, all these guys came into college.

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What's going to happen to their lives after that?

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And that part is not clear.

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So India has grown a lot.

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It's a huge success story on some fronts, kind of.

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But really, more than 90 percent of the jobs are still informal.

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And we keep thinking BPO, you know, business process outsourcing.

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They're taking a lot of outsourcing jobs.

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You know,

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there's so little of that in actual numbers that it supports less than a percent of

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the population.

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So the question,

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the big question that comes is,

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OK,

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all these guys who are going into college,

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they're going in with the expectation that their lives are going to be a lot better.

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And are we going to be able to meet that expectation?

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And the phrase that people use is, you know, we have the so-called demographic dividend.

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where we have lots of young people and fewer older people.

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And the right way to think about it is how do we make sure that that demographic

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fraction which we call a low dependency ratio is a dividend and doesn't turn into a

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nightmare when you suddenly have these tons of people who are like,

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look,

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you sold us a dream.

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You told us that if we make it through the schools,

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which are not great,

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and we go to college and we finish our college,

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We'll get a decent job.

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Where is that job?

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That's why I called my blog a coming of rage story, because our college education has come of age.

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And the big question now is whether it's going to come of rage as well.

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And that's kind of, you know, where I left it.

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But I don't know.

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I mean,

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James,

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do you find kind of similar patterns in Uganda or in Tanzania where you work or

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other countries?

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James: Right.

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I guess I want to start by saying, yes, I mean, Africa is in some ways pretty, pretty diverse place.

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And so I'm going to focus a lot of my comments on the places that I'm familiar with,

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which would be East and Southern Africa.

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Tobi: Yeah.

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James: But I fully expect,

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as I was saying to Tobi,

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I've done some work both in Lagos and in northern Nigeria on education.

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So even though this is a little bit a while ago,

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so I don't quite understand the long run trends and,

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say,

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demand for college.

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But, you know, Africa is a very young continent.

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In many parts of Africa, the share of the population is under 30, you know, is close to two thirds.

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And so, yes, there is the same dynamics in terms of expectations of a better life.

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And of course, I think this is the challenge for politicians.

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So

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So earlier when Tobi was saying maybe,

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you know,

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infrastructure projects get more attention than,

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say,

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education,

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I actually think in the places where I work that,

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in fact,

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education gets much more attention because politicians are concerned about this rage,

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right?

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They're concerned about this gap between people's aspirations and essentially kind

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of the opportunities that are available when they finish school.

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I think that is a huge problem.

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Even in places,

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actually,

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the northeastern Nigeria,

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where I started to do some work on kind of apprenticeship programs,

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there's a lot of attention being paid to addressing essentially kind of this gap.

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Because I think ultimately,

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and I think most political scientists have suggested that essentially kind of the

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share of males between the age of 15 to 29 who are not engaged in school or active work,

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in some ways can be a major source of instability.

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And so I do see the same concerns.

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There's certainly been an explosion in

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in terms of tertiary institutions outside of government.

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And so there are many more private institutions in East Africa than exist,

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say,

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you know,

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20 or 30 years ago.

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I don't think people are building universities or colleges at the same rate as they are in India.

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But there's certainly kind of an attempt to respond to the exploding demand

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And I think ultimately the question for whether there's a demographic dividend or not,

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I mean,

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I've certainly made the case in other fora where I've said,

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look,

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we need to essentially kind of take advantage of this opportunity and we need to

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give these young people the skills to be effective in the world.

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But I think ultimately there is kind of a bigger question about sort of can these

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places produce the jobs and find the markets to really deploy these people?

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Yeah,

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so I hope we won't start the conversation by essentially kind of talking about rage

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as opposed to the high hopes.

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But yeah,

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I think many places where I work are facing the similar sort of challenge of,

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you know,

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how do we convert this opportunity into prosperity as opposed to civil conflict?

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Tobi: So I think for me, the rage...

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question is sort of unavoidable.

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Perhaps the evidence might tell us differently, but at least on some level of perception.

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Certainly, it's a story that resonates with me.

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I mean,

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I live in Lagos,

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Nigeria,

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and I can certainly tell from my observation that you see an army of young men from,

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say,

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18 to 25 with

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absolutely nothing to do, you know, just walking the streets, standing on the corner.

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So what I want to tease out with my next question is the intersection of skills and jobs, you know.

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So on the one hand, there's been this great expansion.

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I think it's certainly true, also of Nigeria, the expansion in tertiary education is crazy.

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Like private schools must be

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Now,

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I don't have the data immediately,

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but I think private universities must now outnumber public universities in Nigeria.

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You can certainly see the same trend in secondary schools.

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But at the same time,

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when you speak to employers,

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the story they tell is that,

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yes,

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there's a lot of schooling,

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but these folks are not really skilled.

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And then recently,

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the National Bureau of Statistics did a labour market survey and what they found is

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like 97% of jobs in Nigeria are still in the informal sector,

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right?

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So is it that we are not creating enough formal sector jobs or the inadequate

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formal sector job is itself a consequence of the quality of education?

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James: That's a great question.

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Let me try and take a stab at it.

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So my view is that clearly causation is running in both directions.

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But I actually would say that,

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in fact,

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I think it's the absence of better jobs that is possibly keeping down the quality

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of education more than essentially kind of the other way around.

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You know, we've written about the demographic dividend in, say, Southeast Asia.

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I think those were places where, in fact, the export markets essentially kind of provided lots of jobs.

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And it wasn't that the people first got education and then got the jobs.

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I mean, you know, in some ways, the question is, why do people get educated?

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There's a nice paper that talks about,

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ultimately,

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should we worry about education policy and improving quality of schools?

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Or should we worry about how to essentially kind of grow the economy, expand opportunities?

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And then in some ways, people will then respond

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to those opportunities by getting the education that essentially maximises those opportunities.

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One way we can generate lots of opportunities is to come up with great new ideas.

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Great new ideas create new markets,

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and you could argue that innovation requires a high-quality education system.

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But I think for many countries that are growing from the levels where Nigeria,

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Kenya,

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Zimbabwe are at the moment,

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My sense is I don't know that the kind of innovation that we're talking about is

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essentially kind of the most important thing.

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I think the lowest cost path is to find manufacturing related markets where,

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in fact,

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you can employ lots of people, where you don't need people to have PhDs and be

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creating patents to get the economy started.

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I suspect Jishnu might have a very different take on this.

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But I think my view is it's the opportunities first that shape the education system

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rather than output of the education system in some ways failing the country.

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Even though I should say I think both of these directions are important,

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I think, I certainly would put much more weight on the former.

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Jishnu: So, Tobi, your podcast is Ideas Untrapped?

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And the second part you didn't tell us, it's like Speakers Trapped.

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I mean, that's one of the deepest questions I've heard in a long time.

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And I'm going to push it back as a question to you and James, but it's a question that worries me.

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And just to quickly summarise,

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you probably already know this,

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but just to summarise kind of three big thought pieces that are out there.

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So Dan Rodrik,

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Kennedy School's been arguing that countries that are not already doing a lot of

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manufacturing have basically missed the manufacturing bus.

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And he's arguing that unlike, say, the U.S.

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or U.K.,

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which deindustrialised much later down the employment chain,

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a lot of countries,

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including Brazil,

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including other places,

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are deindustrialising prematurely,

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right?

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So he's saying, look, the manufacturing bus is lost.

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I mean, if you think you're going to generate those jobs through manufacturing, it's gone.

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I don't know how right these are, but let's just put these out there.

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And then interestingly, Rohit Lamba, who is an economics professor, has this

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very interesting book with Raghu Rajan,

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who was earlier our central bank governor and professor at Chicago,

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basically arguing that if India has to grow…

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So this is similar to Dani and they're saying,

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you know,

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it has to kind of give up on this idea of manufacturing and move to really high

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scale services and patents.

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Right.

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And for that, a whole host of changes are necessary.

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So then it kind of comes back to this big question of if you are able to create

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these really high skilled people coming out of the schooling system and the

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university system,

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will you be able to transition to a great service economy?

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And I'm going to put that question back to you,

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but kind of argue two pieces there,

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which,

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you know,

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I didn't find in Rohit and Raghu Rajan's book or in Dani's thinking.

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One is,

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look,

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if you ask people,

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and I think this is definitely true for India,

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I think this is true for many countries in Africa,

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what do you want from the government,

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right?

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They don't get upset.

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Like, I've never talked to a parent, and I've talked to many parents, but

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they don't get upset at the schooling system.

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You ask them, hey, why is your kid not doing great?

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They'll blame the kid.

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It's like, oh, she doesn't study enough or he doesn't study enough.

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They will almost never say, look, the teacher is a disaster.

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They'll never say, oh, the schooling is a disaster.

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They'll say, it's my kid, right?

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Because they see some kids do well and they see some kids not do well and they're like,

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oh,

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that's the kid.

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On the other hand, so when you ask them, what do you want from the government?

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The number one priority is we need jobs.

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Now, I don't know, and I'd love to hear from you and James on two things.

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One is,

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do you think we can shift or do you think it's even worth saying,

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you know,

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how does the government shift expectations from we want a job to we want our

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schools and universities to function at a totally different level,

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right?

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Do you think politicians are willing to take the risk of saying,

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hey,

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if we give you really good schools,

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but you don't get the jobs,

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you will still re-elect us.

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I don't know.

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And I want to hear what you guys have to say about that.

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And the second one,

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Tobi,

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that people are underestimating,

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and I'm more and more sure in 20 years is going to become a major dynamic,

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is that Europe is running out of people,

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right?

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I mean, the fertility rates are really low now.

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At some stage, they're going to have to get over their racism and bring people in.

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I don't know who these people coming in are, right?

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A big proportion of them are going to be nurses, right?

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nurses who are comfortable working with old people, right?

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So we used to think exactly, as James said, export-led.

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Now, Nigeria already exports a lot of doctors, right?

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I mean, we know exactly how big that export industry has been.

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But are we also thinking about a totally different scale of migration into Europe?

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And what do those skills look like?

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Because I think in 20 years,

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this conversation we're going to have is going to take on a completely different tone.

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Migration is going to be a big part of it.

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You know, how our countries are sending people to other countries is going to be a big part of it.

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And I don't know where that leads.

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So let me put those two questions back to you and James.

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I mean,

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this one about are we willing to transition to politicians saying jobs are really

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the private sector and you guys,

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we are going to give you the skills.

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And second,

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Are we thinking hard about the fact that given how much European fertility is

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declining and other countries' fertility is declining,

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that they're going to need people for all kinds of jobs?

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And is that something on the political horizon?

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And I don't know the answers to these two things.

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So let me tee that back to you as a question.

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Tobi: I think James should go first.

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James: You know, this is the trouble with having Jishnu on.

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He's supposed to be answering the questions, but now he's asking a lot of the questions.

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No, these are the most important questions I think facing certainly our field of development economics.

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And so I think on the second question about

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Does the government, is the government willing to change the offer, right?

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The social contract, change the terms of the contract to say, look, you're on your own.

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We'll give you the tools you need.

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You know, I don't know.

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But let me just say that from what I've observed in a number of places,

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including even in northeastern Nigeria,

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in Adamawa State,

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where we started some work,

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but then it got caught up in essentially kind of the impeachment of a governor

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there a few years ago.

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No, I think that it's extremely hard to change the terms of the contract.

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I think that voters are thinking about their bottom lines.

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They're not thinking about,

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you know,

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give me the tools and I will do the work myself to put food on my table.

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So I'm not sure that's an easy thing to do.

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And if I think about sort of

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what a number of governments in East Africa essentially kind of doing,

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at least in this domain,

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you know,

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I think they find themselves having to come up with all sorts of cash transfer and

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other labor market support programs because ultimately it's not enough for them to say,

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hey,

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you know,

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schooling is free because ultimately,

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as Tobi said,

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when you see those guys walking the streets,

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it's not like they stop asking,

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where is the job that I was promised?

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I think this deep implicit promise is very, very hard to shift.

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But to your second question, I'm curious what Tobi will have to say to this.

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The second question on the global demographic structures and maybe the future of jobs,

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and yes,

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the Rodrik and Raghu and Rohit kind of claim that the manufacturing bus has left

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the station.

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First of all, I'm not entirely sure that I completely buy it, but of course, we're also in the age of

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AI and more powerful machines that are essentially kind of around the corner.

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So it is possible that maybe that bus has left the station.

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And so maybe the future of,

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you know,

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the kinds of jobs that will create opportunities for this large group of young

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people in Africa and in India is essentially kind of in the service sector.

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And,

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you know,

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I already see some of that,

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you know,

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so in East Africa,

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they're big migrant worker,

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essentially kind of programs with the Middle East.

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They are straddled with lots of problems around abuse and exploitation.

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But I can tell you that if you get on a plane to Dubai or Qatar,

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that in some ways many of the people that will be surrounding me will be a lot of

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very young people going to work

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Either essentially kind of inside people's homes or in some cases as baristas and construction workers.

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So I think that's already started.

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And in the places where it's politically, I guess, feasible to do.

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I mean,

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I think,

(00:17:36):

yes,

(00:17:37):

Europe,

(00:17:37):

Japan,

(00:17:38):

North America,

(00:17:39):

you know,

(00:17:39):

yeah,

(00:17:40):

I think those are places where in some ways the political barriers remain

(00:17:42):

quite strong.

(00:17:43):

But I do think that politicians are certainly looking at a lot of these programs.

(00:17:48):

I believe in Kenya just recently signed an agreement with Germany along these lines

(00:17:52):

of basically being able to essentially kind of having some guest worker programs.

(00:17:55):

So I think this is top of mind and it in some ways reflects perhaps the difficulty

(00:17:59):

of kind of changing this contract between voters and their governments.

(00:18:03):

Jishnu: Ah, super.

(00:18:03):

And I just wanted to add one more thing to this,

(00:18:05):

Tobi,

(00:18:06):

for your next question,

(00:18:07):

which is,

(00:18:08):

you know,

(00:18:08):

if you look at Kenyans,

(00:18:09):

Nigerians,

(00:18:10):

I suspect,

(00:18:11):

Indians,

(00:18:11):

I mean,

(00:18:12):

we are ingenious people,

(00:18:14):

right?

(00:18:15):

When I came to the US for my PhD, you know, they would teach that the US is a free market.

(00:18:19):

I was like, you guys have no idea what a free market is.

(00:18:22):

A free market is when,

(00:18:24):

you know,

(00:18:24):

there's a traffic jam and the bus breaks down and you have 30 vendors come to your

(00:18:28):

spot in five minutes.

(00:18:30):

Tobi: Yep,

Jishnu: right?

(00:18:31):

Selling everything under the sun.

(00:18:33):

That's a free market.

(00:18:35):

A free market is not having any clue what your tax is going to charge because

(00:18:38):

everyone's going to negotiate depending on whether it's raining,

(00:18:41):

where you're going,

(00:18:42):

what time of day it is,

(00:18:43):

right?

(00:18:44):

That's a free market.

(00:18:45):

And very fascinating,

(00:18:46):

you know,

(00:18:47):

Rem Koolhaas,

(00:18:48):

the architect,

(00:18:50):

he worked in Lagos for like eight years and they have this wonderful book called Lagos: How it Works.

(00:18:55):

And recently, well, not, I don't know, recently, a while back, I think, his co-author, Kunle Adeyemi

(00:19:01):

I hope I'm pronouncing it right.

(00:19:04):

And it's fascinating what they said.

(00:19:05):

They have a Guardian interview where they said,

(00:19:07):

look,

(00:19:07):

Lagos in 1997 was this fascinating city where the government wasn't there,

(00:19:12):

but still people created a lot of structures that allowed that city to function at

(00:19:17):

a fairly high level.

(00:19:18):

I don't know whether you agree with that.

(00:19:20):

I don't know Lagos at all.

(00:19:21):

And in that interview, you know, at that point, the state had really withdrawn from Lagos.

(00:19:26):

The city was left to its own devices, both in terms of money and services.

(00:19:31):

That, by definition, created an unbelievable proliferation of independent agency.

(00:19:36):

Each citizen needed to take in any day maybe 400 or 500 independent decisions on

(00:19:42):

how to survive in an extremely complex system.

(00:19:47):

That was why the title of the book became Lagos: How it Works,

(00:19:49):

because it was the ultimate dysfunctional city.

(00:19:52):

But actually, in terms of all the initiatives and ingenuities,

(00:19:56):

It mobilised an incredibly beautiful, almost utopian landscape of independence and agency.

(00:20:02):

At this point,

(00:20:03):

you know,

(00:20:04):

and James,

(00:20:04):

I don't know whether that social contract will be able to change it,

(00:20:07):

but the ingenuity of our populations is just through the roof.

(00:20:13):

So we have a sense of how to move it forward and thinking about what are the

(00:20:17):

guardrails we need,

(00:20:19):

right,

(00:20:19):

in this kind of new world that's coming up is,

(00:20:23):

I think,

(00:20:23):

the key question.

(00:20:24):

Tobi: Hmm.

(00:20:25):

Before I jump to my next question, I'm certainly not as skilled as you guys.

(00:20:31):

So my observations are just going to be a layman's observation, basically.

(00:20:37):

On Jishnu's point, first of all, Rodrik has to at least I’ve extended an invitation to him.

(00:20:46):

He has to clarify a lot of things with that new paper.

(00:20:49):

Because for years, he has been arguing the opposite.

(00:20:55):

When people point out that,

(00:20:58):

yeah,

(00:20:59):

a lot of low income countries are stuck in low productivity,

(00:21:03):

informal services jobs.

(00:21:04):

And, you know, perhaps the question should be how to make those productive.

(00:21:11):

I think Rodrik is one of the people that has been arguing that,

(00:21:14):

no,

(00:21:14):

you need manufacturing to really,

(00:21:16):

really,

(00:21:16):

you know,

(00:21:17):

do the structural transformation.

(00:21:19):

So I don't know why or if the evidence that he has now is sufficiently robust to

(00:21:25):

like shift really,

(00:21:27):

really big.

(00:21:28):

But I mean, for Rajan and… Rajan, for example, has been like pushing that view for a while.

(00:21:37):

I think I've heard a few speeches before that book.

(00:21:41):

especially on the construction question.

(00:21:43):

So I'll give you an example.

(00:21:44):

In Nigeria,

(00:21:45):

for example,

(00:21:46):

the two largest private employers are construction firms,

(00:21:52):

Julius Berger and the other Chinese company.

(00:21:55):

The third largest is a microcredit bank, right?

(00:21:59):

So I agree with Rajan that construction is something that might

(00:22:07):

provide that sort of soft landing in terms of large-scale employment creation that

(00:22:13):

manufacturing is for some countries.

(00:22:17):

But as for manufacturing bus leaving the station,

(00:22:22):

again,

(00:22:22):

I'm skeptical because if you look at what Bangladesh has been able to do,

(00:22:27):

yes,

(00:22:27):

they are struggling with diversification away from textile.

(00:22:32):

If you look at what Vietnam has been able to do,

(00:22:36):

on manufacturing, then you see that, okay, well, maybe there's still some hope there.

(00:22:44):

In my own view,

(00:22:45):

I think the challenge would be how democracies manage to create… low income

(00:22:54):

democracies manage to create a highly productive industrial sectors.

(00:23:00):

So, and I think all eyes will be on India for the next decade.

(00:23:05):

you know, how the attention, the investment and everything coming in now can create that

(00:23:13):

China-like story.

(00:23:15):

All eyes will be on India.

(00:23:16):

And if India manages to make that a success story,

(00:23:20):

I think it provides a good example for how other democracies will… where the social

(00:23:26):

contract provides a bit of tension,

(00:23:29):

like you said.

(00:23:30):

And I agree with James.

(00:23:31):

It's difficult.

(00:23:33):

Again, if I want to use Nigeria as an example, electoral politics right now is largely redistributive.

(00:23:42):

You know,

(00:23:42):

if you want to shift spending and public investment towards something with,

(00:23:48):

you know,

(00:23:49):

a little more delayed gratification,

(00:23:52):

I'm not sure that politicians are willing to take that risk.

(00:23:58):

And secondly,

(00:24:00):

I would say that even if you find a government that is willing to take that leap,

(00:24:05):

you're going to run into some serious fiscal challenges that you need to figure out.

(00:24:12):

Macroeconomically, a lot of our economies in Africa are challenged.

(00:24:17):

The debt burden is a huge, huge topic.

(00:24:21):

So the kind of financing necessary to improve your education sector,

(00:24:28):

I think a lot of governments look at that and they would rather spend a fraction of

(00:24:34):

that on cash transfer schemes and expanding

(00:24:39):

public employment, public sector jobs.

(00:24:43):

So if we are able to figure out the finance and the level of fiscal investment that

(00:24:51):

that is going to take,

(00:24:52):

that is a question mark that would need to be resolved,

(00:24:55):

which,

(00:24:56):

I don't know,

(00:24:57):

then leads me to my next question.

(00:24:59):

Again, on the quality of education, what are the low-hanging fruits that

(00:25:09):

are available.

(00:25:10):

If we are trying to, say, improve the quality.

(00:25:14):

You know,

(00:25:14):

like I said earlier,

(00:25:15):

you speak to a lot of employers,

(00:25:17):

they tell you that a lot of graduates,

(00:25:19):

yes,

(00:25:20):

they are schooled,

(00:25:21):

but they are not skilled enough.

(00:25:23):

They are poorly matched to the job they are applying for.

(00:25:28):

For example,

(00:25:29):

most of the people you find in the financial sector in Nigeria are people who

(00:25:35):

graduated from STEM subjects.

(00:25:39):

Mathematics students,

(00:25:40):

engineering students,

(00:25:42):

physics students,

(00:25:43):

chemistry students,

(00:25:44):

they come out of school and they go straight to the financial sector,

(00:25:48):

to the banking jobs,

(00:25:49):

investment banking,

(00:25:50):

advisory consulting.

(00:25:52):

And to be honest,

(00:25:55):

you can say that if you have a thriving STEM sector,

(00:25:59):

they will be poorly matched because they did not actually get that STEM education.

(00:26:06):

You know, I went through the Nigerian schooling system.

(00:26:09):

I can tell you how much practical, laboratory or experimental work I did.

(00:26:16):

Very little, you know.

(00:26:18):

So what are the low hanging fruits to improve the quality of education?

(00:26:25):

Because we seem to have gotten ourselves into,

(00:26:29):

to use a phrase I first learned from Lant,

(00:26:32):

isomorphic mimicry,

(00:26:34):

you know.

(00:26:34):

We have graduates,

(00:26:36):

we have tertiary institutions,

(00:26:37):

but the quality is certainly not the same across the world.

(00:26:43):

James: Let me give this a crack and then I'll let Jishnu polish up my response.

(00:26:46):

So I don't know that there are necessarily low-hanging fruit.

(00:26:49):

I mean,

(00:26:50):

in some ways,

(00:26:51):

I think the way to think about an education system is that the people who are

(00:26:54):

producing the outputs are also essentially kind of products of that education system.

(00:26:58):

And so,

(00:26:58):

yes,

(00:26:58):

I certainly think that if you want to improve the education system,

(00:27:01):

you have to start with the teachers.

(00:27:03):

And then you have to make it easy for the teachers to essentially kind of do their job.

(00:27:06):

And in a context of a historical and,

(00:27:08):

you know,

(00:27:09):

pretty unprecedented expansion of schooling,

(00:27:12):

you know,

(00:27:12):

over the last 50 years,

(00:27:13):

you know,

(00:27:13):

these school systems have expanded very,

(00:27:15):

very rapidly.

(00:27:16):

The curriculum that essentially kind of is being taught,

(00:27:18):

I mean,

(00:27:19):

you know,

(00:27:19):

when you were talking Tobi,

(00:27:20):

I thought,

(00:27:20):

OK,

(00:27:21):

you probably had the same curriculum that I went through,

(00:27:23):

which was,

(00:27:23):

I think,

(00:27:24):

in some ways quite challenging.

(00:27:25):

And if you went to a good school,

(00:27:27):

you had good teachers and you were surrounded by students who actually were well

(00:27:31):

prepared to learn.

(00:27:32):

But my sense is an expanding kind of school system cannot maintain the same degree

(00:27:37):

of difficulty of the curriculum.

(00:27:38):

Or even these things like,

(00:27:39):

you know,

(00:27:40):

the language of instruction is a language that nobody speaks at home.

(00:27:43):

And so the teachers might be struggling to teach in English or French or whatever language,

(00:27:48):

you know,

(00:27:48):

in many places.

(00:27:49):

Tanzania and Kenya may be in some ways a little bit different.

(00:27:52):

So I do think making it easy for teachers requires changing the curriculum and

(00:27:56):

making it easy for students to learn.

(00:27:57):

But,

(00:27:58):

you know,

(00:27:58):

also realising that teachers now deal with,

(00:28:01):

you know,

(00:28:01):

in Tanzania where I work,

(00:28:03):

the average class size for a first grader is on an order of 80 to 100 kids.

(00:28:07):

And teaching in that environment is not easy.

(00:28:10):

And so the low-hanging fruit, I think the low-hanging fruit, in fact, is not that low-hanging in my view.

(00:28:15):

It's really essentially kind of to have to invest a good deal more in early childhood

(00:28:19):

education and to really try and make it easy for that first grade teacher to

(00:28:23):

actually be able to give kids the skills they need.

(00:28:26):

There's a really nice paper,

(00:28:27):

and Jishnu can say a bit more about this,

(00:28:29):

that sort of looks at a panel of kids from four countries,

(00:28:32):

I think is Young Lives Data,

(00:28:33):

and compares Vietnam,

(00:28:35):

Chile,

(00:28:35):

and I believe India and Ethiopia.

(00:28:37):

And of course, you know, Vietnam is a high-performing education system.

(00:28:41):

But it suggests,

(00:28:41):

at least to some extent,

(00:28:43):

that much of that great performance actually comes from the fact that the kids at

(00:28:47):

age five are doing much,

(00:28:48):

much better in Vietnam than they are in the other countries.

(00:28:51):

And that if you condition essentially kind of where they start,

(00:28:54):

you know,

(00:28:54):

the trajectories don't look so,

(00:28:55):

so different but if you focus their starting at a much better level.

(00:28:58):

that in fact, they're going to learn much more.

(00:29:00):

That I don't consider a low-hanging fruit.

(00:29:02):

I actually think that's a pretty significant investment.

(00:29:05):

And I think a number of countries are starting to take this seriously,

(00:29:08):

which is to say,

(00:29:09):

should we expand the age range for which we publicly fund education,

(00:29:14):

say from age six,

(00:29:15):

and maybe even think about starting to fund education from age four?

(00:29:19):

Because I think it makes it much,

(00:29:20):

much easier to give kids the foundational skills that then make them,

(00:29:23):

I think,

(00:29:24):

much more productive workers.

(00:29:26):

So I don't think it's low-hanging fruit, but in fact, I think of these two things.

(00:29:29):

Start young and make it easy for the teachers to teach,

(00:29:32):

whether that includes changing the language of instruction,

(00:29:35):

whether it makes it easy for teachers to spend more time teaching kids the

(00:29:39):

foundational skills.

(00:29:40):

So don't make kids at age six learn five or six different subjects.

(00:29:44):

Maybe focus it on two or three.

(00:29:46):

I think all of those things for me are ways to make it easy to really give kids the

(00:29:50):

skills that they need to learn when they're 10,

(00:29:52):

12,

(00:29:52):

and 16.

(00:29:54):

Jishnu: I guess I'm confused about things a little bit, but I'll tell you where my confusion is.

(00:29:59):

So I've heard people say, you know, our education systems are not actually designed to build skills.

(00:30:05):

They're selection systems, you know, by which they mean.

(00:30:09):

We are remnants of the British systems.

(00:30:11):

And the idea was,

(00:30:13):

can we squeeze and squeeze and squeeze and see who's going to be a good person for

(00:30:17):

the British to take on or something?

(00:30:20):

I don't think they're a selection system at all,

(00:30:21):

because if they're a selection system,

(00:30:23):

then we should see that in every grade as we go up and up and up,

(00:30:28):

only certain kids are making it forward who are the best kids with the best test scores.

(00:30:32):

And that's not happening.

(00:30:34):

[No] Data showing that, you know.

(00:30:35):

There's just no evidence that the kids who are very smart are invested in a lot more in our system.

(00:30:43):

So I think one thing that I think is or not is actually sitting down and chatting

(00:30:49):

about what the hell do we want our education systems to look like.

(00:30:53):

And a good starting point is to say what kind of budgets are reasonable.

(00:30:57):

So, you know, I think this is right, right?

(00:30:59):

But the Nigerian education budget 2024 was what, about $2.2 billion or something?

(00:31:05):

Is that right?

(00:31:06):

Tobi: Yeah, something like that.

(00:31:07):

Yeah.

(00:31:08):

Jishnu: And I think Nigeria should have, what, about 35 million students.

(00:31:12):

You know, that's like $60 a student.

(00:31:15):

The place where I live in the U.S.,

(00:31:17):

which is called Montgomery County,

(00:31:20):

the public school system has about 160,000 students and a budget of 3 billion.

(00:31:27):

We might be just off the mark.

(00:31:30):

by hundreds and thousands of dollars in how much we're leaving on the table by not

(00:31:36):

investing in the education system.

(00:31:38):

So I think the biggest low-hanging fruit is the mistake that we have made.

(00:31:43):

I mean,

(00:31:43):

I think it's incumbent on us as researchers and profs and scholars to say,

(00:31:49):

give the politicians the damn numbers,

(00:31:52):

right?

(00:31:52):

We need to give them very clear numbers on if you manage to invest and improve the quality of schools,

(00:32:00):

then 15 years later, these are the wage returns you're going to see.

(00:32:05):

The mistake is ours.

(00:32:07):

The deficiency is ours because I am sure that if we were able to give them the

(00:32:12):

right numbers,

(00:32:12):

there would be a groundswell,

(00:32:15):

both among the politicians and among people to say we should be increasing our

(00:32:20):

education budgets not by 1,

(00:32:21):

2,

(00:32:21):

20%,

(00:32:21):

30%,

(00:32:21):

but by 6,000%,

(00:32:21):

right?

(00:32:26):

And hopefully,

(00:32:27):

you know,

(00:32:27):

in a couple of years,

(00:32:28):

at least from a few countries like these Young Lives or other places,

(00:32:30):

we'll have some of those numbers.

(00:32:32):

And I think we'll all be shocked at how big the returns could really be.

(00:32:38):

So I think the big low hanging fruit is to actually put the evidence and have that

(00:32:44):

discussion on what is it that we want our education system to do,

(00:32:48):

right?

(00:32:48):

And how much should we be investing in it?

(00:32:50):

And at what point?

(00:32:51):

And I think that discussion, including James's idea of how much should we invest in early childhood?

(00:32:56):

Do we want it to be a selection system or not?

(00:32:58):

Given our money, where can we go?

(00:33:01):

You know, how do we invest in the teachers, given that so many teachers are tenured?

(00:33:05):

Should we park some older teachers?

(00:33:07):

Getting some young guys who are teched up, know how to use the technology, the AI may change things.

(00:33:12):

You know,

(00:33:13):

all of these,

(00:33:14):

I think we need to have a forum where we are discussing it in our countries on a

(00:33:19):

regular monthly basis.

(00:33:21):

I think that's going to make a huge change moving forward.

(00:33:24):

And our big job is to give you the evidence to take that forward.

(00:33:28):

Great point.

(00:33:29):

I fully agree that there are high returns.

(00:33:31):

I'm not sure that I agree necessarily that people are not sharing this evidence.

(00:33:35):

You're right that in some ways I think the kind of evidence that is shared perhaps

(00:33:38):

is more short-term in nature,

(00:33:40):

right?

(00:33:40):

But I wonder whether in fact, and this is a question for you, Tobi.

(00:33:43):

Whether,

(00:33:44):

in fact,

(00:33:44):

the political system as it is and essentially kind of this,

(00:33:47):

you know,

(00:33:48):

electoral competition makes it very,

(00:33:50):

very difficult for any sort of policymaker to say,

(00:33:53):

I'm going to make this deep investment that pays off in 10 or 15 years.

(00:33:58):

And, you know, we will all be better off because of it.

(00:34:01):

And I hope to persuade the voters that they should essentially kind of,

(00:34:04):

you know,

(00:34:04):

carry this burden with me.

(00:34:06):

And, you know, things might not be great in the short run when I'm up for re-election.

(00:34:10):

But this is something we need to do.

(00:34:12):

I don't know the Nigeria numbers as well as I know the numbers in East Africa.

(00:34:16):

You know,

(00:34:16):

Nigeria's education still accounts for,

(00:34:18):

you know,

(00:34:19):

20 to 25 percent of the budget in many places.

(00:34:22):

And it's coming down because,

(00:34:24):

in fact,

(00:34:24):

there's actually now pressure from other sectors to say we need roads and we need

(00:34:28):

other kinds of investments.

(00:34:29):

But I get the sense that teacher,

(00:34:31):

you know,

(00:34:31):

enrolments are essentially kind of the largest category of worker they pay.

(00:34:35):

They spend a lot of their government resources on remunerating teachers.

(00:34:39):

I don't know that there is actually a lot of additional money around to really make

(00:34:44):

these big investments.

(00:34:45):

Sure,

(00:34:45):

they could go to the World Bank and other bilateral donors and say,

(00:34:49):

you know,

(00:34:49):

give us the billions we need to buy ed tech or do this big teacher training program.

(00:34:54):

I think they are in some ways, you know, quite constrained.

(00:34:57):

And I don't know that it's the evidence that's lacking as kind of the most binding constraint.

(00:35:02):

I think that the politics and the budget are more important, but I could be wrong.

(00:35:06):

Tobi: That's fantastic.

(00:35:09):

I still partially think that Jisnu is right.

(00:35:12):

And from my experience, so one example I'll give is I was at a conference two years ago.

(00:35:18):

And an outgoing state governor was on the panel.

(00:35:23):

And one of the things he said, which actually kind of resonated with me, was that we are politicians.

(00:35:32):

We don't know everything.

(00:35:34):

As a matter of fact,

(00:35:35):

he said that their knowledge is pretty limited and that the way the political

(00:35:40):

system… now,

(00:35:41):

it may as well just be describing Nigeria,

(00:35:43):

possibly.

(00:35:44):

The way the political system is,

(00:35:46):

is that when there is a knowledge vacuum,

(00:35:50):

other things tend to fill that,

(00:35:53):

which is a lot of political sycophants surround them.

(00:35:58):

And of course, lots of interests.

(00:36:00):

You know, I want you to give my cousin a job.

(00:36:03):

And these are political connections.

(00:36:06):

He basically said that within a short period of time,

(00:36:09):

they are surrounded in this bubble where almost no real actual knowledge about the

(00:36:16):

society they are making policy for penetrates that bubble.

(00:36:22):

For me, it certainly rings true.

(00:36:24):

And I'll tell you,

(00:36:25):

part of the reason why I started this podcast is to sort of create a connection

(00:36:30):

between policy and research,

(00:36:34):

you know,

(00:36:35):

with the politicians and the citizens as well.

(00:36:38):

Because if citizens are also quite well informed, they can ask the right questions.

(00:36:44):

So I think that while we are focused on

(00:36:47):

a lot on the incentive problem for our political system.

(00:36:51):

The knowledge problem is there, but it's not getting all the attention.

(00:36:57):

So you can have a senator or a House of Representatives member in Nigeria with as much as 50 to 70 aides.

(00:37:07):

And they are all media people.

(00:37:10):

There are no technical people on their staff.

(00:37:13):

People that can actually pass them briefing notes on

(00:37:17):

what policy is,

(00:37:19):

what the current evidence is,

(00:37:21):

what is the latest research on the particular committee that that rep member or

(00:37:28):

senator is chairing in the National Assembly.

(00:37:32):

So there's a disconnect

(00:37:34):

in how knowledge penetrates the political system, certainly.

(00:37:39):

And I don't know if it is researchers that can make a lot of difference here.

(00:37:43):

There are certainly a lot of other players,

(00:37:45):

stakeholders,

(00:37:46):

people in the non-governmental sector,

(00:37:47):

people like me,

(00:37:49):

media,

(00:37:49):

that can make a lot of contribution here to make sure that the evidence,

(00:37:54):

the numbers,

(00:37:55):

the knowledge really,

(00:37:56):

really rings and it's loud enough to get the attention of political players.

(00:38:03):

So that's my view.

(00:38:05):

Jishnu: I appreciate both sides of this debate

(00:38:08):

And I want to know whether,

(00:38:10):

you know,

(00:38:11):

I almost feel,

(00:38:12):

Tobi,

(00:38:12):

that we need to do some experiments like,

(00:38:15):

you know,

(00:38:15):

like if you put in aides who actually know the policy a little bit,

(00:38:20):

if we bring in some students and work with the governors and this kind of stuff on this,

(00:38:25):

will things start changing?

(00:38:27):

I'd love to get some answers to that because, frankly, you're right.

(00:38:32):

We need to get these answers down.

(00:38:34):

Tobi: Yeah.

(00:38:35):

James: So Tobi, a lot of these senators and governors, they are pretty sophisticated actors.

(00:38:40):

There's no shortage of very technical and experienced folks in Nigeria and outside

(00:38:45):

of Nigeria that these guys could talk to,

(00:38:47):

right?

(00:38:47):

And by the way,

(00:38:48):

I do agree with you that your podcast is a really powerful vehicle for connecting

(00:38:53):

ideas and policy and implementations.

(00:38:56):

This is an important avenue,

(00:38:57):

also because in some ways,

(00:38:58):

I think sometimes the ideas that researchers produce and other technical folks are

(00:39:02):

locked away in formats that are just generally not readily available to the kinds

(00:39:07):

of people who actually need them.

(00:39:08):

And so I think a conversation is a good way to essentially kind of get that started.

(00:39:11):

And I think even the pressure that will come from voters who listen to your podcast

(00:39:16):

is powerful.

(00:39:17):

Stefan Dercon has a book called,

(00:39:19):

you know,

(00:39:19):

I think,

(00:39:20):

Gambling on Development,

(00:39:21):

which is to say,

(00:39:22):

you know,

(00:39:22):

ideas in the abstract can be powerful ways of transforming systems.

(00:39:27):

But the actual work of actually translating ideas and implementing them is risky.

(00:39:33):

And so for a politician to take on these risks,

(00:39:35):

I don't think many are going to be willing to say,

(00:39:37):

I'm going to sink all my political capital in this big program.

(00:39:40):

It takes a long time, is uncertain, is subject to all sorts of other essential kind of shocks.

(00:39:45):

and fiscal risks and reversals and so on.

(00:39:48):

You know,

(00:39:48):

so that for me weighs a bit more heavily than he's a guy who wants to do great

(00:39:53):

things and is just casting around for ideas and they're just nothing to be found.

(00:39:57):

I think they meet with lots of technocrats and other people who tell them this and that,

(00:40:02):

but ultimately they have to think,

(00:40:04):

can I pull this off?

(00:40:05):

Can I do good and still essentially be successful as a politician?

(00:40:08):

And I think that calculus is still maybe as important as the landscape of ideas that they're exposed to.

(00:40:14):

Jishnu: Yeah, I mean, I don't know that much about politics and politicians.

(00:40:18):

I always have a hopeful view of the future and of our compatriots.

(00:40:23):

And I feel politicians should be creatures of our own creation.

(00:40:28):

And I've seen the democracy work,

(00:40:31):

you know,

(00:40:31):

and when we put democratic pressure and bring a coalition together,

(00:40:34):

it matters.

(00:40:35):

So I'm going to be the hopeful guy here.

(00:40:38):

Look, I think, Tobi, what you're doing is super important.

(00:40:41):

And I think as it starts to deepen and these kind of engagements deepen,

(00:40:45):

you know,

(00:40:45):

as long as we on our side are providing reasonable data,

(00:40:49):

evidence that you can have good discussions on the basis of,

(00:40:53):

maybe things will start evolving.

(00:40:56):

Tobi: So along the line of this conversation, I was thinking one curious question about health.

(00:41:03):

of generally what we call healthcare here.

(00:41:06):

Again, this might just be my imagination going wild.

(00:41:11):

So from an incentive point of view,

(00:41:15):

how much do you think that global public health interventions interferes with the

(00:41:23):

incentive to invest in healthcare locally?

(00:41:27):

So I'll give you an example.

(00:41:29):

Recently,

(00:41:30):

Bill Gates was in Nigeria a couple of weeks ago to talk about malnutrition,

(00:41:35):

which is now a very big problem,

(00:41:38):

particularly in northern Nigeria,

(00:41:40):

because in the last decade or so,

(00:41:43):

consistent with even previous years,

(00:41:46):

it's been one region of the country that is most ravaged by poverty,

(00:41:51):

lack of education,

(00:41:53):

a lot of violence and political instability,

(00:41:57):

and

(00:41:58):

Essentially, it's created this crisis.

(00:42:02):

The latest being malnutrition about one in four kids in northern Nigeria are now

(00:42:09):

chronically malnourished.

(00:42:12):

So recently,

(00:42:13):

Bill Gates was in the country to promote micronutrients and some form of technical

(00:42:20):

intervention that is supposed to make all the difference.

(00:42:23):

And

(00:42:24):

Yeah, of course, it's giving some money, about $600,000 for that initiative.

(00:42:30):

And,

(00:42:30):

I mean,

(00:42:31):

low-income countries like Nigeria are never short of such global public health interventions.

(00:42:38):

But at the same time,

(00:42:39):

I kind of worry how it interferes with the incentive,

(00:42:45):

again,

(00:42:45):

talking about politicians here,

(00:42:47):

to invest locally,

(00:42:50):

whether it is in primary health care or whatever.

(00:42:53):

So...

(00:42:54):

How does global public health interventions interfere with the incentive to invest locally?

(00:43:01):

Because there's always state neglect on some level when it comes to healthcare investment.

(00:43:07):

Jishnu: I think James will be a perfect person to answer that.

(00:43:13):

James: Let me take a crack.

(00:43:15):

I do think that the interaction of external actors in health can sometimes do more harm than good.

(00:43:23):

I've seen both sides of essentially kind of this,

(00:43:25):

where in some ways an external intervention doesn't really improve outcomes and in

(00:43:30):

some ways distorts a lot of the decisions that people are making.

(00:43:33):

But I've also seen it in many ways actually sort of bring attention to populations

(00:43:37):

that perhaps don't have the political clout to get the services they need,

(00:43:40):

right?

(00:43:40):

So I don't know that,

(00:43:42):

you know,

(00:43:42):

in some ways that we could conclude comfortably that in fact,

(00:43:45):

if these guys sort of stayed out of our business and

(00:43:48):

that, in fact, would make better decisions in the health sector.

(00:43:51):

In some ways,

(00:43:52):

I go back to environment where these systems are essentially kind of cash strapped

(00:43:56):

and they can't provide a lot of services to most of their populations.

(00:44:01):

And I think Jishnu has done quite a lot of work on this,

(00:44:02):

where in some ways,

(00:44:03):

a lot of these health systems in some ways have a big urban bias.

(00:44:06):

We spend more on hospitals and less on public health or primary health care.

(00:44:12):

In some ways,

(00:44:13):

I do think that sometimes the arrival of,

(00:44:15):

you know,

(00:44:16):

not Bill Gates per se,

(00:44:17):

but,

(00:44:17):

you know,

(00:44:17):

if I think about the other actors,

(00:44:19):

the WHO and other international actors,

(00:44:22):

I think they sometimes actually try and rebalance these programs to some extent.

(00:44:26):

But yeah, I think they can certainly do more harm than good.

(00:44:28):

I mean,

(00:44:28):

despite their maybe good intentions,

(00:44:31):

I certainly don't want to start any rumours that they don't have good intentions

(00:44:34):

because I think there's also a lot of discussions out on social media that suggest that,

(00:44:38):

in fact,

(00:44:38):

they are malevolent forces.

(00:44:40):

They actually don't mean well.

(00:44:42):

I think many times they mean well,

(00:44:43):

but there are sometimes unintended consequences of those interventions.

(00:44:46):

Jishnu: So, Tobi, here I'm going to go all Shakespearean on you.

(00:44:49):

And, you know,

the fault, Brutus, lies not in the stars, but in us.

(00:44:56):

In this case, at least, you know, in the following sense, right?

(00:44:59):

I mean,

(00:44:59):

I know that Bill Gates was in Africa and there's been a bunch of articles,

(00:45:03):

including in the Mail and Guardian and in other places,

(00:45:07):

talking about farmer Gates and what he's getting wrong.

(00:45:10):

And in Zambia,

(00:45:10):

for instance,

(00:45:11):

there's been this big concern that,

(00:45:12):

look,

(00:45:13):

Bill Gates really,

(00:45:14):

according to the Mail and Guardian,

(00:45:16):

Simon Allison writes that he really pushed monoculture.

(00:45:20):

And now the country's been in a massive drought and people are suffering.

(00:45:23):

And earlier, people used to plant many crops.

(00:45:26):

And that's been a standard problem ever since the British tried to introduce indigo

(00:45:30):

in West Bengal,

(00:45:31):

right,

(00:45:32):

from a long time ago.

(00:45:33):

Now, my point is the following, which is we are a democracy.

(00:45:38):

So Zambia,

(00:45:39):

Nigeria,

(00:45:40):

India,

(00:45:40):

you know,

(00:45:41):

we may argue about how effective we are,

(00:45:43):

but frankly,

(00:45:44):

we gave universal suffrage to our citizens long before we got rich.

(00:45:48):

And it has mattered.

(00:45:49):

It has made a difference.

(00:45:51):

So my question is the following.

(00:45:52):

We absolutely should not go down the line of saying,

(00:45:56):

oh,

(00:45:56):

we can do everything indigenously and we'll do everything in country.

(00:46:00):

And who are these foreigners to come?

(00:46:02):

No.

(00:46:02):

I mean,

(00:46:03):

if somebody has a good idea,

(00:46:04):

somebody has something interesting to say,

(00:46:06):

absolutely listen to them.

(00:46:07):

It sounds to me completely bizarre to say,

(00:46:10):

oh,

(00:46:10):

we'll not take penicillin,

(00:46:12):

even though it's been invented because it came from a foreigner.

