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Welcome to Ideas Untrapped podcast. In this episode, I talk with economist Robin Hanson. This episode is about an everyday exploration of some of Robin's biggest ideas. We discussed the hidden motives behind our everyday behaviours and how they shape institutions like education, healthcare, and government. We explore his ideas on signalling, innovation incentives, and alternative governance models like futarchy. Robin also discussed his latest idea of Culture Drift: how humanity's superpower of cultural evolution can tend towards a maladaptive direction. Robin thinks this explains worrying trends like persistent low fertility at a time of material abundance, and he also explains why we are reluctant to confront this problem despite our common practice of cultural entrepreneurship.
Robin Hanson is a professor of economics at George Mason University. He has written two fantastic books, Age of Em and The Elephant in the Brain (co-authored with Kevin Simler).
You can find all of the ideas discussed in Robin's books (linked above) and on his popular and immensely brilliant blog Overcoming Bias.
TRANSCRIPT
Tobi: Welcome Robin, to the show. It's an honour to talk to you, and I look forward to our conversation.
Robin: Let's get started.
Tobi: Okay. So I'd like to start with your book, with Kevin Simler, The Elephant in the Brain. You argue that much of our supposedly noble behaviour from charity to healthcare to politics is actually driven by hidden self-serving motives like signalling and status seeking. If so much of human activity is essentially about showing off or gaining social points, what does that imply for how we should design or reform institutions?
Robin: Well, the key idea of the book is that in many areas of life, our motives aren't what we like to say. And this fact is well known to psychologists, but not so well known to the people who do policy in each of these areas, like say education or medicine or politics. The people who do policy in those areas tend to take people at their word for their motives and they analyse those areas in terms of stated motives, and our claim is that you are misunderstanding these areas if you take people at their word and you'll get a better sense of what's going on there and therefore what you can do if you would consider that people might not be honest about their motives.
Tobi: Yeah, I mean, for example, schools, hospitals, and other public or perhaps even private institutions that we interact with openly acknowledge or accommodate our signalling drives rather than pretend that we're always pursuing high-minded ideals. What are the hard parts to reconcile about these facts of the human nature?
Robin: Uh, well, for example, people in the United States are most surprised by our medicine chapter, where we say that in fact on average people who get more medicine aren't any healthier and therefore they're spending way too much on medicine for the purpose of getting healthier. That's very surprising to people and it, of course, suggests that we don't need to spend as much as we do. Instead of subsidising it, maybe we should even tax it. But it also helps understand why we are doing as much as we're doing because we're using it as a way to show we care about each other rather than a way to get healthier. And so if you want to spend less on medicine, you'll have to ask, how can we find other ways to show that we care about each other instead of overspending on medicine?
Tobi: On a personal level, has recognising these uncomfortable hidden motives changed how you live your own life or conduct research? Do you ever catch yourself in acts of self-deception or signalling and you then consciously adjust your behaviour?
Robin: I think many people are tempted to try to look inside themselves to figure out what their hidden motives might be, and I don't think that's going to work very well. So my approach is just to look at how people on average are, and ask what motives best explain typical human behaviour and then just assume I'm like everybody else. So, I have come to terms with accepting that my behaviour is driven by motives that are probably not too different from the motives that drive most people, most of the time. So if other people are going to the doctor to show they care. I probably do too. If other people are going to school to show off how conscientious and intelligent they are, then that may be what I'm doing as well. And I'm just going to accept that I'm just not going to be that different from other people.
Tobi: Over the past, I would say six years or so, particularly with the rise of what is generally termed as woke, the phrase virtue signalling became quite popular. And this is something that you have been writing about before it gained that currency. You've noted that humans, when times are good, devote more energy to visibly displaying values either through charity, moral causes, patriotic posturing, as a way to boost our social standing. How do your theories of hidden motives and signalling help explain the way people behave online? And how does that affect the rise of political polarisation in the US perhaps?