(00:46:14):

No, ideas belong to humanity.

(00:46:16):

And we should celebrate ideas.

(00:46:18):

It doesn't matter to me where the idea came from.

(00:46:20):

If it's a good idea, let's use it.

(00:46:22):

Where I think we run into problems is when we say and when we allow rich people to

(00:46:30):

have privileged access to our political leaders.

(00:46:34):

I think that's the big problem, right?

(00:46:37):

And it's not just rich people.

(00:46:39):

You know, these guys are like super rich.

(00:46:40):

But frankly, we allow all kinds of people access to our political leaders outside the democratic system.

(00:46:46):

So Bill Gates wants to come and say,

(00:46:48):

you guys should be growing monocultural maize or whatever he's saying.

(00:46:50):

I'm not an agriculturist.

(00:46:51):

And I do know that,

(00:46:52):

you know,

(00:46:53):

there are huge differences in productivity between African farms and American farms.

(00:46:58):

You know, whatever he's saying, put it in a damn newspaper.

(00:47:01):

Get on your podcast.

(00:47:04):

Make the case to the public.

(00:47:06):

Tobi: Yep.

(00:47:07):

Jishnu: That I'm totally fine with.

(00:47:09):

And if you want to put your money behind your case, great, right?

(00:47:14):

Don't go and try and sell it to the cabinet or to a particular minister without

(00:47:20):

going through our democratic processes.

(00:47:22):

And we are the people who have to go to our politicians and say,

(00:47:25):

look,

(00:47:25):

what the hell are you doing while listening to this guy without going through our processes?

(00:47:29):

So I don't find it a question of

(00:47:33):

foreigner, foreign money, not foreign money.

(00:47:35):

I find it a problem when it becomes this idea that somebody can come in and whisper

(00:47:41):

in the ears of the finance minister.

(00:47:42):

I think that's totally anti-democratic.

(00:47:45):

And we have to fight tooth and nail to make sure that that's not happening.

(00:47:49):

James: But Tobi,

(00:47:50):

I guess to this point,

(00:47:52):

I fully agree that there should be a very transparent process of adjudicating ideas

(00:47:57):

and offers of support from outside.

(00:47:59):

But I guess in this case,

(00:48:00):

what is your concern with saying here's a very short term urgent intervention to

(00:48:06):

address malnutrition in the context?

(00:48:09):

And I don't know the context very well.

(00:48:10):

So please inform me where,

(00:48:12):

in fact,

(00:48:12):

you know,

(00:48:12):

states in northern Nigeria are really struggling to really intervene.

(00:48:16):

Like what is the distortion that is being created by the arrival of this idea and support?

(00:48:21):

Tobi: I do not really have a strong objection.

(00:48:25):

I don't even have a strong view.

(00:48:27):

It's just a question of curiosity because prior to some of these issues,

(00:48:34):

intervention or when the problems become serious enough to get some form of

(00:48:39):

international attention,

(00:48:42):

almost often,

(00:48:44):

at least I can speak for Nigeria to a certain degree,

(00:48:47):

there have been a long neglected advocacy or

(00:48:52):

noise that politicians or whoever makes decisions ignore, usually for years.

(00:49:01):

So malnutrition in Northern Nigeria,

(00:49:03):

I know so many local activists who are actively involved in Northern Nigeria who

(00:49:08):

have been making noise about this problem for a long time.

(00:49:12):

In some cases,

(00:49:13):

four or five years ago,

(00:49:14):

that this is what we are seeing on the ground and this will become a problem

(00:49:20):

Down the line, this is a disaster we tend to happen, you know.

(00:49:24):

And all of a sudden,

(00:49:25):

Bill Gates can fly in,

(00:49:26):

talk about micronutrients,

(00:49:28):

meet the president,

(00:49:29):

put some money,

(00:49:31):

you know,

(00:49:31):

and then it becomes a problem that commands urgency.

(00:49:35):

And,

(00:49:36):

you know,

(00:49:37):

again,

(00:49:37):

James,

(00:49:37):

I hear you on the question of resources,

(00:49:40):

but at the same time,

(00:49:42):

for example,

(00:49:43):

if you go to northern Nigeria and you see the way the political class,

(00:49:46):

state governors live,

(00:49:48):

Of course,

(00:49:49):

there is resource constraint,

(00:49:50):

but you can also say with some level of confidence that there is misallocation

(00:49:56):

going on.

(00:49:57):

If you don't even want to lean too hard on the corruption question,

(00:50:00):

which is,

(00:50:00):

you know,

(00:50:01):

perennial,

(00:50:02):

you know,

(00:50:02):

there is some form of misallocation going on.

(00:50:05):

So I just wonder, it's more of a curiosity for me.

(00:50:09):

I don't have a strong view, particularly.

(00:50:12):

James: But I think my response to this would be to say that in some ways that the

(00:50:15):

political process is not tuned to really reallocate resources in the way that you

(00:50:21):

and I think it should.

(00:50:22):

So ultimately, these activists who are organising and making a lot of noise, they're not being heard.

(00:50:28):

So one interpretation would be to say,

(00:50:29):

well,

(00:50:29):

Bill Gates comes in and has this idea and suddenly everybody thinks,

(00:50:32):

you know,

(00:50:32):

this is something you should be paying attention to.

(00:50:34):

That's one interpretation.

(00:50:35):

And yes, going back to Jishnu's point, I mean, you know, I think the power belongs to the people.

(00:50:40):

in Nigeria and not to wealthy and influential outsiders.

(00:50:43):

But I think another view is that the activists have actually sort of broken through

(00:50:47):

and that sometimes you might need this assist.

(00:50:50):

As much as,

(00:50:50):

you know,

(00:50:51):

it's undesirable,

(00:50:52):

I think we all wanted a system where we don't need outsiders to advocate on behalf

(00:50:56):

of the people on the ground.

(00:50:57):

But that's another view too,

(00:50:58):

which is to say that suddenly these people now have a champion who can actually get

(00:51:03):

the attention of the political class.

(00:51:05):

Tobi: Yeah.

(00:51:06):

Jishnu: Can I add one more thing?

(00:51:08):

Tobi: Yes, please.

(00:51:09):

Yes.

(00:51:09):

Jishnu: So it's worth going back and saying, OK, what was maybe it's worth going back.

(00:51:14):

I won't claim that it is,

(00:51:15):

but it might be worth going back and saying,

(00:51:18):

OK,

(00:51:18):

what did people write about,

(00:51:20):

say,

(00:51:20):

colonial medicine?

(00:51:21):

Right.

(00:51:22):

Which we know is a big, big part of what anthropologists and historians have looked at.

(00:51:26):

Right.

(00:51:27):

The person whose work I found most interesting in this is David Arnold,

(00:51:31):

and he has this book called Colonizing the Body on British medicine in India.

(00:51:35):

And he basically argues that,

(00:51:37):

look,

(00:51:37):

I mean,

(00:51:38):

there was a huge give and take happening between both systems that gradually got

(00:51:42):

transformed into kind of British ideas becoming,

(00:51:47):

you know,

(00:51:47):

the British starting to think that their idea should be widely used and whatnot.

(00:51:52):

And it met with massive resistance.

(00:51:54):

But the very interesting point he makes in the last chapter of his book is because

(00:51:59):

of various missteps they took,

(00:52:02):

the Indian group started mistrusting any advice that they gave,

(00:52:08):

thinking that all of their advice was coloured by,

(00:52:10):

you know,

(00:52:11):

colonial,

(00:52:12):

how do I get the labour kind of ideas,

(00:52:15):

right?

(00:52:16):

And as a result,

(00:52:17):

you know,

(00:52:17):

one of the most troubling things for me has been there were all these sanitation

(00:52:21):

commissions that were set up in India.

(00:52:23):

And there's very nice work that Guha has done,

(00:52:26):

that Harrison has done,

(00:52:28):

showing that when these sanitation systems were put into cantonments,

(00:52:32):

the mortality went down dramatically.

(00:52:33):

Right.

(00:52:34):

What's really interesting is they didn't make it out of the cantonments.

(00:52:38):

And part of the reason seems to me and David Arnold's book kind of talks about this,

(00:52:43):

is people really started mistrusting the Brits and saying,

(00:52:46):

look,

(00:52:46):

you're just doing this because of X,

(00:52:48):

which is self-serving.

(00:52:49):

And that's,

(00:52:50):

I think,

(00:52:51):

one big piece that we need to avoid,

(00:52:52):

which is we don't want to end up in a system where we are saying no to good ideas

(00:52:57):

coming from outside.

(00:52:59):

Because we think they are corrupt.

(00:53:01):

No, I think that's the big risk that we need to avoid.

(00:53:04):

And then on the flip side is how do we actually make sure that bad ideas don't come

(00:53:10):

through because they are actually being supported by money that is outside the system.

(00:53:15):

You know,

(00:53:16):

the World Trade Organisation has this idea of anti-dumping,

(00:53:18):

which is you can't just put products at highly subsidised prices in other countries.

(00:53:23):

It's this anti-dumping law.

(00:53:25):

I think we would have an anti-dumping law for bad ideas.

(00:53:28):

Tobi: That sounds interesting.

(00:53:31):

James: But as Tobi said earlier,

(00:53:32):

we need essentially kind of a pretty good constellation of actors to make judgments

(00:53:37):

on what's a good and bad idea.

(00:53:39):

Jishnu: Yep.

(00:53:39):

And I think that given how he described essentially kind of the people around a lot

(00:53:43):

of these decision makers,

(00:53:45):

I worry that that's actually sort of not trivial.

(00:53:48):

Jishnu: Yeah, and I think part of that, James, is we have to do it, right?

(00:53:51):

I mean,

(00:53:52):

yes,

(00:53:52):

we have to suck up to the fact that our funding gets in danger,

(00:53:55):

that we run into all kinds of issues when we take on these things.

(00:53:59):

But, you know, part of our job is all to say, sorry, man, that's a really bad idea. Like,

(00:54:04):

Gabriel Demombynes did that for,

(00:54:06):

you know,

(00:54:06):

Sachs when they had this article on their big push, millenium covering…

(00:54:10):

he said,

(00:54:10):

look,

(00:54:10):

the data is not there.

(00:54:11):

And they had a big fight and it turned out the data was not there.

(00:54:14):

So I think part of what we should be doing is taking that forward and saying when

(00:54:19):

it's a bad idea,

(00:54:20):

giving people the ammunition,

(00:54:21):

giving Tobi the ammunition,

(00:54:22):

giving others the ammunition to say,

(00:54:24):

sorry,

(00:54:24):

this is a bad idea.

(00:54:26):

Tobi: So, I mean, this has been a wonderful conversation beyond my expectations.

(00:54:31):

I just have a couple of questions left.

(00:54:33):

So I'll go back again to another piece you wrote, Jishnu,

(00:54:39):

which also quite literally lit a fire in my belly,

(00:54:43):

where you basically challenged your colleagues in the development economics subfield,

(00:54:50):

you know,

(00:54:51):

about some moral questions that they should be asking and are not.

(00:54:58):

I don't know why you chose to write that piece or what you saw,

(00:55:02):

but the way I'm going to phrase the question to both of you is like this.

(00:55:07):

I know that economics generally is going through some sort of empirical phase.

(00:55:15):

Do you think that that has been traded up for asking the big questions that I

(00:55:23):

certainly believe are still relevant,

(00:55:25):

which is

(00:55:27):

Essentially, for me, how does Nigeria double its average income in the next 10 years?

(00:55:35):

How does places essentially get out of poverty?

(00:55:41):

Do you think we've abandoned trying to find answers to those kinds of questions for

(00:55:48):

maybe what Lant has militantly called “kinky stuff?’

(00:55:55):

Jishnu: James has been going first, so.

(00:55:57):

James: No, no, no.

(00:55:58):

This is a question posed and motivated by your writing, Jishnu.

(00:56:03):

So you should go first.

(00:56:04):

Jishnu: I'm happy to take a first glance at this.

(00:56:06):

But, Tobi, you have to warn us even to, you know, completely put us over the wringer.

(00:56:11):

I mean, these are very difficult.

(00:56:13):

So two things, I think two things.

(00:56:15):

I was at the World Bank when there was this whole Spence report on what causes growth.

(00:56:19):

And they had this line,

(00:56:21):

if you go back to that,

(00:56:22):

they had this line saying,

(00:56:23):

if there was a magic bullet or if there was a specific set of policy recommendations,

(00:56:28):

we would have come up with it.

(00:56:29):

We spent a lot of time on this and there isn't, right?

(00:56:32):

And I think if you look at what Abhijit writes,

(00:56:34):

if you look at Esther's idea of the plumber,

(00:56:38):

the economist as plumber,

(00:56:39):

it's saying,

(00:56:40):

hey,

(00:56:41):

can we be modest and humble about where we are and what we know?

(00:56:45):

And the fact of the matter is we don't have a really good set of prescriptions for

(00:56:50):

what growth should look like.

(00:56:52):

But

(00:56:53):

By working on all these different issues, we do start to make progress on people's lives.

(00:57:01):

So if you think about the Millennium Development Goals,

(00:57:03):

I feel the biggest thing the MDGs did was it created a deliberative process to say

(00:57:09):

it's not only about growth.

(00:57:11):

We should care about the fact that fewer children are going to die.

(00:57:14):

We should care about infant mortality regardless of whether it affects growth.

(00:57:18):

And I completely agree with that viewpoint.

(00:57:21):

Then what our discipline does or is doing, look, it's always the case that there's a seesaw.

(00:57:28):

You know, we are always on a seesaw.

(00:57:31):

Right.

(00:57:32):

And one part of that seesaw is what's going on in the world.

(00:57:37):

And the second part of that seesaw is let's close off a lot of things,

(00:57:43):

otherwise we cannot make progress,

(00:57:45):

right?

(00:57:45):

Every discipline needs to build walls around itself because if you let too many

(00:57:50):

things in,

(00:57:51):

then you don't make progress,

(00:57:53):

right?

(00:57:54):

So around the early 2000s,

(00:57:56):

we really had a lot of work that said what's going on around the world,

(00:58:00):

right?

(00:58:00):

So we had, oh, lots of kids are in school, but they're not learning.

(00:58:03):

Look, people go to doctors and they don't get the right diagnosis.

(00:58:06):

Look, the teachers are absent.

(00:58:07):

Lots of stuff, right?

(00:58:09):

On a lot of different things.

(00:58:10):

And we've made,

(00:58:11):

I think,

(00:58:12):

tremendous progress over the last 15 years in saying,

(00:58:16):

hey,

(00:58:17):

on some things and less on others,

(00:58:18):

saying,

(00:58:18):

hey,

(00:58:19):

these were great pieces on what's going on around the world.

(00:58:22):

Let's now put that wall around it and make progress on these issues.

(00:58:26):

And some places we've made a lot of progress, others less so.

(00:58:31):

I feel that now that we had the seesaw that said the real world, make progress by building walls,

(00:58:38):

Now I think we need to push that seesaw back.

(00:58:41):

So it's not necessarily the type of work that we're doing.

(00:58:45):

It's more within the disciplinary core because you always need both types of work.

(00:58:51):

It's within the disciplinary core.

(00:58:53):

Which one do you privilege?

(00:58:55):

So I think it's time to go back to saying we need to privilege the basic work that

(00:59:01):

starts re-examining the world and saying 20,

(00:59:04):

25 years later,

(00:59:06):

what are people's lives like?

(00:59:08):

And I'll give you one example.

(00:59:09):

Right.

(00:59:09):

I was in Delhi over the summer and it struck me,

(00:59:12):

you know,

(00:59:13):

so many of our cities because of climate change are now on the verge of being unlivable.

(00:59:20):

Right.

(00:59:20):

If you look at a place like Delhi,

(00:59:22):

you know,

(00:59:23):

January pollution levels that are at 500,

(00:59:26):

600 on the P2 at 2.5.

(00:59:27):

Right.

(00:59:27):

It's unlivable.

(00:59:31):

February, same thing.

(00:59:32):

March is kind of OK.

(00:59:34):

April starting to get hot.

(00:59:35):

May, 52 degrees.

(00:59:37):

June, 50 degrees.

(00:59:38):

Heat stroke through the roof.

(00:59:40):

July, humidity, wet bulb thermometers above what is livable.

(00:59:44):

August, same thing.

(00:59:45):

October, kind of livable.

(00:59:47):

November, the pollution is back.

(00:59:48):

You put it together and you say, how is a poor person going to live in this damn city?

(00:59:54):

And somebody who can put that together,

(00:59:56):

somebody who can start to say,

(00:59:58):

OK,

(00:59:59):

here's how I want you to think about the year and climate change.

(01:00:02):

That kind of stuff we solely need now.

(01:00:05):

And I think we are almost there.

(01:00:07):

So it's not a question of fighting the discipline.

(01:00:09):

It's saying what part of the discipline should at this point get the emphasis?

(01:00:15):

And I think that, you know, it's going to move.

(01:00:17):

It has to move.

(01:00:18):

It has to move.

(01:00:19):

There's just no two ways around it.

(01:00:21):

James: So let me just add a few comments on,

(01:00:23):

you know,

(01:00:23):

maybe going back to Tobi's question,

(01:00:25):

like where is the advice about how can we get Nigeria to double its income over the

(01:00:30):

next 10 years or so?

(01:00:31):

And there's a really nice characterisation of the two kinds of development economists.

(01:00:36):

And I will not name the person who has shared this characterisation.

(01:00:40):

But there's a small ‘d’ development economist and there's the big ‘D’ development economist.

(01:00:45):

And I think historically,

(01:00:46):

if you think about the big push ideas of the 60s and 70s,

(01:00:49):

or even essentially kind of the Washington consensus in the 90s,

(01:00:53):

I think much of that advice was really about the big D development economists.

(01:00:57):

And maybe the conclusion there, you know, at least it has been going back to sort of the Spence report.

(01:01:03):

Maybe we just don't really have, you know, a very clear set of guidelines.

(01:01:07):

We thought we did, right?

(01:01:09):

We thought we did, you know, reduce your fertility, make markets work.

(01:01:13):

It doesn't seem to kind of produce the benefits, I think, that we would like to think.

(01:01:17):

And, you know, Dani Rodrik has a book, I think, I wish it were more accessible to the general public.

(01:01:22):

You know,

(01:01:22):

we have one economics,

(01:01:23):

but many recipes,

(01:01:25):

which is to say the solution for Nigeria might be very Nigeria specific.

(01:01:29):

It might require essentially kind of a very untraditional path,

(01:01:33):

which is not coming out of a 10 point or 20 point economic plan.

(01:01:37):

But my sense is that, you know, what's happened perhaps to the field is

(01:01:41):

is maybe being honest with ourselves that we don't have all of the answers,

(01:01:47):

at least for essentially kind of the big question that you asked,

(01:01:49):

Tobi,

(01:01:49):

that that answer is not going to come in a nice big report.

(01:01:53):

That that answer,

(01:01:53):

in fact,

(01:01:54):

is a process of,

(01:01:56):

you know,

(01:01:56):

trying a bunch of things,

(01:01:58):

establishing,

(01:01:59):

you know,

(01:01:59):

maybe let's go back to Dani's idea.

(01:02:01):

Like, let's do industrial policy, but let's try and do it well.

(01:02:04):

And we're going to fail.

(01:02:05):

And maybe we might discover one or two great ideas where Nigeria can be quite successful, right?

(01:02:11):

But that's in some ways kind of saying,

(01:02:13):

rather than,

(01:02:14):

you know,

(01:02:14):

do this and this will happen,

(01:02:16):

this is basically,

(01:02:16):

you know,

(01:02:17):

establish,

(01:02:18):

and this is… Jishnu will like this,

(01:02:19):

establish a process for discovering essentially kind of good and bad ideas.

(01:02:24):

And maybe that's essentially kind of the way forward.

(01:02:26):

I'm not going to give you a guarantee that you'll be successful.

(01:02:29):

But in fact, this process will essentially kind of at least help you shut down bad ideas.

(01:02:33):

There's nothing wrong with actually sort of disinvesting in essentially kind of

(01:02:36):

things that are not working in general.

(01:02:38):

And then I think the other part of this,

(01:02:39):

for the small ‘d’ development economists,

(01:02:42):

I certainly sort of think I'm in that category,

(01:02:44):

is what can you do today,

(01:02:46):

right?

(01:02:46):

So maybe there are the big questions about sort of growth over sort of the next 10 years.

(01:02:51):

But I think it's important to also try and improve the outcomes of people today, right?

(01:02:56):

And so I do think that there should be room under the umbrella for both types of economists.

(01:03:01):

But yeah, I certainly think that there's been a shift.

(01:03:03):

Like in order to make space for the small ‘d’ development economists,

(01:03:06):

I think the big ‘D’ development economists in some ways have had to take a backseat.

(01:03:10):

And, you know, it might be a good time, as Jishnu says, to bring them back to the front of the class.

(01:03:14):

Tobi: Final question for both of you.

(01:03:18):

So this is a bit of a tradition on the podcast.

(01:03:21):

What is the one idea?

(01:03:22):

It may be something you're working on, maybe someone else's idea.

(01:03:27):

Can be anything.

(01:03:29):

But what is that one idea that you would like to see spread everywhere,

(01:03:35):

have a lot more influence,

(01:03:37):

have a lot more people believe in?

(01:03:40):

What is that one idea?

(01:03:42):

I'll start with James.

(01:03:44):

James: Put it this way,

(01:03:45):

you ask this question at a really challenging time where in some ways there's more

(01:03:49):

dark clouds on the horizon and maybe,

(01:03:51):

you know,

(01:03:52):

less room to be very optimistic.

(01:03:55):

But let me just say that I think, you know, this might not be a completely original idea.

(01:04:01):

We need to rethink what investment in any infrastructure means today.

(01:04:08):

I certainly think that markets are ultimately at the centre of driving a lot of

(01:04:12):

progress and prosperity and markets work well when people are very well connected.

(01:04:16):

And we are pretty well connected in terms of communications infrastructure,

(01:04:20):

but we're not as well connected on the hard infrastructure.

(01:04:23):

If I think about the prospects that are happening in the parts of the world that I

(01:04:27):

do work in,

(01:04:28):

I worry that,

(01:04:29):

you know,

(01:04:29):

Jishnu was talking about temperature and pollution.

(01:04:33):

I'm worried also about, you know, whether we have

(01:04:36):

roads that are climate proof, whether we'll have schools and hospitals that are climate proof.

(01:04:43):

And while essentially kind of this idea in some ways raises the cost of doing

(01:04:46):

business in general,

(01:04:47):

that I think we really need to start thinking about how we can climate proof the

(01:04:52):

infrastructure we have and what we already have.

(01:04:54):

And so,

(01:04:55):

you know,

(01:04:55):

I don't think this is wildly kind of original,

(01:04:58):

but I just finished doing some work in Rwanda and

(01:05:02):

a big chunk of that work is affected on every rainy season where roads get washed away.

(01:05:08):

And, you know, communities are essentially going to cut off for a long time.

(01:05:11):

And,

(01:05:11):

you know,

(01:05:11):

we're certainly seeing this around the world,

(01:05:12):

not just in East Africa,

(01:05:14):

in Nepal and in North Carolina,

(01:05:16):

you know,

(01:05:16):

not far from here.

(01:05:17):

And so my concern is that we need to start preparing for a world in which life is

(01:05:21):

going to be much more challenging.

(01:05:23):

Tobi: Your turn, Jishnu.

(01:05:25):

Jishnu: You know, so a while back, I had this conversation with this politician, right?

(01:05:29):

And he said,

(01:05:30):

look,

(01:05:30):

around the early 90s,

(01:05:32):

you know,

(01:05:32):

all of you guys said,

(01:05:34):

bring in the market,

(01:05:35):

start to liberalise and everything will improve for everybody.

(01:05:39):

And he said,

(01:05:39):

basically,

(01:05:40):

what I've seen is that things have improved massively for very rich people,

(01:05:44):

but the poor are still where they are.

(01:05:46):

And in fact, they would be much worse off if the government was not doing all kinds of things.

(01:05:49):

And I think that's roughly right, right?

(01:05:52):

So, you know, I want to go back and say, look,

(01:05:55):

I think we are at times, exactly as James said, that are very challenging.

(01:06:01):

And one more thing which is worth emphasising and worth remembering is we are at a

(01:06:07):

time of exceptional,

(01:06:09):

I don't know whether it's exceptional,

(01:06:10):

but we are at a time of massive change,

(01:06:13):

right?

(01:06:14):

And I think what we keep doing as policymakers and economists is we keep saying, do this, do that.

(01:06:21):

And I think we need to start thinking seriously about what kind of robust processes

(01:06:28):

do we need to put in place so that our populations have,

(01:06:32):

you know,

(01:06:33):

serious democratic and deliberative discussion about what they want to do,

(01:06:37):

where they want to go next.

(01:06:39):

Right.

(01:06:41):

So it could well be that our democratic discussions and all of that throws up,

(01:06:47):

hey,

(01:06:47):

we want Nigerian incomes to double over the next 10 years.

(01:06:52):

But it could also be,

(01:06:53):

Tobi,

(01:06:53):

that that conversation throws up,

(01:06:56):

I'm fine with our incomes going,

(01:06:58):

I'm not fine with it doubling,

(01:07:00):

if what it means is that the rich are now 30 times richer and the poor are 5% richer.

(01:07:07):

which is what, you know, we measure it as doubling.

(01:07:09):

But look, I mean, if you look at India, you look at the US, you know, what was the thing?

(01:07:13):

Real wages haven't changed since 1980, 1985 for the poor, right?

(01:07:18):

I mean, that's crazy to me, right?

(01:07:21):

I mean,

(01:07:21):

a lot of the growth in incomes that we're seeing in India is coming from some rich

(01:07:25):

people basically exploiting the environment.

(01:07:27):

So I want to say, how do you, me, how do all of us work on saying

(01:07:33):

What's the process that we need to have robust conversations about who we want to

(01:07:39):

be and where we want to be 20 years,

(01:07:41):

10 years from now?

(01:07:43):

Do we want to be working like crazy and have more money?

(01:07:46):

Great.

(01:07:47):

Or do we want that medicines are available to everyone?

(01:07:50):

That's also great.

(01:07:52):

We should not stick to an ideological position of markets are good regardless of what they do.

(01:07:58):

We have to stick to this is who we want to be.

(01:08:01):

And if the markets are not working or something else is not working, let's change it.

(01:08:05):

So if there's one idea I want people to take away,

(01:08:07):

look,

(01:08:07):

the power really is in us and we need to get together and say,

(01:08:12):

what are the processes that we want to live by that makes at least our kids have a

(01:08:16):

much better lives than we?

(01:08:19):

You know, that's our aspiration as all parents is that our kids have a better lives than we did, right?

(01:08:24):

And I would urge that we start thinking about what processes do we need to put in

(01:08:28):

place to navigate us through these difficult times.

(01:08:32):

Tobi: Thank you very much to both of you. It's been fantastic having this conversation.

James: Thank you so much, Tobi. Thanks for having us on and for grilling us with these really challenging questions.

Jishnu: Oh, my goodness. I feel like we've been put through the ringer on this one. No, Tobi, this was really a pleasure.

In this episode of Ideas Untrapped, I sit down with economist Oliver Kim to explore the complexities of African economic growth and the challenges surrounding industrialisation. We discuss why Africa has struggled to replicate the manufacturing successes of East Asia, touching on issues such as labour costs, political economy, and the global market environment. Oliver also shares his thoughts on the importance of state capacity and regional integration and how to rethink GDP statistics in development research. Oliver Kim is an economic historian and a research fellow at Open Philanthropy. He also writes excellent blog Global Developments.

Transcript

Tobi:Welcome, Oliver, to the show. I've been a fan for a while, and it's fantastic talking to you. So thank you so much for coming on Ideas Untrapped.

My first question to you involves something you wrote a couple of months ago where you talked about African prices, which is always a puzzle that I've been interested in. So, to restate it as simply as possible, we know that manufacturing in Africa has not grown as much, at least relative to other sub-regions in the world. And there are some theories or findings that suggest that it’s because labour cost is too high. And there's a bit of back and forth in the debates about how unique that is to Africa as a continent. So can you shed more light [on that]?

Because you see a lot of comparisons, maybe Ethiopia and Bangladesh…the unit labour cost and how high it is. So, is that really the constraints? What are the nuances based on what you discussed in that blogpost?

Oliver:Yeah. Just to quickly summarise. Africa has kind of missed out on the manufacturing revolution that, for instance, propelled East Asia…so when you think of the East Asian tigers, China, to rapid rates of growth and poverty alleviation. And, i think in some countries, actually, the share of manufacturing value-added or the share of manufacturing employment is the same or lower than where it was in the 1970s immediately after independence. So, from a developmental standpoint, this is a bit of a puzzle and from a poverty alleviation standpoint, it's a tragedy because this is the only sort of way that we know how to lift large numbers of people out of poverty in a rapid sort of fashion. That’s how China did it; that's how earlier, Korea, Taiwan, and Japan did it.

From a prices standpoint, the problem that economists have identified is that labour costs are too high relative to the level of productivity. That's an important qualified statement to make. So most developing countries are poor [and] as a feature of a developing country, one thing that's true is that incomes are relatively low, wages are relatively low, and so labour is relatively cheap. It's also true that if you're a foreign firm deciding where to site a factory, you don't just care about the labour cost. You also care about the productivity of the workforce. And so it works out that what you care about is like the amount of productivity divided by the cost of hiring additional worker.

And on that metric, which is typically measured in something that's called a unit labour cost (the amount that it costs to produce one unit of output), a lot of sub-Saharan African countries turn out looking relatively poor, especially compared to their peers [at] similar sort of income levels.

So there's sort of two dimensions of this problem. One is the productivity side, and then the other is the cost side. On average, it appears basically that African countries have wages that are actually relatively high for their level of development. And so this becomes a further mystery, like why is this the case? One hypothesis that's been put forward in a couple of papers by the folks at the Center for Global Development is that it's because prices are too high. So this is like one step up the causal chain. If prices are high and the goods and services that are to buy cost too much, then you have to pay people a higher wage basically to afford that.

Of course, the sort of factors behind this, I think, are incredibly complex. I think one major, sort of, historical and fundamental feature that I would point to is that historically labour in Africa, sub-Saharan Africa has been relatively scarce. So this is the contrast I guess, with East Asia and potentially South Asia, where population density is incredibly high and labour is constantly in surplus.

So historically, you know, China, East Asia is like one of the most densely populated regions of the world. The opposite is kind of true in Africa. Now the population has grown a lot, but historically you just had actually a lot more land than people. And if you look at the deep history of African sort of polities, a lot of them were trying to economise more on people than on land. So like in East Asia and Western Europe, you know, you had states with very clearly defined boundaries and political control was defined by control over land.

In Africa, there are states, but there are also instances basically where political control was defined more by control over people. And so there was more fluidity in terms of like territorial boundaries. And so control basically of labour, potentially through slavery also, was a way of a political state to assert power. That's a bit of a digression, but historically speaking, you had relatively low population density. I think that's part of the factor into capitalism. why labour was relatively scarce and maybe why wages are low. So in the present day, maybe that's starting to change a little bit. But looking at the sort of deep fundamental factors, it appears that maybe wages are potentially, quote unquote, “too high to enable a sort of African manufacturing revolution.”

Tobi:Yeah, maybe I read that wrong. But one of the things you discussed in that particular essay was the Assam non-linear model or something like that. It was a U-shaped relationship between GDP and price levels, which, again, maybe I'm wrong about this, the conclusion that sort of came out of that, that this might not necessarily be a problem that is unique to Africa. So can you shed more light on that?

Oliver:Yeah. So let me talk about what I talked about in the blog post. So economists have this relationship. It's a purely like empirical one. So if you go out in the world and you observe things, it's called the Balassa-Samuelson relationship, where basically it appears that as countries get richer, prices of things like haircuts and services seem to go up almost more than proportionally, right?

So like, you know, if I go to Switzerland, which is a very rich country, a haircut costs like $30 or something, something ridiculous. Actually, it's probably more than that. It's like $50 or something, 50 Swiss francs versus, you know, if I go to a Kenyosi in Kenya or whatever to go to a barber, that same haircut, which effectively is not that differentiated in terms of quality. Like a haircut is a haircut. Like if I ask for a buzz cut, it's the same thing. It's the same product, but that product in Kenya probably costs a dollar or possibly less. And so this sort of weird differential where richer places seem to have higher prices is known as the Balassa-Samuelson effect. And if you think about like the sort of underlying theoretical mechanism here, basically richer countries have higher productivity. Higher productivity shows up in like higher productivity in let's say like the manufacturing sector or higher tech kind of sectors.

For like service sectors, which everybody needs, right? So everybody needs like barbers, everybody needs janitors, teachers, things that basically don't increase that much in productivity. Even these sectors need to face higher wages in these rich countries in order for them to be able to compete with the manufacturing sector where productivity has gone up a lot, right?

So like people can switch jobs, people can move between different sectors of the economy. And so the price basically of these service sector goods where productivity actually hasn't gone up that much have to sort of keep pace.

And that's how you end up with this phenomenon where - the same haircut, essentially the same quality, costs the same amount across two places with very different incomes. Now, the way that economists typically have thought about this is that there's a linear relationship. So if you drew like a scatterplot of countries by their income levels and their price levels, you'd just get something like a line. That's like the theorised kind of relationship, a linear Balassa-Samuelson relationship. By that logic, if you put African countries on that scatterplot, it looks like basically that their prices are too high.

So they're lying above this line on the scatterplot between GDP and price levels. What I was arguing in this piece is there's some research, in particular a paper from the Journal of International Economics by Hassan, I forget his first name, I think from like 2017 or so, basically arguing that maybe this Balassa-Samuelson relationship is not actually linear. Maybe it's actually nonlinear, right? There's no actually like really strong reason that this thing has to be linear. It's just like it's the easiest model to write down.

And this is like a common flaw amongst economists is that you go with the first thing that's like easiest mathematically to do. And then you forget that it's just a simplification and you start to treat it like a feature of reality. But so he writes out a more complicated model where, you know, as is true in the real world, there's not just like a service sector and a non-service sector, as I laid out just a minute ago. There's agriculture, there's manufacturing, there's services. Countries basically shift between these three things as they vary in their stages of development, right?

Agriculture for a lot of developing countries is actually mostly non-traded. Think of subsistence farmers, people who grow maize or soybeans for their own consumption. And so it's not the same as a big agricultural producer in Europe or whatever that's just trying to sell to the entire world. And so you can think of those agricultural products as more like the services, like those haircuts that I was describing in like a European country. And so it works out if you do the math and you account for basically the movement of labour between these different sectors as an economy develops, you end up with something that looks more like a non-linear Balassa-Samuelson relationship, like a U-shape, right?

So prices may start to go down a little bit as you move from a low level of income to like a medium level of income. And then they start to go up again. And so accounting for this kind of nonlinear Balassa-Samuelson relationship, maybe sub-Saharan African countries don't look like so much of an outlier in a global sense. Maybe this is actually just like a general sort of pattern of development that all countries have gone through, where their prices have started to go down a little bit and then gone up. And so maybe prices are not the reason that African manufacturing has sort of lagged behind.

Tobi:One thing I'm curious about, which I would like you to speculate on a little bit, is how this all relates to food prices. I know that maybe Tom Westland has done a little bit of work here on food prices and divergence in Africa. It's hard to generalise for the entire continent, like you said, but for example, in Nigeria, food inflation is currently 40%. It's been double digits for about a decade. If you further break that down into what, actually, households spend money on, it's mostly food, right? So, like, we have these higher prices, which then feeds into higher wages. What is the relationship to the sort of inability of some African economies to achieve agricultural productivity enough to bring down food prices?

Oliver:Yeah, so this is an incredibly complex issue. I think it plugs into the political economy of a lot of sub-Saharan African states. So the most famous book on this kind of subject is Robert Bates's Markets and States in Tropical Africa. And it's a very slim book, but I think it's a remarkably powerful set of analytic tools for thinking about this stuff. So let's take a step back. Most developing countries, not even just African countries, but most developing countries, what do they have to produce? They have agriculture, right? [In] Most developing countries, most people are farmers.

And immediately after independence, again, not just African countries, but countries in South Asia, countries in East Asia, All of them, they achieved their independence and they started to figure out like, what can we potentially do to start growing? And what sector do you basically have in order to finance development? If you want to import machines, you want to like, you know, foster manufacturing growth. The only sector that you have is basically agriculture, right? And so there's this strong impulse basically to essentially tax agriculture to finance the capital imports and things that you need to foster manufacturing growth.

There's actually a lot of pressure basically to lower the prices that are paid to agricultural producers to finance imports of machines and stuff from richer countries. This process happened not just in sub-Saharan Africa, but again, like in Taiwan and Korea, where basically the state imposed policies that actually had an anti-agricultural bias.

The difference, I think, that Bates argues is that these policies became much more entrenched in sub-Saharan Africa, where basically the state had a lot less sort of penetration into the countryside, where the state was not as beholden, I guess, to the needs and interests of farmers, for instance. And the state basically became captured in the large sense by urban elites who discovered basically that they liked having prices, particularly of food, which as you mentioned [that] for a developing country is the largest portion of the consumption basket, in a lot of places.

And in a trade sense, they also liked having relatively cheap imports from other countries. So for the growing African middle class [and] for the elites, you know, they liked imports of European cars and luxury goods and that kind of stuff. And so that favours an exchange rate that tends to be overvalued to make your imports cheaper. And that actually hurts farmers who are interested potentially in exporting for whom an undervalued exchange rate would actually be the pro-developmental policy.

This is maybe one point of divergence between East Asia and a lot of countries in Sub-Saharan Africa, where, you know, you started from a very similar kind of logic, which is that you should try and take resources, pull resources out of agriculture to fund manufacturing growth so that you can have your own sort of industrial revolution. But those sort of policies that effectively tax agriculture and made it cheaper basically for urban consumers, became entrenched in places like Nigeria and Kenya because the political class and the governing elite became beholden to them in a way that was not true in East Asia. So that was kind of a tangent from your original question, but I think the political economy aspects are worth highlighting here.

Oliver:You’ve mentioned You've mentioned East Asia a couple of times in your answers. It's become the model, the standard when we talk about the economic development. I was telling a friend recently that ever I was telling a friend recently that ever since East Asia, the East Asia phenomenon, basically every country has been trying to make a miracle in terms of development. I mean, 2-3% rate of growth no longer suffices. You have to do 7-10%, at least since China. What was so unique about those set of states Japan, Taiwan ,Korea, Singapore to a lesser extent, Hong Kong? What was so unique about them and that time period that made it possible? Because essentially, i would say, that no country has been able to repeat that level of convergence since .

Oliver:Yeah, unless you happen to be lucky enough to find yourself sitting on a gigantic oil field. Though I guess it's also true that that's not even necessarily good for development. There's a couple of factors that I'd highlight. So the first, I guess, is historical stuff. So East Asia, in some sense, is unusual like Western Europe, in that it has a long history of being organised along state lines. In some senses, like Korea, Japan... and certainly China, these are polities that emerged before the emergence of states in Western Europe. And there's been a lot of research actually trying to understand how these states emerged without a lot of the same interstate warfare that characterised Europe in the medieval and the early modern period, but instead through a process of Confucian learning, of an elite that was based around meritocratic civil service kind of stuff.

Historically, this place is like a little bit unique. And it's unlike, let's say, a lot of Sub-Saharan Africa, where at the time of European colonisation, around 50% of the people were living in sort of polities organised as states. That's not a statement about like, oh, states are better or more developed in any sense. But for the specific problem of if we want to do things like industrial policy or like agricultural policy, get growth to happen, it turns out that having things organised as a state turns out to be a very effective sort of organisational form. Again, to go into the deep history of that a little bit more is this was a rational sort of response by people who were living in Africa at the time, in part because of the relatively low population density. The places actually where you see the emergence of states in Africa around like the Great Lakes region, for instance, or the Ethiopian highlands are places where you had relatively higher population density. So in that sense, it tracks basically the broader sort of global pattern.

Anyway, that's a long digression to say that East Asia is kind of unique in having relatively well-defined strong states. And that kind of already solves a lot of the problems that I think a lot of sub-Saharan African countries are facing, where, you know, essentially a lot of them are creations of European colonialists. You have a whole bunch of people from different tribes, different ethnic backgrounds who don't actually have a whole lot to do with each other and they're lumped together in states that just kind of lack coherence. And so the 60 years since independence have been tragically marred by a lot of the adjudication of these disputes. So, you know, in the worst case, civil war, ethnic cleansing, that kind of stuff. But even in the best cases, a lot of distrust, a lot of competition over rent seeking behaviour, our turn to eat when our president wins election, that kind of stuff.

So at a minimum level, I think states are probably like a necessary precondition for rapid development. The second thing that I would point to in a more near-term sense is that the East Asian states were at a critical sort of boundary in the Cold War, right? So, like, South Korea almost got swallowed up by North Korea. Taiwan was sort of the product of the Chinese nationalists losing the Civil War and for the longest time, actually to this present day, they're worried about getting swallowed up by China. Japan was also similarly worried about communist takeover. And so that sort of enabled a set of policies that are also rather unique. The first one, obviously, is land reform. So immediately after independence for these countries, they conducted large programs of land redistribution. I think politically this also helps. So tying into the state stuff, like, having a broad base of support in the countryside where farmers are part of your sort of governing coalition. And there's an incentive basically to engage in broad based agricultural productivity growth, not necessarily as a result of the redistribution, but because the state has penetration into the countryside and is able to do things like agricultural extensions, spreading fertilisers, high yield varieties and all this kind of stuff.

Yeah. So land reform was like a critical policy that had to happen because across the border, like in North Korea, they have a land reform policy. In China, they have a massive land reform. In fact, because it was so unpopular amongst the peasants, that's why the KMT got kicked out of mainland China. And Japan also had one like in the late 1940s. So, you know, that's just like one very critical example.

Industrial policy, also. The fact that basically a lot of these countries also received a large amounts of American military spending that was directly related to the boundaries of the Cold War. The fact that the United States was fighting these wars, these hot wars, first in Korea and then Vietnam. So it's difficult, I guess, to pinpoint a little bit, but the confluence of these factors - like the existential kind of threat, the fact that if you don't get your development policy right, you will just be taken over [by another country]. In Korea, this was like a very real part of the thinking. It energised things like industrial policy, the fact that we need to create our own domestic steel industry so we can build our own artillery, our own tanks and all this kind of stuff, because we're possibly going to be invaded by the North. Yeah, the boundaries of the Cold War are, I think, an understated component of why East Asia took off.

Tobi:Yeah, so, I mean, it's good you mentioned Studwell, did you?

Oliver:Not yet, but like kind of implicitly.

Oliver:I guess we're going to get there at some point.

So, ever since the publication of that book, How Asia Works, it's sort of become the standardised, informal canon of policy advice in this sort of general sense, perhaps not in the technical sense of what went right with East Asia and what you should do, roughly.

And one country that I think went full Studwell was Ethiopia, with the land reform, the focus on agriculture, the intensive focus on manufacturing, but it hasn't really, really worked out so well. So, to the degree that you know, what was wrong with how Ethiopia just sort of went about going Studwell, to use that phrase?

Oliver:Yeah.

There's a lot of different factors here. And again, I would not call myself an expert on Ethiopia. I've not actually physically been to Ethiopia. I've talked to a lot of Ethiopian students here at Berkeley. So qualify everything that I say with that caveat.

Tobi:Yeah.

Oliver:I mean, it's tragic. I know that this big manufacturing push was already not yielding the expected results before the outbreak of the civil war post COVID. That is just so obviously like a first order fact to point out that, you know, Ethiopia had this horrible civil war a couple of years ago and we're still dealing with the ramifications of that.

It's very difficult, I think, to like try and do broad based rapid economic growth if you just constantly have civil conflicts of this kind. The damage is obvious, I guess, from the pure human cost, from the number of people who’ve died, you know, from the war time kind of destruction. But also like whenever there's a stable sort of post-war kind of settlement, the distrust between the Tigrayans, the Amharas, all these different sort of ethnic groups is definitely going to shape policy. And that's like a common feature, I guess, of a lot of sub-Saharan African countries where there's always competition over spoils rather than thinking about things that could broadly benefit people. And I think that's also partly a rational response. I should also say that even though it wasn't colonised, Ethiopia actually, I think, has some features of a lot of well, it was briefly colonised by the Italians, but nowhere near the sort of penetrating kind of colonial regime. But Ethiopia itself was sort of a product in a response to European colonisation of sub-Saharan Africa, where in literal terms an imperial sort of project that sort of absorbed a lot of surrounding ethnic groups and regions to create buffer zones against European colonisation. So that's the underlying structural reasons for why you have a state that doesn't have a strong majority ethnic group. There's a lot of conflict that's been generated by that.

But even before the Civil War, as I mentioned, the sort of big manufacturing push was not yielding the expected results. There had been pretty impressive, I think, overall aggregate GDP growth under Meles Zenawi, where Ethiopia was achieving something like rates of like 10% GDP growth a year. You can quibble about those numbers, but I think it is probably true that Ethiopia was growing very fast. Most of that, however, was not turning up in the sectors that the state was championing the most, which were the big manufacturing push to very explicitly copy the model of Korea and Taiwan and the East Asian tigers.

Just to list some of the things that the state has done. I mean, the state has like invested in massive industrial parks, which are actually state of the art in terms of the facilities. So you have like the famous Hawassa Industrial Park, it has subsidised electricity for these places. So, you know, a common problem in a lot of sub-Saharan African countries that are trying to pursue manufacturing growth, you know, for instance Nigeria is that power is just simply unreliable or it's too expensive as a manufacturing firm you have to install your own generator that's an incredibly wasteful and costly exercise for everybody to have their own generator. The state has been subsidising electricity in those parks that's building you know the grand renaissance dam this huge sort of project to lower energy costs more broadly.

But even with all these massive explicit and implicit subsidies, the textile sector basically in Ethiopia has just like not been achieving the expected growth One factor that I've kind of identified, it again has to do with these labor costs, where there's just like an incredible amount of turnover, it appears, at these firms. Foreign firms who have sited in like places like the Hawassa Industrial Park, where workers will like turn up for like a couple of days, often their first sort of industrial job so they're coming straight from like farming, and they'll find that they just really don't like it. Or they'll find that conditions are horrible. They're not paid enough for their time. And so they just choose to leave. And I think this creates an incredible amount of churn, basically, where you never actually develop the skills to get better at your job. The managers of the firm aren't able to identify who are the highest performers and potentially promote them. And so it's this very low level equilibrium where you have this constant churn of workers who are not getting paid enough, who are very unhappy, and so the sector just never really grows.

I don't know quite what the policy prescription to that is. One thing I talk about in my blog is like potentially things like trying to institute like a general minimum wage. So if… let's say, the wage is generally set too low, maybe you could raise it to the level where people are like, hey, this job kind of sucks, but I'm getting paid enough to stay around and do it. And maybe that would enable for skill development, would enable for managers to identify the highest performers. But it is like a general problem. And it's a problem that Ethiopia, it appears, has not been able to crack yet. Unlike the East Asian countries, where the manufacturing sector was able to soak up a tremendous amount of labour that was coming in from the countryside. In Ethiopia, despite all these government subsidies, despite all this government effort to try and promote the sector, there just hasn't been a similar movement.

Tobi:I certainly don't mean to pick on Ethiopia or Studwell here. But I mean, just to double down on that question and, you know, emphasise what I'm really getting at. I mean, you can throw in a couple of scholars and public figures here, Justin Hodge, who look at East Asia and, you know, extract a couple of things as policy advices - do industrial policy, state capacity is the big difference, do you have to do land reform which will bring us to your latest paper - because what's certainly been true in the last couple of years, and I can point to your recent work or someone like Nathan Lane too on industrial policy, is that even a lot of what went right with East Asia, there's a lot of nuance to that story than the generalised, simplified model that we've been used to. So is there something wrong with how people are learning from the East Asia experience generally?

Oliver:So what you described, like my paper, Nathan Lane's work, like this is a historical stuff, right? We're looking at what happened in East Asia. But whenever you're talking about development, there's like this additional inductive step. Like, are the conditions that exist in Africa the same as the conditions that were faced by East Asian countries in the 1950s, 60s, 70s? And the answer is like plainly no. The global environment, the global marketplace looks substantially different. So this is, I guess, the third set of factors I would highlight for why there was a divergence between East Asian economic experience and sub-Saharan Africa’s, which is like the environment in which the sub-Saharan African countries are trying to industrialise is potentially just a lot less favourable than that was faced by East Asian countries. And this goes into things like global movements of prices, the relative price between commodities and manufacturers.

During the 19th century, this is work that's been done by Jeffrey Williamson. So [at] the initial stage of globalisation, it was actually not a bad bet as [for a] poor country, [that is] a country on the economic periphery to be a commodities exporter, right? Europe was industrialising at the time, and factories were going up, manufacturing output was going up, manufacturing productivity was going up, and it was driving the relative price of manufactures down. And so if you were like an Indian artisan making a lot of textiles, that was previously the textile hub of the world, this was a tremendous competitive hit, and this was bad for you. If you were an Argentinian cattle farmer and you're producing cattle that fed people who work in the factories and this kind of stuff, that was actually a really good line of business to be in. And so, you know, throughout the latter half of the 19th century, there was this kind of price movement where being a commodities exporter was good, being a manufacturing exporter was relatively bad, particularly if you were doing like non-industrial production in poor countries.

East Asia got incredibly lucky in some sense in that the period where it was trying to develop was very favourable, basically, to manufacturing productivity growth. Europe was basically starting to get richer. You know, it was escaping, I guess, the destruction of the Second World War and the First World War. and so it was recovering, it was growing economically very quickly and you know as you grow quickly you have greater demand for manufacturing goods. At the same time Europe itself was starting to shift potentially more to the services right and so there was an opportunity for places like Taiwan and Korea to start producing things that other markets would want like TVs radios that kind of stuff.

Yeah, the market environment that was faced by East Asia was like pretty favourable. Now, in the present day, the problem is that it appears that those conditions don't exist. In the West, actually, there's been a lot of development in automation that increases the productivity of manufacturing output. That's also true in the places that have claimed the mantle of being the world's factory, Korea and Japan, and certainly China, most of all, where you already have competitors who are able to produce manufacturing goods at a much higher productivity level than if you're a country starting out. And so it's no longer as easy just to rely on the fact that you have relatively low labour costs, like the East Asian countries did in the 1960s or so, to sort of compete in the global marketplace. You actually need productivity as well. And if you're competing against people who use a whole bunch of robots and machines in their production processes, it's just very hard to compete on costs. And so I think there is a sense in which maybe these lessons are not as applicable as we thought, because the sort of global context is just not as favourable to manufacturing growth as it once was.

Tobi:Again, I'm increasingly skeptical and finding it less useful some of what people say, especially when it comes to learning from the East Asian experience, because, oh, yeah, people say stuff like do industrial policy and once you run into the difficulty of doing that, [they say, oh] it's because you don't have the capacity, and okay, so how do I get capacity? Essentially, it's reducible to get a different history, more or less, which is kind of not so different from the institutional people, which is basically just go get yourself a different institution, which essentially means you get yourself a different history.

So I've become less enthusiastic about that sort of arc. Which then brings me to the question, what is the right way to look at successful countries and learn the right lessons that you can then apply to your own context? I know that it's not all different. There are some similarities. For example, I know that a lot of African countries are extremely protectionist in terms of trade policies and shifting a little bit more towards export-oriented sort of trade policies would help. But as an economic historian, how do we learn from history?

Oliver:Yeah, so this is where I would say that the label that I would wear is I'm a development economist, not an economic historian. Like, I do a lot of economic history stuff. My primary interest is like, what can we actually learn to help people today? The historical interest is very interesting. It's intrinsically important. But what's motivating me is, you know, what is actually useful? And I completely take your point. There's a sense, I think, particularly amongst academics, when you peel back the layers of the onion, in the end, it just comes down to, yeah, get a better history. You know, there's just like fundamental factors that are so deep rooted that, you know, basically you can't do anything about it. One answer that I give that's maybe a weird kind of like metacognition kind of point is that let's say you pose this question in 1945 or something. Right. That's not actually that long ago. My grandparents were alive in 1945. I can talk to them and ask them what it was like.

There was no way that they would have thought that South Korea, Japan would be as rich as in some cases richer than France or Germany. Like it was just like inconceivable at that point. I mean, Korea would have a civil war that would kill like 20 percent of the population in five years. And so the cultural factors were broadly the same. The history, you know, up to like 2000 years subtracting like 30 years or so was the same. But the transformation afterwards was just very difficult to predict. So I think there's a sense in which like when we're talking about these sort of factors behind why countries are richer or poorer, we have to remember that we're looking at them from like a very specific point. In 20 or 30 years things could potentially look very different and they can be very different in ways that are difficult to predict.

One example that i like to give a lot is, um, this is like a view that i'm less fond of, like, cultural kind of stuff. Culture surely matters but i think there's like a very strong instinct to want to say that culture is this fixed kind of entity, like these get a better history kind of arguments. It's like this sort of intrinsic quality that is tied to the people and just stays forever. And that's why you're rich or that's why you're poor. In the East Asian case, the answer that's often given by Lee Kuan Yew and others is Confucianism, right?

Lee Kuan Yew became a bit of a celebrity in the 90s or so, just like going around different countries and saying like, hey, the reason that you're not doing well is that you have not absorbed East Asian values of Confucianism, like filial piety, studying very hard for tests, listening to authority figures, having a well-ordered society along these lines. But if you go back 30 years, 20 years or so, scholars, sociologists, sinologists looking at the trajectory of China would have said that Confucianism was a terrible idea, that basically it resulted in states that were unable to adapt to the sort of conditions of modernity. You know, the Qing dynasty was not a great historical success by any means. It completely failed to adapt to the pressures of Western incursions. And so like there's a sense of which I think our descriptions, I guess, of history and culture should be a lot more malleable than I think these get a better history kind of views. The thing that kind of gives me hope is that I think it really would only take one. I know that there's like Mauritius and maybe some other examples, but it would take, I think, only one sub-Saharan African country. I don't know which it would be. Maybe it's Ghana, maybe it's Kenya, maybe it's Nigeria.

But it'll only take one to start demonstrating, I think, this sort of sustainable pattern of growth for that example to kind of spread. That's essentially what happened historically in East Asia. I mean, if you go back even further in terms of the history, the chauvinistic Western view is, you know, modernity was something that was exclusively a property of Westerners, right? Japan proved that very wrong. And that example spread to other countries in the immediate sort of cultural vicinity. I think the same process is definitely possible in Africa. And there's no reason, I think, that it can't happen.

Tobi:So sort of brings me to, I would say my weirdest question yet. I mean, the reason why people talk about development, the reason why someone like me is interested and doing what I do is that I want Nigeria to be rich in my lifetime. It's possible, but maybe not. But certainly that's the hope. Can you imagine a possible future where, to make it as concrete as possible, where 90% of the global population would be around middle income or something we call rich. Like, can the whole world be developed, essentially, is my question?

Oliver:I think so. I don't think there's any structural reason that's holding that back. I'm sympathetic to a lot of like leftist arguments. Like I know there's like core periphery stuff. Like if you're a big fan of like Raul Prebisch, you think that the world is kind of underladen by the fact that, you know, you have like underpaid people in the global south or doing the commodities extraction or whatever to help the rich world.

I'm sympathetic to parts of that thesis in terms of thinking about like why some countries are underdeveloped, particularly from a political economy standpoint, but I don't think in the long run there's any reason that all countries can't enjoy a decent standard of living.

Tobi:As a development economist, which you say is your preferred label, how do you think that development economics and some of the cool research and informative stuff that's going on there can influence policy more because that's sort of like a big, big thing for me because I see more and more governments in Africa becoming so detached from what works at least to a certain degree. So how can development research essentially influence development policy?

Oliver:Yeah, the framing of that question is interesting. You were talking about earlier, maybe before we recorded, that your concern was that African countries, maybe not even just African countries, maybe like developing countries in general, they're not listening to the policy lessons that academics have prepared for their research. But my take, at least coming from someone who was very recently in the heart of the ivory tower, is that academics, even development economists, which in theory should be like the most applied of fields, are not asking questions that are immediately relevant to governments and to policymakers in African countries.

So maybe both can simultaneously be true, like we're kind of like crossing paths past each other. But at least looking at the research production standpoint, when I look at what's published in top journals, often I'm just like, if the composition of development economists looked more like the people who are being studied, would we be producing the set of research? And my hypothesis is probably not.

The framing that you see a lot of development research, particularly coming out of the United States and Europe, is very much in the mindset of I'm a donor, I'm an NGO, I'm an aid agency. What can I do on the margins to make my program better, right? How can I make it more efficient? How can I like, what intervention would work the best? I think that's like a perfectly fine line of work. For instance, my advisor's work, Ted Miguel, he did a lot of stuff in deworming in Kenya. That has helped tens of millions, if not hundreds of millions of people. That is very clearly good to improve. But this is not a critique that's new to me. But broadly speaking, the area that considers the framing of like, if I'm a developing country policymaker, what sort of macro policies, what sort of like broader industrialisation policies can I pursue to sort of foster growth? I think that's a little bit more of a neglected area in terms of academic research. And so, yeah, I guess I would switch the framing a little bit where it's like, the problem I see is also from our end. We need to be producing stuff that's informed more by experiences on the ground, like people who actually know the problems and less about like what we think or what we can convince a grant maker is interesting.

Tobi:What's the one idea that you are most excited about, that you are most enthusiastic about and that you would like to see spread, become more influential? What is that one idea?

Oliver:So this is a bit of an odd one. It's a very nerdy one, but it's like a question that has been bothering me a lot recently. Maybe you can also react to this. It's like GDP is like a number. I recently read like Poor Numbers by Morten Jerven. Have you read this book?

Tobi:Yeah.

Oliver:Yeah, I read it like immediately at the end of my PhD. I mean, I've essentially done 10 years, 12 years of like economic research and like I first heard of this book. Basically the premise, it's almost like a sociology of how GDP is constructed in developing countries, particularly in sub-Saharan Africa. And It's not pretty. Like for those 10 years when I was a researcher in academia, you know, when you go to the UN website, you go to the World Bank, the IMF or whatever, and you download the GDP statistics going back to like 1960, you kind of assume that somebody has done the hard work of like making sure that this is correct. You know, there is actually an army of enumerators out there in Kenya or Nigeria or whatever. They've gone to every store and they've counted every capital good and they've done the math on this stuff. Morten Jerven's book shows us that that's just patently not true. Nigeria features prominently in that book. You know, it's not even clear how many people are living in the country. Population censuses are like an incredibly sort of politically divisive thing. I'm sure you could speak more about that. Various ethnic groups don't want to be counted or maybe they want to be counted more. That determines sort of the allocation of public resources. And so, you know, you don't even have the number of people in the country correct.

And I believe it was like in 2014 or so. This is, I think after the book was published, like Nigeria basically did a revision to how its GDP statistics were calculated. That resulted in a revision that was like something on the order of magnitude of 90%.

Tobi:Yeah. We’ll do another one very soon, ‘cause we’re like the fourth largest economy in Africa now, and I'm sure a lot of people are not cool with that.

Oliver:Yeah, Nigeria like spring vaulted past South Africa to become the largest economy. And like maybe both of those numbers are incorrect. Let's just say that one of them is like as a baseline. That means that at one point your number was 90% wrong. Like I think there's a sense in which like economists have been so focused on things like causal identification, all these crazy statistical stuff, ignoring like the basic question of measurement. If you had a thermometer that was like 90% wrong, like you would not read anything into the fact that your temperature goes up by like two or three degrees. You know, if the air is like 30 degrees, it effectively is meaningless to be making a minute decision. You know, it's not the fault of a lot of these governments. I mean, in some cases it is like maybe they mess with the statistics, maybe they underfund their statistical departments. But it is true that just like it is a hard problem to measure your economy.

There's this anecdote in the book where Morton Jerven goes to the Zambian statistical office and it's like one guy who does both the census and the GDP numbers. And so like that guy was like really well-intentioned, he's probably doing the best that he can. Zambia is like a country of 10, 20 million people and you have one person doing all that work. It's just not conceivable that you could have an accurate sort of statistical product. So getting back to your question, Jerven's book came out, I think everybody like kind of cites it respectfully and they're like, oh, you know, GDP statistics are just not something we should have like a high degree of confidence in, but we just like kind of go on using them anyway. Because what else are we going to do?

Tobi:Yeah. It's just a caveat somewhere.

Oliver:Yeah, yeah. The World Bank did some stuff. There's like a database they have of statistical capacity. So they rate countries from like zero to 100 or something like that based on how good their statistical agency is. But like, again, I spent like 10 years doing development stuff and I just didn't even notice it. So one idea that I've been pushing that I hope to maybe put into a blog post, maybe develop into a formal paper. is like we actually do have a way of kind of describing statistics that are very noisy, which is like, you know, it's election season in the United States, you know, you'll see like Kamala Harris versus Donald Trump polls. But if you're like a sophisticated consumer of this stuff, you always look for the margin of error, right?

Like when a poll is reported, If the margin of error is like 5%, which is very common amongst these political polls, whether Kamala Harris is leading Donald Trump by 47 to 46 or 48 to 47, it's effectively meaningless. There's just too much noise in the underlying measure to include anything from the raw number. I guess one idea that I like to promote is we should do the same thing for GDP statistics. For some reason, economists are willing to treat GDP as this very certain kind of metric without the appropriate degree of skepticism that they sometimes apply to other statistics. And so just having the margin of error printed next to the number, I think, is like a good epistemic reminder to be humble and be like, hey, you know, like these policies that we recommended that we claim boosted aggregate GDP by like point one percent this quarter. Like there's actually no way that you can actually detect that. And so I think that should encourage greater humility amongst economists and policymakers about how much do we actually know about the world and how much can we actually affect it.

Tobi:Not to mouth any kind of defense for Nigeria, but I think since Morten's book came out, there's been some improvement, particularly in measurement, because a lot of it is just the fact that funding statistical measurement is not a political priority. So for a long time, and I doubt it has changed currently…for a long time, the National Statistical Agency is funded by the central bank in Nigeria and not even by the federal government itself. So like Morten recalled in that book, when he came to Nigeria to do research on that book, the Statistical Agency was in the midst of a staff revolt due to poor pay. And the guys that head some of these agencies and try to do the work, they are real heroes because they are trying to basically perform magic with resources that are next to nothing.

I know that, again, the National Bureau of Statistics in Nigeria, the United Nations is heavily involved both in terms of funding and reviewing the methodology and improving the presentation and everything. But you would think that it is something that the government itself should be heavily invested in rather than foreign agency or a donor agency or something. So a lot of it is politics, really, because in the end, governments really do not make decisions based on these numbers. Hence it's not really a priority to get accurate measurements.

So, but I mean, hopefully things are improving, but it's not without controversy. The most recent one in Nigeria, for example, is that the World Bank and the ILO recently changed the methodology for unemployment. And Nigeria, again, just like the GDP thing, went from being 33% unemployment rate to 5% overnight. Right? So, we started having these technical subcategories like underemployment and informal employment, you know, and things like that. So it's politics, really. But i like your idea and we'll try our best to help you spread it as much as possible.

Oliver:All right. Sounds good.

Tobi:Yeah, so thank you so much, Oliver, for doing this. It's been fun.

Oliver:Thank you, Tobi, yeah it's been fun

Hello everyone, and welcome to Ideas Untrapped podcast. My guest for this episode is Decision Scientist, Oliver Beige - who is returning to the podcast for the third time. Oliver is not just a multidisciplinary expert, he is one of my favourite people in the world. In this episode, we talk about scientific expertise, the norms of academia, peer review, and how it all relates to academic claims about finding the truth. Oliver emphasized the importance of understanding the imperfections in academia, and how moral panics can be used to silence skeptics. I began the conversation with a confession about my arrogance about the belief in science - and closed with my gripe about ‘‘lockdown triumphalism’’. I thoroughly enjoyed this conversation, and I am grateful to Oliver for doing it with me. I hope you all find it useful as well. Thank you for always listening. The full transcript is available below.

Transcript

Tobi;

I mean, it's good to talk to you again, Oliver.

Oliver; 

Tobi, again.

Tobi;

This conversation is going to be a little bit different from our previous… well, not so much different, but I guess this time around I have a few things I want to get off my chest as well. And where I would start is with a brief story. So about, I dunno, I’ve forgotten precisely when the book came out, that was Thinking Fast and Slow by the Nobel Laureate Daniel Kahneman. So I had this brief exchange with my partner. She was quite sceptical in her reading of some of the studies that were cited in that book.

And I recall that the attitude was, “I mean, how can a lot of this be possibly true?” And I recall, not like I ever tell her this anyway…but I recall the sort of assured arrogance with which I dismissed some of her arguments and concerns at the time by saying that, oh yeah, these are peer-reviewed academic studies and they are most likely right than you are. So before you question them, you need to come up with something more than this doesn't feel right or it doesn't sound right. And, what do you know? A few years, like two or three years after that particular experience, almost that entire subfield imploded in what is now the reproducibility or the replication crisis, where a lot of these studies didn't replicate, a lot of them were done with very shoddy analysis and methodologies, and Daniel Kahneman himself had to come out to retract parts of the book based on that particular crisis.

So I'm sort of using this to set the background of how I have approached knowledge over my adult life. So as someone who has put a lot of faith naively, I would say, in science, in academia and its norms as something that is optimized for finding the truth. So to my surprise and even sometimes shock - over different stages of my life and recently in my interrogation of the field of development economics, people who work in global development - [at] the amount of politics, partisanship, bias, and even sometimes sheer status games that academics play and how it affects the production of knowledge, it's something that gave me a kind of deep personal crisis. So that's the background to which I'm approaching this conversation with you.

So where I'll start is, from the perspective of simply truth finding, and I know that a lot of people, not just me, think of academia in this way. They are people who are paid to think and research and tell us the truth about the world and about how things work, right? And they are properly incentivized to do that either by the norms in the institutional arrangements that birthed their workflows and, you know, so many other things we have known academia and educational institutions to be. What is wrong with that view - simply academia as a discipline dedicated to truth finding? What is wrong with that view?

Oliver;

There's many things. Starting point is that it was not only Daniel Kahneman, behavioral economics has multiple crises also with Falsified work. Not only with wrong predictions, wrong predictions are bad but acceptable. This is part of doing science, part of knowledge production. But Falsification is, of course, a bigger problem now and they had quite a few scandals in that. The way I approach it always is sort of like a metaphor from baseball. Basically there's something called the Mendoza Line in baseball which is a hitter that has a 200 hitting average. This is like the lowest end of baseball. If you go below 200, then you’re usually dropped off the baseball teams. And on the upper end you have really good hitters that hit an average of like 300 or something. If you have a constant 300 average you usually get like million dollar contracts, right? We can translate this to science in a lot of ways. Of course, there is a lot of effort involved in going from a 200 average to a 300 average to a 20% average of being right to 30% a average of being right. But still if you're at a 300 level, you're still wrong 70% of the time.

And so the conversations I observe, they're people that are not specialists in a field [and] we're trying to figure out who is right in a certain conversation. Talking about conversations in a scientific field we basically try to use simple pointers, right? One of the pointers is of course a paper that has gone through peer review. You see these conversations of like, okay, this paper has not been peer reviewed, this paper has been peer reviewed. But peer review does not create truth. It sort of reduces the likely likelihood of being wrong somewhat but it doesn't give us any indicator of this is true. The underlying mechanism of peer review usually cannot find outright fraud. Cannot detect outright fraud. This happened quite a few times. And also peer review is usually how close is the submitted paper to what the reviewers want to read. There is a quality aspect to it, but ultimately it changes the direction of the paper much more than it changes quality. So academia overall is a very imperfect truth finding mechanism. The goal has to be [that] the money we spend on academic research has to allow us to get a better grasp of so far undiscovered things, undiscovered related relationships, correlations, causal mechanisms, and ultimately, it has to give us a better grasp of future and it has to give us a better grasp of what we should do in order to create better futures. And this all basically comes down to, like, predicting the future or things that were in the past but yet are to be discovered.

Evolution tends to be a science that is focused on the past, looking at things in the past. But there's still things we have to discover, connections we still have to discover. And this is what academia is about. And the money, the social investment we put into academia has to create a social return in the way that we are better off doing the things we need to do to create a better future for everyone. And its [academia] track record in that regard has been quite mixed. That's true.

Tobi;

So let's talk a little bit about incentives here. Someone who has also written quite a lot, who talked so much about some of the issues - I think he's more focused on methods. He's andrew Gelman, the statistician. I read his blog quite a lot, and there's something he consistently allude to and I just want to check with you how much you think that influenced a lot of the things that we see in academia that are not so good, which is the popularity contest - the number of Twitter followers you have; whether you are blue checked or not; bestselling books; Ted Talks that then lead to people making simplistic claims. There's the issue of scientific fraud, right, some of which you alluded to also in behavioral economics, behavioral science generally. There was recently the case of Dan Ariely, who also wrote a very popular book, Predictably Irrational, but who was recently found to have used falsified data. And I recall that you also persistently criticized a lot of people during the pandemic, even till date - a lot of people who made outright wrong predictions with terrible real life consequences because policymakers and politicians were acting under the influence of the “expert” advice of some of these people who will never come out to admit they are wrong and are less likely to even correct their mistakes. So how is the incentive misaligned?

Oliver; 

Okay, many questions at once. How does academia work? And like I always like to say that academic truth finding or whatever you want to call it is not too far away from how gossip networks work. The underlying thing is, of course, any kind of communication network is basically sending signals. In this case, snippets of information, claims, hypotheses and the receiver has to make a decision on how credible this information is. You have the two extreme versions, which is basically saying, yeah, I just read this paper and I think this paper makes a good claim and is methodologically sound or I just read this paper and this paper is crap as everything about it is wrong. So you basically start with a factual claim and an evaluation. This happens in science Twitter in the same way a gossip network communicates typically good or bad news about the community. Also, a gossip network communicate hazards within the community, sending warnings, which is what academics have been doing quite a bit over the last two and a half years. And they also have this tendency to, a) exaggerate claims, reduce claims, and [they] also have this tendency to create opposing camps. Because very few middling signals are being retransmitted.

I've been watching the funeral of the Queen, I have no strong opinion about British royalty in either direction so if I post something on Twitter about it, nobody will retweet. And, of course, the two extreme ends will be retweeted. This is how Twitter works, but it's also how science usually works. You’ll see that strong claims in either direction are being transmitted much more frequently than middling moderate claims. So the bifurcation of opinions is inherent in both of them. This element of credibility, that you build credibility, based on how someone else reflects your own beliefs. Your own prior beliefs, really. This is the core mechanism [that if] I read something that confirms my prior beliefs, I'm much more likely to retransmit it with a positive note that "I really like this and I think it's methodologically sound." And if it's something that contradicts my prior beliefs, I'm very much more inclined to question its methodology. And I think we've seen this to an extreme over the two and a half years because we had situations where the discussion was very polarized. And the really bad thing to observe in a scientific discourse in general, but also the amplified scientific discourse on Twitter, is like the absolute lack of quality control when something confirms one's own prior beliefs. So this is usually what a scientist has to do. Like, if I get something that confirms my beliefs, I still have to do a minimum quality control [to check] if it's actually methodologically sound. And this clearly did not happen. People were just passing on anything that confirmed their beliefs and basically expected someone else to do the quality control. The first job any academic has is basically to subject everything, even that confirms your beliefs, and this is also [what] you think is true, you still have to subject it to quality control. And clearly this rarely ever happens. This is why academia is supposed to run on confrontation that, basically, the other camp does it. But if you bring academia together with Twitter, which is [an] amplification network that runs on social engagements, likes and retweets, then you have a very toxic mix. And this is the situation we had over the last two and a half years, how scientific communities can coalesce around things that are just not empirically sustainable.

Tobi;

Now pardon my language, there's a way that academics, whether they are scientists or social scientists (I know economists are particularly notorious in this arena), they completely f**k with your mind when you're a skeptic. So I'll give you an example. Two days ago…I opened with the replication crisis in psychology, so two days ago, I read a SubStack by someone who is presumably a psychologist, who was then basically complaining that, “oh, yeah, after the replication crisis, a lot of them in academia who were doing PhDs, were also having their own crisis of confidence, because then you have to confront a public who thinks they know everything.” So, like, you describe your study or you say you found something and someone says, "oh, but the field didn't replicate." The whole thing just sounded like some weak apologia that just didn't make any sense. I recall that sometimes a little bit after the financial crisis [of] '07-'08, if I recall correctly, Paul Krugman was dismissing something Talib, Nicholas Nassim Talib, wrote by saying that, oh, if you think you found something that a whole community of academic experts… I'm not quoting him verbatim, I'm paraphrasing… If you think you found anything that a whole academic community of experts missed, then you are most likely to be wrong.

So, it brings me to the question of skepticism and how to approach it, because at the other extreme end of this is to say… and certainly there are people like that in the world today who think that no scientific knowledge is true, who question even proven medicine, and there are also conspiracy theorists who say outrightly false things for their own motives, no doubt. So, like, how does one deal with skepticism? Especially if you have conspiracy theorists and outrightly ignorant people on one side, and on the other side you have academic confusion or experts who out of their own biases or some of these institutional and social problems that you have described can also not really come out and admit that, oh, we botched this and this and this is what we are doing to correct our errors. How do you handle skepticism in such a milieu?

Oliver;

The first thing is and it's also the reason why I like the baseball metaphor is if you are [an] academic, you're an expert in a field, you spend far more time studying this field than others, you're communicating with other experts in the field, so you can get this feeling, and probably justified feeling that because you put more effort into it you should get more reward in the form of more recognition and more credibility. But you should also come up with a realization or understanding that any field you're in and that includes economics and all other fields, there are so many things that are still undiscovered, so many things that are undiscoverable that we have to build axiomatic constructs around in order to actually help us move forward. And if you're able as an academic to move from 20% right over many years to 30% right, you're still 70% wrong. So these are not empirical numbers, but I think they get the point across. And if you don't get that, then you're doing something wrong in academics in general, right?

And we've seen this arrogance that was not supported by imperial superiority, like, quite a bit over the last years. Especially Paul Cook when he got some of the things very wrong just recently when he came out, when he admitted that most macroeconomists have been dead wrong about inflation for over a year. And then he claimed that nobody could have foreseen that. This is doubly wrong. You can be arrogant or you can be incompetent, but you cannot be both at the same time. Basically, academia is also a competition for attention. This is an attention industry and exaggerated claims get more attention than moderate claims. So this is not a problem. The problem is, and I see in the discussion is the complete absence of understanding of what the scientific method entails. And that clearly, a lot of academics become specialists in a particular subsection of the scientific method but don't have an understanding of how the whole thing works.

Which is interesting, especially in economics, because economics has this very strong claim that it underwent An Empirical Revolution over the last 20 years, which is certainly true. Econometrics have got a much bigger role over the last 20 years, but they also claimed that because they underwent an empirical revolution, they also underwent a credibility revolution, that their results are much more credible and this is a much bigger claim. And this is not a claim that recent events have validated or recent economic performance has not been up to par to support it. But the key thing [is that] the scientific method is basically starting out from a theory which does not have to be a formal way of expressing, but you have to have an overarching idea of how things are connected, how some things cause other things. And from this, you have to be able to create predictions. Basically, foresee future discoveries. And you do this in a number of steps. The first step is usually formalization. You try to come up with a formal model. There are lots of discussions about like, okay, how formal does a model have to be? Usually, formalization is a self-discipline device. It means that you don't come up with ad hoc predictions, but the predictions are based on a clear mechanism that should be working under a variety of conditions. And then once you have a formal model, which we've seen a lot of people trying to build formal models over the last few years, and a lot of them have gotten more attention than they deserved or that they expected, and then you come up with a hypothesis. Hypothesis usually means are you comparing your own view of the world to competing views of the world. You try to find the positions where they diverge the most or where it becomes visible. And then you do empirical test experiments. Or in economics, you try to do a natural experiment or control trials in order to show that your overarching theory, your model, is closer to the truth than the competition. But the key is also and this is remarkably what a lot of people have just simply missed out on, this is the replicability and the role of moving away from a subjective view of the world to an objective view of the world so this can be refuted or replicated by others.

And this also means that people who are opposed to your viewpoint have to admit that your view of the world was better than others. And this has almost completely broken down. Because in the two scenarios, economics (macroeconomics) in particular has been dead wrong, especially about inflation which is really one of the core predictive elements of macroeconomics and they have been dead wrong for an extended period of time for the very simple reason because they did not want to acknowledge it. And this is a problem, right? So then we start obfuscating about where you went wrong and you're trying to play political games that being wrong was not just unexpected change in economic environment or social environments or something but being dead wrong was basically caused by your model being fundamentally wrong.

Very clearly economics should be in a crisis. The crisis should be clear within the field and the less the field itself owns up to this crisis, the more the outside world [should] pressure the field itself to come clear with its wrong predictions because the cost of getting these things wrong are staggering

Tobi;

True. So I have three questions but I'll ask them differently. You mentioned towards the end of your answer you talked about political games which is something that also gets me really angry and sometimes confused. And a related issue about that I found also is in development economics. But that will take us into the second question. So let's talk about the politics here. For example, take a field like economics which is highly partisan. You have some people that are called neoliberal economists. Some people are socialists, some people are heterodox, some people are capitalists. I know within the field of macroeconomics itself, they have all these other labels - new Keynesian monetarist, you know, whatever.

But what I'm getting at is the role of partisanship, because you always have rival camps accusing themselves of partisanship. One story I related to, which I'm sure you also must have come across is - I saw a story on Twitter a couple of weeks ago before the Chilean constitutional referendum that Mariana Mazukato, Gabriel Zukman and Thomas Piketty, who are all economists, who are all leftists, who mix their research with political preferences and policy advocacy, plan to travel to Chile to celebrate the new draft constitution because it's a win for justice, it's a win for this or that. It's the final rejection of the Pinochet dictatorship and the neoliberal imposition that is. I did not encounter in that particular discourse chain anybody asking what is good for Chile, and Chileans, and even more relevantly how Chileans feel about this.

And, I mean, what do you know? The referendum happened and 60% of the voters rejected the new draft. And I know that partisanship and political games, like you said, play not just in economics, it happens in other fields as well. So I'm curious - is this okay? And how exactly did should I say, scholars, particularly in social science, people that have been able to make extraordinary contributions to our body of knowledge and what we know, how have they managed to keep their politics, their personal politics away from their work? Or is it just that everything just used to be easier before we had Twitter?

Oliver;

Politics and economics have been intermixed long before Twitter. So this is not particularly new, and the mechanism itself is also not new. But your starting point is basically, as I said, like, very simplified that the role of academia is to predict the future and to design strategies to reach good futures. So in that situation, it's not surprising that academics take political positions. The problem comes in, of course, that if the ideological mix in academia and the ideological mix in the overall population and the ideological mix in sort of the ruling elites don't line up. This is a tricky situation, but being close enough to the highest echelons of power for long enough to observe what happens. If you have a change in the administration in Washington DC, then usually the new administration brings in economic experts from favourite schools. And then if the administration loses to the other party, then the other party brings in their favourite economists. So in that regard, if you have this semiconstant exchange of viewpoint, an economic viewpoint gets discredited, it gets replaced via the political process with other people, this is usually how you get closer to the view - I used to call it the drunk unicyclist. You're not really moving forward in a straight path, but you're moving around left and right, and you just try to avoid falling into a ditch. And this is what we observe. No political process is perfect. And as long as the political interests of the academics and the political interests of the elite are aligned with population ones, this is as good as we can get it.

I generally have a problem with ideology in economics, but it's inevitable. And my quality is that I be able to read and appreciate writers from the left end of the spectrum, on the right end of the spectrum. I usually deduct points over ideological bent. But good thinkers can make good points even if they are driven by ideology. The problem also comes in when there is essentially no penalty for being wrong in academia. So basically being wrong and being catastrophically wrong externalizes the damage to others. So the worst scenario you do if you're tenured faculty, sort of what I call the endowed chair blue check, like a tenured faculty with a wide reach in social media, you can be dead wrong,you can be persistently wrong, completely unwilling to own up being wrong, and there's no real penalty to it. This is the major problem we're facing right now.

Tobi;

So that then brings me to the question of niches or what I'll call cottage industries in academic research generally. I know recently I did ask you about what you think about the EA movement. I'm not talking about them, but for descriptive purposes we see the behavior of that group, the adherents, the critics and how much commitment, particularly adherents display to their tribe. I see a lot of that too in academic research. One group I am very familiar with is in economic development (development economics) where everything now is about field experiments and randomized control trials. And one of the fundamental ways it biases research in my opinion and also have negative real life consequences is, if you do a field experiment, a randomized control trial on cash transfer, say in a Kenyan village over a period of time and you measure your results and they are positive and say oh yeah, well, cash transfer works.

But the real question that policymakers, whether local governments or central governments or regional governments really deal with every day are sometimes bigger than that. So, like, for example, if you want to choose between building a power station for that particular village at $1 million versus scaling up your cash transfer program, what you’ll find is that development economists in the current paradigm would most likely go for the cash transfer plan. Let's scale it up. We have tested this. It works. Essentially they are biased to what they can measure - like, we don't know the spillover benefits of electrification, it would be difficult to design a study, there are so many externalities. So basically they reduce real-life situations into the parameters of their methods and its limitations. And such behaviour is very, very similar to what you see with other social groups. Whether it is the Effective Altruism movement… I was briefly involved also with the Charter City people where for every problem that they can see, the solution is to build a charter city.

That movement was actually inspired by your dear friend, Paul Romer. So there is this almost blind commitment and loyalty to their method, to their cottage industry. And sometimes I see it as just drumming up support for their tribe, as opposed to a commitment to the truth and finding what works. So, again, pardon my big question, what's going on here?

Oliver; 

Okay, two things on the starting point about tribes within academia is…like, one of my favourite sayings is that tribalism is the shared belief in counterfactuals, counterfactual being everything that is unknown. And the less we know, the more unknowns there are, the more we tend to flock with our own tribes. So this is something you see everywhere in academia. That's what we call thought collectives. Ludwig Fleck, one of the guys who influenced Thomas Kuhn, came up with this term, thought collectives, to describe this idea that people that share the same idea of causal mechanisms tend to come together and confirm each other and create this thought collective. And this is, of course, what we see here, especially in academia. Economics has additional problem. I think it's not nearly as strong in development economics as other fields, but it's also visible there. This is very much the way economists are recruited. Economics, especially US and UK-centric economics, is extremely mathematicized. So, like, mathematical skills are basically number one, two, and three and the priority.

And so you have basically a situation where real-world understanding has almost no role in getting accepted into PhD programs or getting promoted within the system. It used to be theory knowledge, formal theory knowledge. Now it's econometrics knowledge that gets you promoted. And this is very far away from qualification to solve real-world problems. And of course, people are impressed by mathematical skills. So this is something that you can play as a trump card. And this is what happens in the field. And the field is closing itself off from all kinds of outside knowledge because of that, especially in the social sciences. And in my world, I use people with mathematical skills, but only for very, very clearly defined tasks. I have my own mathematical skill set, but I also understand what the limitations are, and I think that's a major problem. And basically, if everyone around you came up in this system that promotes mathematical skills over real-world skills, then you believe that this is the only thing you need. And it's been very clear that basically every ten years, economics has a major crisis about being completely wrong in their predictions. And this intellectual monopoly is a major problem with that.

Tobi;

My third question in that line then pertains to the philosophy of science.

Oliver;

Yes.

Tobi;

So there are people who argue that a lot of these problems are also because modern science or the methodology of science today is divorced from some kind of philosophical foundation. I'm familiar relatively mildly with three philosophical approaches to science and let's just say truth finding.

Thomas Kuhn basically puts everything down to competing paradigms. Like my last question, you know, competing tribes. And it's the tribe that wins at the moment that sort of has the monopoly of truth, not strictly, but socially. Then there's Karl Popper, which is also quite popular, that for anything to be valid as truth, it has to be falsifiable. And we've seen this play out so much in particle physics with things like string theory and things like many-worlds interpretation and so many things where their critics are saying, you guys are basically making claims that are not falsifiable, that cannot be tested and what you are doing is not science. And that has been going on now more or less for about three decades, right? And, of course, there's the Lakatos approach, which sort of fits into your own view, correct me if I'm wrong, which is that science has to make novel claims and it has to be predictive, it has to make predictions about the world. So my question then is academia, science, the truth-finding industry, so to speak, or the knowledge production industry, is it having a philosophical crisis?

Oliver;

I think it has more of a structural crisis. I'm not that deep in the philosophy of science I’m much more interested in the process itself. But one of the things that I think matters to me is Milton Friedman's claim that there are no wrong assumptions but whatever assumptions you make about the world has to generate correct predictions. A theory is being evaluated by its ability to produce non-falsifiable predictions, right? Predictions that turn out to be true even if others don't believe them. This is something you see in the arts as well, you see actually in religion as well, this mechanism of belief propagation that starts with one person believing and over time and over time, can be many decades, of something being accepted as true by everyone.

So everyone starts believing in it. Basically, social contagion mechanism. I've always been interested in this. One scenario where this happens or should be happening is science. Right. This is, of course, a process. A process happens via this academic mechanism of peer-reviewed publications, getting tenure based on publication records and so on. And these are all very very imperfect mechanisms. The two extreme versions of that [are] the American system, which is extremely stratified, and the German version is the opposite, it’s non-stratified, [and] we produce a massive amount of mediocrity. So, like, neither of them are optimal mechanisms to create truth. And we've seen that over the last two and a half years that political posturing took precedence over truth finding.

Is it in a crisis? I think, yes, very clearly. We have two and a half years where very wrong, easily debunkable claims were propagated and were not retracted, even after they've been proven to be wrong. And ultimately, we're in a situation where an economic crisis is very clearly caused by misjudgment from people which we support and pay for being less wrong than the overall population. And that just simply did not work.

Tobi;

One last thing I’ll like to get off my chest and then I'll pass them out to you is, I mean, specifically, if we follow from our last two podcast episodes, I'm a bit frustrated that there is a bit of lockdown triumphalism that the people who vigorously and vehemently used their academic or expert pedigree…

Oliver;

Credentials.

Tobi;

Yeah…to advocate for lockdowns are also taking a sort of victory lap. So the pandemic is over. Everything is back to normal. We did the right thing, even though the whole world was against us. That frustrates me a little. I was still watching a clip on YouTube recently because you get even more sensible take from everyday people, people who are experiencing these things than people who are building models and tweeting. One person somewhere here in southwest Nigeria complaining during the pandemic that the government has decided that it is better for us to die at home of hunger than not die from the pandemic. Because this pandemic, we don't know what it is, we don't know how it spreads, but without giving us any information, you basically confined us to our homes with no means of livelihood and nothing to depend on. That makes me sad because in Nigeria here and in many parts of Africa today, a lot of what we are seeing as, and are calling the food crisis, cost of living crisis, whatever it is you want to call it, did not necessarily start, but were aggravated or exacerbated by that approach to the pandemic. And it makes me sad that the people that are culpable, we can have a situation where they can take a victory lap. So that's me. Over to you. What would you like to get off your chest about everything that we have disclosed today?

Oliver; 

Number one is epidemiological modelling was clearly an empirical debacle. The predicted epidemic wave that would take five to six months, that would wipe all large parts of the population never happened. And we have, I don't know, how many thousand waves in our database now, they all go for eight weeks. They start declining, acceleration starts declining very early on. And now we had enough scenarios where simple no measures were taken at any time during the wave. The key moment in that case was, I think, Paul Krugman complained that Denmark was removing all restrictions at the height of the epidemic wave and basically the very next day, the Danish wave dropped. Not a lot of people saw it, but it was extremely embarrassing for him. I've been in very much the same situation because I was living in the United States in the early 2000s and I was very clear from the very beginning of the Iraq war that Saddam Hussein did not have bioweapons. And so the whole invasion was built on Untruth. And the United States and the UK back then also knew that.

Back then there was a strong moral panic, especially in the United States, against anyone who was basically speaking against the rationale for going to war. Now, 20 years later, almost nobody is willing to admit that they were speaking up in favour of the invasion back then. This is like a one-generation thing. And we'll see the same thing about the epidemic. This is very clear. The young people who had to carry most of the restrictions…up till now in Germany they’re still forced to wear masks at school. They will have a very different view about what happened than the politicians in power. These are the things that'll evolve over many, many years. So I expect the same thing to happen. The interesting thing is really sort of back then it was more on the right end of the spectrum that drove this moral panic. Now it's moved over to the left end of the political spectrum. This is something that we’re still to be investigated, why these moral panics unfolded onto the ideological spectrum as we know it. But it might be an interesting topic for the next call.

Tobi;

True.

Welcome to Ideas Untrapped. My guest today is Vincent Geloso who is a professor of economics at George Mason University. He studies economic history, political economy, and the measurement of living standards. In today's episode, we discuss the differences between democracies and dictatorships, and their relative performance in socioeconomic development. The allure of authoritarian governance has grown tremendously due to the economic success of countries like China, Korea, and Singapore - which managed to escape crippling national poverty traps. The contestable nature of democracies and the difficulty many democratic countries have to continue on a path of growth seems to many people as evidence that a benevolent dictatorship is what many countries need. Vincent challenges this notion and explains many seemingly high-performing dictatorships are so because their control of state resources allows them direct investments towards singular objectives - (such as winning Olympic medals or reducing infant mortality) but at the same time, come with a flip side of unseen costs due to their lack of rights and economic freedom. He argues that the benefits of dictatorships are not as great as they may seem and that liberal democracies are better able to decentralize decision-making and handle complex multi-variate problems. He concludes that while democracies may not always be successful in achieving certain objectives, the constraints they place on political power and rulers mean that people are better off in terms of economic freedom, rights, and other measures of welfare.

TRANSCRIPT

Tobi;

You made the point that dictatorships usually optimise, not your words, but they optimise for univariate factors as opposed to multiple factors, which you get in democracy. So, a dictatorship can be extremely high performing on some metric because they can use the top-down power to allocate resources for that particular goal. Can you shed a bit more light on that? How does that mechanism work in reality?

Vincent;

Yeah, I think a great image people are used to is the USSR, and they're thinking about two things the USSR did quite well: putting people in space before the United States and winning medals at Olympics. Now, the regime really wanted to do those two things. [That is], win a considerable number of medals in [the] Olympics and win the space race. Both of them were meant to showcase the regime's tremendous ability. It was a propaganda ploy, but since it was a single objective and they had immense means at their disposal, i. e. the means that coercion allows them, they could reach those targets really well. And it's easy to see the Russians putting Sputnik first in space, the Russians putting Laika first in space. We can see them winning medals. It's easy to see. The part that is harder to see, the unseen, is the fact that Russians were not enjoying rapidly rising living standards, they were not enjoying improvements in medical care that was commensurate with their level of income, they were not enjoying high-quality education. You can pile all the unseens of the ability of the USSR as a dictatorship to allocate so much resources to two issues, [which] meant that it came with a flip side, which is that these resources were not available for people to allocate them in ways that they thought was more valuable. So, the virtue of a liberal democracy, unlike a dictatorship, is that a liberal democracy has multiple sets of preferences to deal with. And in a liberal democracy, it's not just the fact that we vote, but also that people have certain rights that are enshrined and which are not the object of political conversation. I cannot seize your property, and it's not okay for people to vote with me to seize your property. And in these societies, the idea is that under a liberal democracy, you are better able to decentralize decision-making, and people can find ways to deal with the multiple trade-offs much better. Whereas a dictatorship can just decide, I care about this. I am king, I am president, I am first secretary of the party, I decide this and we'll do this regardless of how much you value other things that I value less than you do.

Tobi;

Two things that I want you to shed more light on. Depending on who you talk to or what they are criticizing, people usually selectively pick their dictatorships. If someone is criticizing, say, for example, capitalism, they always point to the Cuban health care system in contrast to the American health care system. How the American system is so terrible, and how capitalism makes everything worse because of the profit motive. And how we can do better by being more like Cuba.  