Robin: So the term virtue signalling is usually used to describe behaviour that the speaker doesn't think is very virtuous. Um, so when we signal in general, typically our signals are effective and that we are actually showing the thing we claim to have. So if by going to school you show that you are smart and conscientious and conformist, then typically if you go to more school than other people, you are in fact more conscientious and conformist and intelligent than other people. You are successfully showing that. So the analog, if you took it literally for virtue signalling, would be that you are showing that you are virtuous. And that should be good. Maybe it's not so great that you are so eager to show it, but it is a good thing about you that you'd be showing. So the phrase virtue signalling is instead a criticism of people who are trying to appear virtuous without actually being very virtuous. That's, I think, the implication of the claim. And so that certainly could be happening and we should certainly wonder whether people who are claiming to be virtuous actually are virtuous. So certainly a lot of what's happened on the internet in the last ten years is what they call cancel culture and so that's where a particular person is accused of being bad or doing bad and then a mob, you know, jumps all over them and maybe gets them fired, gets them, uh, you know, thrown out of an organisation, gets people to quit their YouTube channel, et cetera, because they have been accused of being bad. Then the question is, well, if in fact they are bad, and if in fact these sort of responses are the appropriate response to someone who is bad in the way they are claimed to be bad, this wouldn't be such a terrible thing. Uh, the claim is that in fact they are accusing people of things they aren't guilty of or vastly exaggerating their guilt. And then it's bad if people are going way overboard to cause them harm without good cause.
So certainly one of the things that's going on in the world is the difference between gossip and law. So, uh, law didn't really exist until, say, 10,000 or so years ago. Before that, for maybe a million years, we had gossip. And the way we managed people doing bad things and dealing with that was by gossiping about it. And we mostly lived in pretty small groups who knew each other pretty well, so it wasn't that hard for people to gossip and figure out what's really going on and then react by whatever way they chose to do when they talked about it together. But in much larger societies that we've created in the last 10,000 years, gossip doesn't work so well. Because there's this incentive to a rush to judgment. When somebody comes to you with a complaint about somebody else, your main incentive is to agree with this person in front of you who you know better than the other person being complained about. And so in gossip, people tend to believe whatever they're told and they don't get the whole story. They don't ask for the other side of the dispute. And law was invented substantially to overcome this problem with gossip wherein there's a central place that you take an accusation to and that central place's job is to hear all the evidence before they make a decision. And then that overcomes the rush to judgment.
But when we have things people disapprove of that aren't illegal, then we revert back to gossip and then we have the problems of gossip wherein people are too quickly agreeing with an accusation before they've looked at the full, um, evidence from the other side. That's something that's going on lately with new social media when there are many accusations that many sympathize with that are things that aren't and not, in fact, illegal. But these are all relatively minor variations on the basic thesis of our book, which is that people are trying to look good and they do many things in order to look good, but when they do, they are actually good. On average, they are showing things that are actually good in order to look good.
Tobi: An idea that also become quite popular first in scholarly circles, but I mean, I see it almost everywhere now, maybe that's not a statistical fact, but it's the idea that evolutionarily, humans are not truth-seeking, we are coalition-seeking and our reasoning is basically to get people on our side. Looking at social media and how people use it, would you say that it's fundamentally amplified our worst signalling instincts by rewarding outrage and performative statements? And do you think it can somehow be a harnessed to improve honesty and information sharing?
Robin: So the thing I can be the most sure about is just looking overall at human behaviour across the world, across history, and roughly describing the middle of the distribution of that human behaviour and what's going on there. That's what the point of our book is about and that's what I feel most confident about. When you go to try to explain differences between some places and others or differences across time, you have to dig in deeper into the details of what's happening in your data about that in order to draw conclusions about those smaller differences. And honestly, we were just wrong about the basics here. So our book is saying that look up until our book or recently, people have been pretty wrong about the very basics of what people are doing on average across time and space. And so that's what our priority was, is to try to figure out just what are people doing in the typical situations. And because that was hard enough to figure out, maybe we shouldn't be very confident in our ability to judge differences in time and space. So, recently there have been some changes in the world in terms of social media, for example, and many other changes, and many people are eager and interested in tracking those changes and predicting their consequences, but... honestly, that's just a secondary priority from my point of view. Uh, I don't think I can judge as well. So we do have a long history for many centuries when any time there's a new element in the world of communication or, um, talk, people have disapproved. And they have complained about the new thing compared to the old and for novels, for example, and the telephones and video games and TV. Pretty much any substantial change in the way we get information and share with each other, people have criticised as making things go bad, and no doubt some of them were on average bad, and some of them were good, but I just don't feel like we can tell very well, uh, certainly at the moment, very recent changes in which ones were good or bad, how.
Tobi: So, I mean, before I move on from that line of questioning, as someone who call out uncomfortable truths and who has had some brushes with online outrage, generally. How do you personally navigate online conversations where image conscious signalling can really drown out sincere debate?
Robin: So compared to most people, I've chosen my role in the world to be a certain kind of intellectual analyst, a certain kind of person trying to figure important things out near sometimes uncomfortable topics. So I just feel it's my job to take whatever hits that are coming from doing that. And I think I have suffered some hits where people made accusations against me which I didn't think were fair but still cost me in reputation terms in some eyes. And I just feel like that's gotta be my job.
Now, honestly, actually, the biggest times when people complained about things I said were about pretty minor things relative to my whole main area of research. So... had I anticipated those particular things being what would bother people the most, I might have just not mentioned them out of the practical constraint that they weren't actually that important. Basically, side comments, often on gender, have been the things that have most bothered people about what I've said, mostly because I think... people believed other people's claims about what I intended when they were wrong.
Uh, look, compared to most societies in history, we have a lot more freedom to say things and think things and share them with each other. And even if we do suffer some penalties, they are still vastly less than people in the past have suffered for such things. So I still gotta think I've gotten off easy compared to, heretics or, uh, you know, people who give disturbing thoughts in history.
Tobi: So I'd like to move on to foragers versus farmers. You've written about the deep tension between our ancestral forager mindset, which is egalitarian, expressive, novelty seeking and later farmer mindsets, which is hierarchical, discipline, abstinent. And the cultural conflicts today, you say, can be traced to this clash. Uh, you've also written that wealthier societies are gradually reverting to more freewheeling forager values in many domains. Can you expand on this idea a bit and its implication broadly?
Robin: There are many long-term trends that people are eager to explain. You were just talking previously about recent trends in social media, but there are trends on many different timescales. And one of the most common interests that people have is explaining trends. What things have changed, how? So, in thinking about trends in the last few hundred years in the modern era, there are a number of consistent trends that are hard to explain. And so I, you know, ten or fifteen years ago, looked to our longer term history for a framework to explain these more recent trends. So the key idea here is that human's nature is actually pretty flexible. So there probably is sort of a human nature in the sense of what we revert to without any other pressures. But a distinctive fact about humans is we are culturally pliable. We can change and become different things in different cultural contexts. And the biggest example of that, most plausibly, was the switch from foraging to farming.
So as foragers we were more like animals in the sense of just doing what felt natural and that typically worked out okay. And then farming became possible, but only possible if humans would just drastically change a lot of their ways of life. And we did. So we became farmers. We stayed in one place instead of drifting around. We had property. We had marriage. We had war. We had trade. We had more inequality and slavery and domination. Disease. It was just a pretty different world. And we were actually pretty different. Humans became substantially different as farmers. And, you know, you could certainly just see that if you ever... You know, see traditional farming communities and compare them to traditional foraging communities. They are just enormously different. Foragers not only don't have much property or marriage, they're very egalitarian. They wander around. They have more variety of places they go and food they eat and they work less hard. They're certainly less religious and they're just really quite different.
So my key idea for explaining the last few centuries is this idea that: as we got rich, the pressures that had made us into farmers weakened. We were made into farmers in substantial part because we were poor and near the edge of survival and people could credibly threaten us that if we didn't follow the farmer norms of our world, we would die. And that actually happened. But as we've gotten rich, we can look at ourselves and say, if we don't follow the farmer norms, so what? We'll do okay. We see all these other people around us and they seem to do okay, even if they don't follow the farmer norms. And so we have... just drifted back more toward forager attitudes and styles because that deep down feels more natural. And this can explain a number of big trends over the last few centuries. So for example, more democracy, less religion, more leisure, more travel, less slavery, less domination, more egalitarian attitudes, less fertility. A number of the most important, largest trends over the last few centuries can be understood as our going back to being more like foragers.
Now, one thing to notice here is that this trend back to being more like foragers is plausibly explained by the absence or weakening of selection pressures. So that means this change is not plausibly adaptive. That is, we haven't changed because this is a better way to be in our new world. We've changed because the world is less disciplining us and forcing us to be any particular way. And this is what feels natural. So it may in fact be maladaptive. That is, we may be suffering in the long term in terms of evolutionary success by becoming more forager-like. Nevertheless, we have this space to do so because we're rich and comfortable and peaceful. And this is what we feel inclined to do.
Tobi: So, if that is the case, what does it mean for the stability of our more traditional farmer-style institutions that have brought us this far as a civilisation and um, yeah.