On the other end of that particular spectrum, if you're talking about economic development, critics of democracy like to point to China. China is not a democracy. And look at all the economic growth they've had in the last 40 years, one of the largest reductions in human poverty we’ve ever seen in history. I mean, from these two examples, what are the shortcomings of these arguments?

Vincent; 

Let's do Cuba first, then we can do China. So, the Cuban example is really good for the case I'm making. Because the case I'm making is essentially that the good comes with the bad and you can't remove them. So, people will generally say with Cuba, “yes, we know they don't have political rights, they don't have economic freedom, but they do have high-quality health care.” And by this they don't mean actually health care, they mean low infant mortality or high life expectancy at birth. My reply is, it's because they don't have all these other rights and all these other options [that] they can have infant mortality that is so low. That's because the regime involves a gigantic amount of resources to the production of healthcare. Cuba spends more than 10% of its GDP on health care. Only countries that are seven or ten times richer than Cuba spend as much as a proportion of GDP on health care. 1% of their population are doctors. In the United States, it is a third of that, 0.3% of the population are doctors. So, it's a gigantic proportion. But then when you scratch a bit behind, doctors are, for example, members of the army. They are part of the military force. The regime employs them as the first line of supervision. So, the doctors are also meant to report back what the population says on the ground. So, they're basically listening posts for the dictatorship. And in the process, yeah, they provide some health care, but they're providing some health care as a byproduct of providing surveillance.

The other part is that they're using health care here to promote the regime abroad. And that has one really important effect. One of those is that doctors have targets they must meet, otherwise they're penalized. And when I mean targets, I mean targets for infant mortality. [If] they don't meet those targets, the result is they get punished. And so what do you think doctors do? They will alter their behaviour to avoid punishment. So in some situations, they will reclassify what we call early neonatal death. So, babies who die immediately after exiting the womb to seven days after birth, they will reclassify many of those as late fetal deaths. And late fetal deaths are in-utero deaths or delivery of a dead baby so that the baby exits the womb dead. Now, if a mortality rate starts with early neonatal death [and] not late fetal ones, so if you can reclassify one into the other, you're going to deflate the number total. And the reason why we can detect this is that the sources of both types of mortality are the same,[they] are very similar, so that when you compare them across countries, you generally find the same ratio of one to the other. Generally, it hovers between four to one and six to one. Cuba has a ratio of twelve to 17 to one, which is a clear sign of data manipulation. And it's not because the regime does it out of, like, direct intent. They're not trying to do it directly. It'd be too easy to detect. But by changing people's incentives, doctors’ incentives, in that case, that's what they end up with.

There are also other things that doctors are allowed to do in Cuba. One of them is that patients do not have the right to refuse treatment. Neither do they have the right to privacy, which means that doctors can use heavy-handed methods to make sure that they meet their targets. So in Cuba, you have stuff like casa de mata nidad, where mothers who have at-risk pregnancies or at-risk behaviour during pregnancy will be forcibly incarcerated during their pregnancy. There are multiple cases of documented, pressured abortions or literally coerced abortions. So not just pressured, but coerced. Like, the level is that the person wants to keep the infant, the doctor forces an abortion to be made. Sometimes, it is made without the mother's knowledge until it is too late to anything being done. So you end up with basically the infant mortality rate, yes, being low, but yes, being low because of data manipulation and changes in behaviour so that the number doesn't mean the same thing as it does in rich countries. And now the part that's really important in all I'm saying is [that] what people call the benefits for Cuba is relatively small. My point is that, yeah, maybe they could be able to do it. But the problem is that the measures that allow this to happen, to have a low infant mortality rate are also the measures that make Cubans immensely poor. The fact that the regime can deploy such force, use doctors in such a way, employ such extreme measures, it's the reason why Cubans also don't have property rights, don't have strong economic freedom, don't have the liberty to trade with others. Which means that on other dimensions, their lives are worse off. That means that, for example, their incomes are lower than they could be. They have higher maternal mortality. So, mothers die to [a] greater proportion in labour than in other countries or post-labour. There are lower rates of access to clean water than in equally poor countries in Latin America. There are lower levels of geographic mobility within the country, there are lower levels of nutrition because, for example, there are still ration services. So that means that, yes, they have certain amount of calories, but they don't have that much diversity in terms of what they're allowed or are able to eat without resorting to the black market. Pile these on. These are all dimensions of life that Cubans get to not enjoy because the regime has so much power to do that one thing relatively well. Let's assume it's relatively well, but the answer is, well, would you want to make that trade-off? And most people would probably, if given the choice, would not make the choice of having this. So, those who are saying, “look at how great it is,” are being fooled by the nature of what dictatorships are. Dictatorships can solve simple problems really well, but complex multivariate problems, they are not able to do it in any meaningful way.

The other part that is going to be of also importance is when you look at Cuba, before we move on to China, the other part about Cuba that's worth pointing out is, I was assuming in my previous answer that the regime was actually doing relatively well. Even without considering all the criticism, it still looks like it has a low infant mortality rate. But when you actually look at the history of Cuba, Cuba was exceptional in terms of low infant mortality. Before the Castros took over, Cuba already had a very low level of infant mortality even for a poor country. And so with a friend of mine, a coauthor, Jamie Bologna Pavlik, we used an econometric method to see if Cuba has an infant mortality rate that is as low as it would have been had it not been for the revolution. So, ergo, we're trying to find what is the effect of the revolution on infant mortality and we're trying to use other Latin American countries to predict Cuba's health performance. And what we find is that in the first year of the regime's, infant mortality actually went up, so it increased relative to other Latin American countries, but it gradually reverted back to what would be the long-run trend. So that Cuba is no more exceptional today in terms of infant mortality than it was in 1959. That is actually a very depressing statement because it's saying that the regime wasn't even able to make the country more exceptional. So even if it's able to achieve that mission quite well, it's not clear how well they've done it. At the very least, they haven't made things worse in the very long run, they only made things worse in the short run. So when you're doing, like, kind of, a ledger of goods and bads of the regime, all the bad trade-offs I mentioned: lower incomes, higher mortality rates for mothers and maternity, lower rates of access to clean water, lower rates of access to diverse food sources, lower rates of geographic mobility - pile these on, keep piling them on, that's the cost. What I'm saying is what they call the benefits, they're not even as big as it's disclaimed. The benefits are relatively small.

And now with regards to China…

Tobi;

Yeah.

Vincent;

The Chinese case is even worse for people because they have a similar story with GDP. So, in China, a regional bureaucrats have to meet certain targets of economic growth. Now, these same bureaucrats are in charge of producing the data that says whether or not there is economic growth. You can see why there is a who guards the guardian's problem here? The person who guards the guardian is apparently one of the guardians. So you could expect some kind of bad behaviour. And there is an economist, Luis Martinez, out of the University of Chicago. What he did is he say, well, we have one measure that we know is a good reflector of economic growth and it is artificial light intensity at night. Largely because the richer a country is, the more light there will be at night time. And so if you have like 1% growth in income, in real numbers, you should have some form of commensurate increase in light intensity during night time. If the two deviates, it's a sign that the GDP numbers are false, that they're misleading. Because if they deviate, the true number, the always true number will be the light intensity at nighttime. So, when Martinez used the nighttime light to compare GDP in Chinese regions overall and the actual GDP, he found that you can cut the growth rate of China by, maybe, two-fifths, so it is 40% slower than it actually is. So, China is not even as impressive as it is. And the thing is now think about the pandemic, think about how extreme the measures that China deployed to restrain this has been, no liberal democracy would have been able to do that, no free society would have tolerated forcibly walling people into their houses. And there are massive downsides to the communist regime in China. Like, yes, the regime is free to do whatever it wants, but it also means that it can put Uyghur Muslims into concentration camps. It also means that it can wall people into their houses when they do not comply with public health order. It also means that people are under the social credit system where they are being largely surveilled on a daily basis. It also means that the government can allocate massive resources to the act of conquering Taiwan or flexing muscles towards Japan. All things that when you think about it, is that really an improvement in welfare? Obviously, you can say that, oh yeah, they're doing X or Y things really well but here are all the bad things that come with this. And those bad things are on net much worse than the good things.

Tobi;

Now, you keep emphasizing liberal democracy and I want to get at the nuance here because I've seen several results. Either it is from Chile and other countries that say unequivocally that democracies are better for growth than dictatorships, even in the case of Chile, despite all the reforms of Pinochet regime. But what I want to get at is, what exactly about democracies make them better? Because, for example, we can think of Nigeria and Nigeria as a democracy. We've had uninterrupted election cycles for over two decades now, but there's still very weak rule of law. Successive governments still rely on extracting oil rents, basically. And, the degree to which people enjoy rights vary depending on who is in power or their mood on any particular day. And, of course, Nigeria is a democracy. So is it liberal democracy? Is that the key factor?

Vincent;

So, think about it this way.

Tobi;

Yeah.

Vincent;

Think about it this way. Inside the big box of liberal democracy, there is for sure democracy. But the part that makes the box liberal democracy is not only the smaller babushkadal inside that box which is a democracy one, it is the other constraints that we put on the exercise of political power. The true definition of a liberal democracy, at least in my opinion, is that not only are people allowed to vote, but they are restraints on what we can vote on. So, for example, if it's not legitimate for me to steal from you, it is no more legitimate for me to vote with two other people to steal from you. The act of democracy should warrant some acts that are outside the realm of political decision-making. There are also constraints that exist on rulers, so it's not just that there are some rights that are not subject to conversation. There could be also incentives that prevent rulers from abusing the powers they have. That would mean, for example, checks and balances, where there are different chambers that will compete with each other, different regional powers of government that will compete with each other for jurisdiction, and so they will keep each other in balance. It could also be some form of external constraint, because a liberal democracy can also rely on external constraints upon political actors. It could be the fact that people can leave the country, the fact that taxpayers can migrate to another country, puts pressure on politicians to not abuse them. People can move their capital out of the country, [this] creates a pressure on politicians to not try to steal from them, because people will just remove all the productive capital and the ruler will be left with very little to exploit as a result, regardless of whether or not the ruler is elected or not. So the way to think about this is liberal democracy is, you want to have a system where there are rules, incentives, constraints that make it so that we are not betting on a man or a woman, for that matter, being the correct man and woman for the moment. We care about a set of incentives, constraints, and rules that will make sure that even the worst human being possible will feel compelled or compulsed [sic] to do the right thing. So, that's like the old Milton Friedman thing, it’s like “I don't want the right man. I want to have a system that makes sure that even the most horrible person on earth is forced to do the right thing.” That's what a liberal democracy is.

Now, it is a broad definition that I've provided. It is not narrow in any way. It is not specific, largely because I don't think it can be what works. It’s not everywhere the same. The general family to which this belongs is universal. But the way it can work is not the same everywhere. A homogeneous, small, Sweden probably doesn't need as much level of, say, breakdown of provincial versus federal powers. Whereas, from what I understand, Nigeria is a somewhat multinational country, multiethnic country with multiple groups east and west from what I understand the divide is in Nigeria. There, it might be good to have a division inside the country where things that are most homogeneous, you leave to the federal government, to the highest level of power. Then the things that you can delegate to the local level, [it is] better to do it that way. Countries that are incredibly heterogeneous maybe need even more federalism. What is optimal for one place won't work elsewhere. So I couldn't take Belgian institutions and then just dump them in Nigeria. Same as I couldn't just say, well, let's take Swedish institutions and dump them into Canada. But what makes generally Sweden work better in terms of institutions than Nigeria, for example, is the fact that Sweden does fit in that general box of liberal democracy. There are clear constraints, there are restrictions, there are constitutions that are well respected, there's a strong rule of law, and politicians are compelled to not fall prey to their own baser instincts.

Tobi; 

 A couple of months ago, I had Mark Koyama on the show.

Vincent; 

Great guy. He's a colleague of mine.

Tobi;

Yeah. So, we were talking about state capacity. We're talking about his book with Noel Johnson. So I did bring up your paper on state capacity, [in] which, basically, one description that stuck with me is that you never really find a poor, but highly capable state in history…

Vincent;

You mean backwards. A rich society with an incapable state?  

Tobi; 

Yes, a rich society with an incapable state. Thanks for that. So, I've been trying to disentangle this state capacity thing, I know Bryan Caplan basically dismissed it as a sleight of hand. Right. So, like, how does it work and how is it a necessary ingredient for economic development, so to speak?

Vincent; 

I am actually quite respectful of the state capacity literature in one way. So let me do like kind of a quick thing. State capacity says that you want the state to be able to do certain missions. Right, so we're not making judgments as to whether the mission is good. State capacity is about the abilities of the state. The reason why that literature has emerged since the 2000… here's a story of economic thought really briefly: in the 1950s, Samuelson and others show, ‘oh, well, there are market failures’ and then a few years later there are the public choice rebuttals, where the public choice economists say, ‘well, you're kind of wrong. There are also government failures.’ And the state capacity crowd tries to come in between these two and say, ‘yeah, there are market failures and there are government failures. How do we get a state to solve the market failures but not fall into government failures?’ Okay, straightforward, good argument. The part that I'm sceptical of is that the argument of the state capacity crowd is that you will have a lot of rich societies that will have strong states, you will have much fewer societies that have strong states but are very poor (the USSR would be a good example of that), [and] you will have a lot of societies that are poor and have weak state. The thing is that they can't seem to explain why it is under their theory that there are no societies that are relatively weak state but rich. Even though in history we do have many examples of these and they collapse all the time.

The argument that I make with my colleague, Alexander Salter, is that societies that have weak states will fall prey to predation because their neighbours with stronger state will try to capture their wealth by conquest. If they are conquered, they grow immensely poor, they are made poor. Basically, it's a terrible event for them. Or they resist, and if they resist ably, the result from resistance is that they have to build a strong state themselves to resist predation by other rulers. And so in the argument me and Alex build, it boils down to: the state is not necessary for development, but it is inevitable as an outcome. So, the task of political science, of political economy, is understanding if we are going to be stuck with one of them, how do we make it that we get the least terrible one? If it's not necessary, but it is inevitable, then how do we get to one that will maybe do some benefit, or at least, we can get the best kind possible? Well, that's where the liberal democratic answer gets into. [It] is [that] we need to find sets of constraints, rules, incentives that force the politicians to make it too costly for them to engage in predatory behaviour, in redistributive behaviour, and that they concentrate on what you could call productive behaviour. That would be like solving externalities. Like dealing with pollution or producing public goods stuff that markets have a harder time to produce. Getting into that category is the task of what liberal democracies are trying to do. That is a much harder proposition. Daron Acemoglu in his somewhat awful book, The Narrow Corridor, calls it a narrow corridor. (I don't like that book that much. I think it's a horrible piece of literature. He should have kept it at Why Nations Fail, we had everything we needed with Buchanan, and it was much better in the other version. He was a much worse version of that.) So, Parenthesis over on Daron Acemoglu, but his point is still relatively okay. There is a narrow corridor on which we evolve. That is a very narrow equilibrium that we want to stay on to, to avoid veering either into more territorial forms of government or into different types of authoritarian[ism], in a certain way. So the corridor for a liberal democracy is very, very, very, very narrow.

Tobi; 

I like that description. The state is not necessary but inevitable. Whereas with the traditional state capacity crowd, the state is often assumed and never justified.

Vincent;

Actually, that's a bit unfair to them. The state capacity crowd, a lot of them are interested in state capacity as a story of the origins of states. That, I think, is a much-valued contribution. However, the issue of whether or not state capacity is linked to growth, I think this is where there's overstretching. My point is “no, there's very little reason to believe that state capacity is related to growth.” State capacity is more the direct or indirect result of growth in the past. So, either you are getting state capacity because you get conquered and you get imposed it by somebody else, or you get state capacity because you want to protect your wealth from other predators.

Tobi; 

For the record, I'm not talking about your colleagues. There's this industrial policy school in development economics who are also big on state capacity, who think the state has to do this heavy lifting. They sort of assume the state and not justify it. But I won't let you go without asking you this final question. You recently published a paper - talking about the work of Thomas Piketty, the French economist - with Phillip Magness, I should say. What is your critique of his work? Because so far as I can tell, yes, I read the op-ed in the Wall Street Journal, [but] everybody else is sort of pretending that a critique of Piketty does not exist. And the political coalition around their research, along with [Emmanuel] Saez and [Gabriel] Zucman is moving rapidly apace, whether it is in taxation or other forms of agenda. So, what is your critique? I know there have been others in the past Matthew Rognlie, I'm not sure how to pronounce his last name.

Vincent;

Yeah. Our argument is actually very simple. And to be honest, I don't really care about the political conversation where, [for] the political people who are using Piketty's work, I ignore them. There may be a motivation for doing this work because it tells you the importance of his work, but the person I'm trying to talk to is Piketty himself. And the point we make in the paper is that he [not only] massively overestimates inequality in terms of levels, but he also misses times a lot of changes. In the article that me, Phil, another Phil, and John Moore published together in the Economic Journal, we find that there is a very different timeline of inequality in the United States. The most important part is that unlike Piketty and Saez, who can assign most of, and later Zucman… who can assign most of the changes in inequality to tax policy, we find that actually half the decline in inequality that happens between, say, 1917 and 1960, half of it is because of the Great Depression. And just as good economists, we should not be happy that, okay, the rich are growing poor faster than the poor, but the poor are also growing poor. That is not a decent outcome. So we're minimizing the role of fiscal policy and tax policy in doing inequality, but also the other changes that we find give a very different story of what matters in changing policy rather than being taxes, it has more to do with labour mobility within the United States. With capital mobility within the United States. So poor workers from the south, mostly black Americans, move to richer northern cities where wages are higher. Capital moves from the rich north to the poor south where workers are made more productive. So, the levelling has to do with a very standard force in economics - it's a Solow growth model - capital goes to where the returns are greatest, labour goes where the wages are greatest. Most of the convergence is explained by this, not by tax policy changes. So that's the critique we make of them. And there's a lot of other people who are joining in, Gerald Holtham, David Splinter, a lot of people are actually finding that their numbers don't make much sense and they're actually in violation of a lot of other facts of economic history, even though they're correct in the general idea that inequality fell; fell to 1960 and rose since the 1980. The problem is that all they got right is the shape, but they got wrong the timing, the levels, the extent of the changes. They got most of it wrong. They just got the general shape right. And that's no great feat.

Tobi;

Thank you so much for joining me.

Vincent;

It was a pleasure.

Welcome to another episode of Ideas Untrapped. My guest today is Charlie Robertson, who is the chief economist of Renaissance Capital - a global investment bank - and in this episode we talked about the subject of Charlie’s new book, "The Time-Travelling Economist''. The book explores the connection between education, electricity, and fertility to economic development. The thrust of the book's argument is that no poor country can escape poverty without education, and that electricity is an important factor for investors looking to build businesses. It also explains that a low fertility rate helps to increase household savings. Charlie argues, with a lot of data and historical parallels, that countries need at least a 70-80% adult literacy rate (defined as being able to read and write four sentences in any language) and cheap electricity (an average of 300 - 500 kWh per capita) in order to industrialize and grow their economies rapidly. Small(er) families (3 children per woman) mean households are able to save more money, which can improve domestic investments by lowering interest rates - otherwise countries may repeatedly stumble into debt crises. We also discussed how increasing education can lead to higher domestic wages, but that this is usually offset by a large increase in the working-age population - and other interesting implications of Charlie's argument.

TRANSCRIPT

Tobi;

The usual place I would start with is what inspired you to write it. You mentioned in the book that it was an IMF paper that sort of started your curiosity about the relationship between education, electricity, fertility, and economic development. Generally. So, what was the Eureka moment?

Charlie;

Yeah, the eureka moment actually came in Kenya, um, because I'd already done a lot of work showing how important education was. It's the most important, no country escapes poverty without education. So I'd already made that clear and there wasn't much debate about that. Perhaps there was a debate about why some countries have gone faster than others, but there wasn't much debate about that. The second thing I was very clear on was electricity, which kept on coming up in meetings across Sub-Saharan Africa, Pakistan, [at] a number of countries, people kept on talking about the importance of electricity. But the eureka moment came when somebody pointed out to me that Kenya, where I was at the time, couldn't afford to build huge excess capacity of electricity, which I was arguing you need to have. You need to have too much electricity, so that it's cheap and it's reliable.

And then investors come in and say, "great! I've got cheap educated labour, and I've got cheap reliable electricity. I've got the human capital and the power I need, that then enables me to invest and build a business here." And the question then was, well, why was it so expensive in Kenya but so cheap in China? Why was the cost of borrowing so high in Nigeria but so cheap in Morocco or Mauritius? And when I was trying to work out where did the savings come from in China, uh, well I was looking globally, but China's the best example of economic success and development success we've seen in the last 50 years. Over half the answer came from this IMF paper saying, actually it came from their low fertility rate. That's over half of the rise in household savings, which are massive in China, came about because the fertility rate had fallen so dramatically.

And I then thought, could this possibly be true for other countries as well? Could this help explain why interest rates are so high in Nigeria or Kenya and so low elsewhere? And the answer is yes. So this book, The Time Travelling Economist is bringing all of these three things together - the fertility rate, the education rate, and electricity - to say not just how countries develop, cause I think I've answered that, but when they develop. Because once we know those three factors are key, we can then work out the when. Not just in the past [of] countries, but also in the future. Um, so that's where this came from.

Tobi;

I mean, we're going to be talking about each of those factors over the course of this conversation, but another question...some would say boring question, but I know how development economists and economists generally always try to defend their turf, you know, around issues like these. So, has anybody like taking you to task on the causal link between these three factors and development? And how would you defend yourself against that were it to be asked?

Charlie;

I haven't found anyone yet who's argued successfully against these points. Um, the closest criticism I get, and just to say, you know, this book came about off the back of three key reports I did in 2017 on education, 2018 on electricity, and 2019 on fertility and savings. So I've now been talking about these ideas for three to five years. The book only came out in July, 2022, bringing them all together. But in five years I haven't had pushback other than people ask, "is it not correlated?" You know, "is it not perhaps economic growth leads fertility declines or boosts savings?" And I think I show really clearly in the data that "no." Um, the fertility declines give us the growth. You don't get growth without adult literacy of at least 40%, you certainly don't get industrialization until literacy is at 70 to 80.

So, you know, I'm looking at the data and I think it's pretty crystal clear that you've gotta get these other things right first before your economy can take off. And I can't find any counter-examples. Except, I mean there's the inevitable few, those countries like Qatar or Kuwait with huge amounts of energy exports per capita or diamonds in Botswana's case. And there you don't have to get everything right before you get wealthier because you just happen to be lucky to have huge amounts of energy exports per person and a very small population. But they are a bit of an exception. I think you could probably argue that they do grow first before they get everything else right. But for the vast majority of the planet and all countries in history, it's the other way around. You gotta get education, power, fertility rates in the right place to take off.

Tobi;

So I mean, getting into the weeds, let's look at education first. Before your book, personally for me, and I should say what I really like about your book is, it's well written, it's an interesting read. It comes across as a bit less analytical, which is what you get from the standard development literature, you know, and I think that's partly because you are writing about a lot of the countries that you have also worked in and interacted with a lot of these factors. So it really gives it a first-hand experience kind of narrative. So I like that very much. So prior to your book, if someone were to ask me about the relationship between education and economic development or catch-up growth, generally, the reference usually goes to Studwell's big claim, Joe Studwell, that: Yeah. You don't really need a super high level of education metrics for a country to industrialize because the standard explanation is that how a relatively poor country starts industrializing is from the low-skill, uh, labour-intensive, low-skill manufacturing jobs, that you don't need a high level of education and skill for you to be able to do that.

So what I wanna work out here is what is the transmission mechanism between adult literacy and industrialization the way you've, like, clearly analyzed in your book?

Charlie;

Well, thank you very much for saying it was nicely written, I appreciate that. I wanted to try and make it as accessible as possible. Yeah, I think Joe Studwell's books are really good and I think he's right that you don't need a high level of education to do that first step out of rural poverty, subsistence farming into a textile mill. I think what's interesting is how many people writing about development forget how important just adult literacy actually is, because we've taken [it] so much for granted. So Adam Smith, who wrote The Wealth of Nations, the father of economics back in the 18th century in Scotland, he didn't make a big deal about adult literacy driving growth. And more recently, you know, people like Dani Rodrik have echoed exactly that saying you don't need any great education to work in a textile mill. You just need to be dextrous with your fingers. Which is almost exactly actually what Adam Smith said 250 years ago. And I was sympathetic to that, but I then kept on seeing in the data, well, first of all, I found this theory written in the sixties that said that no country has industrialized even to that first basic level of textiles without adult literacy being about 70 to 80% of the population. Which means basically all adults, all men, plus well over half the female population as well. And this was the theory written in the sixties and when I looked at the data, it was proven right and I couldn't quite understand why - if you just need dextrous fingers to work in a textile mill, why would there be that link? And I ended up talking to a guy who ran Levi's factories in Asia in the 1980s and he said, “Charlie, just think about it.”

You've got this box of Levi's jeans coming down the conveyor belt. Do you put that box onto the truck labelled United States or that truck labelled Europe for export? And if you can't read and write, you won't even get that right. So the adult literacy thing I think is overlooked. People are focusing on secondary school, high school education, how much [many] university graduates a country needs and they do need graduates too. But until you get to that 70 to 80% adult literacy, textile mills don't go to a country. And we can see that they did go to China in the nineties when they got to adult literacy of 70%. They are in Southeast Asia. They're in Bangladesh since education hit about 70 to 80% in the last 10 to 15 years. But they're not big in sub-Saharan Africa, or at least in parts of Nigeria or the Sahel or West Africa because the education levels still aren't there yet. So, you know, I looked as far back as I could go to the 19th century and even the first non-European country to take off, Japan, had an adult literacy rate of about 70% by 1900 and 20 years later, they had a thriving textile industry. The education always comes first. And Korea copied that Japan model in the 1950s and sixties, Taiwan, Hong Kong, all the rest [of] Southeast Asia's followed. Now, South Asia's doing it and luckily it's spreading across Africa too. But the adult literacy is the first essential step.

Tobi;

One possible objection. And I haven't seen this anywhere, but I couldn't really get it out of my mind while I was reading that part of the book is that some will argue that increasing education also increases domestic wages and that is really a problem for industrializing. And, if I recall, one particular point that the anonymous economic historian on Twitter, Pseudoerasmus, made particularly about Asia, is they were able to combine a very high adult literacy rate - a measure which you use is completion of secondary education…

Charlie;

Yeah.

Tobi;

With very unusually low domestic wages. What role do wages play in your analysis?

Charlie;

I think that's the norm actually. It connects to the fertility thing. And I'm not sure if you want to jump there just yet, but what tends to happen when you've educated your population is that the fertility rate drops a lot. And when that happens, the number of people who have to stay at home looking after 5, 6, 7 children goes down a lot too. Women can go into the workforce and of course cause you've got the education, right? Those women are educated so they can join the industrial workforce as well. So very roughly, if we say there's a hundred people in Nigeria, 50 kids and 50 adults, let's say 25 of the adults have to be staying at home to look after 50 kids, you're talking 25% of the population can go out and work of the overall population. You go to Asia today and it's more like 70% adults, say 30% of kids.

So you need maybe 15% of adults to stay at home. And you end up with something like 85% of the whole population can go out to work instead of 25%. Now, the consequence of that is a massive rise in the working-age population. And I think that that keeps industrial wages low for a few generations, in fact. Or at least three decades. Probably 40 years, where the education's come through, the fertility rates come down, you've got this huge excess supply of labour, which is then joining the industrial workforce and getting jobs. But because there keeps on being more people joining that workforce, it keeps wages relatively low. Now, what eventually happens then after a few decades is that that big increase in the workforce stops increasing as fast. We've seen this in China in the last 20 years. So, 20 years ago China's per capita GDP was about fifteen hundred dollars, $1,500.

Whereas now, now the population has stopped growing. Working age population's shrinking. It's gone up to over $11,500. It's gone up tenfold. So the big reward for industrialization comes later. And we had this in Europe of course in the 19th century, you know, wages were pretty awful and industrial working was pretty awful experience in the 19th century. I mean it paid slightly better than rural subsistence farming, which is why people came to the cities. But London was a horrible place for the vast majority of people. And the industrial workhouses were terrible places as well. And that lasted for generations. It's only when that big population, kind of, boom stories started to shift that labour eventually got any bargaining power. Cause when there was too much labour coming into the market, they had no bargaining power with the factory owners. It wasn't until the 1870s that the trade unions became legal in, say, the United States. Because up till then, you know, "you join a union, I fire you," you know, could be what the factory owner would say in the United States, cause there's always gonna be another person I can employ. But once the workforce starts to gain a bit of bargaining power, cause it's not expanding quite so fast, then finally wages start to pick up. So I think what's happened in Asia is pretty normal and will probably be the experience that we've seen across Africa as well.

Tobi;

Inevitably this will take us into what it means to be educated, really. Because a lot of countries, I mean it's pretty much standard - they say, Oh yeah, we want invest in education. Um, we know it is important for human capital. We know how important it is to have an educated population and all that. You talked about some data challenges also for some countries in your book. So what I wanna ask here is what exactly does it mean to be educated in the sense that you are talking about in the book?

Charlie;

Yeah, this is a really fair question. Why am I talking about adult literacy? The definition is can you read and write four sentences in any language? Sentences like "farming is hard work." So it's not a very high threshold and I wouldn't argue, I don't think you would, that it's highly educated. It's just educated enough to put that box of jeans onto the right truck when it's going to America or Europe. But all that's doing then is taking your country's per capita GDP from your per person kind of wealth from say $500 a year, a thousand dollars a year to the kind of two, $3,000 a year level. It doesn't mean you've got the education levels you need to get to the $10,000 per capita GDP level growth or 20 or 50 or even a hundred. Um, to get to the 10,000 level, I think you probably need very good secondary school education as well.

And to get to the $20,000 per capital GDP level, you're talking a lot of graduates coming out of university and you need to have that education then spreading throughout the population, both broadening and deeper education as well. And that is a process that takes decades. I mean I focused quite a bit on Korea because it was one of the most successful models and then China came along and did it even faster. But what Korea prioritized in the 1950s was getting that adult literacy rate from 35% or so, too low even to grow sustainably, to about 90% they said by 1960. So in about 10 or 15 years they got it from 35 to 90 and that was enough then to have textile mills do really well in the 1960s and they became a manufacturing country, an industrialized country by the early 1970s.

But already then the government said, right, we need more engineers, we need graduates coming out of university to do heavy industry, to do cars, shipbuilding. But Korea had no cars or shipbuilding at the time, nothing significant. So they were changing the university focus from, kind of, the arts or law towards engineering and the sciences before they had the economic sectors that they were trying to promote. And then about 10 to 20 years later, all these graduates were then in the economy and ready to start up companies like Deawoo, Hyundai, Kia, Samsung. And they started small obviously in the 1980s and early nineties. But this kind of sequential thinking about it meant that Korea kept on having the right human capital at every stage of development. So my book's trying to focus on, you know, why hasn't Pakistan got all the textile factories?

Why does Bangladesh have them? Why doesn't Nigeria have them? Why does Vietnam have them? And this is saying first you've gotta get that sequencing right of everybody ideally being literate, everybody having had school up to 11 years old and come out with a good standard of education. On the quality issue you just raised, the problem here is a couple of things. So I mean firstly people sometimes just make up the data and say, yes, my population is literate when it's not. But secondly, when you try and kind of shoehorn a hundred kids into one class to say, you know, they're all going to school now, but you've only got one teacher, you are not coming out with a good education at all. You might not even be coming out literate at all. So that, you know, I'm also trying to warn that governments can't do this on the cheap. Or not completely. They have to take it seriously and say, look, we actually need to make sure everyone really is coming out able to read and write. It's not just trying to tick a box to say everyone's at school.

Tobi;

Hopefully, we'll circle back to policy questions around this later. Let's talk briefly about electricity, which as you say, once you start investigating these factors, then you start teasing out what's what for each country. And the way you introduce that is [that] there are some countries with very high adult literacy rates but still weren't getting the benefits - like [the] Philippines, which was your example in the book. And it turns out what was missing in that particular case was electricity generation. But first I want you to make one distinction for me quite quickly. Cause it's funny, I was reading David Pilling's brief coverage of your book in the FT and he talked about the fertility part being controversial and I wonder that people miss the obvious controversy in electricity, but we'll get to that. So, now, is it really about investment in electricity that is often missing in countries that can't quite manage to get it right or the way their electricity market is structured? I know you are quite familiar with Nigeria and it's really a big, big, big debate that we've been having for, I don't know, like 20 years. So, some people will say you need very large upfront investment, possibly by the government, in generating capacity transmission, machinery and co. We argue, oh no, you really need to restructure the electricity market first. People have to pay for what they use. You need to restructure the tariff system, blah blah blah, blah, blah. What are your thoughts?

Charlie;

Um, big issues. And there is a debate. There're so many debates about this actually. There's the debate about whether you need a big national grid, big national generation and distribution companies or whether you can have localized electricity. Um, you are getting a couple of points though that I think it's easier to say some answers to. And one of them was to do with getting people to actually pay their bills. Certainly a problem in Nigeria, apparently, you know, discos will say that because there hasn't been good metering and despite privatization that those meters have not been rolled out. I know the government's promising to roll it out to all 10 million account holders now, but because there hasn't been metering, you can't charge necessarily the fair price for the amount of electricity people have used. So then people don't wanna pay. So then the discos are losing money, then they can't pay the generators and this then becomes a problem.

And I think there is a case to say that if the generators can sell some power directly to some big companies, that could be one way around part of the problem. So in a place like Lagos, very similar to the Philippines in the 20th century, good educated population just held back by a lack of cheap reliable power. You know, I think if Lagos could have its own electricity story, it would be a phenomenally successful economy. It should be over the next three or four decades. So there is a case about how you structure this. But I found two or three things interesting when I was looking into this issue in 2018. And the first was just clarifying that it really is electricity that people need more than say transport infrastructure. You know, this is a survey the world bank had done and the only countries where they've said transport infrastructure was the bigger problem was countries where there wasn't an electricity problem because there's so much of it.

So countries, where there's a load of electricity, say yes we need more transport infrastructure, but everybody else says we have to have the electricity first. So then it's a question of how do you roll that out in a way that makes money and supports development? And there is a... I think, a problem at the moment with well-meaning policies from people like the United Nations or the African Development Bank saying everybody should have access to electricity. But my point in the book is, and Adam Smith said the same thing in the 18th century, you want your infrastructure to be making money not losing money. You need to make sure that if you're going to supply people with a road or a bridge or electricity, that they can pay for it. And if you start building stuff that loses you money because people can't pay their bills, then you'll end up with an uneconomic electricity system which can't function properly and can't give industry what it needs.

And what I try to emphasize in this is that every country from America and France in the 1920s to Turkey in the 1960s or seventies to Korea in the 1970s, every country has said, okay, let's make sure we've got electricity for industry first. Profitable, makes money, and then households over time? Yeah, okay, we'll connect them over time, but only when they can start affording to pay for electricity. It's not another subsidy that governments can't afford, we just can't do that. [This] is what every other country's done. But at the moment I do see this pressure for electricity systems to try and roll out universal access and so, in places like Kenya that's putting the whole electricity system under financial pressure because it's hurting their profits. And if you're trying to roll out cheap electricity to households, well how do you pay for that?

Well, government subsidies partly, but the other way to pay for it is to make industry pay a high price. But if you're making industry pay a high price industry won't come. They'll go to Asia; where they get a low price for electricity. They're not going to go to somewhere that's got a high price. Cause no company's gonna say, I just wanna subsidize households getting electricity. Companies are coming to build stuff in countries because they'll make a good profit from doing so. So I think you've raised a number of issues there, you know, is localized electricity good, and so on? You know, what should you be prioritizing first - industry or households? And there's a whole host of issues. But I hope I've answered that.

Tobi;

Actually, that's the controversy I was referring to at the beginning of that question because the background that is, it'll be a very, very tough sell in the current political climate, for example in Nigeria, for any person aspiring to public office to make this argument that you have to power industry first. What it's going to sound like is: you are just trying to prioritize the rich and trying to exclude some people from what, like you said, has come to be framed as a universal basic right. You talk to a lot of small businesses, even individuals, like you mentioned with the World Bank Survey, the importance of electricity is so paramount on everybody's mind that if there's stable electricity, I can start X and Y businesses. I could make money and, I mean, no one needs the government for anything else. Just give us electricity.

Charlie;

Yeah.

Tobi;

So my point is practically… thinking about this practically, how do you think a sensible government that is not trying to bankrupt itself prematurely can manage this situation?

Charlie;

Well, I think it's hard work. Um, how did the Koreans do it in the sixties or the seventies or the eighties? They gave you no right to protest - military government. How did the communists do so well at getting this industry first, households later? How did they get it right in China or Russia? Same thing. You've got no rights to protest. "Your interests don't matter, we're thinking 10 to 20 years ahead how to make our country better off and how to make everyone better off. So you suffer now because we are gonna prioritize business." So that is one model. I'm not recommending it, I'm just saying it is a model that can be done. The other way is to allow it to be done by the private sector. And if you let the private sector roll out electricity, they will not supply electricity to people who won't pay their bills.

And that is the story that you saw in western Europe, it's the story you saw in the States, and to some extent you're seeing actually in Kenya. There's quite an interesting company there called M-KOPA. And M-KOPA will sell you, well, they'll lend you, they'll lease you, a solar panel, a little one that you can put on your - actually, a friend of mine was showing it to me the other day in Uganda...they put it on the straw roof of the mud hut and that solar panel, you pay a monthly fee and after about 18 months you've paid for the panel, you've also got energy during that time enough to supply a mobile phone and so on, lights a little bit, and then it's yours and that's effectively privatizing that rural distribution story. But I think the difficulty is that politicians find it really hard to do this.

And part of what I'm writing about in the book is how really hard it is for governments in a country with no savings, big population growth, to constantly meet all of the different demands. With huge population growth you're having to build new schools all the time, you have to hire even more teachers all the time. You've got population pressure, maybe, causing clashes over agricultural land like the Fulani herdsman in Central Nigeria, Northern Nigeria as well. And all of these pressures are on you all of the time. And there's constant demand to spend more on bridges, on hospitals, on education, on security. And what you can't afford to be doing is making a loss. And so I think what politicians need to do is say, we've gotta sequence this right. The same thing as with education. It's no good having a million university graduates if a country isn't literate enough to have an industrial base, you've gotta have the literacy first.

And equally, it's no good having electricity rolled out to every household when there are no factories for people to go and get the jobs they need to be able to pay the electricity bill. And it's not easy. I, I totally understand it's not an easy situation for anyone to be in. The difficulty is [that] because it's not easy, too many political leaders will take what appears to be the easy option of saying, "I tell you what, let's just go and borrow a load of dollars offshore. Nigeria's going to go and issue a lot of dollar debt and we'll use that to try and sort these problems out." Kenya's done the same, Ghana's done the same, Pakistan's done the same. And the risk then is that you end up in default situations. So that feeds into one of the other chapters in the book as well.

But I think it's very difficult. I think realistically governments need to say, what can we do here? And this is how long it's going to take. And it's going to be not a five-year story, it's going be a 20-year story, a 30-year story to get it right. And people, sadly, need to be patient, which is hard; when for generations people have been waiting for things to get much, much better and little progress has been made, relatively little progress has been made compared to Asia and that causes a lot of political frustration. I think.

Tobi;

I mean, speaking about Asia and I mean your point about taking away the right to protest, I think Africa and Nigeria sort of missed that window when we had military governments everywhere. So, uh, let me give you one experience I've had in trying to discuss your book with friends. So I get two reactions to the fertility section.

It's almost automatic, you know, when you discuss fertility being at a certain level and I try to, you know, successfully argue your point, you get two strands of reactions in my experience, one goes immediately to the China issue - the one-child policy; that, "oh, so are you trying to say we should do what China did?" The other slightly more technical objection I get goes to the relationship between population growth and economic growth that is quite pervasive in the growth literature. Did you also experience that while writing the book and debating with colleagues?

Charlie;

Now I'll take each point in turn. Um, the China one-child policy story helps explain this massive rise in Chinese savings and then their very strong growth. What I'm trying to show in the book, of course, is that every rich country has seen a fertility decline. And what I'm arguing is probably the right sort of level for countries to aim for is about two to three kids on average. I don't care if people have five kids or one kid, it's just as a country the average of two to three kids is consistent with a very high, well, a big jump in the level of sayings. And with those savings, you can then industrialize and grow, and grow fast. Um, China I think actually made a mistake. I think China got it wrong by going for the one-child policy because they kind of turbocharged that story, that story that every rich country has got, of lower fertility, it took a really long time in Europe. I mean it took a really, really long time in Europe and that's why Europe had the slowest growth of any industrial revolution. It was done faster by the communism [they had] in Russia and they did faster growth and we've done even faster in China. But the consequence of this one-child policy and what the Chinese have discovered is it's bloody hard to get the fertility rate back up again once you've had one kid. I was talking to a Chinese professor on a plane back from Asia once and she was saying all of her friends, they can't get married, they can't stay married. They get married and they can't stay married because they're all used to being a one-child kind of princess or prince in the family who gets everything they want and then they try married life and they discover as you might well know, that you never get everything you want in a marriage, and you have to compromise.

And it's certainly created a problem now that China can't get the kids, they can't raise the fertility level and it's not just China that's discovered that once you've got a low fertility rate, too low, I think of one, you have a problem raising it. Again, Italy's had the same problem, Iran, uh, Russia. So I think China did it too fast. And you certainly don't need to do it and loads of other countries show you that just aiming for that two to three kids figure really helps your economy and gets you onto the path to being middle-income and then a rich country. So I don't think you need to do the China one child. No. Um, the second issue, the population growth versus economic growth. What I show, what we did in this was we looked back at every country's growth rate since 1960 and I compared the per capita GDP growth, the per personal growth of an economy, it's the best way to measure how well an economy itself is really doing. And I compared that growth rate against the share of adults to kids that I was talking to you about a little earlier.

Tobi;

Yeah.

Charlie;

And where it's 50-50 roughly, between adults and kids, per capita GDP grows at 1% and that was the story of Asia in the sixties and seventies. It's still the story for a good number of countries including Nigeria today. So per capita GDP growth is about 1% when half your population can't work because they're kids. But once you get two-thirds of the population being adults, your average per capita growth in lower-income countries by half of America's wealth level, so not even lower-income, lower or middle-income countries, your per capita growth, and it averages three to 5% a year. So the structure of your population tells you what your per capita GDP growth is. So it's just... I can't see that there's any other way to explain this than you've gotta get that fertility rate down first before you can start to get the high per capita GDP growth. Um, and it's connected to the savings, of course; cause once you've got two kids instead of six, you're saving money in the bank, the bank starts to have more cash to lend out. There's more money for lending for investment. The government can borrow more cheaply so it can build infrastructure, roads and rail, electricity and cheap electricity cause interest rates are low cause the savings are high because most families are able to put some money aside at the end of the week. But that doesn't happen when 50% of the population are kids. They're not earning any money, they're not saving anything and the poor parents are trying to manage to feed five, six kids on average. You know, they've got nothing left at the end of the week to put into a bank.

So the bank's got no cash. So interest rates are really high cause there's no money in the bank. Um, so money's really expensive. So the government can't afford to invest in infrastructure and if it does build electricity it has to charge a lot of money cause it's having to pay a lot of interest on the debt it's taken on. So to me, I've yet to find someone demolish the argument and uh, you know, it could happen.

Tobi;

Yeah.

Charlie;

But so far it seems you've got to get the fertility rate down first if you want to get fast growth. Now if you don't want to grow at three, four, 5% a year, you could do it really slowly like Europe did and you grow at say, one and a half, two, eventually, you get from European farming in 1800 to factories that are producing not great stuff by 1900, a hundred years later. But when I'm looking at Nigeria today, I don't want Nigeria to be waiting a hundred years to be doing what Europe took a hundred years to do. I also don't think the Chinese model of it taking 30 years, 20, 30 years but then having a population problem of being too old, I don't think that's the right solution either. But there's somewhere in between. At the moment though, Nigeria's on that long growth story, it's not yet ready for the faster growth story

Tobi;

On the China question, um, thinking about your answer there, is extremely low fertility or what they say "fertility below the replacement rate" a feature of the kind of explosive growth 30, 35, 40-year trajectory that we've seen in Asia. Because if you look at Korea, Korea even have worse demographic numbers than China and there was no draconian population policy, but it's kind of gone through this explosive growth phase that is even faster and bigger than China's.

Charlie;

Well, it's been going on for longer. So what the Koreans got right was they raised their adult literacy rate to, you know, they said about 90% by 1960. China, despite being communist and communists tend to say they really appreciate education, didn't get to over 70% literacy until 1990, sometime in the early 1990s, which is 25, 35 years later than Korea. Uh, so Korea was already booming in 1970 at a time when China was having the catastrophic mistakes of the cultural revolution and really bad growth and people feared mass famine. Well many, many did die in China in the sixties. So what I would argue is that Korea had a slower fertility decline and the growth rates were not as fast as China's but they've been growing for 50, 60 years already. So Korea's two to three times richer than China is today. But as you say, they're so ageing that they're gonna be the oldest country in the world by 2030.

And what's gonna get interesting then, and I can't really answer this in the book cause we haven't seen it yet, but what's interesting about Korea and we're going to have to watch it carefully, is that you are going to end up with, not 70% adults and 30% kids, it'll be less and less working-age adults, maybe 60%, I dunno maybe eventually 50% and it'll be 50% kids and old age pensioners who can't work. And my guess is that Korean growth is going to slow back to about the 1% per capita growth that Nigeria's got at the moment because Korea's going to be too old. You know, and that's not something that I think people should be thinking about or worrying about. [People should be thinking about] Pakistan, East Africa, Southern Africa, West Africa at the moment. It's [Korea is] just not a...you know, that's a problem to worry about in 50, 60 years. But it is going to be interesting to watch what does happen to growth in really old countries. Um, can pensioners actually still do work? You know, maybe they end up retiring at 70 or 75 or 80, I dunno. It's gonna be quite interesting to see.

Tobi;

So I mean the question then is, uh, for countries that have fertility rates that are higher than what you described in the book.

Charlie;

Yeah.

Tobi;

It then becomes how do we get it to the point where domestic savings start going up, interest rate for the domestic investment environment then benefits from that virtuous cycle. You talked about access to uh, reproductive interventions like contraception, also education, which takes us to where we started this conversation from, especially the education of women and girls, generally. I was taking a look at David Le Bris recently where he was talking about equality between siblings and inequality between siblings and how it affects the overall capital formation, whether it's physical capital or human capital in the society. So my question then is, do you see individual sort of personalized household decision-making affecting this more or it is sort of a national policy thing?

Charlie;

When it's something as important as family, you know, the individual decisions matter a huge amount. And as I said earlier, I've got no issues with anyone doing what they choose to do. But that big family story, I was just talking to a former minister, actually, of a... former finance minister of a country and he's got five kids, he's saying that he's been able to help fund them go to university, but he can't afford to help them buy a house cause he just hasn't got the cash. And I thought that was a really interesting example of even in a wealthier country, you know, it still matters how big that family is. You know, when I looked into this on how do you get the fertility rate down and there's been quite a lot written about it. I don't have a magic or a single answer, but the theories are first: girls if they're staying at school until they're 18, versus girls who leave school at 13. If you leave school at 13, perhaps you have your first kid at 14, maybe a second kid at 17, third kid at 20. But if you stay at school until you're 18, perhaps the first kid's at 20. So already you've reduced the fertility rate by two just by keeping girls at school. And the key figure, but just kind of remind, well tell people is the key figure is at about three to four kids per woman on average, the banking system has got deposits cash in it of about 35% of GDP, at four to five kids, it's around 30, 25 to 30. At five to six kids, which is where Nigeria is, it's about 20% of GDP. Um, so 20, 30, you know, these sort of levels. If you get to two to three kids though, if you get it below three kids, it more than doubles to about 60% of GDP.

That's when banks suddenly have loads of cash. When banks have got loads of cash, there's loads of lending, suddenly access to finance isn't a problem anymore. So how do you get it below three kids? So you educate girls, there's an incentive when women are educated for them to work cause they can start to make decent money in a textile factory that you can't do unless you've got that literacy. Um, the government just telling people that low fertility is a good thing is shown to have some success. From Indonesia to India, these kinds of government campaigns suggesting lower fertility rates have made a difference. The third thing, which really surprised me cause it's such a strong correlation, is [to] stop kids [from] dying. And I was pretty upset, actually, to see the numbers where, for Nigeria, you've got a 10% chance, just over a 10% chance of dying before the age of five because you're born in Nigeria. And when I was comparing that to Covid - which the world spent, what, trillions trying to fight - with a fatality rate of about one or 2%, you think of those with more than a 10% chance of dying just before the age of five in Nigeria. Anyway, it's kind of shockingly high, but when you have such a high chance of losing a child, you tend to have more children and the correlation is really quite strong. So, if you can try and address infant, [and] young child mortality rates, which doesn't cost that much, you can see countries with Nigeria's wealth level that have a mortality rate of not over 10%, but five or even 3%. And usually, countries with such a low mortality rate then have a much lower fertility rate as well. So, people tend to have less kids when they are more confident that all their kids are going to survive childhood. So, some investment in basic healthcare for children, education of girls, contraception availability, yes it does help, and government information campaigns. You put those things together and then you get a country like Bangladesh. Bangladesh which had the same population as Nigeria about 15 years ago. But today Nigeria's got tens of millions more. But Bangladesh is growing as fast as India. Bangladesh's per capita GDP is over $2,000. And it keeps on growing at six, seven, 8% every year. Because they have on average two kids per woman, they've got savings, they don't have much foreign debt because they don't need to borrow dollars from abroad to fund their growth, because they've got their own savings, because the fertility rate is low. Muslim Bangladesh: tremendous success story over the last two or three decades.

Tobi;

You sort of made allowances for countries that can't quite get their savings right up to the levels where they can get the desired domestic savings and really positively affect their investment environment in a big way. And you talked about debt in the book, which would be familiar to anybody that's been in the new cycle about Nigeria currently, which is that government revenue has collapsed. Debt servicing is rapidly approaching a hundred percent of what the government can collect. And it's only a matter of time before we are talking about a debt crisis. But, like you said, a debt crisis is, like, unavoidable if you're trying to grow and you don't have to requisite domestic savings to sort of mitigate that. But this inevitably brings in the question of debt restructuring which, again, some would also argue does not help you grow. So, in terms of just the sheer macroeconomics management of this, how do you go about it?

Charlie;

It's tough. The book's arguing, obviously, that a whole chunk of this stuff is really long term. You got to get the education right. So, you've got to have enough teachers and that takes, well, at best Korea did it in 15, 20 years. But even if you've got the education, then you've got to get the fertility rate down. And that takes at best 10 years to get it down by about two kids per woman. Nigeria's at 5.3 kids or so at the moment. It needs to be below three to have the local savings. So, we're talking at least 15 years, even if every priority was made today to try and improve education, do all this reproductive education and so on. So, the governments then have the choice of what do you do? I mean, if you're going to wait 15 years, you can grow at 1% a year per person. But you'll find the population is getting pretty cross because you've got all these other countries in the world growing at three, four, 5% per person every year. You know, why is my country growing at one [percent]? So, the politicians then...[it] becomes so attractive to go out and borrow and, you know, every country, not every single one, but the vast majority of debt defaults in the second half of the 20th century were in high fertility countries. The fertility rate I think was around, on average, five - five kids per woman was the average fertility rate in countries that defaulted in the second half of the 20th century. Wherever they were in the world. A lot of them were in Latin America in the debt crisis of 1980s. So firstly, debt crises are really common in high fertility countries because governments say I want to speed up my growth and they borrow when the markets let them.

And we've certainly seen that in Africa in the last 10 years too. And then they borrow too much and then they go into default and then they can lose maybe a decade. And that is what happened in Latin America in the 1980s. But the alternative is to only grow at 1% a year. And yeah, you can avoid debt default. I'm not saying every high fertility country defaults. I'm saying almost all the countries that have defaulted are high fertility. So, you can settle for the low growth but if you don't want to settle for the low growth, the debt becomes a very attractive way to try and get faster growth. But it causes a problem. I end up finding roughly two other ways that you can try.

Tobi;

Okay.

Charlie;

And grow faster. Is it okay to jump on to those?

Tobi;

Yeah, go ahead please.

Charlie;

Yeah. First is to try and bring in as much foreign investment as you can. Cause you haven't got enough local savings, you don't want to take on too much debt cause eventually you'll default. So, you can try and make yourself very attractive for foreign investors. Foreign direct investors. The only problem with that model is that those foreign direct investors do also want their cheap electricity and the good infrastructure that unfortunately high fertility countries haven't got the money to pay for. So, it's difficult to get in a lot of foreign direct investment. Foreign direct investment in China, I was just reading a really good book by David Lubin, who's the chief economist of Citi for Emerging Markets and he did a book called Dance of the Trillions. Highly recommend, it's brilliant on emerging markets. And he says FDI suddenly started in China in the 1990s. Now, I know why. My book is explaining why I think, which is you finally had a literate population, 70% literacy and you also had the low fertility rate. So, you had the high savings, you had the good infrastructure. But the FDI didn't come 10 years before into China. It only really picked up in the 1990s. So, the point of then is, I mean yeah, try and get some [FDI] if you can, but the last option that I can see other than to just, perhaps, try to go full Stalinist, kind of communist, take control of every part of the economy. But even that still education and low fertility really helps... Um, the last option which any country can do is to run a current account surplus, I think. Have a currency level that's so cheap that you are running a trade surplus. A current account surplus, which is obviously trade plus services and remittances and so on.

If you've got a surplus on that current account, you are bringing dollars into the economy and those dollars help reduce interest rates. And Nigeria saw that actually in 2005, six, seven and eight when the oil price was booming. Nigeria had that flood of dollars coming into the economy. Interest rates were really low below inflation and investment was relatively cheap and easy to finance. Now it's a problem to manage when it's a commodity-driven boom because commodities then bust. So, all that flood of money that came in suddenly disappeared again, you know, once the oil price collapsed there wasn't that current account surplus anymore. But if you run a cheap currency policy to make sure you always run a current account surplus, then that helps give you that supply of savings that you can then use to start investing. So that seems to me one of the few ways that a low-income country that's got not enough local savings, doesn't want to wait forever until its fertility rate's down [and] low enough to build the domestic savings, this is one way that looks sustainable that can bring in some foreign cash to help support growth.

Tobi;

But one minor aside on FDI and you can really correct me here if I'm wrong, wouldn't that really be a bit unstable? Because if you have loads of FDI, if other indicators are really working in your favour and at the slightest hint of a crisis, all that money then flows out.

Charlie;

Yeah. Well, I'll just differentiate between foreign direct investment and foreign portfolio investment. And, again, David Lubin's book is very good on this because the Washington consensus, which is this set of policies that were drawn up by policy makers around 1989, 1990, it said countries should welcome foreign direct investment. Building factories that it's pretty hard to move out of the country, that that should be welcomed. But when the original guys who drew up the Washington Consensus wrote down the kind of 10 principles, they weren't that keen on foreign portfolio investment. This is the hot money that will include a lot of my investors who will come in and buy shares in companies in the Nigerian Stock Exchange and might come in and buy bonds. And I think it's fair to say that that money can leave in times of trouble and doesn't really support...isn't necessarily as supportive [of growth] and that money we count on the capital account because it is foreign capital.

What I was talking about on the current account surplus was obviously the trade surplus, the remittances, the services and so on. So, I think it's more debatable. I think a number of countries have restricted foreign portfolio flows into equity market or the bond market. And if they've got other things going for them, like a low fertility rate, they can kind of get away with that. Um, what I'm highlighting is that for some countries they just don't have that choice. And when America was short of capital in the 19th century, it was British capital that went over and built their railways, that bought all the shares in their infrastructure companies. The Brits owned America for much of the 19th century and then the French actually owned most of Russia. Uh, the railways and the ports and some of the industry, the coal mines [were] very significantly owned by French investors, portfolio funds, and portfolio guys are there to make money as well. You know, they're there to make profit and if you're making good profit, five, 10% a year or whatever sitting in Nigerian equity market, people will stay, and it won't leave. They'll be happy to stay there for many, many years as people are and have been doing in India, actually, since India's education fertility and electricity numbers have all come together in the last 10 years in a really good way. Foreign portfolio guys are saying, "Hey, we wanna put our money into the Indian stock market too." And Indian shares are pretty expensive right now because of that. But the money doesn't want to leave. It'll leave when policy mistakes are made but fundamentally doesn't want to leave. However, I don't deny that there is a reasonable argument you can make to say we're going to choose foreign direct investment, we're going to be more restrictive on foreign portfolio investment. Because that can be more volatile. It can leave quicker. And I wouldn't argue with that. Well, I mean we could debate it, but I think it's harder to prove that you must have foreign portfolio investments to thrive. I think the current account surplus is a better policy choice because it's in your control. Foreign portfolio investors and what they do, that's not in your control.

Tobi;

One question that stayed with me throughout your book, which is a bit silent in the book itself, maybe it's implied, you can tell me, is that it's really difficult to find a country at any particular point where all these three factors align at the same time. Where you have the requisite adult literacy rate, electricity and fertility, they rarely align at the same point in time in the history of any one country. Because your book did not really distinguish between any particular political preference or institutional arrangements, which I like that, but what institutional arrangement favours the consistency for all these factors to sort of come together, uh, in the economic history basically of a country. Because we know that political leaders tend to favour what benefits their ambition at any particular point in time, you know? And a lot of these things are investments that do pay off in the long run, you know? Like we talked about on savings, a lot of political leaders would want to borrow a lot of money and then leave the debt crisis to the next administration.

Charlie;

Yeah. Yeah. Happens a lot.

Tobi;

Yeah. You know, and so many other things, whether you are investing in electricity or education or whatever, they don't really want to do the hard work. They want to do the easy stuff and just leave it to the next guy.

So, what institutional arrangements have you found in your observation and study of this that favours the patient consistent build-up to the alignment of these three factors?

Charlie;

I think it's really, um, it's kind of interesting actually because in each chapter I try and say which countries are at the right place for industrialization, education, which countries are at the right place for electricity, and which countries are at the right place for fertility. Perhaps I didn't properly bring that together in one chapter at the end to say, "so, who's the fast growth story?" But right now, the countries that have brought them together are Vietnam, India, Philippines, Indonesia, Bangladesh, and I think those five countries, Morocco actually six, um, those six countries should be the countries that will show the really good growth for the next 30 to 40 years. Um it's going to be great. And I'm then trying to highlight who's closest to joining them on a 10 year view. Um, Pakistan and Egypt both got big debt problems right now, but five to 10 years they could be joining that group as well and Ghana and actually Kenya and I would argue southern Nigeria could be, could be there in the 2030s.

Um, so I am trying to say when they come together. The question you are asking, though, about institutions or perhaps leadership and so on, I think is a really important one because I guess this book in lots of ways is an argument against Why Nations Fail, which was a really interesting book; and [it] said it is all about institutions and the right institutions and that's why if you walk a kilometre across the US border into Mexico, things are run so very differently. It's got to be the institutions, that book argues, that makes the difference between a country succeeding or not. And what I'm arguing is that I don't think that's true. I think you appear to have the good institutions when everything else is running well and you appear to have the terrible institutions when you don't have the education or you don't have the electricity or you don't have the low fertility or worst of all, you haven't got any of them.

So, a country that hasn't got any of them, like Niger, Chad, Somalia, you know, these are countries in a terrible place. But I'm saying that they can't have good institutions cause there's no money in the economy, there are not enough educated people in the economy. There's just no way that you're going to get a good setup in those countries. And actually, even at the beginning when, at the first 10 years or so, when you've got these things all coming together, you still don't think the institutions are good. You know, you go to India today, people don't think, "wow, this is a brilliantly run civil service. It's so uncorrupt[ed]." Such wonderful institutions everywhere. They don't say that. They don't say that about Philippines' Duterte, the president who's been just recently retired, by people who were worried the institutions found it difficult to control his populism. And yet Philippines boomed under Duterte, and India's boomed under Modi and countries like Korea boomed even with a level of corruption that means in the last 10 years we've seen four presidents go to jail for corruption.

Um, so I argue that the better institutions come afterwards and that's why four presidents have gone to jail in Korea because they're now getting the institutions better. And I read a really good book about why democracies die by some American academics about three or four years ago now. I recommend it. And they pointed out that Latin America, across Latin America, they just copied the American institutions. They said, look, what's working in the Americas is North America. It's United States, they've got it right. Let's copy their institutions, we'll put them into my country, be it Venezuela, Brazil, Argentina, whoever. And then they discovered that actually if the human capital is not as advanced, people will undermine the institutions. And you arguably saw Trump try it in the United States itself, but the human capital and the rest of the place was good enough to stop him from going too far.

This is all debatable stuff, but you know, this is... So, I think the institutions do work when everything else has been working for some time and before then it's very hard to argue that the institutions work or can make a huge difference. I think the fundamental economic reality of are you growing at 1% a year or three to 5% a year per capita? That isn't about the institutions. Having said all of that? I think there's no doubt that you can have, if you're lucky, very lucky, really good leadership. A leader like Lee Kuan Yew in Singapore, who has got vision, understands or is lucky, but he prioritized education and all the rest, who gets it right and takes the country onto a new path. When I think of some of the most obvious successes, a lot of them are small Singapore, Hong Kong, even Taiwan really.

And maybe it's just tougher to do it in a country the size of Nigeria with over 200 million people or, or uh, India with over a billion, which is why it took India so long or Brazil. But I remember even the French president, Charles de Gaulle, I think in the sixties or seventies said, "how is it possible to govern a country with 350 types of cheese?"

.

Um, and in India you'd say, "how can you govern a country of over a billion people with that many different dialects, different customs, different local cultures?" Um, and it is hard, but once you get these fundamentals of education, electricity and fertility right, suddenly, it looks like you can govern well. So, I want to think there is a role for good leadership, um, and it can make a difference and it does help. I just think history's telling us over the last 300 years that we can't count on luck and that lucky guy who happens to be the right leader to come in, sometimes woman who can come in, and push reform in the right way. What we can count on is that if you get the education, electricity and fertility numbers right, you will get out of poverty, you will get better off and your kids will have a much, much better future and your grandchildren even more so.

So, I think that's probably one area [where] my book differs from many in the last 10, 15 years is saying, "I don't think it is so much about the things that we all like to pay attention to [like] who's going to win the next election and what are their different policies going to be?" And you know, most of the time I'm arguing it doesn't really make as much difference as we'd like to think.

Tobi;

Now, another point that came in the later chapters in the book, which I found interesting, and which is quite also a bit of a political issue right now, surrounds migration. Uh, a lot of Nigerians are leaving, I mean it's become even a social media trend and meme - "who is...

Charlie;

The Japa trend.

Tobi;

Who is leaving next, uh, yeah, yeah, Japa. So, like, who is leaving next, you know? Right. But you argued in the book that as countries grow richer, there will be more migration not less because what you often hear is that the reason why people are living is because the country is so bad and they're looking for a way to make better lives for themselves, which is true anyway. So, and that the way to really stop this migration wave is if you can improve the domestic economy and then suddenly you see a drop, but you are saying no, um, we are actually going to see more migration as countries grow richer. Now, how do you suppose that this can be resolved with the current, should I say, political environment in Europe and to some extent in America that is increasingly seeing migration from poorer countries as a problem, right? Is it a case of as countries grow richer, then the migration demographic just, sort of, changes to more educated people leaving and less tension and political rancour about migration?

Charlie;

Um, I doubt, I mean, I doubt that these political problems about immigration in Europe and The States are going to disappear. Cause we've seen election results just in the last two, three weeks in Italy with the far right becoming dominant, in Sweden as well. Where they took in a huge amount of, I think, it was Syrian refugees and before that Somalian refugees. Um, and you're trying to integrate people coming from a country with very low adult literacy into, particularly in Somalia's case, into a country like Sweden, which had a hundred percent, nearly a hundred percent adult literacy already by 1900. That's an integration process that takes generations. As America's still struggling 150 years after civil war, still struggling to manage integration. So, I think that political problem is going to carry on, but it is going to get more acute for Europe, um, and eventually United States because Europe is this aging old continent that hasn't got enough people.

I was in Germany two weeks ago and there, there was a surprising number of industrialists saying "we must have a much more open border situation." I said, well, you know, that'll be really interesting to see if you do that because the backlash that we're seeing elsewhere says there is a limit to what countries politics seem ready to accept. And, I think, I even think the Brexit vote was about that. It was about the East European migration into the UK, which had the most open approach to east European countries from Poland and Hungary and Czech coming to the UK. Every other country in Europe kept in a border, well, restrictions, but the UK didn't. And I think that backfired on the UK when it had a Brexit vote that said, "oh, we have too many Polish people eating sausage in our supermarkets. And I, I, yeah, I mean really people cared.

I don't understand it. I love the variety obviously, but while I don't understand, while I don't feel the same, [some] people do. So, I think that's the political problem. And even educated people who are needed by the economy might find it hard to integrate, say, beyond the bigger urban centres. I was really shocked when I was writing the book and I was looking at what happens when you've got an educated population but a high fertility rate. What happens across history is people leave. Cause there aren't enough jobs at home. Cause the fertility rate's so high, there's thousands, millions of people coming into the workforce. The savings aren't there to help create the jobs. So, they leave and it's the Philippines, you know, in the 20th century, it's Pakistanis now, where a number of people are well educated, not everyone sadly. But 150 years ago, it was Ireland, and it was Norway, and they were sending their excess population to America, and it caused huge controversy.

There was, you know, rioting between, kind of, the Italian immigrants and the Irish immigrants in New York. There was legislation in parts of America deliberately aimed at Norwegians.

.

I've never heard of anyone discriminating against Norwegians before, but you go back a hundred years ago in the United States, and they really didn't like people speaking foreign languages on trains, they were banned from doing so, they had to speak English. So, I think, first, it's inevitable people will want to move, and I think we're going to see quite a lot of this struggle to manage immigration by countries that really do need it. The problem for a Nigeria, say, is you're going to be educating more and more people to a better and better quality. You know, it's been happening already for more and more people getting access to education for 50, 60 years. That gives them the skills they need to immigrate.

But Nigeria also would benefit from those skills staying at home. So, it's, uh, I don't think there's much you can do about it other than go full communist and not let people leave the country.

But, it’s going to be a challenge. And the numbers do get worse, it’s quite interesting. So, [at] a $1,000 per capita GDP, low-income countries don't see much immigration cause people haven't got the skills on average to be able to leave. But it peaks at about eight, $9,000, quite high levels, kind of where Mexico is, its like the peak. That's when people are really saying, “I've really got the skills to go and work anywhere and I’m gonna go off to America and make my fortune.” And then it [immigration] drops. So, once you get to about $15,000 per capita GDP, people say, “you know what, my standard of living is actually pretty high.” And what we've seen in Poland is that 10, 20 years ago they came to England, they've probably got a better standard of living today, in Poland now, than they do in the UK. Housing's expensive and, you know, everything's expensive in the UK and in Poland you get a better quality of life. So it looks like people finally do start moving back, but only when you get up to that quite, quite wealthy level.

Tobi;

So, I've got two final questions for you. One is hypothetical in a way. As you know, Nigeria has elections next year - February. And, of course, campaign season has started. Now, suppose that whoever of these guys in the election, whether you are at Tinubu or Peter Obi or Atiku and, like, gives you a ring and say, "uh, Charlie, I've won the election. I really want to do good in Nigeria. What and what should I prioritise?" Against the background of this book and your research, what would your answers be?

Charlie;

The first challenge for Nigeria in the long run and the most important is the educational divide in the country. The fact that well under half of adult women in the north, many northern states, cannot read or write in any language, nor has learn anything else. And I just think this is going to ensure that per capita GDP growth in the north will be low until that changes. While in the south, because the education levels are that much higher, the per capita GDP growth can be higher. So, the divide between north and south is just going to get bigger and bigger until every effort is made to get universal basic primary education for all girls in the north, but actually an adult literacy campaign as well. Castro did it in Cuba in the early sixties, Korea did it in the 1950s. You get literate students, and you send them out to the villages, and you get them to teach everybody to read and write.

Even the people who say I don't need to read and write, I've lived my whole life without being able to read and write. Everyone needs to get this. And that would be, I would argue the most important thing for Nigeria in the long term. Second issue is that in itself will then encourage that lower fertility rate and eventually improve Nigeria's savings, um, which will come, but uh, I'd be very tempted to say what's going on with infant mortality and child mortality and why is Nigeria's ratio so much worse than other countries of the same income level like Ghana or Cote d'ivoire. Let's bring in as much support - Medicine San Frontier, whoever it might be, private charity. I don't know. And it doesn't matter who. Anyone who can come in and try and address that, I think that that, again, is one of those very long-term policy choices. But should be a huge focus.

I mean, unfortunately, the state of security in Nigeria means that while I don't like to see a government have to spend money trying to just maintain security because that's not really investment, but unless there's security, you're not going to get that education. So, unfortunately, something has to be done about the security issue too. And I say unfortunately because it just means spending is being spent on that rather than the long-term growth drivers. And then the question comes of what can we do about the lack of savings now? Now, these are all great long-term policies, Charlie, this is fine, but you know, it's not going to sort me out in four years. What can I do now? And I would argue, try the cheap currency policy that will run a current account surplus and help bring dollars into this economy. Because Nigerian needs savings and if the currency's cheap enough, the current account surplus should happen and then there's some savings to be able to invest in some of the infrastructure that's needed to get the economy going.

And at a more micro level, I wonder whether that, for electricity, trying to get Lagos right. Let's try and see if we can get a city with good education and actually relatively low fertility rate compared to the rest of the country, potentially more savings within Lagos state. Is there a way of sorting out electricity here so that this place can show how it can be done? Because the success stories in China, it all began on the coast. It wasn't inland, it was the coast and for 20 years it was the coast that led growth in China. It was only when the coast had done incredibly well - Shenzhen and , all of these cities up and down the coast had done really well. It was only then that money started getting invested in a big way inland and rural, bringing up the rest of the country too. So, if Nigeria can create some positive success stories in [the] Southern states that act as a kind of symbol of what can be done that's, you know, I don't know if it can be done in four years, but on a four to eight year view and one to two terms in office, I think you could start to make a noticeable difference to the growth rates in some of the southern states and that can help be an example for everyone.

Tobi;

My last question for you is, uh, and of course this is a bit of a tradition on the show. What's the one idea - you're not allowed to take from your book, by the way...

What's the one idea? It may be current, it may be past, it may be global or specific, that really gets you excited, and you like to see it become more widely accepted and popular. What's that one idea? Just one idea?

Charlie;

Yeah, that's a difficult one. I mean the book that interested me in terms of the future, over the last two or three years, was Homo Deus and this is the guy who wrote Sapiens as well. But if you read the last third of Homo Deus and he's talking about robotics and genetics and AI and how much they're going to change everything, eventually, for all of us. Um, that, that interested me. I'm not sure that he came out with one specific idea about it, but I would recommend people to take a look at that last part three of Homo Deus and have a read cause it got my mind thinking, not working out the answers either, but it was just something about "this is going to be big. Um, and I don't know quite how it's going to be big." But, anyway, I recommend reading it. I don't know if that's quite the answer you were looking for, but that's totally caught, caught my attention anyway.

Tobi;

Okay, Charlie Robertson, it's been fantastic to have you on the show. Thank you very much.

Charlie;

It's been an absolute pleasure. Thank you for so many thoughtful questions. It's really, um, it's great to discuss it.

Bangladesh has transformed tremendously in the last twenty-five years. Average incomes have more than quadrupled, and many of its human development indicators have improved alongside. It has also become an export powerhouse with its garment industry, and generally a shining example of development - though things are far from perfect. Five decades ago, when Bangladesh became an independent country, many were not hopeful about its chances of development. So how did Bangladesh turn its story around? Well, it turns out the history of its transformation is longer than credited - and the process is more complex than what is cleanly presented.

I could not think of a better person to help me unpack the Bangladeshi miracle than Dr. Akhtar Mahmood. He is an economist and was a lead private sector specialist for the World Bank Group - where he worked in various parts of the world for three decades on privatization, state enterprise reforms, investment climate, competitiveness, and more broadly private sector development. He has written some excellent books (see embedded links), and his column for the Dhaka Tribune is one of my wisest sources of economic development commentary.

Transcript

Tobi;

Welcome to the show Akhtar Mahmood. It's a pleasure talking to you. I am very fascinated and curious about Bangladesh, and you are my number one option for such a journey. It’s a pleasure, personally, for me to be having these conversations. I've been reading your column for about a year now with the Dhaka Tribune, and I've learned so much. They are very perceptive, and I'm going to be putting up links to some of my favourites in the show notes for this episode. Welcome once again, and thank you so much for doing this.

Akhtar;

Thank you very much for having me. Thanks, Tobi.

Tobi;

There's so much that I want to talk to you about, as you'd imagine, but let me start right at the end, which is now. There has been a lot of attention on Bangladesh, recently, at least in my own orbit, there have been two quite detailed and interesting columns in the Financial Times about Bangladesh. There is also Stefan Dercon’s book, which used Bangladesh as a positive case for what he was describing about the development process. But also, there's the issue of what's going on right now with the global economy. First, it started with COVID and how the economy suddenly stopped, and all the reverberation that comes with that - the supply chain, and now, a lot of countries are going through a sort of sovereign debt crisis and Bangladesh, again, is in the spotlight. 

So, I just want you to give me an overview, and how this, sort of, blends with countries that put so much into development…you know, in terms of policy, in terms of the things they are doing right, in terms of investment and attracting investment, and the exposure to these sorts of global economic risks and volatility. [This is] because, usually, what you get in Western discourse is that a lot of countries are victims of some of these risks because of some of the wrong policy decisions they make. But in the case of Bangladesh, at least to my knowledge, nothing like that is going on. And yet, it is usually talked about as a very exposed country in that regard. I know you wrote a column recently about this. So I just want you to give me a brief [insight]—is there anything to worry about? How do countries that are trying to get rich, that are trying to do things right, how do they usually manage these sorts of global risks?

Akhtar;

Right? I think, inevitably, we'll have to go a bit into the history of how we came here. But since you started with the current situation, let me briefly comment on that, and then maybe I'll go to the history. Right now, yes, like most other countries, we are facing challenges, but I think there has been a bit of hype about how serious the challenge is, in terms of the risk of a debt default, the risk of foreign exchange reserves going down very sharply. And I think there is a bit of the Sri Lanka effect, and then also the Pakistan effect, as people are trying to put Bangladesh in the same bracket, which I think is very, very misplaced. I think the IMF has made it clear, [not only] in its latest country report, which came out in March 2022 but also in many recent statements, that Bangladesh has both a solvency situation and a liquidity situation. As you know [that] the solvency is typically measured by the external debt to GDP ratio, one of the ratios is external debt by GDP and the liquidity is measured by debt service requirements - the external debt service requirements by the export earnings ratio. And there are these certain thresholds, and if you go beyond that, it's considered a bit risky. 

Bangladesh on both these accounts is much below the threshold. So there's already a lot of headroom in the sense that even if things get worse over the next few months and maybe a year or two, Bangladesh would still be able to manage the situation. So I just wanted to make that clear at the beginning. Now, that doesn't mean that there aren't other issues in Bangladesh, issues which have been brewing for quite some time. For example, many of us are concerned with the efficiency of public expenditures. We know of projects where there have been cost overruns. Some of it may be for genuine reasons, some of it may be related to corruption, which sadly still remains a serious problem in Bangladesh. I feel that I've written about it, and you may have read some of these articles about the spectre of rising cronyism, which, again, is not surprising; when an economy grows as fast as Bangladesh's has, there are certain people who become economically powerful. And at some stage they acquire political power as well, and then you start seeing the problem of cronyism. So we have that, we have a serious problem in the banking sector with a lot of non-performing loans. I'm not suggesting that we don't have serious problems, we do. But there is a disconnect between the typical headlines and where the real problems lie in Bangladesh.  

Now, this may be a good moment to bring up a little bit of history, and I can go deeper into it. The Bangladesh economy has certain resilience. And I just want to comment on that. One which is not discussed much, because the story often is about garments and remittances, is the transformation that has happened in the rural areas. It started with agriculture, it actually started with rice production, which is the most important crop in Bangladesh. And then it expanded into other crops, and then even non-farm activities in the rural areas, we can go into the details of this later. But agriculture provides a certain resilience. And we saw that again during COVID. Because the agricultural activities in Bangladesh were not affected that much by COVID, and that was a big benefit. 

The other is the unleashing of an entrepreneurial spirit in Bangladesh. And this spirit has been unleashed across the board, so it's not just some large conglomerates or some large government manufacturers who have become entrepreneurial. This is something which has happened across the board, from small farmers to large conglomerates. And that, I think, is a big asset for the country. Because we don't have natural resources; unlike Nigeria, we don't have natural resources. In some ways, it's actually a good thing. Because then we are forced to use other assets and latent entrepreneurship… you know, Albert Hirschman, the famous economist, wrote a book in 1956, which is a classic, on the strategy of economic development, and he made a very interesting comment. He said, in developing countries, you have a lot of latent resources. In developed countries, the task is how to allocate the resources you have; how to best allocate them. In developing countries, it is about bringing out the latent resources you have; and entrepreneurship is one of the latent resources developing countries have, but many countries have not been able to bring that out and make use of it. Bangladesh has, and that gives a certain resilience to the economy. So yes, the shocks are going to affect us, especially because our major industry, in fact, is export-oriented, which is garments. So that is affected by the shocks, but unlike commodity prices, export earnings don't fluctuate that much. And the industry has proven to be resilient over the years.

Tobi;

Yeah, I'm glad you touched on history because, really, that's where I wanted to start. But I just want to get the pulse of the moment and how to make sense of all the headlines that we're seeing around. So usually, and I’ll refer to the two pieces I've read in the FT [Financial Times] recently that I referenced in my first question. The development trajectory of Bangladesh is usually dated as something that started around 1990. But Bangladesh became an independent country two decades before that. So my question then is: that intervening period before that sort of consensus about the takeoff point, what were the things that were brewing in the background that culminated in that takeoff? I know a lot of things went down, and just to mention that one of the reasons I’m very interested in Bangladesh is that it sort of defies some of the seductive examples of development and progress - the Asian tigers, you know, so to speak - where things seem to be very clear, the prescriptions are very precise, you need to do this and do this. 

Bangladesh seems like a regular country - like Nigeria, with its history, its complexities, its problems like every other country in the world, but that has also managed, despite a situation that has seemed hopeless, at first, to people who look at these things in terms of hard boundaries - that has emerged as this fantastic example of economic growth and development. So what were the major things that happened before 1990 that sort of made this takeoff possible?

Akhtar;

Now, one may debate on whether 1990 is the point of the takeoff. In any case, it's very difficult to pinpoint. But anyway, it's good. So 1990, twenty years after independence and also a transition to democratic rule after fifteen years or so of military or quasi military rule. So that's another reason people take that as a counterpoint. But it's a good counterpoint to start discussing these things. Professor Stefan Dercon, whom I think you had on your show recently, who wrote this book Gambling on Development; he has been saying that actually, in some ways, it's a Bangladesh experience which may be more relevant for many developing countries than the East Asian [experience]. And one of the reasons he mentions is, I think, what you just alluded to - that there is a certain messiness, and yet Bangladesh developed. So countries which think that they are also in a somewhat messy situation, or whatever dimensions, say in governance or other dimensions - whether it's possible for them to develop. And that's why the Bangladesh example may be more relevant and encouraging than the East Asian, where one common characteristic has been the strong capabilities of the state. In China, it has been there for hundreds or more,  thousands of years. In East Asia, yes, I'm sure they also have that but they certainly acquired that quite fast. So how do you develop in a country context where the state capacity, the governance quality are not that great, and then you have many other problems as well. So you're right. In that sense, Bangladesh may be very relevant. 

I think I'd like to first start with, um, even deeper history, because if you look at the region which now constitutes Bangladesh, it used to be part of a province in British India. So it was East Bengal, and then you had West Bengal and then together it was Bengal. Now there was a time in history when Bengal including East Bengal was supposed to be reasonably rich, perhaps the richest province in [the] whole of India before the British came. But if we go back to the beginning of the twentieth century, East Bengal was actually quite backward economically and in many other ways. And if you look at the political discourse in the first half of the twentieth century, before the British left, the political and intellectual discourse in what is now Bangladesh, you’ll see there's a lot of talk about peasants being exploited. We were a very peasant dominated economy and society. In many ways we still are, although there has been a lot of urbanisation and industrial activity. At that time it was very much peasant dominated, and the theme which dominated the discourse was exploitation of the peasants. And the aspiration that the leaders whether political or intellectual had is how can we improve the conditions of the poor people. And that sort of got ingrained in the minds of the leaders, and that continued during the time when we were a part of Pakistan. Because you may have heard that there was a lot of disparity and there was a lot of discriminatory treatment by the Pakistani establishment. 

So that theme was there. When we became independent in ‘71, you could think of the political leadership, you could think of the professional leadership, the bureaucracy, the intellectuals, the media, this theme of doing something for the poor, was actually very strong. So right at the beginning, and, I heard somewhere that our first prime minister, Sheikh Mujibur Rahman, was asked by a foreign journalist: what is the number one problem of your country? And he said, I actually have two number one problems. One is food security, and one is population. And we need to take care of that. So right from the beginning, even in the midst of all the turmoil in the first few years, and all the challenges of relief and rehabilitation, work had started on ensuring agricultural growth and food security. And we were fortunate that the HYV rice, the high yielding variety of rice, had been introduced just before independence, so we had something to work with. So that was very important. And there was a strong program to bring down the rate of growth of [the] population and we succeeded on both counts. So by the time we come to 1990, agriculture is taking off. Rice production had taken off significantly, farmers were diversifying into other crops. And we had started to see the beginnings of a rural non farm sector. So agriculture and non agriculture together. And, Bangladeshis had been going out as migrants, and they're sending back remittances, most of it going into the rural areas. So there was a vibrancy in the rural area by the time you come to 1990. 

Secondly, sometime in the late 70s, the government decided that not only should we move away from the early talk about socialism, [but] towards a more private sector-oriented or market-oriented economy. They also understood that industry has to grow to absorb the surplus labour in agriculture, and export orientation has to grow, because the market in Bangladesh is simply not large enough. So there was an early emphasis on exports. And of course, fortuitously, you know, the South Koreans were running out of their garment quota, so they wanted to relocate some of the production to Bangladesh, but we were ready to take advantage because by then the government and let's say the elite of the class had decided that we need to industrialise and the major driver of industrialization is going to be exports. And then throughout the 80s, we saw the takeoff of the garment industry. The third thing which happened was the liberalisation of policies, mostly in the 80s. So, privatisation was done, the banking sector was open to the private sector. The agricultural input market, which was previously dominated by the government, was gradually liberalised and towards the late 80s, there was a significant liberalisation of that. And finally, as remittances started coming in, our foreign exchange constraint was relaxed. So that also gave government some comfort that we can decontrol certain things. And we can allow industry to move ahead without too many controls. So all these things coming together sort of created the context in which we entered the 1990s. So a lot of the preconditions - the population growth rate had fallen significantly by the time it came to the 1990s, agricultural growth had taken off, industry was taking off, especially the labour intensive garments, which is export-oriented, that industry was taking off.

Tobi;

That was such a loaded answer, which has preempted some of my further questions. But let me quickly make one digression on agriculture, because over the past seven years or so, in Nigeria, there's been this debate. There's been a huge debate about agriculture, the current administration sort of prioritised agriculture and a lot of resources (capital) was allocated to that sector. And there's been challenges and there's been critics, sometimes I've found myself on the critic’s side of things. Now, what I want to know from you is that,the link between agriculture, especially investment and the agricultural productivity that is necessary for the vibrance of that particular sector, how was the Bangladeshi experience? How did Bangladesh achieve food security, especially in terms of improving yield and productivity?

Akhtar;

Right, so a few things. Firstly, as I said, the high yielding variety of rice had been introduced in the late 60s, and then just after independence, government continued, but more vigorously with a model of… it was more [of a] public sector driven model, where the public sector would import the major inputs. One is irrigation equipment, because this rice needed irrigation, and the other was fertiliser. So, they're imported by the public sector, then they're distributed by the public sector going all the way to the farmers. Maybe at the last mile, there were some private traders who act as dealers on behalf of the government. So, the government took that responsibility. Later on, as I said, in the 80s, they started liberalising it. We'll come to that later. Second is, there's been quite a bit of investment in agricultural research. Now the HYV rice came from abroad, but as it was being applied in Bangladeshi farms, in many cases, we realised that there was some adaptation needed, because the conditions were not always well suited for this variety. The crop conditions varied even within Bangladesh, even though it's a small country, lots of variation. Later on, for example, salinity became a problem, because a lot of water was coming from the Bay of Bengal into Bangladesh. So there are all kinds of problems - there's flooding also. There were many areas where after floods, the waters don't recede that fast, so they remain underwater for a long time. 

So the agricultural scientists in Bangladesh, and they were all in the public sector, they came up with innovations to come up with rice varieties and later other varieties like maize varieties or vegetables, which are better suited to the conditions in Bangladesh. And then the public sector effort was also complemented, supplemented by NGO efforts. You may have heard about BRAC [Bangladesh Rural Advancement Committee], which is the largest NGO in the world, and we often talk about their activities in the health sector, in education, in microfinance. They were actually doing a lot of work in the economic sphere as well. R&D in agriculture was one of the things that we're doing, in collaboration with the government often, so there was R&D. Another thing happened, which I forgot to mention, when I mentioned sort of the run up to the 90s. In the 80s, the government started a massive program to build rural roads, connecting the rural areas to the small towns and the small towns to the bigger towns. So,a huge rural road network was built starting from the late 80s. And it continued into the 90s, which broadened the markets of the farmers. So in all of this, the core player was the small farmer. As I said, Bangladesh is a peasant, small farmer dominated economy, so it is remarkable that these farmers were willing to innovate, they were willing to move away from what their parents and grandparents had done for many, many years, and adopt these new varieties. So the combination of the government with some NGOs and the farmers, I think that created the basis for productivity improvements in agriculture. And that was sustained because the market was sustained. There were lots of public policies. And at some point, when the government thought the public sector delivery model was not working that well, they allowed the private sector to come in.

Tobi;

I don't want to infer anything, but from your answer, I can tell what Nigeria is doing wrong, but maybe we'll get to that later. So let's talk about the conditions, which you've also sort of answered for me but I want to know if there is more. Dercon in his book, I'm talking about Professor Stefan Dercon, talked about elite consensus that sort of becomes the bedrock of deciding to pursue economic development. So this broad consensus amongst the Bangladeshi political elites to improve the conditions of the poor, and, which, I'm speculating sort of enabled an ecosystem of policy consistency, even if there are deviations at the margins, how did it emerge? And how was it sustained?

Akhtar;

Okay, as I had mentioned to Professor Dercon ‘cause I also had a conversation with him for our Bangladeshi group. And I said that – and, he agreed that, it's really difficult to define if there was an elite consensus because it's not that the elite are sitting in a room discussing and bargaining and one day they come out and say, okay, here is an agreement, we have agreed on these three things, it doesn't happen. And there is a bit of tautology in his book as well. And he agreed with that, that in his country chapters, he says, these countries had an elite bargain. And then he says, Okay, this is how the countries grew. And if they have grown, therefore, they must have had a bargain. So there's a bit of tautology there. But coming back to this, I think, I started giving you a flavour of that when I brought in history, even before the British left and how in East Bengal, there was this deeply ingrained feeling that something has to be done for the poor people. And then just after independence in ‘74, we had a big famine. And that sort of strengthened this feeling amongst Bangladeshis. And you know, you mentioned the word elite and it's a bit difficult to define the elite. I would say that it's a broader… I'm talking about people who can influence policy, both the formulation and the quality of implementation. 

There are a lot of people in the bureaucracy who may not, in that sense, be called part of the elite, but they do have some authority. Now, most of these people, they actually are not too far away from the poor people of Bangladesh. Many of them still have very strong connections with their villages. They go back regularly. They know what the conditions are there. And in a densely populated country like Bangladesh, you see poverty all around you. So all these things, I think, have ingrained in the minds of the elite, however you define it, this commitment to doing something to safeguard the interests of the poor, but that is the security side - food security, [to] address the vulnerability. But somewhere down the line, people started recognizing that Bangladeshis also have an entrepreneurial potential. And there was a feeling that we should try and help unleash that potential. So, as I said, it's difficult to pinpoint a particular period where there has been a consensus but in a subtle way, there has been this consensus that to achieve food security, to help take advantage of the latent entrepreneurship of Bangladeshis, we should be focusing a lot on growth and more generally on development. And that has survived the transitions in administrations, from one government to another, that common element has been there.

Tobi;

It's not exactly a push back, and I should note that there is a lot more; there's vastly a lot more to Bangladesh than Dercon’s book. So, and I don't want to be caught in debating his book. But, why I find that particular line of thought relevant is that, from what you have described, it's amazing to me, so maybe you can help me understand the difference. Now, how a country can set out to do some of these things; invest in agriculture, agricultural R&D, and all these other support programs with big macro effects. Whereas a Nigeria can set out to do those same things and then you find divergent outcomes in their implementation, particularly the inability to execute. You know? There's always a plan. We want to improve the lot of the poor. We want to invest in agriculture. We want to improve productivity. We want to build infrastructure, you know, this, that, they are always so nice and interesting. But the difference is always at the end of the day, countries often don't do these things, right, they never stay true to these things. And of course, we can talk about various reasons why it fell astray - corruption, state capacity, and all that. But what I… which you mentioned in your last sentence [is] how policies survive, even though there are political transitions, election cycles come and go, the particular direction that policy goes, survives this transition, I think that's really what I'm trying to get at.

Akhtar;

Okay, so I don't know that much about Nigeria. Now, people say that the fact that you have natural resources may have been in some ways a curse, I don't know if it's true or not, but certainly, that sometimes gives governments a sense of complacency and therefore, even if they start on a certain course, they may not have the discipline to stay that course. Now Bangladesh, we never had the advantage of having natural resources. Nowadays, certain things have improved, you know, foreign exchange reserves have been at comfortable levels for several years. So, that may induce a certain degree of complacency, but for a long time, the government knew that we were operating with very narrow degrees of freedom. So that was the context in which Bangladesh had to operate. Which also meant that we were somewhat dependent on donors and that certainly imposed an additional set of disciplines on Bangladesh. But later on, I may come and comment on exactly the kind of relationships I think existed between donors and Bangladesh. But maybe the best way to answer your question would be to say a little bit about the way in which policies have evolved in Bangladesh. And in a sense, it's a bit of a “muddling through” process. And I wrote a blog for the Brookings Institute a year ago, where I said that Bangladesh did it, alluding to that famous song of Frank Sinatra - “I did it my way.” So what was that “my way?” 

We all know that the Bangladeshi Government has never been tremendously competent, there's always been corruption problems as well. So the way it has happened is the following. Things happened in the economy, let's say agricultural productivity is improving. But then it hits certain constraints, and the economic actors, or people acting on behalf of the actors; like academics, donors, journalists, will bring up those issues. And they will probably say that, “here are ten things which need to be done.” Now what the governments in Bangladesh have done, successive governments, [is] they have responded to that, not by doing all the ten things. No. They may have picked up two or three things. And they may have done a little bit. Why a little bit? Because they were risk averse. They wanted to test out what would happen in the market, how the market players respond. [As the government], if I do just three or four things and not everything, and then see the response…and here comes the entrepreneurial side - the response was usually quite good, and when the response was good, the government felt encouraged. And then the government said “okay, let's do a few more of the things that were demanded.” The other thing which happened was, as the response came, newer constraints were revealed, or constraints which were not binding before became binding. 