Robin: Well, so there's been a lot of change in the last few centuries and a key question about that change is which of it has been driven by healthy cultural selection pressures and adaptive processes such that the new behaviours make sense and are actually more useful and adaptive and productive in our new world, and which of these changes are not? Are just changes that are happening because we feel like it and we can't be stopped, at least for a while, but are not going to make our world more healthy and functional, etc. And so a major challenge in analysing the world to try to distinguish these two cases. So one simple way to distinguish them is to think about how local is the variation that's allowed. So think about most technology. Technology is the sort of thing that if you see a new technology, you're typically allowed to switch to it without too many other people complaining about it. And because of that, we have the strong selection pressures for people to adopt the technologies that they think they like. And therefore, plausibly, over time, as we've adopted technologies, those have been adaptive choices. They have been ways that the new world makes more sense when you have these new technologies than without them. Because there are these strong selection pressures. And more generally, if you think about firms in capitalism, businesses, we have a great many firms around the world and they try a great many different corporate cultures inside the company, different attitudes and practices and norms inside companies. And different companies try different approaches and plausibly there's enough different companies facing strong enough selection pressures that over time, the better business practices probably went out.
If we have firms having business practices today that are substantially different than they had three centuries ago, that's probably because these are better business practices. Or because there's enough selection of variation. But if you think about aspects of culture which are sort of our basic values and norms where we face strong conformity pressures to all adopt the same ones, it's less plausible that those are actually going to be adaptive. And therefore, it's plausible that changes are maladaptive. And that's more the problem. Uh, so if you'd like, we can go through, you know, a number of specific examples, but the key issue is to distinguish which kinds of changes seem to have been subject to enough selection pressure and variation to produce healthy cultural evolution and which have not.
Tobi: Please go ahead. Be as expansive as you can.
Robin: From a biological point of view, falling population in times of plenty… peace and plenty, and, you know, low disease is problematic. It's just puzzling. It's plausibly evidence of maladaption. So the most clearly maladaptive trend is falling fertility. And we can identify a number of cultural trends that are causing that. And so those are also candidate maladaptive cultural trends. So for example, we get a lot more education than we used to and education seems to be hindering fertility and plausibly we're just getting too much education. It's the amount we're getting [that] is maladaptive. We, for example, switched from cornerstone marriage norms to capstone marriage norms. Like, when I was young, the idea was to marry young, somebody. You weren't fully formed, they weren't fully formed. You didn't know exactly where you're going to be in the world. And both of you figured that out together. And now the norm is more that you should wait and to figure out who you are, find your place in the world, be secure, then find somebody else who matches your particular place in the world, after they found themselves and figured out who they are and then that's you should marry. So that change also is a big hindrance to fertility.
Another norm that's limiting fertility is that we pay a lot more attention to children now than we did in the past. So it could be that some distance time in the past we were paying too little attention to children, but plausibly now we're paying way too much attention. And the more each parent is supposed to pay a lot of attention to the children, the less likely they are to have more because they think they've kind of run out of time and energy for the children they have. Um. So these are some examples of cultural trends that have been hindering fertility and that are plausibly maladaptive, because they're not only hindering fertility, it's not obvious that they are overall making the world more adaptive.
Tobi: I'll get to some of what you've written on culture drift later. But for now, one of the preoccupations, at least in the domain of what is called development economics or studying economic development generally, is institutions. Largely because it is perhaps major determinants of which policies get adopted by countries and those policies can be the difference between being poor and being rich. Right. You've championed a provocative idea called Futarchy - in which elected officials would define a national welfare metric. I'm a big fan. And prediction market speculators will then decide which policies are most likely to improve that metric. In Futarchy, if the market odds clearly show that a proposed policy will increase expected national welfare, that policy becomes the law. In theory, this could make governments far more informed by leveraging collective expert knowledge and avoid, you know, some of the problems [of] political gridlock or interest-based politics. But I want to put it to you directly. How realistic is Futarchy in practice? Especially if we go outside of markets like the US.