For example, initially when the agricultural growth was not that great, when production wasn't that huge, the fact that we did not have a good rural road network connecting the rural areas to broader markets wasn't that big a constraint, because you're not producing enough to go out in a big market. When you started producing a lot of marketable surplus, you needed a broader market. And that's when you started feeling the constraint. And people started talking about the need to build up the rural road network. And to the credit of the government, they responded. So, this is what I call the sort of back and forth, policy dynamics - things happen in the economy, government notices it or it is brought to their notice, they react not in a grand way, just doing a little bit here and there;nd then the market responds, may be much more than in many other countries, because of the entrepreneurial spirit, and then the government responds. And that process has gone on uninterrupted throughout the last fifty years. And so, once you accumulate, even if these are modest steps, once you accumulate all of that, you'll see a tremendous result. And that's what we're seeing here. So, what it means is countries – the governments don't have to be very competent, they just have to pick the signals. So, you know, you have this phrase called “picking the winners” and a lot of people say, no, governments should not be in the business of picking winners. I say, in Bangladesh, that what the government just does is pick signals. They’ve picked signals from the private sector, from the farmers, and they have acted accordingly. And I think the accumulation of all these, the synergies created by all these is, I think, what has made the difference.

Tobi;

That's interesting. So, generally, the usual story with development is structural transformation. That is, for you to grow rich, the economy has to transform from a largely agrarian, low productivity economy to preferably an industrial high productivity economy. And, I mean, to an extent, we've seen the same process also in Bangladesh. Manufacturing, particularly the garment industry, is eighty or so percent of exports and employment is largely created also in that industry. Now, what I want to ask you is, the role of foreign direct investments in that cannot be understated. You talked about South Korea earlier, and how it played a role in that. For South Korea, so many other scholars would cite the role of Japan in kickstarting the South Korean garment industry; garment and textile industry itself. So, my question then is, is there a link here? I mean, also in your columns, I've read about the role of Samsung, and the electronics industry in Vietnam. Right. So the role of FDI in development, and especially getting industrialization started, what are the favourable conditions? To what degree is it external and internal? I guess that would be my question.

Akhtar;

Okay. Well, you use the term kickstarting, because in Bangladesh, in the garment industry, a foreign investor helped kickstart that industry, but didn't do much beyond that. So, Bangladesh’s Government has been largely domestic…[it is] a case of domestic entrepreneurship leading the sector to the heights that it has achieved now. Yes, we have some Export Processing Zones where we have a number of foreign invested garment factories, but the bulk of it is domestic entrepreneurship. But you're right. The initial thrust came from this partnership with Daewoothe IU. It was a five year partnership. Daewoo trained Bangladeshis, (they) took them to their plants in Korea, trained them. They obviously had the market connections and market knowledge, all that was very useful. But what many people don't know is that the Bangladeshi partner actually quit that agreement just one year into that five year period. So after one year, he thought that he had learned everything that needed to be learned. Now, if he hadn't done that, I believe Daewoo had other plans of coming into other sectors, which we may have lost. But then we did end up with this vibrant mostly domestic-owned garment industry. But foreign investment had a role in jumpstarting that. If you go a little beyond industry, think about sectors which facilitate industry. The entire mobile phone development in Bangladesh, which is also remarkable, was foreign investment led. So, foreign investment played a major role there. 

So, I agree that foreign investment can play an important role in kickstarting industries, and that is something very important now that we want to diversify our exports, make them more sophisticated, we can come to that subject later. Now, you asked me about what are the conditions which are conducive for foreign investment. And this is where I would say that in Bangladesh, the conditions are still not that conducive. In the case of garments in the late 70s, it was the exhaustion of the South Korean quota of garments, which was the major inducement for them to come in. But also, as I said, the new government, which came into power in ‘75 was talking a lot about export promotion. So, that was there. But the most important constraint that Bangladesh faces, and it's true of many other countries, is policy and regulatory uncertainty. So, Bangladesh often says that we have got a policy regime which is very friendly to foreign investors. And that may well be true. But the execution has problems. And there are a lot of case by case decisions which are taken, which affect the foreign investors adversely. And that creates uncertainty. And those stories are told to other prospective investors. And when they hear those stories, they get discouraged. And the World Bank where I used to work, in fact, the last unit that I worked on, they did a survey of CEOs of multinational corporations just a few years ago, asking them about what are the factors which are very important for you when you decide to invest or not invest in a country, and policy and regulatory uncertainty was top of the list. So that is where Bangladesh still has got a lot of work to do. It is attractive in many other ways - very large domestic market, relatively cheap labour, the labour is quite fast at learning, a lot of good things there. But I think the policy environment, particularly the implementation, the certainty, that has to be ensured.

Tobi;

I have a further question, particularly on that point, and referencing another one of your columns, I think I'll just stick to your columns today for all my questions. For example, in Nigeria, I'll give you an example. In Nigeria, recently, foreign airlines are threatening to quit. Over the past three, four years, foreign investment (FDI) has plummeted. It's barely a billion dollars, currently, one of the lowest even in Africa. And of course, a lot of these things you mentioned are the problems that investors and business people talk about - policy uncertainty, especially around the control of the exchange rates and inability of companies to repatriate their capital, and to fund their operating expenses, and so forth. 

So, I mean, that's one constraint. But one distinction you made is like the types of FDI. There are different categories of FDI; market-seeking FDI, natural resource-seeking, efficiency-seeking [FDI]. And the reason I'm asking this is that there seems to be one problem, which, to my mind, Bangladesh has solved, it's not perfect, that Nigeria is struggling with, which is this inertia to get things started, you know, once you start on a journey, you can muddle through, but the inertia to get that process going is still something that Nigeria struggles with, in my opinion. So, now talking about FDI, if I were a policymaker today talking to you; advise me, what kind of FDI should I prioritise in trying to lure investors into my country, for them to create jobs and [create] a nest of high productivity manufacturing industry? So is it market seeking? Is it natural resources seeking? Is it efficiency seeking? Which one is the best in terms of the necessary incentives for sustainability?

Akhtar;

Okay, so one of the articles, not as part of the regular column, I think, but I wrote for the same newspaper a few years ago, was titled “investment for what?” So that's a question the governments have to ask. Because everyone talks about attracting FDI. It's a mantra all over the developing world. But governments need to ask why exactly do we want FDI? How is it aligned with our development aspirations and development programs? I wanted to just emphasise that because often governments just go blindly trying to attract foreign investors. And whoever comes in, we welcome that. That's not necessarily a good strategy always. For example, in Bangladesh, if we now have a lot of foreign investors coming in, to make jeans and T-shirts, using the same technology as before, we don't really need that, we can't afford to give our scarce land and utility and other things to do things which our domestic entrepreneurs have become reasonably good at doing. So it has to be something new that comes in. Now, at the same time, we also have to recognize that the foreign investors also have their own interest and their own calculations. So we have to come to a balance between the two as well. Now, it's difficult to say a priori that we prefer market-seeking or efficiency-seeking. On a natural resource, it's a slightly different issue if you have natural resources, and if you don't have the capacity to develop them yourself, you may need foreign investors. And obviously, we all know why foreign investors are often very attracted to that. But let me confine my answer to the choice between market-seeking and efficiency-seeking. 

Now, let's take the case of Bangladesh. We are now talking about diversifying our exports. And we are talking about going into more sophisticated products like electronics. If that is our objective, we may want to target some people who come and make electronics. Now they may come for two reasons. Bangladesh has a huge market, our per capita income may not be that high, but our total economy size is actually pretty large. We are amongst the top 40 economies in the world. And if you look at the size in the purchasing power parity terms, we're actually in the top 30. That's a very large economy. So, naturally foreign investors would come in looking at the market as well. But if our objective in this sector is to make a breakthrough in the global value chains, and not just serve the domestic market, then we'd like to have foreign investors come in with an efficiency-seeking objective that, in Bangladesh, we can make these things more efficiently, at lower cost, than in other places. So that Bangladesh then can ride on the backs of the foreign investors, who know the markets, who have the brand recognition and show the world that things can be made efficiently in Bangladesh. And, then once we have shown that with the help of foreign investors, maybe Bangladeshi entrepreneurs can also start doing it. So here you see I give you an example, where you have a strategic objective, and you attract foreign investors of a particular type. 

Now, there are also many needs in the domestic market. Bangladesh needs to develop a very good logistics system. And we may need foreign investors to come in and invest there, but will be more market-seeking. I mentioned the case of mobile telephones, that was not an export-oriented industry, although it may have facilitated exports, that was domestic market-oriented. And we encouraged foreign investors to come in, who were obviously coming in as market-seeking investors. So the answer would vary depending on the sector or the activity. But that brings me back to my first point, the government should have a clearer idea of what is the role of foreign investment in implementing the various dimensions of your development strategy. And accordingly, you're going to target efficiency-seeking investors in some cases, and market-oriented investors in other cases.

Tobi;

So, now, from a policy perspective, because really, that's what's sort of dominating this conversation. One thing that keeps coming up is the role of government, the strategy it pursues, you know, this, that. But inevitably, that leads to the question of what… in terms of economic development, what role does the government play by itself? Now, China, and, of course, other East Asian economies are very, very popular in the development discourse and these are largely autocratic governance. Right. And, to an extent the gospel of state-led development has travelled far and wide, sometimes in contrast to what is generally called the neoliberal or the Washington Consensus-type policies. But at the same time, at the nexus of all this is the role of markets, how the economy is regulated, liberalisation. How does a government approach regulation and policymaking generally, with the right incentives for the government to take the lead in areas where, maybe because of access to market or not seeing the prospect of returns, private actors are reluctant? And also at the other end, this sort of control, excessive control, that you see in so many developing countries, like Nigeria, and so many others in Africa, where government sees itself as the primary player in the economy, right? What is the balance? What is the heuristic generally, in trying to, [or] should I say, make policy and regulations to encourage economic development, and, of course, your Bangladeshi experience of that?

Akhtar;

Okay. So, when you say state-led, there are many ways you can define that. One is the direct participation of the state in productive activities. And in China, that is still pronounced, there are different models of state-owned enterprises, including public private partnerships, but the state plays a dominant, or at least an important direct role in the production of activities. That's one thing. The other is playing a direct role, not in production, but in things that facilitate production. So I had mentioned the case of research and development in the agricultural sector of Bangladesh, which was there right from the beginning. It was largely a private sector activity, but that was meant to facilitate productive activities by the private sector, in this case, thousands and thousands of farmers. So, the whole spectrum of things that the government does and, of course, there is the whole regulatory function of the government. And I think in choosing the balance, and the balance itself may shift over time as the economy develops. And I give an example of that, again, from the agricultural sector of Bangladesh, how the government moved away from the direct import and distribution of agricultural inputs, giving more and more space to the private sector over time. So initially, in the 70s, maybe that was the right thing to do. And then later on, the right thing to do was to withdraw and create space for the private sector. So the balance, (a) has to be thought of carefully, in terms of the capacity of the government, that's very important. And, again, if I [could] mention Stefan Dercon, he talks about the self awareness of [the] government. Are governments aware of what they can do and what they cannot do? And that answer would vary by country. Often governments make the mistake of thinking that they can do a lot of things, and therefore they; (a) go into productive activities themselves directly, and (b) also controlling too much the activities of the private sector. Controlling is not that easy. It requires a lot of skills, and many governments actually don't have the skills of doing that. 

The thing that may have happened in Bangladesh is the government has been more or less self aware, not always, but more or less self aware of what they can do and what they cannot do. And that has led to a certain division of labour between the government and the private sector, and the NGOs. With that division of labour also changing over time. That's very important. So the government needs to be aware of where its capacities are, and they need to also have some faith that the private sector, if given the opportunity, can come and do certain things. Because governments often say, okay, but if we don't intervene, the private sector is not going to come in. Or we have a big factory, if we close it down, then a lot of people will lose their jobs, and the private sector will not be forthcoming to create jobs for them. If you want, I can give you a good example of that kind of thinking. In Bangladesh, we had the world's largest jute mill called the Adamjee Jute Mill, and it was bleeding like hell, and every year the government had to subsidise. So there was lots of debate on whether the factory should be (a) privatised, and there was no taker, then the question is whether it should be closed down. Then, about 20 years ago, exactly 20 years ago, a very bold decision was taken to actually close down the factory. It was a controversial decision. About 26,000 workers lost their jobs. Some of them were ghost workers, maybe 20,000. Now the story of what happened after that is very interesting. That land was converted into an export processing zone. And now the latest figures are that about 65 to 70,000 jobs have been created there. So you had lost about 20 [thousand jobs] and you have created so many. These are all private sector firms, they're all export oriented firms, the government doesn't need to subsidise them. So you can see once given the opportunity what the private sector can come and do. So you don't have to hold on to a loss making enterprise just because you're worried about job losses.

Tobi;

Let me sort of ask you a big picture question on this particular point, which is the role of democracy in development, generally. Democracies have been taking a beating recently, so maybe you can speak up for it, somewhat. Do you think democracy has some kind of unique weakness in terms of trying to engineer economic development, particularly because of elections? I mean, to cite the example of the jute mill you mentioned, some regime that is sensitive, maybe in an election year, or maybe that wants to appeal to a particular constituency, or, maybe workers Union or something might actually kick the can down the road. An example is (fuel) petrol subsidy in Nigeria, which the bill keeps increasing, but I mean, each government promises to remove it or reduce it, and then kicks it to the next government because nobody wants to annoy the workers union, nobody wants to lose votes, the party wants to remain in power, you know, and these incentives that are common in democracies. So, do you think this makes democracies weak in a way, in trying to develop the national economy? Because a lot of people will say that's why China has developed much faster than India, for example. What's your take?

Akhtar;

Okay, let me start by giving you an anecdote. So this is from about I think it was 2008 or so, 2007 maybe. Bangladesh then had a quasi military government, it was called a caretaker government, whose major responsibility was to conduct free and fair elections. So they were in power for about two years. And I was actually working in Bangladesh at that time. And we had, I think we had a natural disaster, or maybe we had floods. So conditions were pretty bad. And one of the… well, they were called advisors, but they were de facto ministers, who was having to deal with this problem of getting food to poor people, dealing with rising prices [and] all that; he said to me, “I can feel a certain handicap being part of this kind of government.” What is the handicap? Right now what I need a lot is information from the grassroots, I need to know what is happening in different parts of the country, and I need that information very fast. I need it right now, about what's happening earlier today, or what has happened yesterday. Fortunately, I have some connections in the NGO world, this gentleman was an academic. I'm getting some information. But if this was a political campaign, I would rely on my political network, my workers, my small town leaders, and within a few hours, I'll be getting information from all over the country on what the conditions are. Now, why do I mention this anecdote? Because in a democratic system, your feedback mechanisms may work very well. Yes, there can also be a lot of noise. But otherwise, the feedback which is very, very important for government, they need to know what's going on throughout the country with different groups of people, with different localities etc. That is something that autocratic governments lack. Yes, information flows, flows from lower level bureaucrats, but I'm sure they are modified on their way. Because, the boss often doesn't want to hear certain things. It may happen in political democratic setups, but generally, the flow of information is much better for politicians. Now, how they act upon that information is another issue, but that's very important. Secondly, politicians operating within a democratic setup, (a) they develop a lot of empathy, because of their interactions with people, [b] they also get a good idea of what the trade-offs can be. And these are very, very important in decision making. So those are the good sides of democracy. Now, yes, in democracy, you also need to cater to your political constituencies, and that may lead to certain decisions, which technocrats may feel are sub optimal. But that is the price you pay for democracy. Compared to the gains for having a democratic system, that is sometimes a small price to pay, although sometimes that can get out of hand. But if it gets out of hand, it’s usually where you may in name have a democracy system, but in practice, you don't. So the kinds of disciplines that democracy imposes on the government are lacking there. So that is my answer. Now, as you can see, implicit in my answer was some definition of democracy. It's not just about electoral politics. It's not just about having regular elections and free and fair elections. It is the monitoring mechanism. Are governments picking the signals, are they getting the information? How wide is the information that they're getting? That's a very important characteristic of development.

Tobi;

So another one of my sort of big picture questions to you, and in this case, using the Bangladeshi experience and example, is, in the last couple of years, there has been this big debate in development over, oh, do you prioritise the big things or the small things you can measure? You were with the World Bank, I'm sure you have some familiarity with the so-called empirical revolution and how it has sort of taken over the field of development economics where, yeah, there is a lot more preference in terms of international aid funding for interventions, things that you can measure. So, the RCTs, or, whether it is conditional cash transfers, and all these things – and the atmosphere with which this debate happens sometimes, personally, I find it frustrating because it makes it seem like a zero-sum kind of thing. Like, you can either have one or the other. You either pursue growth, or you forego that and choose to do all these small scale, local and domestic interventions. But Bangladesh, like you mentioned, the issue of BRAC and also people like Naomi and co. have written about – Naomi Hussein [that] Bangladesh managed both. There was a sort of productive combination of both frameworks, that is, the role of non governmental organisations who were able to provide some support for the rural communities. And of course, there was the big macro policies that were explicitly designed to pursue economic growth, get businesses going, create jobs, you know, and all the other things that happen in the private sector. 

So, my question would be, how did that sort of synergy happen in Bangladesh? How was that cooperation, so to speak… I mean, you talked about the role of BRAC in R&D and agriculture, you know, how did that happen? How did, perhaps, it wasn't intended, but in practice, how does it work?

Akhtar;

Okay. Let me start by recounting something I heard Abhijit Banerjee, the Nobel laureate, who got a Nobel prize for his work on RCTs, said something about the rationale for going into RCTs. And he's saying that the kinds of interventions that we talk about in the context of RCTs, they're not the only interventions that bring about development. In fact, the most profound development impact may come from other kinds of interventions and policies, and other factors. But his point was that, let's say, as a development practitioner, we are not able to influence these big things. So I'm going to focus on the things that we can influence. So I'm doing a project here, a project there, and we can change the parameters of the project in certain ways that we achieve the most significant impact. And how do we change the parameters or what parameters we choose or how do we design the project? That's where randomised control trials can give us very useful insights. And we can get more bang for the buck from the development expenditures in those kinds of projects. Now, he never said that that's all about development. There are many other things that need to be done. And governments, in their collective wisdom, may have a better idea of what those things can be. And that's different from a particular project team trying to do a project. They won't have all that knowledge, which can lead them to think about much bigger things, but governments can; not perfectly, but governments can. Or large organisations like BRAC can within certain spheres of operation. So, yes, I agree with you that this is a false dichotomy, that you either completely forget about RCTs or you get completely immersed into RCTs. So, one has to find the right places where the randomised control trials, which are after all an instrument, one of the tools in your toolbox… which is the best time and place to deploy it. 

I would say in Bangladesh, yes, the scope for applying them is more than the actual application so far, which means that we have a scope to improve the efficiency and effectiveness of public spending by using these techniques judiciously in certain areas. Now, coming back to, I think you mentioned the question of BRAC in the context of R&D, but also BRAC has played an important role in market development through their social enterprise world. So, as I said before that the part of BRAC’s work which is not discussed much is the work on the economic sphere. So what happened there? I’ll just give one or two examples. I think giving concrete examples is the best way to illustrate this. So, they got into, let's say, they got into dairy [farming]. Actually, the way BRAC started most of these activities was from a livelihood concern. They wanted to create livelihood opportunities for the poor people in the rural areas of Bangladesh. So they said, okay, we have dairy farmers whose incomes are limited, we want to do something to help enhance their inputs [output]. So they came up with certain small interventions, which helped improve the productivity of their dairy farming, and they ended up with more production, then they had a problem. Now, milk is not something that you can preserve for a long time, you need to have some cold storage facilities, some refrigeration facilities, and that was lacking. So a lot of these increased output was actually being wasted. That led BRAC to start thinking about what else it needs to do. So then it went into refrigeration plants. So, they set up refrigeration plants, where the dairy farmers would come from adjoining villages and store their milk. And that led to other things also down the road. So there are many examples of BRAC where they went into a certain activity, they went into poultry, for example, and then discovered that there isn't a good supply of day old chicks, which is an important ingredient in poultry. So they went into that. And the interesting thing is, in many cases, BRAC was the first one to go into that, later the private sector came in and came in in a big way. And when they did, BRAC withdrew. Because BRAC thought, okay, we have played the role of a pioneer, we have catalysed the entry of private enterprises, we can now withdraw and attend to certain other things. 

So what's going on here? What's going on here is, you have value chains, which are underdeveloped - there are gaps in the value chain. And one aspect of development is to make the value chains more complete. And here you have an actor, BRAC, which has entered the market… [enters] one part of the market, trying to do something, discovering that there is not much it can do unless it intervenes in other parts of the value chain. Well, it can do something but the impact will not be that great, so then it intervenes. But at one point, it realises that other players who are better at scaling this up have entered the field so let me withdraw. So judicious entry, and judicious withdrawal. And that is also true of the government. It's also true of BRAC. I think that's the kind of dynamics of development which is very important. And somewhere there, yes, you may have some trials, which may be randomised control trials, it may be just informally observing from your own experience of what is working, what is not working, but this idea of learning by doing, learning by doing, the government has done it in Bangladesh, BRAC and other BRAC-type institutions have done it. The private sector is also doing it.

Tobi;

The last of my big-picture questions to you is– Another dichotomy that I have observed is the business cycle concerns of an economy and policy and these sorts of other long-run development growth policies. For example, in Nigeria, it's a common refrain that we had growth in some years, but we never really had development. Income didn't grow as fast as GDP, and growth has been cyclical, it's not sustained. And some of the issues that really plague governments and policymakers is that even in trying to make policies that are tolerant and favourable to long-run growth, there are short term issues that you have to deal with [like] foreign exchange policy, inflation, and sometimes I've heard people say that, Oh, as a developing country, you have a lot more tolerance for inflation than developed economies. I think you’ll have to tell me whether that's true or not. Because inflation does not happen in a vacuum, it affects the purchasing power of people, poor people even more so. Right. So how do policymakers in growing countries manage these tensions in terms of – and, I'm working my way through your book with Gustav Ranis on this – how policymakers mine through these everyday concerns of the economy, versus the long-term prospects and the projects you are trying to put forth as a government?

Akhtar;

Okay. Well, since you alluded to that book, I will first briefly mention the main theme of the book, and then come to this specific [question]. The main theme of the book, which we illustrated through a comparative study of East Asian countries and Latin American countries, [was that] we talked about the East Asian pattern of government behaviour and the Latin American pattern of government behaviour. And the period covered was from the mid 60s to the mid 80s so things may have changed after that. And in any case, it's difficult to talk about (a) East Asian pattern, and (b) Latin American pattern. But what we were talking about is that during the course of a business cycle, or terms of trade cycle, as your terms of trade improve, your foreign exchange reserves go on increasing, obviously, growth accelerates. The question is what does a government do when things are good? Do they let growth accelerate according to some normal – “normal trajectory”, or they get excited, and they try to push growth beyond the “normal trajectory”-- making it higher than what the good times normally would make it? So, in the “Latin American” scenario, when things were good, growth was happening, government wanted to have more of it. So they went for expansionary fiscal policies, expansionary monetary policies to push growth beyond what the natural trajectory is. And then inevitably, because we are talking of cycles, inevitably a time came, where things started going down. And conditions were not as conducive as before. At that time, what the East Asian countries did– but first– they never tried to artificially push growth above the natural level. When the downturn came, they allowed the growth to fall. So they went for contractionary policies, they allowed the growth to fall. But in the Latin American scenario, having pushed growth beyond the natural path, it's almost like being intoxicated, you could not get rid of that habit. So, you try to artificially maintain growth even though the signs were all pointing downwards. And then the time came when things just crashed. And you fell into a deep crisis. Whereas the East Asians, they had their ups and downs, but they didn't have a serious crisis at that time. They had later, but not at that time. So that was the main thing about how you conduct your policies during the upturn, and then also during the downturn. 

Now, coming back to the specific situation like the one we observe now, when there are many economic challenges facing countries, and what can governments do to ensure that the course on which they had been before the crisis started, or the challenges started, and hopefully it was a course of development, how can they stay on that course as best as they can? First is, governments should look for existing inefficiencies. For example, in your public expenditures, there may be a lot of inefficiencies, and if you can identify those and get rid of those [inefficiencies], then you can bring things under control in the context of the challenges without sacrificing growth. Most developing countries, including Bangladesh, do have inefficiencies in their public expenditures. So the question is, do you target those inefficiencies and curtail them? Or, do you target those parts of expenditures which are actually very useful? So that's number one. And that's why we often have this phrase, “don't let a crisis go to waste.” Because a crisis can often focus attention better than good times can. And a crisis can also create the political and social consensus to take some tough decisions. So that's one thing. Second is the importance of social protection. And we must remember that for people at the margin, and in our kind of countries, Nigeria, Bangladesh, a lot of people are still at the margin. Even a small shock which takes them below the threshold is not a temporary damage that after some time they can come back [from], often it's a permanent damage. They have to sell off their productive assets, which means even when things start improving, their conditions won’t improve. So that's why it's very, very important to have good social protection systems in place.

Third, coming back to a point I made earlier, it's very important to have good monitoring systems. ‘Cause we really want to know what's going on, how the lives of different people across the country is being affected by the tough conditions in which you are, without that your policies will be suboptimal. So that monitoring is very, very important. And it's very important to engage different stakeholders in society. And for two reasons. One is part of the monitoring, because economists, business people, journalists, and others, would know a lot beyond what the government knows and it's important to tap into that knowledge, but also to build consensus about some of the tough decisions that need to be taken. So, at the end of the day, it is a lot about governance. It's a governance challenge that countries face when they're facing an economic challenge.

Tobi;

My final question to you, I have a couple of other questions, but… from a policy-making perspective, how do you then make knowledge count? Because from everything you have talked about, the role of knowledge… which takes me back to where we started, you know, talking about agriculture. The role of knowledge is actually very important. But you have situations where you can have knowledgeable people in government, world class economists, and the government itself might be making policies that are clearly wrong, which means there's a disconnect somewhere. And I mean, in Bangladesh, it's often talked about how there is a policy knowledge ecosystem that informs the public and shapes their accountability and expectations, and also informs policymakers at the other end of that spectrum. How does a country build and nurture that? Especially, how does knowledge of, whether it is knowledge of economics, whether it is knowledge of society and other programs, how it transmits to the key decision makers, and influence some of the actions or policies, or regulations, that are taken? How does that happen?

Akhtar;

Okay, so you mentioned the sort of the ecosystem linking policy and knowledge in Bangladesh. We have an ecosystem, I wouldn't say it always functions very well. And we do have many instances where people in government feel that they know the answers to all the problems. They know the problems, the issues, and they know the answers to the problems. The question is whether they will do something with that or not. That depends on various calculations. So that happens, we have that problem. And some would say that problem may have become a bit serious in recent years, especially because the economy is doing well, and when the economies do well, governments often suffer from a certain degree of complacency. But it is true that we do have a good system. We have some good research institutes [and] think tanks who work on economic issues, and they have a very good tradition of doing surveys where they go and get information from rural areas as well. We have had that tradition for a long, long time. And that has informed the policy debates. 

Now, how do those insights enter the arena of policymakers? This is where the role of policy intermediaries is very important. So the researchers themselves may sometimes be able to play that role. Or if they're part of an institute, there may be some people in the Institute, who are particularly good at taking the findings of their researchers, their colleagues, and taking it to the government. So you need to have that kind of capacity. There can also be specialised institutions. In Bangladesh, we have an institution called the Center for Policy Dialogue, which is created with that objective - that they will pick up the research being done by other think tanks, and they will create platforms where policymakers, politicians, journalists, and researchers can come together, donors as well and discuss these issues. And that has been going on for more than 20 years. They get a lot of publicity in the media, so the role of the media is extremely important, and the quality of the reporting in the media - is it data based? Is it logic based? - that's also very, very important. But one important thing for people outside the government to understand is that politicians will seek out advice from experts when they have a strong need to do so. If they don't have a felt need, you can still try and create that need, but that requires a lot of creativity. Otherwise, you can invite them to seminars, they will come out of politeness, they will say the nice things, they will listen to you, but then they will go back and forget that. So the first thing to do is to identify what is keeping the politicians awake at night? What is the need that they feel? They may not have articulated that very well, but once you understand that, then see, what do you have in your knowledge base, which will be useful for the politician? (b) What is the best way to transmit it? So what is the language that you're going to use? Because the language of the politicians is different from your language. And third, you have to understand, in fact, let me mention an anecdote here. 

Many years ago, Sheikh Hasina, who is now the prime minister, but was the opposition leader came to Washington and there was a meeting with a group of Bangladesh economists. And there was a World Bank macro economist who started talking about the importance of trade liberalisation - the usual World Bank mantra of trade liberalisation. She stopped him midway and said, look here, there was a time when I was living with my husband, who is a physicist, in a border town, the border of Yugoslavia in Italy. Three days a week, the borders were opened up. And I saw people from this part going to the other part, and the other part coming to this part, exchanging goods. So I saw firsthand the benefits of trade liberalisation. But if today we liberalise trade, some industries may go down under, what will happen to their workers? The workers are going to come to me, they're not going to come to you in the World Bank, but they will come to me, whether I'm in government or opposition, and say, what do you do about us? Right? So the interesting thing is that the politician had reached the same conclusion, like the technocrats, that trade liberalisation is good, but she has come from a different route, and she had different concerns. And technocrats need to understand the concerns that the politicians have. They need to understand the world views of the politicians. They need to understand that there is a method in the madness of politicians, and only then you can communicate well, and only then your knowledge will be taken seriously by politicians.

Tobi;

On that note, and this is a bit of a tradition on the show. What's the one idea that you feel most passionate about, it may be recent, it may be in the past, it may be from your work, or any other field that you would like to see spread everywhere?

Akhtar;

I think the idea of, as I said, the notion of picking signals. If I'm talking about the government, so if I'm in the government, the idea of picking signals from the people, and then acting upon it, and then seeing the reaction of the people and then acting upon it again. So this idea of synergy of interaction between the government and the marketplace, and continuing that over time, is an important idea. I don't know exactly what you meant by an idea, or what kind of idea you're talking about… 

Tobi;

It could be anything.

Akhtar;

I don't know if this satisfies it. But for my own study of the history of policymaking in Bangladesh and economic transformation in Bangladesh. This is, I think, [an idea] I have found to be at the core of the success of Bangladesh. Which is this kind of interaction between policymakers and economic actors, and the repeated playing out of this interaction. And that is, I think, one idea that I'd like to leave behind.

Tobi;

That's a fantastic idea. In your experience. I mean, Bangladesh gets talked about a lot. What are the common misconceptions about your country?

Akhtar;

Okay, so I often see notes on Bangladesh. And we saw a lot last year when we had the 50th anniversary of Bangladesh's independence. So people talk about the good things that have happened in the economy. And they will often say, despite the government, and I know The Economist had an article about two or three years ago, “Bangladesh has done well, despite the politicians.” And I think I've made it abundantly clear in the conversation, Tobi, with you today, that the government had a role. And I've given you many examples of what the government did, including the withdrawal. Now, withdrawal also is important because it's not easy to withdraw. We may think it's easy to withdraw. But when you have had a system for many, many years, withdrawing is not that easy. So, the government has done so. And in many, many ways the government has played an important role in Bangladesh's development. So, the development has not happened despite government, that's a big misperception. And that's why we need to know what exactly was the role the government played? And that's why, as I said at the beginning, maybe, that has more relevance than the East Asian experience for many developing countries, because the government in Bangladesh, the initial conditions, were probably similar to that in many developing countries. So if Bangladesh can do it, others can do it. So that's one thing. The other misperception is that it was all about garments and remittances. But as I said, agricultural transformation in Bangladesh has played a very important role. And the third could be a smaller misperception that NGOs like BRAC, their contribution is limited to the social sectors - of course, [a] very, very profound contribution, but limited to the social sectors. As I've said, I've given examples of how they had also operated in the economic sphere, and how that has also had profound implications.

Tobi;

What are you most proud of when you think about Bangladesh’s journey in the last 50 years? What are the things that you're most – I visited Dhaka about 10 years ago, I love the food, but the traffic congestion reminds me far too much of my own city, Lagos.

Akhtar;

I went to Lagos about 20 years ago, and Lagos reminded me of Dhaka. I think the thing to be proud of is the thing I mentioned earlier, the fact that Bangladesh’s in general have become entrepreneurial. And in some ways, there’s an audacity, which I'll say it's a sweet audacity. The audacity that yes, we can do it. We can do this. Whether in Bangladesh or abroad. You know, the writer Amitav Ghosh, he said in an interview that Bangladeshis are probably the most globalised nation in the world, because anywhere in the world you go, maybe with the exception of that in America but that may also change, you will see Bangladeshis there. So there is a certain degree of audacity that yes, we can do it. I think that's what we should be proud of as Bangladeshis - that we have shown that we can do it against tremendous odds. So that confidence, that audacity, which I think is very sweet, is what we can be proud of.

Tobi;

Fantastic. Thank you so much, Akhtar, for this conversation. I enjoyed it so much.

Akhtar;

Thank you so much for inviting me. It was a pleasure talking to you.

Bangladesh has transformed tremendously in the last twenty-five years. Average incomes have more than quadrupled, and many of its human development indicators have improved alongside. It has also become an export powerhouse with its garment industry, and generally a shining example of development - though things are far from perfect. Five decades ago, w…

We often speak of economic development as a phenomenon of sovereign national countries, but the process by which that happens is through what happens at individual firms in the economy. The decisions by firms to upgrade their products (services), export, and adopt new technology are the most important determinants of economic development. The incentives and conditions that shape these decisions are the subjects of my conversation with my guest on this episode. Eric Verhoogen is a professor of economics at Columbia University school of international and public affairs. He is one of the leading thinkers and researchers on industrial development.

TRANSCRIPT (edited slightly for context and clarity)

Tobi;

Usually, in the development literature, I know things have changed quite a bit in the last few years. But there is a lot of emphasis on cross-country comparisons and looking at aggregate data, and a lot less focus, at least as represented in the popular media on firms. And we know that, really, the drivers of growth and employment and the source of prosperity usually are the firms. The firms in an economy, firms are the ones creating jobs, they are the ones investing in technology, and doing innovation. So firms are really important.

One of the things you often hear a lot is that one of the reasons poor countries are poor is that the firms are not productive enough. So that's sort of my first question to you, how exactly do we define and also measure productivity, you know, for us to be able to distinguish why firms in the developed countries are more productive than the lower income countries?

Eric;

Yeah, this is a big important question. So I agree, in principle, that firm productivity is very key. So countries that are going to be doing well are countries that are populated by firms that are being very innovative, and their productivity is rising, they're learning how to do new stuff, they're producing new products, etc. And so there's a reason why people are very focused on this conversation about firm productivity. The sort of, I would say, dirty secret of economics is that it's very hard to measure productivity well, right? And so the productivity measures we have, I think, are very noisy, and most likely fairly biased. But basically, the way you estimate productivity is you run a regression of like sales on inputs, okay, so on how much you're spending on labour and how much you're spending on materials, and then the part that's left over, we call that productivity. So it's like unexplained sales, you know, sales that can't be explained by the fact that you're just purchasing inputs and purchasing workers.

But that is actually a very noisy measure of productivity. And so I've been working on a review paper, and a separate research paper kind of pointing out some of the issues with productivity estimation. So in principle, it's exactly what we want to know; in practice, it's very hard to measure. So one argument I was making in that paper is we should go to things that we can actually directly observe. Okay, so sometimes like technology adoption, we can often directly observe whether the firm has adopted this particular new technology, or if they're producing new products, we can directly observe that. Sometimes we can observe the quality of products that can be measured. Now, the standard datasets that we have typically don't have those things. It is possible now, in many countries, to follow manufacturing firms or even other sorts of firms, [to] follow them over time, which is great, at a micro level. But those that have the technology, they don't have quality, they do it now increasingly have like what products they're producing, often they don't have the product people are producing and so it's harder, you have to go out and you have to talk to people, you have to access new sorts of data, there's a lot more work, a lot more shoe leather - we'd say you wear out your shoe is going to talk to people trying to get access to other datasets in order to have these measures that you can observe directly.

But I think there's a big advantage to that. Just in terms of measurement. Like, can we measure these things, and record that technology quality and product innovation together? I'm not sure that's answering your question. But, you know, I mean, I totally agree that what firms are doing, that's crucial, right? So the big macro question is, why are some countries rich and some countries poor and how can we make poor ones richer? That's the big question. I think that's kind of too big to be able to say much about. The much more concrete thing, which we need to be focusing on is how can you make firms in countries more innovative and productive. That's the absolutely right question. But that's just hard. There are challenges and research about, you know, how you actually analyze that, and it has to do with these issues of measurement.

Tobi;

I understand the measurement problem, and of course, TFP, the residual, and so many things like that. But practically, I want to ask you, what can you say, maybe if you have a handy checklist or something? what distinguishes firms in rich countries from firms in poorer nations?

Eric;

Yeah. So let me say what I don't think first, and then I'll say what I think. So it's become increasingly common to say that firms in poor countries are just poorly managed. The firms in rich countries have better management, and the firms in poor countries have poor management, right? And partly that's coming from the influential paper by Nicholas - Nick Bloom - and others, and David McKenzie and John Roberts. You know, they had consultants go to some factories in India. In some they camped out for four months, some they were there for only one month, and the ones where they camped out for four months ended up doing better, right? And they say that that's because these consultants improve the management of the firms and management matters. And I do agree that sometimes these management practices matter, but I don't think... sort of, one kind of implication of that line of work is somehow, like, the firms in a developing country are just making mistakes. They haven't gone to business school in the United States, and so, therefore, they don't know what they're doing. And I think that's incorrect. I think that's incorrect. I think the problem is, firms in developing countries face many, many constraints that firms in rich countries don't face. Right. So often, for instance, gaining access to high-quality inputs can be very difficult, right? That you just don't have the supply chains domestically producing high-quality inputs. Often skilled workers are very expensive relative to unskilled workers, and even relative to the price that you might pay in rich countries. Having skilled workers, including skilled managers, is very expensive. In addition, you have all these frictions on trying to get your goods to market or trying to, you know, trying to access export markets, often there are, you know, their costs involved in that.

In addition, being productive requires know-how and often firms lack that know-how, right and so the question is, how do you get that know-how, you know, like, the distinction I'm trying to make is, it's not that they're making mistakes, it's just that they're doing the best they can given know-how they have, and given the constraints that they face. And so in that sense, I would sort of point to those constraints, right, those constraints both in know-how and both in the input and output markets, rather than just failure of management. So now, one of the constraints I should say, actually, so is often, you know, legal and regulatory institutions are much weaker in many countries. It is true in Nigeria, and it's true in many places, right? And so then that does create a complicating factor also when you're trying to do business with somebody, but you don't have the legal recourse of going to court to enforce whatever contract you write down. And so that creates friction. So then you have to do things differently in part because of that. And so you're likely to be much more based on, like, networks of various types. It might be ethnic networks, or it might be people that you know or that you have long-term relationships with. But then that means you can't necessarily just find the best supplier of something, you actually have to find someone that you trust, and that can complicate your life, basically, if you're trying to do business and develop.

Tobi;

So one thing I want us to discuss is the issue of firm upgrading. I mean, one of the things that have helped me in reading your work and taking this firm-level view of development is that, okay, on the one hand, if you look at a country like Korea, we can say the average income, the income per capita for Korea 40 years ago versus now and compare with say Nigeria, but also we can look at Korean firms 40 years ago versus where they are today. Today, Korea have global firms that are at the very frontier of technology. Companies like Samsung are innovating and making chips and making electronics and making smartphones and you compare with firms in Nigeria who have not been able to upgrade their products over that same period. And now what I want to ask you is how important is a firm's ability to upgrade productivity. I take your point on the measurement but controlling for that, how important is a firm's ability to upgrade its output? Its products on its productivity?

Eric;

No, no, I think upgrading is crucial. And upgrading in various ways, you know, more specifically technology, producing higher quality products, producing new products, new innovative products, you know, you might be reducing costs, right, all those things. I do think that's crucial. I think that's crucial to the development process. I mean, much of the conversation in development economics has often been not about firms. It's about, you know, social policy, or it's about education. It's about human capital accumulation. But I'm with you on that, the firm-level upgrading is totally crucial. You know, the question of like, why isn't it happening? Or how could you promote upgrading? That's a very difficult question. There are lots of papers that are sort of speaking to that subject. And this review article I was trying to write was basically all about that. So Alexander Gerschenkron way back in 1962, is a historian writing about late industrialization had this phrase, not very politically correct phrase, but basically, advantages of backwardness. So in principle, if you're a developing country, you should benefit from the fact that technologies have been developed in rich countries, and you should be able to go and adopt them off the shelf. But for some reason, that's difficult, right? It's hard to do. Partly, it's difficult because of, you know, know-how reasons. So I'd say that often, much of the knowledge that you need in order to implement these technologies is not written down anywhere, it's not really in the manual, right? You have to kind of talk to people who know it, rather than just downloading the instruction sheet. That's one reason.

It's also true that many times, machines or processes, actually, may be context specific. So like the picker machine, in a very humid environment, they operate differently than in a non-humid environment. And so, you know, there are things that you need to learn. So I'd say that kind of like gaining the know-how is an important kind of constraint on upgrading. And partly that happens through networks or through... there's a ... Juan Carlos Hallak, who's in Buenos Aires (who would be a good person for you to have on your show, actually, I think that he'd be an interesting person to interview) as a very interesting paper. It's basically on like Argentina, looking at industries that have done well, they've been able to upgrade essentially and looking at what was it about them that made it possible, and especially the leading firms, what were the leading firms doing? And what we're basically finding is that often the key person in the firm, like, had been embedded in markets in rich countries, maybe in the US or in Europe or someplace. So they understood very much how those markets work and what consumers want. So one was like making boats, sailboats, or motorboats right, that was one of the interesting things he focused on. But knowing sort of what the people who are buying those boats really want to see in their boats ended up being important for what they're doing. And so that's an important part of the know-how. It's like, yeah, understanding the customer understanding also how if there are firms that are producing there, understand what the competition is. And so that's know-how that often has to be sort of gained in person rather than, you know, just reading a book or talking to somebody on the phone. And so when I think about... I don't know Nigeria very well, but when I imagine, you know, Nigerian producers, I think, partly what might be holding back is, sort of, maybe not having the understanding of what are the requirements, what are the expectations of consumers in the export markets, right, in the rich countries that they may be selling to?

We've talked about the barrier, we can talk about the driver of upgrading. So then, like, gaining know-how would be a driver. So that's one. I think, and part of a lot of my work has been about quality upgrading, you know, producing higher quality. And I think that's in part driven by who you're selling to, right? So Mexican firms, you know, if they're selling to Mexican consumers, they produce different products than if they're selling to us consumers, which is their main export market, right? And so, you know, and if you're selling to Mexican consumers who have a certain willingness to pay for quality, we would say, right, they have a certain level of, you know, demand for certain characteristics, the optimal thing to do is keep producing that kind of lower quality stuff, right, rather than producing the higher quality. So I had this famous example of a big Volkswagen factory in Puebla, Mexico, which for a long time, it stopped in 2003, but for a long time been producing the old beetle. The old beetle that had first been produced in 1940, or certainly the 1950s. But for a long time, in the Mexican market, that was the main car that people were buying, and they were happy with that because it was cheaper. It was like, you know, it's very reliable. But that same factory started producing the New Beetle, basically, for the US market, right, for the US and European market, which is much more sophisticated, but also much more expensive. So it depends a little bit on which market you're selling into and whether you're going to upgrade or not. And so accessing export market can, in some sense, like pull the upgrading process, you know, once they access these export markets, they'll start producing higher quality stuff for these consumers. And that I think, actually, generates some learning, and I can talk about one paper that shows that a bit. But it seems to be that by gaining access to markets and producing high quality, then firms learn how to do stuff better. And so that can be an important driver of upgrading.

And conversely, not having access to export markets or having a hard time breaking into export [markets] can be a reason why firms failed to upgrade. Let me tell you about one paper that, you know, demand effects can drive learning.

Tobi;

Yeah. Go ahead.

Eric;

Okay. It's a paper by David Atkin, Amit Khandelwal and Adam Osman. It's in Egypt. Okay, it's an RCT experiment, a randomized controlled trial. And it's among rug producers, producing rugs. What they did is they randomly allocated initial export contracts, right? So if they work with an intermediary, like a buyer of rugs, you know, among several hundred rug producers, they say, Okay, some guys are gonna get an initial contract, and some guys not. And so that was a way, this is a way of investigating basically what's the effect of exporting on the decisions and in a very clean way, and they found a couple of things. So one is those guys who had the export contracts and started producing higher quality stuff. So that's sort of consistent with my Volkswagen story, too, right? So increasingly, export markets produce higher quality and they did lots of measures of, you know, how thickly packed the rugs were and how straight the edges were - the very dimensions of quality of rugs. That was one thing. And then the other thing that they found which is very interesting is that you know, these weavers of rugs got to be better at producing rugs, basically. So then, when they took them into a laboratory, and they say, okay, produce this identical rug to a whole bunch of producers, both in their treatment group, and in their control group to produce this identical rug, and they found that the guys who had gotten the export contracts were better at producing that rug, they produce sort of higher quality rugs than the other guys. This suggests that demand can drive upgrading, right, in the sense that it induces firms to produce higher quality, but there's also learning involved in that process. These Egyptian rug producers became more productive as a result of having access to these export countries.

Tobi;

Yeah, I mean, listening to you, I can think of a few things that click in place. When I look at, say, a country like Nigeria, I think about the way the central bank has been running the exchange rate policy, which is messing seriously with the way firms actually source inputs. Some firms actually don't have access to the foreign exchange quota to actually source quality inputs. I mean, from manufacturing firms to agribusinesses who want to buy high-quality seeds overseas, I see how that can be a constraint. But two things I want to get at. Also, if you look at Nigeria whose industrial policy is really about domestic self-sufficiency, you could see that there isn't really an incentive for upgrading, and therein lies my question. If we talk about upgrading and how important it is, even though it's not really discussed as it should, what role do you think industrial or state-directed policies can play in this? Why because industrial policy is back in fashion, you know, it's being discussed everywhere... but usually, at least in my experience and in my opinion, what most scholars and advocates are focused on are [things like] state investments, you know, how the state can put money in one sector or the other. There really isn't so much focus on this sort of micro-level detail and what happens at firms, which your work is about. So for practical purposes, do you see industrial policy as something that can really, really, play a role and incentivize domestic firms to upgrade? For example, something like export quotas, you know, for firms?

Eric;

I mean, in terms of your question, do I think industrial policy can be helpful? I do. I do think that industrial policy can be helpful. Basically, I think that learning generates spillovers that firms themselves can't fully capture. And so I think there is a role for government to promote learning, basically, in a way. To subsidise learning such that - the socially optimal, or - the best sort of amount of investment in learning for society is more than individual firms to do on their own. And so there's a role for industrial policy. But I agree that it's got to be smart industrial policy, it's not just any old industrial policy. And so many countries have this idea...it's a little bit of nostalgia for import substitute industrialization, or it's very much like inwardly focused industrial policy. We're going to try and guarantee a domestic market for our producers, something like that, right? I'm not a fan. I'm not a fan of imports substitute industrialization or these very inward-focused strategies because then you get to the point where there's just not a lot of pressure on domestic firms to be more productive. They become kind of in a comfortable situation where they have kind of protected markets, not very competitive, they have a lot of market power in that market, and so that is a recipe for stagnation over the long term.

So I think the crucial thing is that the targets for industrial policy be export-oriented, you know, outwardly oriented. You want your firms to be successful in world markets, right? I think that should be the key, rather than domestic self-sufficiency. Or rather than just the government investing in well, okay, so I don't have a problem with the government investing in infrastructure, investing in things as long as the aim is always ''what's going to facilitate our firms being successful in world markets'', right, I think that's a good target. Because those world markets are competitive [and] for firms to be able to be successful there, they're going to have to up their game and be more productive and be more innovative, subject to the measurement constraints we talked about, right and to upgrade. And so I think that the smart industrial policies are going to be things that sort of push firms to learn and to be more innovative and to be successful as exporters.

Now, the other thing we have to keep in mind in thinking about industrial policy, is that [for] the governments, it's just very hard to [know] in the future what are the sectors that are going to be successful. What are the activities that are likely to have a future? It's just very hard, it's very hard for people who are, you know, private equity firms embedded in the sector... it's very hard to know, it's gonna be even harder for a government official or someone making government policy to do that. So I think we need to think about policies that have this effect of promoting learning or subsidizing innovative activities, but that, you know, don't require too much knowledge and understanding of the future on the part of the people setting the policy. Right. So things like collaborations between universities and firms for, you know, how to train workers to have the skills that the higher tech firms in your country need. That's something that seems like a good idea that's probably going to promote upgrading without having to pick and say, I think this product or this sector is the future of the Nigerian economy and therefore we're going to subsidize that thing. And you also want policies that are somewhat flexible, right, so that if something happens... so I'm working on a project in Tunisia, where the Tunisian Government was trying to promote exports. But the issue that they've had, and it's a matching grant program where sort of half of the costs of exporting of a certain category of costs of exporting will be paid by the government. The problem with that program, though, has been that it was somewhat inflexible. So basically, if something happened, you know, there's a big shock, and in fact, COVID shock, you know, and that changes what firms want to do. And it's very hard for them to switch gears and say, now I want to spend money on something else, can you please subsidize this other thing, and there were a lot of frictions in the program. And so that's often the case for government programs. The government sets a policy and then the world changes, firms want to do something else, but the policy is still stuck, you know, in the old world. So we need to think about how to build in, you know, flexibility into the programs so that if firms decide, actually, the market is moving in this direction, rather than this direction that we were expecting, that the support that they receive could move in the same direction.

Tobi;

Yeah, I agree. And I don't mean export quotas as hard targets. So I'll give you an example. Nigeria has this policy that we've been running for about six to seven years now, where there are multiple exchange rate windows for different parts of the economy or sectors that the government deems should have priority, you know, to import. And I recall a paper where Korea had a similar arrangement, but it was focused on firms that export. Firms that export to world markets sort of get priorities so that they can source inputs at a very low cost and seamlessly, you know, but it's not just something that we really think about in Nigeria, because we are so focused on the domestic market and how large the population is not minding, you know, how much of that population is poor.

Eric;

Yes, no, absolutely. So, certainly, Korea did this. But the Korean model, a key part of it, and they definitely picked sectors in a way that, you know, it's, there's a little bit of tension with what I just said about, you know, the government officials are not going to be very knowledgeable, there they seem to have done a good job of picking sectors to advance. But the key part was it really was oriented towards success in export markets. And the industries that were not successful on the export markets, they pulled the plug, they removed the, you know, they removed the support, which is politically hard to do, you need a fairly insulated, like, secure government in order to be able to do that. Because, otherwise, you start providing support, and then the industry lobbies a lot to maintain that support, you know, and so then it becomes politically very difficult to remove it. But I think if the government is committed to ''if these industries are not successful, we're gonna pull the plug on the support'', then this can work. Right. But you're absolutely right, in the Korean model, the key thing is the export orientation rather than the import orientation. And what you mentioned about exchange rates, I didn't comment on that. But I think it is an issue, you know, especially for a resource-rich economy, that the exchange rate can be, you know, highly valued, arguably overvalued, which makes it hard to develop the domestic industry. And so I think that's a real issue that, you know, some countries seem to be able to handle that, you know, ''what do we do with the natural resource wealth a little better than others'', if you just let it accumulate and people are going to spend and that leads to devalues your currency to increase that's going to make it harder to achieve export success in export markets for manufacturing goods or other exporting services. And so that is something that needs to be a focus of thinking about how to upgrade.

Tobi;

Yeah, I want to talk about technology for a bit. You had this very, very, an interesting paper on the soccer ball, we call it football, the soccer ball producers in Pakistan. And in a bit, you're going to tell me some of the interesting things you learned about that study. But first, Dani Rodrik and Margaret McMillan had this interesting paper about industrialization in Africa, and how domestic manufacturing firms are now shifting more towards capital-intensive technology. So hence, manufacturing firms are not creating jobs as much as historical patterns should suggest, do you see this as sort of a problem? I know so many other people have this worry about automation and how this technology can be exported everywhere, which is really a concern for maybe a continent like Africa with a large, jobless, and young population. So do you see this as a trend that we should worry about, you know, more capital-intensive technologies, or are there opportunities?

Eric;

Yeah. So I do see it as a trend. I do think it is something to be worried about. You know, Dani Rodrik recently organized a panel with the International Economics Association I participated in, along with Daron Acemoglu and Fabrizio Zilibotti and Francis Stewart from Oxford. And I sort of had two points there. One point was, yes, I think this diagnosis is correct. Basically, economists refer to it as appropriate technology. But the idea is that many technologies are developed in rich countries, you know, given factor proportions, we would say in those rich countries, so basically, skilled workers are more abundant, unskilled workers are less abundant, and so people develop machines that kind of conserve on unskilled workers. That's, in part, the background to the story that Dani Rodrik and Margaret McMillan are saying that in Africa, many firms are using this technology that's been developed in rich countries, that's very skill intensive, but it's not generating a lot of them. Right. So I think the diagnosis there is correct that that happens, right? And so the technology often is inappropriate for poor countries given, you know, their supply of unskilled labour, given how many workers they have that could use employment. On the other hand, the other question, though, was, what do you do about it? And so I was less convinced. So my worry about that. There are two versions of that concern about what you do about it. One is, given the set of existing technologies, you could try to encourage firms to use more labour-intensive technologies. Okay. But the problem is that you may encourage them to be less productive. Maybe they might generate more employment, but they'll be less productive, right? There was an interesting paper that I cited in Brazil by Gustavo D'Souza, which was sort of saying the Brazilian government basically put a tax on international technology licensing. And he shows that sure enough, firms were less likely to use International Technology. They're more like to use domestic technology. They actually generated employment, but they were less productive. Right, and they overall did worse. So there's a worry that you're gonna make firms less productive in an immediate sense. The other worry is that, like, if the Nigerian government starts encouraging Nigerian firms to develop new technologies, which are more labour intensitive, you know, then they'll generate more employment, the worries that you're gonna get sort of fall behind the world technology trajectory, I'll call it that. Like, you can think about the world frontiers moving in whatever, pick an industry, and the world frontier is moving at a particular place, and then, you know, firms are competing with each other and they're, you know, someone gets a patent, someone comes up with a new idea and sort of technology moves in a certain direction. And then Nigeria says, no, no, we want to be on a different trajectory that generates more employment, right? The problem is, you're going to be permanently behind where the technology curve is, right? Where the world frontier is. And I feel like that's worrisome, right, you're likely to have less learning, right, there's gonna be a gap between where the Nigerian firms are and where, you know, the world frontier is that it's gonna be hard for them to catch up afterwards. So in the short term, you might generate more employment, but you're gonna have a less dynamic industry as a result. And so I think, my own view, and this is, it's a feeling rather than something that's very research based at this point. But my own view is, even though it means that firms are not going to generate that much employment, they have to try and stick as close to the technology frontier as possible, or, you know, catch up as quickly as possible to where the world technology frontier is.

Tobi;

And so talk to me a bit about lessons from your walk with the Pakistani soccer ball manufacturers. What did you learn from that particular experiment, especially on the role of appropriate technology and technology use and the incentives that surround it for firms and investors?

Eric;

Yeah, so it was a study of technology adoption, what are the factors that encourage technology adoption? And what made it possible was that the football producers, I'll use that word football instead of the soccer ball, these football producers, there are a lot of producers using the same simple technology, right? And this football design is, you know, 85 or 90% are just these hexagons and pentagons. If you can imagine a, you know, a football, it's got hexagons and pentagons. And so the simple technology involves cutting out hexagons and pentagons and then stitching them together. And there were a lot of those and what made the project possible is we came up with a new improved technology, which is basically a way of cutting pentagons from these sheets. The main costs, you know, 50% of the cost are the sheets, they call it rexine. It's like artificial leather, that's the exterior of the ball. But they were cutting pentagons in a way that was wasting some material. Wasting more than they need to and so the new technology is a way of cutting these pentagons so that you can fit more into a given sheet so that you can get basically 8% more pentagons which ended up being about a 1% reduction in total costs. Which wasn't enormous but on the other hand, it's a pretty competitive industry, profit margins are about 8% so we felt like they shouldn't have been paying the 1%. And actually, when we started out, we thought we were gonna be studying technology diffusion, right, which is, you know, one person adopts, then is that their neighbours who adopt or is it their cousins? Or is it the, you know, people who share suppliers, and what are the channels of diffusion, right, and we're trying to keep everything secret, and we thought, okay, when we let it out, it's obviously the people we give it to who are gonna adopt right away, and then it's gonna spread. And so then we gave out this technology, for free, we gave it to 135 firms.

And then, you know, we had a few firms adopt, and they started using it, and including one big firm that was producing - I can tell you the name later, but basically had like 2000 employees and is producing for Nike, and as a big producer adopted this technology, and, you know, is basically cutting all of its pentagons using our design and our die for cutting rather than the old one. So after, you know, 15 months, there were six total firms that had adopted. And that was puzzling and thought, you know, why is that? So then we started asking firms, we started talking to people and basically, it was revealed that the reason was that the guys doing the cutting... so the cutters are basically paid piece rates, they're paid per pentagon or per hexagon, or essentially per ball like, which is, you know, 20 hexagons and 12 pentagons they're paid. That was what their salaries were based on. And they didn't have the incentive to reduce waste, like, they weren't penalized if they wasted the material, right? And so they just wanted to go fast. And our die was slowing them down, right, made them go more slowly because they had to be more careful how they placed it and also, it was a different design, it was the design that they were used to. Now, it turns out that within about a month, they could get back up to speed, to the speed they were at before but they didn't know that, and in any case, for that month, their salaries would be way down, they'd just be slower and knowing that if the firm didn't change the contracts, their salaries would be lower. And the workers were figuring this out, the cutters are figuring this out, they said, this is not good for me, right, that my salary is gonna go down if I use this thing, I have no incentive to use this new technology. And so then they started telling their firms, you know, this is bad, bad technology, it doesn't work, it's dangerous, it has all these issues.

Okay, so then we realized that this was happening and we said that we were going to do a second experiment. So, you know, half of the people we originally gave the technology to who hadn't yet adopted, we did a second experiment where we said to workers, we're gonna give you a month's bonus, which is not very much it is about $150 US dollar. So these guys are not paid very much we said ''a month's bonus if you can demonstrate to us and the owner of the factory that the technology works.'' And actually, that was enough. The workers were excited about that, you know, they got paid for doing this. Everybody who did it then subsequently passed the tests. So they demonstrated that the technology is working, and then a statistically significant share of the firms that they worked at ended up adopting the technology as a result. So those were the two experiments, those were the facts. What are we learning from that? I think we're learning that, basically, the lack of information flow from workers to their owners, to their managers, was what was getting in the way of technology adoption in this case. Like, the workers knew that the technology was working, but the owners didn't know because they sort of delegated the process of cutting the pentagons to the workers, and given the contracts, the workers didn't have the incentive to share the information. Right. So I think those sorts of, like, information flows or barriers to information flows are actually very important in the learning process. And kind of what our second experiment did when we did this bonus of a month's pay, which induced the workers to share the information and that was sufficient to make the technology be adopted. And so I think the punch line or the one-sentence version of this is, workers need to see that they're going to benefit from the adoption of new technology or from upgrading generally in order for the process to work well. They have to buy into the process. And they have to see that they have the incentive to do so. One recommendation coming out of that would be some sort of profit sharing, or some sort of gain sharing between workers and firms would actually be very useful. And will it help there be more innovation?

Tobi;

It brings me in a way to another very interesting paper of yours which [they] also had a summary essay about, I think, in VOX or something, which is about wages in poor countries. And I mean, thinking about the soccer ball story and the lesson. One issue and this has generated quite a number of debates between I think Rodrik and a bunch of other scholars who are thinking about Africa, is that the reason Africa is not really industrializing, or firms are not creating jobs is because wages are too high relative to the level of income. But what I learned from your paper, and you can correct me if I'm wrong, is that paying higher wages in poorer countries is not really a disincentive to creating employment and even generating productivity and profit. Tell me a little bit about how that works. Because, usually, we've gotten familiar with this logic that for you to be able to industrialize, if you think about China, and so many other countries, you need to have access to low-wage workers, you know, you need to be able to do very cheaply, and labour is where you can really cut a lot of your costs. And then it becomes a problem if your domestic wages are too high for the level of your income or what firms and investors are willing to pay. So tell me this high-wage, low-wage dynamics, especially... I remember the famous Paul Krugman was it article defending sweatshops in Bangladesh, where if you force firms who are outsourcing to pay higher wages or impose certain conditions, poor people in those countries will lose jobs, and they will lose their livelihoods. And so you should not mess with that process. What are your thoughts on these [issues]?

Eric;

Yeah, very interesting. So I think the article you were thinking of, it's related to the specific case of the football producers and seal coats. In Pakistan.

Tobi;

Yeah.

Eric;

There was a very interesting thing that happened. I mentioned that one firm adopted this new technology. And you know, one very large firm and it was producing for Nike, it's called Silver Star. The interesting thing about that firm is that because they're producing for Nike, which had had sweatshop scandals in the past, Nike required them to do a bunch of things, basically, so that Nike wouldn't be vulnerable to a further scandal, right? And among the things that they had to do was make sure they were paying the minimum wage in Pakistan. And the only way this firm could guarantee that they were paying the minimum wage in Pakistan, which many firms were violating basically, the only way they could is to say, we're not going to pay a piece rate, we're going to pay a fixed wage. Right. So this firm was paying a fixed wage rather than a piece rate. And actually, we talked to them about when they first won the Nike contract. They said their labour costs went up 20 to 30%. So they did a bunch of things. They had this fixed wage, there was a medical clinic on the factory grounds. They had sickness pay, they had some retirement benefits. So a bunch of things, they did raise wages. But the advantage of that was that the workers were much less likely to block the adoption of this new technology. Because in a specific way, they did not have a disincentive, you know, their wage was going to be their wage no matter what happened, rather than in other firms [where] what was happening is that the worker can see if they adopt this technology, their wage would go down. And so we believe, and I wrote this in an article that you saw in the Harvard Business Review, I think that's where it was, that those wages, you know, higher wage payments and fixed wage payments, which were imposed by Nike actually contributed to the process of innovation. The title of the article is how labour standards can be good for growth, and also in the process of upgrading. So that's an example of how having higher wages can actually be good for this upgrading process.

Now, there are factors going in both directions, right? On the one hand, you know, the 20 or 30% higher labour costs, I think they did contribute to innovation. On the other hand, 20 or 30% higher labour costs may mean that firms will hire fewer workers or that the industry will be less competitive. So it's not that, you know, this innovation effect is all powerful and it's going to overwhelm anything that's about labour costs. But I think it is something that we need to take into account. And so, you know, labour market institutions that, you know, maybe promote profit sharing with workers, that promote longer-term employment so you have people who are around for longer, that have some job security, the sorts of things that often labour unions want to negotiate, can actually be good for this innovation process. And that's one factor that should be weighed against this issue of, you know, how higher labour costs and how competitive is the sector going to be. You often hear, like, the World Bank or the USAID, the development agencies will often say, you just have to be cheap. Like, you know, the competitive advantage of Nigeria is cheap labour and therefore, you should be focusing on having low wages and producing, you know, garments and textiles and toys and low-end manufacturing. But I think that's kind of a low-road model. You know, and I think that there are viable high road models, which would involve somewhat higher wages, some sort of gain sharing or profit sharing, and being more innovative at the same time. I can't tell you I have it all worked out exactly what that model would look like, I think it's going to vary by country. But I think we need to try to think about and push in that direction of where you can have, it may not be high wage, but it's gonna be higher wage than the market by itself maybe would bring about. So I am optimistic that that can happen. But again, the devil's in the details, you know. So Nigeria needs to think about what are we relatively good at doing right now and let's think about how can we be more innovative and move up to the quality ladder, the technology ladder in those industries. And then how can we get our workers on board to the process of moving up that ladder? And that will probably involve paying those workers more, rather than just trying to cut wages to the extent possible.

Tobi;

Before I let you go, let me... I know you're a relatively quiet person so let me draw you in a little bit... yeah, I know you're not active on Twitter or anything like that. Let me draw you into a little bit of professional controversy. And one of the things that I admire most about your work, I should confess, is that it's methodologically diverse. You know, you do structural econometrics, you do RCT, you do regular modelling and so many things. So there's this huge debate currently that I think, a lot of my colleagues may not think so but I think has important consequences for the policymaking process on development, which is that - is development research right now focused on the right things? You know, RCTs are like the standard tool for the investigation of development questions. Empirics have sort of taken over the field.

But on the other hand, you have folks like Lant Pritchett who are constantly pushing back that this is encouraging researchers to think too small, they are researching cash transfers, and so many other key interventions, whereas we really should be focused on the big questions. And in my experience, these have real-life implications, especially in poor countries where they have budgetary constraints. We might say this is due to corruption, and that will be true, but sometimes they have a real balance of payment crisis, because a lot of these countries are resource-dependent, and it's often cyclical. So a policymaker may really want to know where to spend the most resources to have the maximum benefit for the citizen. So I find these questions very important. What do you think about this debate? As someone who transverses the field very often in your work, how have you been able to navigate this debate? And what do you think is the, maybe right is not the right word here...what do you think is the useful approach going forward?

Eric;

Yeah, good question. Yeah, in my own work, I've been very question driven rather than methods driven. Right. So I've always thought, you know, I'm interested in this question of from upgrading, what are the barriers to upgrading? What drives upgrading? How can we, you know, learn about that, and if we can learn about that using an experiment, that's great. If we're in about that using other methods, that's great, too. So I, sort of, don't have a dog in the hunt, as Bill Clinton would say about, you know, the methodology. And I'm kind of in the middle of the road, I think, in terms of this debate between, you know, J-PAL and Esther Duflo and Abhijit Banerjee and Lant Pritchett or others on the other side. I think, you know, in situations where you can run an experiment, I think that is the most credible source of information. Okay, so I'd rather have a randomized experiment than do a correlation and put some causal interpretation on a correlation. At the same time, I do think that there are many questions, either that can't be answered with an experiment, or that are just very, very costly to answer with an experiment, right? And so it's very hard to run, you know, it's running experiments on firms. I've tried to do it, but it takes a long time. It can be very costly. You have to give much bigger shocks to firms to get them to react, etc. And so, I've heard Abhijit Banerjee articulate that, like, we should never do a policy that hasn't first been evaluated by random experiment, I think that's too strong. Because we're gonna be waiting years and years and years to get the experiments and with a huge investment of resources in order to get the experiments that would then inform the policy. So we're going to have to make policy and, you know, make decisions based on other sorts of information. And so there, I do think we need to be like small ''c'' Catholic, allow for lots of different types of methods, quasi-experimental methods, you know, even structural methods, and then also experiments. There's this famous joke about the drunk guy with a streetlight, you know, he's looking for his keys, and he's looking under the streetlight, because that's where the light is, maybe not where the keys have been lost. And so I take that point, like, maybe we really care about these big questions about, you know, what's going to drive growth, then in that sense, I'm sympathetic to the sort of the Lant Pritchett view. On the other hand, under the lamppost, we actually are learning stuff, right, I feel like we're more confident that we're making progress by looking under the lamppost. And so I think the, you know, the trick, the art here is to sort of stay near the edge of the lights and we're getting closer to the big questions, but in a way that's still credible, and that we're still, you know, we can believe the answers that we're actually given.

To sort of counter the Lant Pritchett view, you can post these big questions, and you can, you know, think big thoughts. But at the end of the day, you have to be able to convince, you know, you have to show us the data, right, you have to show that this is really correct. And that's just very hard to do for many of these big questions. So we need to incrementally build up based on this work. That's why I kind of like this work on firms, we're getting towards these big questions about growth, but in a way that you can actually have some confidence that you understand what's going on.

Tobi;

In your experience doing this work, what are misconceptions that you have encountered in the field that either the professional development industry, so I'm talking about aid and the think-tank and all the other folks, or it may even be your academic colleagues, what are the common misconceptions that you have encountered?

Eric;

Yeah. I mean, so one big thought [is] I think that the of field development agencies, right, it's like, how are we going to spend aid dollars in a way that's going to have a positive effect? And I think there's value to that. All right. I'm all in favour of spending, you know, aid dollars, in the most effective way. But I think that you know, a set of questions does limit to some extent the impact of the field of development on the development process. So I actually think we could spend every aid dollar in an optimal way, and would it have a meaningful effect on the material standard of living of people in poor countries? I'm not sure. I mean, maybe a little bit, maybe marginal, right? I think what's really going to matter is, do these countries start getting industrialization happening? Are they getting upgrading? Are they growing? And so in that sense, I sometimes get a little bit frustrated with the development discussions, it's all about this, you know, how do we spend aid dollars, and let's do RCTs to figure out how to spend the aid dollars, rather than these bigger questions, which are going to have a longer-term effect on people's living standards. You know, that's changing a little bit. I'm encouraged. There are more and more people talking about firms, there are more and more people taking sort of industrial policy ideas seriously. They're talking about bigger-picture questions in a kind of micro-founded way. So there are some encouraging signs. But I think a lot of development is still about that issue of like, what's the right way to do social policy? What's the right way to do, you know, aid spending, rather than trying to understand deeply why is it that Korea was able to make this transition from a poor country to a rich country, essentially, in a generation? And why is it that many countries in Africa are not? What is it that's actually getting in the way? And for that, that's not really like how to spend aid dollars question that's more about how firms behave. What are the factors that constrain them? And those sorts of things.

Tobi;

This is a show about ideas. So I want to ask you, what's the one idea? Just one. One idea that you think everybody should think about and adopt, that you would like to see spread everywhere. What's that idea? It may be from your work, or it may be from other things that inspire you. What's that one idea?

Eric;

I think the one idea I would choose is, uh, workers have a brain. This goes back to the soccer ball study, that there's knowledge and information that, like, workers have or people who are lower down in the hierarchy have, which is not being taken advantage of. Right, the soccer ball thing was an example. The workers were understanding the technology, but because of the way they were paid, and because of the, you know, institutional arrangements, they didn't have the incentive to share that. And I think the world, including the economics profession, tends to undervalue the intelligence that people have. Even the people who are actually, you know, on the frontlines doing the work. And if we can figure out ways to harness that knowledge and give people incentives to share it and give people incentives to develop their own intellectual thinking about whatever it is they're doing, I think that'll have a big payoff. And so I'm interested in sort of investigating what are the sorts of arrangements, what are the sorts of policies that can lead that to happen more?

Tobi;

Yeah. Thank you so much, Eric. I mean, tell me a little bit about what you're working on right now.

Eric;

What am I working on right now? I mean, so one thing related to what we've been talking about that I'm excited about is, again, a paper on technology adoption. This is in Bangladesh, with an energy-efficient motor like sewing machines. They're different sorts of motors that the traditional ones they're kind of spinning all the time. And then people have the foot pedal they like to press the foot pedal and then the needle comes down and stitches right but they're actually wasting a lot of energy because these motors are spinning all the time. And so there's a new type of motor called a servo motor which spins Only when the needle is moving, right, so it's energy efficient, energy efficient motor, but it can just replace the old motor, you don't have to change anything else about the machine, you just put this new servo motor to replace the old clutch motor. And we're studying when new managers or when new owners, when do they make those decisions. And so we're trying to track we're giving them information in different intensities, like including installing the machines in their factory one is just showing a video when it's just providing information, but one is actually installing their machines. And we're seeing how they react to that information. So I think that's a big topic. It's like what's getting in the way of the adoption of energy-efficient technology? These are the people who are making mistakes, or they just don't have good information. Or that basically, maybe if they have the right information, they actually will adapt very quickly. So that's one thing I'm thinking about.

Tobi;

It's been fascinating talking to you, Eric. I enjoyed it so much.

Eric;

Thank you, Tobi. Good questions.

I was thrilled to get a chance to talk about cities with Alain Bertaud - he has been one of the most important thinkers in urban planning for the past fifty years. His book Order Without Design is a must-read and an excellent summary of his research (conducted in collaboration with his wife Marie-Agnes, an urban planning scholar in her own right) project with aim of bridging the gap between urban planning and urban economics. Alain is a brilliant and generous teacher who has greatly influenced me - I hope my questions have done their bit to honour him.

Transcript

Tobi;

Welcome to Ideas Untrapped podcast and my guest today is legendary urban planner, Alain Bertaud, welcome to the show, sir, it's an honour to speak to you.

Alain;

Thank you very much for inviting me, I'm quite honoured.

Tobi;

You are aware that some of the biggest cities into the future are going to be in the so-called low-income countries, because urbanization is exploding in cities like Lagos, Kinshasa, and these cities are a bit different from some of the cities in other places around the world, especially in the West, you know, in that they are lower-income, they are a bit congested, they don't have much density, and, it's a challenge for such cities having to host that many people. Now, if I may ask you, what would you say the problem has been in making some of these cities work? Are we seeing a failure of markets or planning or a bit of both?

Alain;

I think that there are sometimes market failures. But I think that there has been a neglect of infrastructure. For me, a city, and that's something common to all the cities of the world, whether they are, you know, in Europe, in America, in Africa, or Asia, the main things for cities are labour markets, that's why people go to cities to find a job. And that is why a big firm will go to Lagos. They will go to Lagos, rather than a small town somewhere. They will go to Lagos because they will find in Lagos people who are competent in whatever they want to do. They will find a large labour force, you will have a lot of choices. And so if I am a migrant living in a small village somewhere in Africa, and not necessarily Nigeria, I may want to go to Lagos because I know there are a lot of jobs there. So if we accept that a city is a labour market, the most important things are two things.

First is transport. You should be able to move in this large city. Within an hour, you should be able, ideally, to go from one side to another side, in order to find the job you want and change jobs. You know, changing job also is very important. That's why company town, you know… sometimes you have a mining town or a town developed around a steel mill or something, and then everybody there is working for one employer - the mine or the steel mill, this is not very good, because you have no chance of changing jobs. I think the advantage of very large cities like Lagos or Abidjan or Dakar, is that there are so many employers that you can fill your way, you know, you can change jobs and learn things from other people, that's what's a city.

Now, what should the planning be? Planning should be transport, you know, there should be a system of transport. And when I say transport, I don't mean necessarily a subway, I mean, subway sometimes is necessary, but not always. It could be informal transport, you know, the different minibuses, for instance, so things like that which are private. But the planners often consider them as a nuisance, you know, that they are a little messy, they stop everywhere. Sometimes they don't follow the rules very much. But if they are there, it's because there are people who prefer to take this informal thing rather than a regular bus. So we have to take them into account. And we have to make them more efficient, you know, by having specific stops where they can stop which is wide enough and things like that rather than eliminating them.

So the first thing is transport. The goal is to allow people to move from one part of the city to another in less than one hour. Now, in a very large city like Lagos, I suppose it's a bit like Mexico City, you will find that this is impossible right now [to move] from one side of the city to [the other], you know, let's say you go from north to south, it may take you three hours to go there. The goal is to decrease this time, you know, [and] how do you decrease this time so that you can have access? Any individual should have access to the maximum number of jobs. And it's the same for the employer. You know, the employer, when they look for employees, if they move to Lagos, suddenly they need somebody with specialized, I don't know, a welder, for instance, somebody who is very specialized in something. They want to have a choice between competent people. If the transport system works well, they will have a choice between 100 welders and they will select what is best for their company. So transport is the most important thing and you have to take into account informal transport, you know, this is very important. You cannot just say the best will be to have a subway or... you know, it's possible that the subways might be necessary but it's only one part of the transport system. You cannot pretend that one day everybody will move by subway, or municipal buses, or even ferries or things like that.

All these modes of transport have to be combined and thought together, including cars, by the way. Many of my colleagues now are dreaming of cities without cars, I don't think it can work because first you have freight, and you have certain jobs which cannot be done without a car, you know, if you are a plumber, or if you are an electrician, you have to move around with your material, you cannot take a subway… if you are a plumber, you know, with your bathtub or something like that. So a large city has acquired a lot of freight, you know, you have restaurants, you have bars, you need to bring food to those restaurants, to [bring] bottles of beers, something like that. So you need a transport system which accommodates all modes of transport. Some of my colleagues have a preferred means of transport that they love, you know, say light train, tramway, or bicycle, or scooters, or whatever, or subway, or monorail. And I think that it's possible that a monorail is a good thing, but it will be only a small component, you know.

So the job of the planner is to accommodate all these different modes of transport. And if people prefer to take even a taxi motorcycle for instance, which I think in many countries of Africa, I'm sure in Lagos it exists too, you have to accept that this is the best way for some people, not everybody, but for some people. So you have to also accommodate that and say, Well, what do we do for them to reduce, for instance, reduce the pollution they cause but also reduce accident, make them more convenient, because those means of transport are serving certain groups of people who have no choice, who cannot afford it, or who live in a part of the city which is not served by the normal transport.

So transport is very important and transport has to be multimodal, and you have to look at it. The other thing which is very important in every city is housing. People move to the city from the countryside or from another city, and they look for a job, but they have to find housing. And very often, I think [for] many of the cities in Africa, but also in Asia, or even in Europe, they didn't welcome the migrants, they considered that the migrants are a nuisance, you know, because usually, they are relatively poor. Some of them are coming from the countryside, so they do not have the skills. You know, they have skills, but they are raw skills, which are not necessarily very useful in the city. So they have to learn skills. The city has to welcome those people because they are the labour force of the future. They are the ones who are going to pay taxes in the future. You cannot import only people who have PhDs or things like that, I mean, those are very useful, too.

But we have seen that during the pandemic. During the pandemic suddenly I remember in New York, but everywhere else, people were saying indispensable people, who are the indispensable people? And we found that the indispensable people were not professors like me, they were people who were delivering food in grocery stores, they were indispensable. They are indispensable for the life of the city. So that's why they have to be welcome too, you know, and for that they need housing. So they need housing, they need land. I think that the big mistake that many cities have done, again, everywhere in Europe, as well as in Asia, or in South Africa, by the way, is to concentrate too much on housing, and not enough on infrastructure.

I think what planners need to do is to let people build whatever they want even if it's a shack, but provide clean water supply, provide sewers, and some services like health [centres] and schools, and let people build whatever they want on the lot, even on the very small lot. In my book, I have an example in Indonesia what they call the Kampung development which were villages which were absorbed by the city, and you know, if they were very poor, they will have a lot which is only 15 square meters, and they will build a house of 10 square meters with corrugated iron and bamboo and then that's it. This is okay, providing they have clean water supply and that the dirty water is evacuated. What is terrible is to live in an area where the garbage accumulates, children play in dirty water and there are no health facilities at all or schools.

So, to me, the criterion of a successful city is how long do they take to absorb a migrant, a migrant who is coming from the rural area, who has no skills, he has only his arms or her arms. And how long does it take to absorb them so that they can get an urban job where they are very productive for the city and then contribute to the welfare of the city. So some cities have tried to measure it a bit informally and some cities take one or two generations. You have one or two generations of migrants living in extreme poverty, very often being sick because they live in very unhealthy neighbourhoods, and it takes two generations to be absorbed. In other cities, in some cities of Asia that I know, in half a generation, those people are absorbed. So for me, how quickly you can absorb these people in the city life is a sign of success that you can measure. Now, the attitude very often of the housing board or people in government involved in housing, is to say, well, these are poor people, let us be nice to them and build really nice houses for them. So they build kind of a walk-up apartment, or five, six-storey or something like that. And the problem with that is sometimes they are well designed, most of the time badly designed. But when they are well designed, they are too expensive. So the government, instead of delivering one million lot a year to absorb those migrants, they deliver 500 houses. So the houses are nice, you know, they have electricity, they have plumbing, but 500 houses do not solve any problem at all for all the others.

So I think that you have to give up the idea of building houses. And this is not very popular, by the way. Politicians like to say, we are going to have one... usually, they say 1 million houses, and then they end up building on the 5000. And they call the press, they build a simple building and they say, you see everybody in the city now is going to be entitled to a house like that, and then never get built. And then we are back to square one. So I think we have to be very realistic, we have to accept poverty, we have to accept that there is a lot of difference in income in a city and we have to concentrate the resources of the government on the few things which are important, like water supply, sewer and things like that. Not, you know, not having an ideal city.

And poverty is something which is temporary. For instance, I used to work in Korea, a long time ago, you know, Korea, in 1968-70 I think had about the GDP of Mali, you know, it has about the same and then what happened? And suddenly now it's an industrialized country. They absorbed migrants very intelligently, I think the absorbed migrants and the area which were slums are well developed, you know, you still have neighbourhoods which were former slums which have been developed. So you see, poverty is a temporary phenomenon. It's not a permanent one. And you have to accept it when it happens. But then slowly make the people employed, so slowly, they will emerge from poverty. You don't address the problem of poverty by giving say somebody who has an income of, let's say, $300 a year to give this person a house, which costs you know, $50,000 is not going to solve poverty because you will not give very many houses like that to them. And probably those houses are going to go to people of much higher income very soon. So you see where infrastructure is always useful for everybody. So that's my attitude, those two things. First, the people who live in the city are the ones who are going to make this city so the infrastructure has to serve this. And the infrastructure, in particular the roads, has to give access to a lot of land even if the cities sprawl, so that everybody has access to a piece of land where they can build something. If originally they build a shack which is not very nice,[it] doesn't matter providing they have an infrastructure which allows them to stay healthy, and to have access to jobs eventually. So then they will themselves either move to another neighbourhood or build something which is better. Again, I think my chapter on the Kampung in Indonesia in my book illustrates this very well.

Tobi;

I'm going to come back to cities as labour markets later, which is one of the most powerful insights I got from your book. So we're talking about housing. For example, in Nigeria, it is popularly reported that we have a housing deficit of 17 million households, there are many independent estimates that put the number higher than that. So how do we, especially, in the face of rapidly increasing urbanization… how do we increase urban housing at a big enough scale? Do we have to democratize land markets in some of these cities? For example, in Nigeria, we have a Land Use Act that places the ownership of land solely in the hands of government, though there is an informal land market but it's, of course, largely informal. So do we have to democratize ownership? And would you say the ideas of Hernando de Soto will be useful here, like, we need to absorb more people into the formal land registry?

Alain;

Right, yeah, I like your idea of democratizing the land market. That's exactly what you have to do. Now how do you do that? I will give you an example. In Indonesia where I worked again, when the government started investing in the Kampungs, which were slums at the time, you know, pretty bad slumps, actually, but providing the infrastructure in those slums, you know, I was working for the World Bank at the time. And we insisted that they should survey this informal area, and give tenure to everybody, even people who had only say 10 square meters of land. And then the Indonesian told us, that will cost a lot of money, it will be very, very long to do because, you know, all the streets are crooked and things like that it's very difficult to survey. And they say, why don't we just accept the informal market. And it took a long time for us to accept, and then we accepted it. And then we realized that after people were giving water, you know, clean running water in those slums, they had a bill to pay for water. And the bill was a substitute for tenure because they have an address. You have an informal market which becomes formal, because it was legal, because people could do it. So you have to legalize. It doesn't mean necessarily that we have to have a registry in the cadastral, in the formal cadastral, because that may take 20 years.

In a way, the Kampung in Indonesia, you could consider an entire neighbourhood as a condominium. So it's a condominium and within this condominium, you establish the rules which are specific to the condominium. And then let people trade. They know what is the boundary of their lot, usually, they're very small. And everybody knows that and says, if you have three or four witnesses, you will have a piece of paper. And little by little, then you could formalize it. But I think that recognizing the informal trading of land, making it legal, and including, by the way, we found then in the Kampung that even banks now accept as a title, just the water bill. you know, there is a water bill, Mr So and so during last five years had paid this water bill at this address, and you know, you don't have the former survey, but you know, the lot is, say 50 square meter, and a bank will accept that as collateral, because it's recognized by the government, it's not going to be bulldozed.

The problem with informal settlements is that sometimes the government will just go through and bulldoze that area, or put a highway through, and do not compensate people because they do not recognize the legitimacy of their claim. And so if you do that, then, of course, you create an enormous uncertainty on tenure. You do not encourage people to invest in their own neighbourhood. And of course, banks will never touch it, because you know, if they learn something, and then a highway goes through and there is no compensation. So I think that integrating the informal sector, not necessarily making it formal in the sense that they have to follow the same rule as the formal, but have special role for the informal sector to make it legal. And then look at land use regulation. That's been my problem all over the world. And that's true, by the way, in New York or Paris, that there are standards for housing which are not really reflective of what people want.

For instance, in New York, the government imposed by regulation, larger apartments than what people want. You know, there are a lot of people now in New York who are living alone who are a small couple with only one child or no child and the regulation do not reflect that, that those people will be very happy to live in a studio and they are not allowed to build a studio. So I think it's the same in developing countries. If you are poor, you can live with your family in 10 square meters, but if that 10 square meters is close to jobs and have, again, access to clean water, and if there is a school nearby, this is what is important. And you should be able to live there legally, you know, legally without the threat of being exploited or things like that.

And again, you know, you were mentioning at the beginning housing deficits, right. I don't believe in housing deficit. Deficit is only, what is your minimum standard for a house? Have you measured all the houses in Lagos to know which ones are below the standard? And what are your minimum standards? You know, is it 10 square meters? Is it 100 square meters? Do you need two bathrooms? For instance, the UN have this thing, I think you have to have, I think it's one room per person or one-half person per room or something like that. And if it's below that, it's a slum, and it's informal. It's a deficit in the housing, I don't think it is. By definition, all the people who live in Lagos live in something they can afford. The problem with housing is that they can afford very, very little, and there's no water and no electricity, maybe, I don't know. And so you have to increase the consumption of housing of the people who are already living there, it is not a question of saying this is not housing, we need to build a new house somewhere to compensate for this house.

So I think that the idea of deficit, you know, doesn't lead you to good policy. It's too abstract. You could say, you know, in Lagos, for instance, we can produce only, I don't know, 20 litres of clean water per capita, per day. And so we want, of course, to increase it to, for instance, 60 or 80 or 100. And then you will need to bring more clean water or use more clean water in Lagos, that's legitimate. Let's say you have a deficit of water in the sense that you want to increase the consumption of water. Now, when you do that, you will have to look at the income distribution curve within the city, you know, but in my book, I have several of those curves, and you will have to see if you increase the supply of water in Lagos, you have to make sure that the ones who increase their consumption are the ones now who consume very little. And so you increase their consumption. So you have to measure the consumption of these different groups. Clearly to increase consumption is not to build more houses. And people will build [for] themselves more houses if there is enough land with infrastructure. So the goal of the city is to develop more land with infrastructure.

Tobi;

So urban planners are by nature very practical people, but I'm going to ask you a bit of an abstract question. Do you think part of the problem with this housing thing is that on some level we do not really respect or extend that abstract idea of property rights to poor people? Is that part of the problem?

Alain;

Absolutely. Absolutely. I think there is a paternalism, let's say, of the elite, who consider that poor people will always be dependent on a social program. And in a way, you have a society that largely lives on markets. But then you try to condemn the poor into a kind of non-market things, you know, like putting them in public housing or saying well, wait for public housing, we are going to provide you with public housing, you know, don't worry about it. So they are in a socialist system with no property rights. You know, their property rights is going to be given to them by the government, it's not something they will acquire by themselves. So you have these two societies, and then it creates a poverty trap for the poor, you know, they cannot escape because they never accumulate capital. They cannot invest in their own house because their house belongs to the government, [it] doesn't belong to them. So I think that, yes, it's a problem of poverty right. And very often also, many cities have colonized poverty right only if you have a lot developed very formally of a certain size, you know, they will not allow people to own land if the parcel is not at least 200 square meter or 500 square meters, I don't know. And this is not correct. You know, if somebody owns 100 square meters, you should recognize that this ownership is 100 square meters because if not, if you put this minimum threshold of ownership, that means you exclude from ownership half of the population of your city, and you make them live in a non-market economy while the rest of the economy is working on the markets.

Tobi;

Let's talk a bit about density. So when I travel to New York City, I enjoyed the fact that from my hotel, I can access a cafe, I can access the cinema, I can go to my appointments, possibly all within a walking distance of 15 to 20 minutes.

Alain;

Yes.

Tobi;

That is something that I don't have in my city. Sometimes if I want to see a movie from my house, I have to drive two, sometimes two and a half hours. So how can cities in... I don't like that phrase developing world, but that's what I'll use for now. I don't like it. So how can our cities, and by us I mean cities like Lagos and co., better optimize for density or [as] I'm also seeing, ideas by some other planners or thinkers in that space saying that perhaps some of these cities have to give up on the idea of density altogether? So?

Alain;

Controlling densities, yeah, you see, every land use regulation, control density, tend to put density down, always. You have a minimum lot size. So some people would like to have a small lot, but they are obliged to have a bigger lot because that's the regulation. And then you have the floor ratio or maximum height of buildings. I think that the height of buildings should be removed. So planners say ah, ah but if we do that, we will not have the infrastructure to serve higher densities. Infrastructure is much cheaper than land, always. Much cheaper than land. So what engineers are doing, they are saying, Hey, you have now a water pipe, which is only that big. Therefore, the density cannot be more than that, because we will not have enough water if the density increases. But they are making a trade-off between land and the price of your pipe. And land is more expensive, and more useful. So I think that if they let the density increase, of course, they have to have a system of taxation on land. But again, if they recognize the ownership of land to a lot of people, they can have a type of property tax or something like that which will allow them to have the resource to pay for the infrastructure. And it's always cheaper to increase the level of infrastructure in [an] existing area, to increase the capacity than to expand further away.

So if your regulation restricts densities, it means that people will have to build somewhere else, you know, further away. And they're not going to leave the city because the planners say the density here is restricted to that, they are going to stay there but they are going to live further away and at lower densities. So many of those regulations should be audited. I'm not saying that all regulations are bad, not at all, I think the markets need regulation. But the regulation which regulates consumption, that the people themselves can see... you know, if I go into a studio which is 20 square meter, I know it's 20 square meters, if I want to rent it to buy it, this is my business, the government do not have to tell me, No, no, a studio has to be certain square meter, or at least you cannot buy 20 square meters, this is absurd. Let the consumer decide what is best for them. Because then they can... you know, the problem you were mentioning, they can make a trade-off between living in a smaller house but closer to amenities, or a large house far away from everything, you know, some people may prefer that. So regulation restricts the choice. And of course, regulation, because they have this minimum consumption standards, if you look at the income distribution curve, those minimum construction housing standards have a cost. So they eliminate automatically, maybe 50% of the population from anything formal. You know, informality is really created by regulation. It's not created by anything else.

Tobi;

I want to talk about, perhaps, maybe, there is a kind of market failure in trying to deliver density. Devon Zuegel, I'm sure you're aware [because] she is your friend, wrote...

Alain;

She's my friend, yes.

Tobi;

She wrote a blog post a couple of days ago...

Alain;

I read it, yes.

Tobi;

Very interesting. I found it very interesting. And while read in that I, because i liked it...

Alain;

Yeah, Devon, in the last line of her thing [blog], she says, I have not discussed regulation. And my experience is that most of the inconsistencies or contradictions of densities in cities are due to regulations. And I will argue with her about that. You know, that she has to do a blog on regulation.

Tobi;

I would love to read that because while internalizing the idea she was putting forward, I thought about my street. So I live on a beautiful street. There is access to a major road and so many other amenities. it's gated well secured and all that. But we have just nine houses. Landlords built these huge compound houses. And I can't help but think, every time I go back and forth, that this is an area that can actually house a lot more people. So would you say that's a failure of markets because I think that equilibrium came to be because the first settlers on my streets prefer building for space as opposed to access?

Alain;

Yeah, but that's not a failure of markets. The market is a mechanism. It's not a god, it's not a religion, it's a mechanism. So here you have people in your compound who live there because they enjoy having low density. And I hope that they paid for it, they didn't steal the lot. So they paid for it? And so that reflects the market. At a certain point, if there is demand for higher density there, a developer will come to your compound and say, I'm making a deal with you, you know, I will give you that much money, and we are going to build more houses here. Unless. Unless there is a regulation which says you cannot have more houses there, or unless the water company tell you, we will never provide enough water in this area for higher density. You know, there are market failures, by the way, but I don't think that density is part of market failures. I think the market predicts rational densities if they are free to [build].