Robin: So, for every policy proposal, there's two very different questions about that proposal. And it's realism. One question is, is anybody ever going to adopt this thing? And as an economist, I have liked many policy proposals over my decades that have not yet been adopted and that many people think are just never going to be adopted. And so they think we're wasting our time and effort if we pursue and elaborate and think through the details of policies that nobody's ever gonna do. And, you know, that's a fair critique and it comes down to what are the chances of it getting adopted and then, you know, finally being tried. A second question is, if we tried it, would it work? That's a very different kind of question in terms of feasibility or realism. And I feel much stronger that that should be addressed. So I'm okay with making proposals that maybe have a low chance of being adopted if I'm pretty sure that if they were adopted, there'd be a good chance of success. But, I mean, another thing to realise is all we need to do when we adopt something is try it for a bit and see if it works. So the main harm of trying something is the short time during which you would have tried it. And then found out it didn't work very well and then quit. Nobody should be proposing making vast changes to society on the basis of relatively speculative things that haven't been tried much. The proposal is to take an idea and then try it out on a small scale. And when it works on a small scale, try it on a bigger scale and it keeps working there, bigger, bigger, until eventually it might be big and be applied everywhere and give us huge gains.
Tobi: So why aren't there more experiments? What is holding up experimenting with this idea on a very small scale, perhaps within companies or local governments? Is it about trust or yeah?
Robin: Yes. So, um, like all my life I've been around economists and other people inventing things that they think should be tried and seeing some of them tried and most of them not.
So first thing is to say is there's a lot of energy in politics. A lot of people really like to be involved in politics, and they really want to argue for this policy or that, or this administration or that, or push for this person to be elected or that. But when it comes to thinking about new institution ideas, there's very little energy. Very few people care at all about that, or they don't want to be bothered to try. So unfortunately, just trying new institutions seems to be low status and not very interesting to most people. Right. And when things do get tried in the world, they tend to be tried because someone high status with a lot of prestige and power in some area endorses an idea. So a major limitation of things getting tried is what are the high status, prestigious people willing to endorse to get tried? Most people are just not interested in trying something unless it gets that sort of endorsement. And people like me aren't powerful, high status people. So that means we have to influence somebody who is more powerful and high status to be interested enough in something to try it in order to get it tried. So the major reason why not enough stuff is tried is because for most people, they don't care very much about trying new things, they're just not eager to. And then we have this bottleneck. They need high status, powerful people to endorse an idea, for trying it in order for it to get tried. And of course, if it doesn't work out well, that may be worse for the reputation. But if it succeeds, it may go better. And that's basically the world we live in.
I would rather people spent less time arguing about politics and more time trying out new institutions. I think the world would just be much better off if we put more energy into trying out new ideas, but just because I wish that were true doesn't make it actually true. Now, you asked about the specific idea of Futarchy a particular governance mechanism, and I can happily report that in the last few years we now have a bunch of experiments, a bunch of people trying it. So I first described the idea over 25 years ago, in roughly 1999, just before then. And for a very long time, many people had heard about these ideas and liked to talk about them and to hear about them, but almost nobody wanted to try them. But now, in the last few years, there are trials, and so far they seem to be relatively successful. But as I said, what we need to do is try things on smaller scales and then work up to bigger scales, etc. until we can get them much more widely adopted. But most of the experiments in the last few years have been crypto-based organisations. There is this thing called a DAO, a distributed autonomous organisation, that people have tried out on crypto where there's some governance mechanism on the blockchain and that drives an organisation's behaviour. Those haven't worked very well, but applying Futarchy recently has had more success in governing these organisations.
There's also been government based experiment that's seemed to have gone well. And now there's a number of other crypto-based organisations that are setting up to do trials and experiments here. So I'm excited that we finally have some trials.
Tobi: I assume you are in touch with some of the people running these experiments.
Robin: Yes. I am officially advisers on many of them.
Tobi: Oh, okay. That's cool. What have you learned from those experiments? And has it led you to refine your vision on how decision markets might work in governance?
Robin: Yes. I have to admit that 25 years ago, I thought through the idea in substantial detail, but there were some details I just didn't get into, and that finally seeing people try them now made me think a little more detail about some of the issues that I had neglected and slopped over before. So I guess I could have always thought about those more, but I didn't feel very motivated to when no one was actually trying it. So there have been some details. I've tried to work out more, and we're going to see how those play out in these small scale experiments. I also hope to do some lab experiments to test these things. So, yes, we're working out some particular details. I mean, I don't know how far you want to go here in this conversation into those details, but they're relatively detailed. But still, there's work to be done.