So let us talk about market failure. For instance, pollution is a market failure, you know, there is no way to decrease pollution directly through markets. I mean, you can do it by taxing polluting cars more than non-polluting cars, you know, this you can do, but you have to address it through market mechanism. But the market itself is not going to create a non-polluting thing. The same with global warming, you know, you have to price carbon. The government has to put a price on carbon because the market will not go into putting a price on carbon. That's clear. And then for major infrastructure, for instance, say, if a large city like Lagos needs more water, you know, enough water, clean water for everybody, you need major work to get the water somewhere - from a river, from a deep well, I don't know. And this major work is not going to be created by markets. The government could use a private company to do it. But the initiative has to come from the government, to say we need that many millions of cubic meters of water in the next 10 years. And our engineers say that to do that, we need to have, say, deep well, or whatever water plants, and that will cost that many million dollars. And that will be recovered from taxation. So it could be tax on land, it could be tax on income tax, I don't know. And then we have to do this major work somewhere in the city or in the suburb of the city where you will have the water plant. So all this is not done by markets, the total amount of water which will be brought to [households] has to be done by government, it has to be planned. And after, you will allow the land market to work. If you are allowed to put a network of pipes with water everywhere, including in areas which are not yet developed, including areas which have very low density but could not densify without more water.

Tobi;

Finally on housing before I move on, do you think that some of [the] newer propositions or technologies like blockchain, for example, hold any promise in terms of land registration, and generally democratizing property rights in cities?

Alain;

It's quite possible. I am not knowledgeable about [blockchain]. I'm very interested and intrigued by blockchain but I have not seen an example yet. But it's quite possible that yes, this could do it. Yes. You know, at the beginning I was talking about the problem of formal cadastral you know, the traditional property rights [that is] given the cadastral way [where] you have a surveyor from the government who starts taking [measuring] things, and this is very slow, it's very costly to do. It's possible that there are better ways of doing it. And it's possible that blockchain will be [it] but I've not seen an example yet, but it's possible and it might be a good way to start in a city like Lagos, just to try it, see [if it works].

Tobi;

Interesting. So let's talk about charter cities. I know you're very good friends with Paul Romer. I became intrigued by the idea when I first saw his presentation. And I've sort of followed how that idea developed. But first of all, why do you think some of these projects failed? The one in Honduras and Madagascar? Yeah. What do you think were the pitfalls?

Alain;

Because government were not ready to allow a [...] charter city, they saw that as just a new real estate development, and they thought that they could control it. And if the existing government control it, it means it's going to be a traditional city, it's not going to be a charter city. I think that in Honduras it was very clear. In Madagascar, I'm less aware of the details. But in Honduras, I follow the [development]. By the way, there are several new charter cities in Honduras now, I'm curious to see if they will succeed or not. Actually, Devon is involved in one of them. And I'm curious... sometimes I'm a little uneasy when I see that one of the first things that the promoter of a new charter city [does] is asking a big architect to put the design first. To me, a charter city is, again, developed land, and the possibility that you were talking about the beginning, democratising land ownership. That means that if you move to a charter city, and you want to open a small restaurant where you will sell sandwiches to workers, you should be able to either rent or buy a little piece of land where you will build your restaurant. You should not go through the government and say I want to open a restaurant, please give me a permit.

So for me, a charter city is first a layout of streets, not building, you know, it's a layout of streets where you can buy very small pieces of land. And you can buy some big one, you know, maybe a department store or an office building so they want a big lot, that's fine. But there should be small lots available to people who move there. Because, again, the indispensable people are not only bankers and architects and lawyers. Indispensable people are the people making sandwiches. And so I think that one of the problems is that they have to start with the layout, and making land available to all sorts of people, including very small lots. And I think that will work.

Now, my argument was Paul for the first part of your question, but when we first discuss it, you know, when we started working together, and he told me, well, we think that we could do 50 charter cities, you know. My first reaction is, cities are dictated by location and there are no more locations for 50 cities. The good locations are all taken. So if you want to start from scratch, you go to the countryside, and, you know, you have some farmers there even and you say, Oh, the land is very cheap there because there is nothing, why don't we do a charter city? In Lagos land is so expensive. Don't forget that a city is people, it's not the sewers. You're not going to move to a city because it has a nice sewer system, you are going to move to a city because there are jobs, because there are other people you want to work with or be friends with. So the problem with any new city is, who is the first one? Would you leave Lagos for, let's take NEOM in Saudi Arabia (the city that the Saudis want to build)

Tobi;

Yeah.

Alain;

So if I told you, okay, in NEOM we could give you a house for $50,000 and it has this fantastic infrastructure. Would you leave Lagos to go there? Unless you know how many people are already there? Are you going to move by yourself or with your family? And you don't know if the schools are working? You don't know if there are restaurants or bars there, you know, [finding] bars in Saudi Arabia is always a problem. [laughs]

And so you see, that's the problem. I have an example to explain the problem of a new city. In South Korea, they thought that Seoul was too large, and they thought that they would build a satellite town which will be self-sufficient. So they calculate how many jobs they will need, how much housing and the Koreans are very good at that, they really planned it extremely well, it was financed very well too. They matched exactly the number of jobs and they use the demographic, everything. And they're very good at logistics too. So they built the school, the sewer, the transport, the buses, all at the same time and well done. And it was nice architecture. So the idea was it will be self-sufficient [and] that the people who live there will work there. When the city is fully built and inhabited, they found that 90% of the people who live there commute to Seoul. They work in Seoul, but they live in the New City; and the people who have jobs there, they come from Seoul, they live in Seoul but they work in the New City. Why that? Why didn't they manage to match the thing? It's a question of the first inhabitants. When the plan is finished and the thing is ready to be sold, they told firms in Korea, well, you know, if you want to establish yourself here, you could have a factory of this and it will cost that much and you will pay that much more for electricity, So very attractive. So the firms say, Hey, we are in Seoul right now, but we want to expand, and in Seoul, we cannot expand because land is too expensive, so let's move to this new city where we'll something more modern.

Now, these firms, if they have the money to move to the new city, completely new, it means that they already have employees, they have [an existing] business. So they are not going to fire their employees and say we are going to recruit entirely new employees. So the employees which are already in Seoul, working in the old site are going to commute to this. Now, why don't they say oh, we have this new job there and we are going to move into an apartment in the new city? Because where they are now, maybe they have their mother-in-law who is babysitting their kid and they cannot move. Or maybe they have a school that they like a lot for their children. And they don't want to move their children to a new school which has no record. You know, there are a lot of reasons why people don't want to move, or maybe because there are a couple and one of them is working in the neighbourhood and do not want to commute. So the new firms are attracting existing employees from outside and the people who take housing there... you know, if you are a young couple in Seoul, you are desperately looking for a new apartment, but it's too expensive and suddenly, they propose you a nice apartment in the new city... Now, you will need an hour 20-minute commute but you think well, this is a really nice apartment, there will be a nice school so you move there with your family. But your job is in Seoul, you know, because if you can afford an apartment in the new city it's because you already have a job. So you're not going to quit your job and say, Well, I've moved to the new city, I'm going to look for a job in the New City. Maybe after 20 years, you will do that. But initially, you won't.

So you see this is a problem of new cities and that will include charter cities unless the charter city becomes so attractive in terms of, again, the democratization of land use, and of property rights. But again, you have the problem of the first mover, you see. So that's why cities like maybe Abuja or Brasilia are successful because they are civil servants so they are obliged to go there. And the government pays for it and all the taxpayers, by the way, all the taxpayers of Nigeria are paying for Abuja.

Tobi;

Yeah, that much is true.

Alain;

Yeah. And this is true also for Brasilia, you know, the people who live in Brasilia are not paying for their infrastructure, it's the Brazilians who live in Recife or Rio de Janeiro who are paying for that. So, you see, those examples are not very good examples - the new capitals. The other thing which is very difficult, and I saw that when I was working in China in a new economic zone which usually piggybacks on a city is the cash flow. You know, when you build a new city, there are certain things that are discrete, you know, for instance, you cannot build a sewer plant for 500 people, you are obliged to build a sewer plant for at least 10,000 people or 20,000 people and when you build that you have to spend for 10,000 people but you will not get 10,000 people before five or six years. So you pay interest on this capital for five or 10 years. So you have a negative cash flow for a long time and that is [for] the sewer plant but that's true for schools, that's true for roads, that's true for the water system, that's true for garbage removal, you know. You need right away to bring trucks to remove the garbage to treat it and before you have [enough] inhabitants. So you have to pay a lot of interest. My experience in developing a new economic zone in China was that the cost of interest during construction (that means the cost of interest before the lots were sold to the private sector) represents sometimes 40% of the entire expenditure.

So this negative cash flow, if it's a private city, by the way, you have bankers, so the banker, let's say, trusts you. And they say, all right, you have planned to have, say 1000 people, the second year at 10,000 people, the fifth year... and then 100,000 people in 15 years. So they trust your business plan, but then imagine that it's a little slow at coming. So you are borrowing more and more money, and at the same time the bankers get cold feet, and they say, we are not going to go roll over your loan, because you know, your thing… it's too risky, you are accumulating a negative cash flow much longer than we thought. And then they will cut your finance, and then you will go bankrupt. And that's why the most successful new cities are capitals because the entire country is paying the bill, you know, money was no object.

Tobi;

Does this mean you're bearish on private cities generally? So I'll give you some examples. And I'll try to be brief. For example, in Lagos, there was this project called the Eko Atlantic project. This was a land that was basically reclaimed from the Atlantic Ocean, it raised $6 billion, right. And at the end of the day, they ended up building office buildings for oil companies, banks and skyscraper apartments that cost $2 million. Almost nobody goes there to work, which fails the labour market condition in my view, right. There was also the story of Gurgaon, I'm not sure I'm pronouncing that right. In India...

Alain;

A suburb of Delhi. Yes, yes.

Tobi;

Yeah. So, where, maybe it was partly driven by the labour market, the tech workers and private firms. But we saw that they could not deliver on things like the sewer system... public goods investments failed woefully. But the common thread in some of these narratives and initiatives, and of course, you know that private cities are very, very hot right now in Silicon Valley...

Alain;

Yes. Sure

Tobi;

Is to look at Shenzhen and say, oh, yeah, this was a fishing village of 30,000 people...

Alain;

Yes, yes. Right. Yeah.

Tobi;

And it's now the manufacturing capital of the world, the centre of technology with 50 million people. So are you bearish on private cities generally, that was one? Secondly, what are we missing from the Shenzhen story?

Alain;

You know, Shenzhen by the way, I know it well, because when it was a little more than a fishing village, I was working for the World Bank… the Chinese invited me there with the team. We were five or six planners and economists. So at the time, it was about 300,000 people, but dispersed, it was not really a big city. And they say we want to build the city of, at the time they say, 4 million people and we want the World Bank to finance it. And this is one skeleton in my closet. I told them you are too ambitious. If you want to build a city of two million, up to 2 million, you know, I made a back of an envelope calculation, I say look 2 million is a city is so large, so fast [and] would be impossible because of logistics. You will not have enough trucks, it will be impossible and I was wrong. So after that, I followed because I was spectacularly wrong. I followed what happened in Shenzhen I went there regularly and you know what created Shenzhen? First, location.

You know I was telling you at the beginning [about] location. They have a deep port. A natural deep port in Shenzhen and you know the rocks are going there. And it's next to Hong Kong. Hong Kong port is already saturated. They are at a coveting distance from Hong Kong. So when they want somebody very specialized - an architect, an engineer - at the time when they built it, that was in '83, you know, when I was there, '83-'84, the needed manpower will commute from Hong Kong. They will spend maybe the night in Shenzhen and go back. And then you have the Pearl River Delta on the other side of Hong Kong, you had Guangzhou, you know, which is a very important city too. So, they are in between.

Now. The major thing which did the success of Shenzhen was Deng Xiaoping [who] for the first time in the history of China, put a line around Shenzhen and say within this area, the firms are going to pay the workers according to [the] market, and people who come to Shenzhen will negotiate their salary with their employers, depending on their skill. In China before that, if you were, say, a geologist, at 30 years old, the government will say your pay is this per month, period. If you are a welder, the government will say, for entire China, this is your pay, and the government will decide where you will be employed. You have no labour market, there was no labour market in China, you know, people were unemployed, but the government tells them where to [work]. Even the kid coming out of high school, the government will say you're going to work in this factory for the rest of your life. Now, in Shenzen, for the first time, you had the labour market, and a lot of Chinese coming from the north, from all over China (the ones who were the most courageous, you know, [it's] a bit like migrants coming to Lagos are the most courageous in a way that, you know, it's a selection of people) they decided that they were trusting their own skill, they say, we'd rather work and negotiate our salary and change employment when we want rather than stay with it.

So you had an influx of people, of talent, from all over China. And that's why, you know, Shenzhen is in an area where everybody speaks Cantonese, normally, you know, in the south of China, like Hong Kong or Guangzhou, but you will find that, in Shenzen, most people speak Mandarin, because they came from all over China. They didn't [all] come from there, [the southern part]...some people from Guangzhou, obviously, from the Pearl River Delta, but say the language that you hear the most is Mandarin because they came from all over. So, you see, what created the enormous success of Shenzhen was the market. It was the labour market. It was the first time you had the labour market in China. And then after that, they used experiment, and you had that, you know. And by the way, housing, also… it was the first housing on the market that people will be paid at the market price, but then with their salary, they will have to pay for housing. Where before in China, housing was provided by your employer entirely. That means that you have no mobility and you have no capital either, by the way. You cannot leave your job because if you leave your job, you have no savings, and you have no house.

So that's the story of Shenzhen, and do not forget the location. Look at the container port of Shenzhen, it is one of the best in the world and it's because location, you know, it's even better than Hong Kong. It's larger than Hong Kong's. In Hong Kong, they have to do a lot of land reclamation, whereas [in Shenzhen], it's natural. They don't need to dredge it or anything, you know, it's a natural beauty. So that's the story. So I am not bearish. You know, I like the idea of trying new cities and private cities, I think that's a good thing. But let's say, you know, just to think that if you have a good infrastructure, you know, [when] building [a] new city, they say, Oh, we will have this fantastic system for removing garbage by vacuum and things like that, this is good and well. If the city is reasonably clean, that's good enough, you know, and you don't move to a city because the garbage is vacuumed. You move to a city because there is a good job, the city's attractive, you have bars, cinemas, and you know, whatever, if you'd like to go jogging or things like that, you have nice parks. But you move to a city mostly because of the people who live there. So the question of new cities, how do you attract a lot of people right away in the beginning? Who will be the guinea pig to live in this new city? And then there is the financial aspect, you know, this cash flow, you need to have a lot of money in advance to finance it because bankers will get cold feet. Maybe I've been talking too much and not [...] enough questions. I enjoy it. That was very interesting. I hope maybe we can do it again sometime.

Tobi;

Okay. Thank you very much.

In the episode, Tobi talks to Dmitry Grozoubinski about the politics and complexities of global trade, emphasizing the tension between free trade and protectionism. Dmitry explains how trade policy decisions involve difficult choices that impact both producers and consumers, using Nigeria's food inflation as an example. They explore the balance between national interests and global commitments, highlighting how protectionist policies are often rooted in political concerns rather than economic efficiency. The conversation also touches on the challenges of multilateral trade agreements like the WTO and AfCFTA.

Dmitry served as an Australian diplomat and trade negotiator at the World Trade Organisation and beyond. He has negotiated complex agreements in Geneva, at WTO and UN Ministerial Conferences in Kenya, and as part of the MH17 task force in Kyiv, Ukraine.

Before joining the Department of Foreign Affairs and Trade, he was a lecturer and tutor at the Monash Graduate School of Business and with the Australian trade consultancy TradeWorthy. He is the lead trainer of ExplainTrade and a Visiting Professor at the University of Strathclyde’s School of Law.

Transcript

Tobi: The complexity of trade agreements, the bargaining, the negotiation, and everything that surrounds the politics of trade generally does not get covered so much. It's always about the economics of it. And that's what I love about what you do, your project, your book, and everything. So my first question to you is that I know you wrote this basically from the perspective of global trade, and with everything that has been happening, I would say, basically, since the Trump presidency, which, like, brought trade into the headlines, particularly with the US-China “trade war”, quote unquote. And, of course, COVID is what we see with supply chains, decoupling, and so forth. But, I would also say to you that in development, the sub-field of economics that we call development, which is what we try to cover here on the show, trade is also a huge deal.

I'll give you a bit of a background. In Nigeria, currently, one of the biggest policy issues is the government trying to decide whether or not to allow the importation of food, basically rice, wheat, and all this other basic stuff. Primarily because food inflation is way above 40%. There's basically a cost of living crisis that has been going on for a few years. People are hungry, people are starving, people are angry because their incomes can no longer even feed them, you know? And so it generates this intense debate because on the other side of that, you have the producer class - the farmers and various lobby groups and political interests who say that, “oh, you really can't import, you're going to turn the country to a dumping ground, we're going to de-industrialise and so many other things.”

So one practical question I'll start with you is, if I were a politician, for example, and you know, with the title of your book, let's say that I am an honest politician. Let's assume that I'm an honest politician and I'm asking you that, Dmitry, how do I make this decision? What practical advice would you give me when considering trade policies generally? How do I make trade policy?

Dmitry:

I think that's a really good question, and I think it kind of goes to the heart of what trade policy is. Anytime you're doing trade policy, you're making choices, and they're often hard choices. You just laid it out perfectly there. You have farmers and other producers of food in Nigeria that are benefiting from very high prices. And you have consumers that are effectively suffering because a substantial part of their weekly budget is going to food, and more than was going before. You mentioned inflation at 40%. That is hugely unsustainable. So as a politician, when you are talking about the choice of bringing in more food, the first thing to do is you have to be honest. And you have to say that, yes, if you allow more food into Nigeria, you will hurt the interests of producers.

One reason I wrote the book is that politicians will often try to gloss over this and pretend it's some kind of win-win. They'll talk about competition. They'll talk about greater efficiencies. And that's all true to an extent. But in the short term, if currently you're locking out foreign rice, which is considerably cheaper than Nigerian rice, and you allow that rice in, you are going to hurt Nigerian rice producers. There's absolutely no way around it. So the first thing is to be honest about that choice you're making. The second point is to be honest about what you're trying to do versus what you're not trying to do.

So one of the ways that this particular debate often gets twisted into an uncomfortable alley is people will start talking about the notion of food security. So they'll say it's important that Nigeria be able to feed itself. And if we allow foreign food in, that will degrade our ability to be self-sufficient on food, right? To my mind, that's a way of basically misleading the public. It's very, very, very, very few countries are food secure in the sense that if trade were cut off tomorrow, they would produce enough food domestically to feed everyone in the country. Countries like the United Kingdom import something like 65% of their food. Why? Because it's far more efficient that way. And global trade supplies what people need. The amount of work it would take to convert the United Kingdom, for example, into being able to feed itself would mean you have to stop doing everything else in the country and prices would go through the roof. So it's important to be realistic about that.

It's also, I think, really important to say we live in an era of climate change. And one of the real problems we are going to face moving forward is that extreme weather events are going to become more common. So you are going to have parts of let's focus just on Africa, you are going to have in coming years parts of Africa that are in drought or flood, while parts of Africa are having a phenomenal crop. And those parts will shift around over and over. Our ability to feed people consistently moving forward is going to rely on us being able to move food from the places that are having a really good year to places that are having a really bad year. And I think any politician who is trying to say that if we just keep the walls around like the tariff walls, the barriers to importing food high enough, Nigeria will be able to feed itself forever every year without sky-high inflation, I think maybe is skipping over just the reality of where we live.

Tobi:

So, as you know, in places like Washington and the like, which gives advice to poorer countries on how to make policy and what will make them rich, you know that for about three decades, the orthodoxy has more or less been free trade. You know, you need to be more open. You need to allow more trade. You need to allow more goods into your country. Protectionism doesn't work. Which economically seems to be true, but right now, you have some of the richest countries in the world who have been advocates of open trade regimes, actually more or less going back to the mercantilist protectionist policies of the past. Which I think you sort of touched upon, especially the history of this in the second chapter of your book. So can you just give me a brief rundown on some of the shifts that we've gone through historically? And, like, what moves the needle on the dominant thoughts on trade policy?

Dmitry:

Sure. So when economists talk about free trade being the optimal path forward, what they're actually saying is, if you don't have tariffs, if you don't have trade barriers, we can maximise the efficient use of resources. So the free market will sort of allow and everyone will produce things in the most efficient way. And so overall, as a planet, we will be maximising our labor and our resources. And that's the benefit of that. They also suggest that having competition in your market pushes your own producers to work harder and having free trade can attract more capital. So inflows of capital from abroad that can make investments in your country. With the confidence that if they build a factory in Nigeria, if you've got free trade, if you've locked that in with treaties, they know that that factory will always be able to get the inputs it needs from abroad and always be able to sell whatever it produces to buyers outside of Nigeria. So that makes Nigeria a more attractive investment destination, for example.

So that's kind of the logic for a long time. And you mentioned Washington, Brussels, you know, the big economies generally tended to push that line and tended to believe it. Now, I would say straight away, it's important to note that they didn't universally believe it. So, for example, Europe is like, yeah, free trade's great unless you want to sell us certain agricultural commodities. So if you want to sell beef to Europe, suddenly free trade is not so great. And they protect their beef farmers or their lamb farmers or even their wheat and sugar producers. Ditto, America loves free trade when it comes to certain things. But if you try to sell America a light truck, you're paying a 25% tariff at the border. It's virtually impossible to sell certain kinds of services into the U.S. If you want to get a visa into the U.S., you sometimes have to do a job, you sometimes have to wait two years for an interview at a U.S. embassy. So even the rich countries that were preaching free trade were preaching free trade asterisk.

So what they were basically saying is, we believe that this is the optimal way to arrange the global economy, except on the things that we care about, the things that we're really sensitive on, where we think what's important isn't efficiency, but keeping the French farmer employed or protecting the US insurance market. What we're seeing now is that that asterisk is growing. So the US, Europe, China, all of these major players are increasingly saying free trade is great unless we have a national security concern. Free trade is great except when we want to rebuild the factories in the US Rust Belt. Free trade is great unless we want to create an instrument where you can't bully us with trade, so we're going to set up the EU anti-coercion instrument. So all of these kind of asterisks are being piled on top of what they used to be before.

Tobi:

One thing that often challenges observers, and I would imagine policymakers and politicians included, is the balance between, say, national interest, which again is becoming more prominent when it comes to trade policies, and global commitments, especially membership of world trade organisations, bilateral trade agreements, and other forms of multilateral agreements. And I want to get, especially from your experience advising and consulting on trade, what are the challenges or the headaches, the difficulties that leaders often encounter trying to balance between national interests, like, oh, we want to protect certain companies who are national champions, we want to protect certain key industries, and being signatories to a much wider multilateral, even bilateral agreements? How do you balance such contradictions sometimes?

Dmitry:

So the whole multilateral trading system, the WTO, all of it is built on the exact tension that you're talking about. You mentioned sort of balancing the national interest versus being part of the WTO. The WTO fundamentally only works as long as all of its members broadly believe that those two are the same thing—that ultimately what you're doing when you join any kind of trade agreement or really any kind of international agreement is what you're really saying is, "I am going to sign away my ability to do certain things." So I'm going to say I will swear off doing certain kinds of policies in exchange for you doing the same. And that's not because you never want to do those policies. You know you might want to do them in the future. But overall, you think the benefit of being in a world where no one's using those policies outweighs the short-term benefits of using those policies.

I compare it to like an arms ban treaty that bans chemical weapons on the battlefield. Chemical weapons are tempting to use on the battlefield because they can help you achieve a certain objective that might be really effective at what they do. They're horrific. But countries have come together and decided that the benefits of no one using chemical weapons and our battlefields not being full of chemical weapon residue outweighs any of the tactical advantages we might get ourselves from using chemical weapons. We prefer the confidence of a chemical weapon-free world to the benefits of having chemical weapons.

Trade agreements work the same way. You're always signing away the ability to use some policies you find tempting in exchange for that kind of global stability. So the tension tends to come because we are encouraged to be very short-term in our politics. And the benefits tend to be pretty narrowly focused and acute. So a specific industry is saying, "You have to protect me against foreign rice farmers." And that's something you can do today. The benefits of the global trading system and that kind of predictability are much, much broader, but much more diffuse. Everyone benefits from predictability. You get more investment. You get more trade flows. Prices overall are lower. That's all very good. But it doesn't have that acute politics of a particular industry that wants protection and will throw you a party if you give it to them.

So what political leaders are constantly fighting is the temptation to do something in the short term that weakens the system in the aggregate. And one of the few balances we have against that is the sense that if you do something like that, you're going to get retaliated against and other countries will hit you back.

Tobi:

I think one of the reasons why your book is well-timed is that it comes at a time when we are fundamentally learning that trade policy is inherently political, right? So a way to, like, further extend the last question for me is… sometimes I find it surprising that a lot of trade policies or trade agreements or even I would say maybe intellectual consensuses that have formed over time around a particular subject have political, intensely political origins and not economic or positive-sum motivations. So maybe you can provide me with a few examples from history of how politics have come to shape the conversation. An example I have in mind is recently the Biden tariff on electric vehicles from China. Most of the people, smart people, I should say, who have defended that policy would always say something along the lines of national security. America really needs to reindustrialise its core, you know, this and that. Because it's so obvious when you point out that if you want to transition to cleaner energies, if you really want to fight global warming, then slamming tariffs on electric vehicles makes absolutely no sense. But at the end of the day, people easily just recede to political arguments that would hardly pass water a couple of years ago. So I find that just contradictory, confusing. Help me out. I'm drowning here.

Dmitry:

I wish I could. I wish I could make it all make sense. The only thing I could do is first say—and this is a point that I hammer in the book over and over to the point where I'm worried I'm boring people—is that the big issues in trade have always been politics first, second, third, and then economics somewhere around, like, 26th. If you look at any major trade issue, it almost always comes down to, like, highly politicised questions. And there are really lots of examples on this.

So, for example, Japan, which generally has a reasonably liberalised open trade regime, has insanely high tariffs on rice, like hundreds of percent. And there is absolutely no economic reason for that. Rice farming is a tiny, tiny percentage of the Japanese economy. You know, Japan would be fine as a country without rice. But the traditional way of growing rice in Japan is very politically iconic. It's significant. They have a strong lobby. And so Japan, even while sort of preaching free trade, makes it incredibly difficult to sell rice to Japan in order to protect these small group of farmers.

Another story I like to tell is that when Australia did its free trade agreement with China, China is by far Australia's largest trading partner, hugely, hugely significant. And we finished the free trade agreement. It takes many years to finally get done. We sort of announce it to the public. We take it to parliament and everybody, the media, the opposition party, the entire national conversation becomes about this one tiny provision buried somewhere deep in the services chapter that creates a tiny visa subclass for like 100 Chinese workers a year to come work on gas projects in the middle of Australia. 100 people. 100 visas. But that sort of captures the national imagination. It becomes politicis ed. It becomes symbolic. And that's like the only thing we talked about for weeks on this trade agreement.

So we laser-focused on this issue that was hugely politically significant. But in economic terms, it was so small that it wouldn't have registered on any statistics. Like legitimately, if you looked at Australian nationwide statistics, a 100 workers working on a gas project somewhere outside Alice Springs is not going to even turn up on statistics. So this has always been the case. It is everywhere. And so I think what we're seeing now is just a continuation of that.

One thing I think we are seeing more and more of is politicians trying to distort the choices that they're making. You brought up electric vehicles. I think electric vehicles are one example. Solar panels are the example that absolutely gets me. Because there is no way we do anything about climate change without a transition to much cleaner energy. And right now, China is overwhelmingly the largest producer of solar panels. They are doing that through subsidies, and they are dumping these solar panels on the world market. We need to have an honest conversation about the trade-offs involved in taking those solar panels. Are we comfortable with allowing Chinese government money to create this giant industry, to create this dominant position in world markets if it means we get lots and lots of cheap solar panels? It's a hard choice to make, but it's a real choice, and we need to be honest about it.

So to kind of not answer your question properly because I can't think of any way to make you feel better about all this, it's that in some ways, what we had before—so I'm talking about before Trump 15 years ago—the trade conversations were mostly happening below the radar. There was mostly a consensus in the West about how trade policy should work. Trade very rarely made the news. You know, maybe with a big trade agreement, like the one when the US and EU tried to do, maybe around the Seattle round of the WTO, but mostly it was sort of hidden away in a corner and there was no public discussion about it. And now at the very least, it's in the headlines, and we're having conversations about it. And that is an improvement, even if some of those conversations aren't necessarily helpful.

Tobi:

My two-part follow-up question to that would be that regardless of one's disagreement or misgivings, the consensus around how these conversations are happening and how they influence policy changes seems like it's here to stay. I mean, like we talked about before we started recording, Trump might be winning another election and it's going to be another rollercoaster ride. So, I mean, in a common-sense kind of way, hoping that that prevails in actual policymaking, how would you suggest that countries balance the trade-off that may or may not exist between their economic interests and strategic imperatives like national security, trying to build up your defence base or be industrialised, and so many others that are intensely political and won't go away? How do you suggest the politicians or the advisors find a balance? Relatedly, especially in poorer countries, how do they find this balance without resorting to the kind of hurtful protectionism that we've seen with some countries over the years? So those are my questions.

Dmitry:

I think the only way forward is to be really specific and concrete about what you are trying to achieve. Because I think the danger that we're seeing now is that you have politicians identify a very high-level and nebulous objective. So you say like national security or to, you know, defend ourselves against China at some point in the future. And then they create that very, very high-level objective. They don't define what exactly they're picturing in their heads, like what they want the country to be able to do in that regard. And then that opens the door to justifying just about anything they want to do in any area.

So if I say, well, hypothetically, I am worried about the rise of China and I'm worried about having to fight a war with China and my industrial production in that event. Because, like, oh, what if we need to suddenly make a lot of tanks and bullets? If you've kind of set your objective that nebulously, then any time any factory owner comes to you and says, I want you to intervene in the market to help me, you can retroactively justify that. Because you can go, well, this factory is in trouble. If we go to war with China, we're going to need factories. It's important that we save this factory. And so you've kind of opened the door to politicians doing what is easy or tempting or popular on any given moment by not concretely defining your objective.

But I think there's a lot you can constructively do, even in ways that are sort of protectionist, that's fine, if you've narrowly defined your objective. So if you say, I would like to further strengthen Nigeria's IT sector, right? Like that's what you've defined as your objective. You can look at the barriers, the difficulties that the Nigerian IT sector is experiencing, and work out if there are places where a government intervention, including a protectionist one, might really help. And you've got like, I want to boost the Nigerian IT sector. My goal is to create 50,000 new IT jobs within the next three years. And I want us to have a really good ecosystem for entrepreneurial Nigerians who want to build apps. What would that take? What do I need to do? You've defined your objective. You've defined what victory looks like. And then if you say, OK, one of the things I really need to do to make that happen is to make it harder for Nigerians to use apps hosted in other places so that they're more inclined to use Nigerian apps. You can do that. And then two years later, you can see if it worked. We can judge the policy based on like, we wanted to create 50,000 jobs. We want to create lots of new apps. We took this step. It cost us something. It made life more annoying for Nigerians who wanted to use, like, Canva. But do we now have a Nigerian Canva alternative that's good, that people like, that's selling to the world?

So if you concretely define the objectives, are able to identify how what you're doing will deliver those objectives, and then finally have a way of testing afterwards if it worked, you can have a really mature conversation with the public about this is what we want to do. This is how we want to use the levers of government where trade policy is concerned to make your lives better in these ways. And then the public can sort of decide if the trade-offs are worth it. That's what has to be the mature policy discussion that needs to be taking place between the public and leaders, because otherwise you can just kind of justify anything if you say, well, I'm just doing this to create, you know, for prosperity or whatever.

Tobi:

I want to circle back to something you mentioned at the start, which is about winners and losers with regards to trade policies. Of course, there are always losers. I'll first seek a philosophical commitment from you, which is that on what side of the divide do you fall when it comes to wins and losses from trade policies?

Dmitry:

So where I tend to come from is that the kind of winners and losers framework can be really heartless in the sense that if I'm walking down the street and I decide I want to go for a coffee and I go into one coffee shop instead of the other, that is like a winner and a loser. Someone is going to earn my four dollars for my flat white and someone isn't. But that other company is going to be fine. So there's a winner and losers in that scenario, but it's not a big deal. Whereas, let's say you have a small town in Nigeria that's basically grown up around a factory. Let's say that factory makes shoes. And because of international competition, that shoe factory closes.

From an economic standpoint, like pure economic theory, you're like, well, kind of, OK, that's good because now Nigerians on the whole will get slightly cheaper or more better value shoes from abroad. And these guys can be freed up to do something else more efficient. But that's not how anything works, right? A linchpin factory closes in a town. You've got huge rates of unemployment. All of the businesses that feed into that factory are now in trouble. The doctor who treats the workers, they can no longer afford to pay her. So she moves to the city and now the town doesn't have as many doctors. So there's like a cascading effect. And a 53-year-old factory worker who makes shoes probably isn't going to immediately pivot to making TikTok videos for money. You know, they're not going to become a web developer overnight. So we need to be aware of just how bad it can be when trade creates losers. That doesn't mean you have to try to prevent it ever having any losers. But I think we have to be really, really sensitive to what happens when we create losers. And we need to have a plan for how we are going to help those that, frankly, capitalism rolls over.

Tobi:

I think you sort of answered my pushback because what I was going to say was that sometimes in reality, it can be difficult to tell a priori who the losers are going to be. I might be the trade minister, you know, staying in my fancy office in the capital and not aware that this little town somewhere in central Nigeria depends so much on the shoe factory until after we are seeing the effects. Maybe I get to hear it in the news or something. My question then would be that what are the right sensibilities that policymakers need to have as a general rule when dealing with wins and losses from trade policies?

Dmitry:

One of the things that trade ministries really struggle with is exactly what you're describing, which is in order to understand what the consequences of a trade policy decision are going to be, you really kind of need firm-level and local data. If you're just looking at national statistics, you get a very, very stratospheric picture. So one really common example is that the entire UK fishing industry, so absolutely everyone involved in fishing in the UK, contributes less to UK GDP than the company Games Workshop that makes Warhammer figurines. So if you're looking at national-level statistics, you're like, well, one of those is more significant than the other. But if UK fishing were to disappear overnight, that would be tens of thousands of jobs, dozens of coastal communities that would be devastated. And so if all you're doing is sitting in a capital looking at those high-level statistics, you're going to miss these acute pain points.

So one of the biggest challenges is how do you create a consultation system where the ministry and capital is talking to local authorities, talking to kind of mayors, talking to business associations that are spread all across the country and going, what would happen if we did this? Sort of what would be the consequences? Who would the winners and losers be in your local area? And what do we need to think about? What do we need to keep in mind? That's really, really important. I kind of go back to the example used right at the very start about the current debate that Nigeria is going through on importing food or not in the face of food inflation. And I think that's a really good winners and losers story, because whatever choice you make, you can sort of think through who the winners and losers are going to be.

So if you decide to open up your markets, the world price of rice and grain is published. You can have a look. You can examine how much of a hit that's going to be to farmers' incomes. There's no unknowns in that equation. So we can probably figure that out. Then you can decide, OK, if we let in more food, who are the farmers that are likely to be put out of business or significantly hurt, and what can we do to help them? Well, then on the flip side, if you decide not to let that food in, again, you've got statistics on how much does the average Nigerian spend on food? What is the current rate of inflation? Who in our society, if we keep these barriers up, is going to need help making ends meet and being able to afford to feed their family if we keep food prices where they are and we don't let food in? And how do we deploy the resources of the government to help them?

Tobi:

One of the things that I'm most fascinated about is countries that were previously poor a few decades ago, who are today global giant exporters of certain technologies or goods or commodities. So how would you advise a country that is trying to develop a globally competitive export sector in general? Because the consensus in development economics is that exports help your economy, exports help you grow, create jobs, your industries are upgraded, you're able to import technology and upgrade via all that. So how would you advise countries? What policies would you advise countries to focus on that are trying to build from scratch a globally competitive export sector, especially at the firm level? Because we tend to focus on countries, but it's actual firms that are making these goods and exporting these services, you know, and there are international regulations and standards to comply with. So how would you advise countries to do that?

Dmitry:

Really big question. And obviously every country has its own local challenges. But let me try to give you like a big-picture answer. And I respect your audience to know that I'm painting with a really broad brush. So the fundamental issue is you want to build a competitive export sector. Almost certainly that requires investment because unless you are—maybe if you're like growing saffron, you don't need that much investment. But almost anything else you're going to make, you're going to grow, you're going to export, requires capital and investment in order to do.

Capital looks at opportunities, but they're also really sensitive to risk. So, the question then becomes for governments, how do you send a de-risking signal to a potential investor? An investor is looking at your country, thinking about building a factory there. What are the risks that they're thinking about? Increasingly, factories are modular and can go pretty much anywhere. It's not like it used to be where you have to build them only in certain places. Theoretically, a factory can go almost anywhere. Then the question for that investor becomes, firstly, will that factory be able to consistently get what it needs to operate?

What do factories typically need? Well, you need workers who are capable of working at a modern factory. So that means your education system has to be producing good, talented workers. Second, it needs power. So the power grid needs to be reliable. Third, it needs predictability of your trading regime. So it needs to know that that factory will be able to import the parts and the components it needs from abroad reliably and be able to export reliably. Fourth, it needs to know that the infrastructure is there for it to be able to get its stuff in and out of the country. Fifth, it needs to know that your legal and regulatory regime is robust and predictable and that they won't run into legal challenges.

Now, that's really big picture. There are ways that individual governments have been phenomenally successful at ticking all of those boxes in microcosm ways. One concept that's really taking off all over the world is creating special economic zones. So you designate a part of your country, literally like a couple of square kilometres, and you say, this is going to be the special economic zone, and I'm going to focus on attracting investment and production here. And then inside that zone, you create better regulatory conditions. You create better tax conditions. You then deliberately build infrastructure to that zone because you know that's where the factories are going to be. So you can save on rather than trying to sort of do stuff everywhere, you just build like a really good railroad just to that zone.

When you think about the regulatory compliance challenges that a lot of businesses, especially in the developing world, are worried about, what they're actually worried about is the countries we want to sell to are going to increasingly create new regulations on how green stuff has to be, how carbon neutral stuff has to be, how slave labor-free it has to be, all of these kind of new standards and rules. The challenge for most developing countries isn't in meeting those regulations. It's in proving that you've met them because it's not enough to be carbon neutral. The customs official at the port of Rotterdam has to accept that you're carbon neutral.

And one thing that special economic zones allow you to do is that you then set up the trust to say a laboratory that tests your meat products for all of the things that your buyers are worried about, you set it up in one place. And because it's servicing the entire special economic zone with lots of businesses inside it, that makes commercial sense rather than trying to build one all around the country. So one way that you can think about this is by saying, OK, it's going to take too long to raise the entire country up to the level where it ticks all six of those boxes for potential investors. But we can start building individual areas that tick all of those boxes and use those to lift the rest of the country up.

Tobi:

I love the answer so much, especially the latter part. And speaking on regulatory standards and the like, a couple of years ago, and this was after years of debate, African countries finally signed up to what they call the Africa Free Continental Trade Agreement. I'm not sure if you're aware of that. So it has faced difficulties. So I would say it hasn't lived up to its promise. And part of the challenge is that it has been really difficult to scale up or harmonise the regulatory and the standardisation, that is, both legal and logistical and all the other things has been really, really challenging to replicate that across all the signatory countries.

But as we saw with Europe, that in itself can then become a challenge, you know, because you can have farmers in England angry that Brussels is making the rules, or people in France complaining that German goods are unfairly competitive because Germany suppresses industrial wages, or you have Greeks complaining that their tourism sectors cannot compete with Turkey because the euro is overvalued. So my point is, what are the benefits and risks of single market type of trade agreements, and how can you make best use of them, and how can you like, you know, slam on the brakes so that it doesn't break stuff domestically?

Dmitry:

So the dream of the AfCFTA is pooling all of the unique strengths of different African countries together to make a much more competitive whole. If you think about the strength of the US economy, one of the things that makes the US so economically powerful is that you can combine and build something across five different US states. And then you get lower wages because you're manufacturing it outside of Detroit, but you get to bring in capital from New York. You get to bring in design from California. You get to bring in raw materials from the Midwest. And you can do all of that because there are no internal borders to cross within the US. You just load up your trucks with the materials and you drive them across and it's all seamless. And then it goes to a port and leaves, right?

That's kind of the advantage. And that makes the US a lot more economically powerful than the 50 individual states would be on their own. And that's kind of the dream of the AFCFTA too, right? This idea that you'll be able to combine stuff that was made in Nairobi and then sent to Nigeria for further processing and then maybe shipped out of the infrastructure in the ports in South Africa, right? And at the moment, that is a huge, huge bureaucratic challenge. The WTO once screened a documentary where a television crew basically followed a truck driver driving a shipment of flowers from Central Africa-West and eventually to Europe and just photographed all of the paperwork that driver needed to cross each of the individual internal African borders. And it ended up almost being a second truck worth of paper because every single border required a different version of the form that he needed to carry. Because every country had its own export and import declaration, and every country had its own plant health declaration.

All of that makes it much, much harder to manufacture Africa-wide and build a competitive product. That's the advantage. Obviously, there's some benefits to local consumers as well, bringing down prices. The disadvantage is the inability to kind of compete with other African countries on your regulatory regime. Everything becomes a lot slower and more rigid because if you have to design a new regulation, but in order for it to come up, be real, you have to agree it with every other African country in the context of the AfCFTA, you can't be agile and dynamic anymore. Nigeria can't go, I am going to attract more investment than Uganda by having a looser regulatory regime around something. So you lose that ability to compete internally, which can be good and bad.

And as you say, it does tend to generate its own political antagonism, because what you were describing in what all politicians in Europe talk about is the fact that anything bad that happens is the fault of Brussels. Anything good that happens is them. So the system like that builds up its own opposition because it creates the incentive to blame all of the problems on the AfCFTA while claiming all of the good things that happen for yourself. And over time, that builds up resentment and political opposition to the project.

Tobi:

Recently, I was reading in the news something about the Director General of the WTO warning that we must not return to the protectionist policies of the past. I mean, the whole leadership of the WTO, in my opinion, can sometimes cut a hapless figure. Because here you are, sometimes it seems like the wheels are really falling off global trade, and you have the premier institution of global trade basically toothless to do anything about it. But again, when you then talk to countries or you hear politicians from individual countries speak, you turn around and blame the WTO, the inability to enforce certain rules, which then creates this unfairly competitive environment, you know, maybe some accusations that have been levied against China, for example, the China shock.

So my question to you would be, what are your suggestions on how to fix WTO, or do we need an entirely new framework for the governance of global trade?

Dmitry:

So my best advice is to think about what the WTO is set up to do versus what it's not set up to do. I think your diagnosis is 100% right. You're seeing a shift towards other priorities away from just liberalising trade. You see major players doing things like the European Carbon Border Adjustment Mechanism, the US's IRA, their big kind of investment, sort of, green energy transition bill that has a lot of subsidies. So you have all of these really, really big things that governments are doing. And expecting the WTO to stop them is crazy. If the European Parliament has just passed the biggest climate deal it's ever going to do, it's not going to reverse it just because someone in Geneva complains about it or because someone takes a dispute with the WTO. So the wrong way to think about the WTO is in preventing all of this. The WTO has to explain what are the dangers and what are the trade-offs, and that's important. But the WTO, I think, also has a really significant role to play in shaping the implementation.

So let me give you like a really concrete example. The way that the EU's carbon border adjustment mechanism is going to be implemented or is implemented is incredibly complicated and has lots of different potential kind of externalities that might be hurting, for example, African firms in a way that the EU never intended. The WTO is actually a really good place for African countries to come and say, hey, EU, the specific way you're doing the CBAM is hurting my companies in this specific way, and we have an idea for how you could fix it. Not by reversing CBAM, but by changing a little bit the way it works. It could be just something as simple as the verification requirements, the forms, the procedures.

And the WTO, because of the way it's set up, because there's procedures, there's committees, there's experts, there's a process to follow, is a fantastic place for us not to prevent deterioration of the trading order and other priorities being pursued, but to shape them in a positive way, to mitigate unintended consequences and kind of add some oil to the machinery of whatever the global trading system is turning into.

Tobi:

So my final question to you, Dmitry, is this, and again, this is a bit of a tradition on the podcast. What is the one idea, just one, that you would like to see spread everywhere, that you would like people to be excited about, that you would like to be more influential? Just one idea. It can be your idea. It can be borrowed. It can be from any source. What is that one idea?

Dmitry:

I think one of the coolest programs I have ever seen is working visas for young people. A lot of rich countries have this between themselves. And what they say is basically if you are under sometimes 35, sometimes 30, you can come over and work in our country for a year or two years. And it's not immigration. You come over, you work. And it is such an amazing way of bringing like the world together, bringing new cultures into other cultures. The people come back with incredible experiences. You know, they come back and they start businesses back home. They bring ideas. And it's so amazingly powerful for spreading ideas, spreading cultures, spreading conversations. It's like stimulating economies, but without brain draining poorer countries. One idea I would love to spread is just the idea of letting young people all over the world spend some time in a hassle-free kind of visa manner, working wherever they want to work, doing the jobs that they want to do, just so that we have a world where more people have experienced what it's really like to live in another culture, and more people have the experience of working with entrepreneurial, exciting young people from all over the world, rather than just their backyard. So that is one idea I would love to see spread, love to see take off. And I think it would genuinely make the world a more pleasant place to be alive in.

Tobi:

Yeah, yeah. And we will do our best to help you spread that idea. My guest today has been Dmitry Grozoubinski. You should check out his wonderful book, Why Politicians Lie About Trade and What to Do About It. I want to thank Dmitry for coming to the show. It's been fascinating talking to you.

Dmitry:

Thanks so much, Tobi.