Tobi: Another subject that's risen in status over the years is, um, the idea of progress and debating progress has also risen in status, I should say, in public discourse. I mean, we have even, uh, people on the left arguing for abundance with the new Ezra Klein and Derek Thompson's book and there's the whole progress studies ecosystem that seems to be growing. Uh, one of the things that makes me laugh while researching the themes I want to cover for this episode is there seems to be either a Robin Hanson blog post or paper for everything. So one of your papers that I loved so much is Patterns of Patronage, where you looked at the 18th century practice of prizes in spurring scientific research and how that was replaced by the grant system. Uh, and you found that the shift wasn't because grants are inherently superior, but rather because the dominant patrons changed, you know, more non-local democratic governments who prefer grants. What does this historic lesson tell us about how the structure of funding can shape the pace and direction of innovation, especially at a time where there seem to be worry that innovation is slowing down.
Robin: Right. So a lot of people I know in economics or even science studies have a strong presumption of progress. That is, whatever changes happen must have been good. And unfortunately, this particular datum and some related ones suggest that's not true. So one of the biggest trends in academia and science in the last few centuries is that academics themselves wrested control of academia from other people who fund it. And that happened first in grants, but then it later happened in tenure and in basically other ways in which academia doesn't have to listen to outsiders as much as it used to. So many centuries ago, say, during the beginning of the Scientific Revolution, there were outsiders who had a lot of influence over science because they were paying the money. So scientists typically didn't all do it themselves on their own wealth. They got money from other people to do science, to do academic things. And those other people had a say. In the past, people initially gave out money more often through prizes than grants, and then they also gave money through sort of just supporting infrastructure, like making a library or funding an expedition, you know, paying for journals.
The funders had a sort of direct influence over the topics and priorities via they paid and so they could dictate, through their paying, some conditions. And what happened? We did have the switch from prizes to grants. And grants are a way in which academics are more in control of the money. You give money to a bunch of grant givers, and the grant givers decide who the money goes to. And then there's no particular accountability of whether those grant receivers actually do anything particular with the money. But in addition to moving from prizes to grants, we also moved to peer review. When Einstein did his papers, for example, those were not peer reviewed. Peer reviewed is something that showed up more mid 20th century. Previously, there were editors of journals who just had a lot of control over those journals and could use their judgment to decide what were good papers or not. And that was another way in which academics were held accountable to outside powers, in this case, journal editors who could disapprove of what they were doing or think things were low quality and make an impact that way. And the third change that happened was tenure. So most professors didn't have tenure long time ago. They might have job security the way most people have. If you've been working somewhere for a while, they don't really want to get rid of you because you have a good working relationship. But the formal idea of tenure is also something that showed up in the 20th century, and that was yet another way in which outsiders couldn't influence the academics and their behaviour and choices as much. The idea is after a certain number of years, you get tenure, then you can't be fired and nobody can complain about what you do.
Now, academics like all these freedoms, the way in which academics have wrested control from the outside of the world and run their own world to their own tastes, they like that. But it's not obvious that we actually have more total intellectual progress as a result of that, I guess in fact, we probably have less. But this was a consequence of academia becoming much more prestigious, and that prestige is what allowed the change. So the first change from prizes to grants happened because the people who were running prizes, who were managing prizes were in fact the main scientific societies of the time. And then the scientists who ran those societies decided to do a coup, basically, and to say, we refuse to accept any money to run prizes anymore. We're only going to accept money to run grants. If you want our name to be on this money you give, you have to give it in the form of grants. And that happened both in the French scientific society and in the British. And they had a successful coup. And so they made people giving the money change their mind about how to give it so that they could have their name on it. And that's a way the academics wrested control of the process from the people who are giving the money, and got more autonomy to give it to their friends. It's not like the money was handed out at random to people who said they wanted to do science. It was a set of insiders who took control over academia and then used it to favour themselves and their friends, and that's now basically how academia works.
Academia still has enormous autonomy from the outside world. People give it money, but then it's basically the most powerful insider academics who decide who gets the money, who gets the jobs, who gets the publications. That all is decided by those insider academics. They, of course, will claim that that's great because they have great taste and they have good judgment, and everybody else should shut up and leave them alone and let them decide. But we can reasonably be skeptical about whether they actually have better taste.
Tobi: Science is still largely funded by large institutions, governments. Uh, Donald Trump's clash with big education might reorder that, but the alternatives that are most likely to rise will also be rival governments who are engaged in geopolitical or technological competition with the US. And I take your point or caveat so to say about progress. But if we want to encourage more positive breakthrough innovation, what alternative funding models do you think needs to be revived?
Robin: I do think prizes just do work better than grants. So I think if we would switch back to prizes, that would be an improvement. With a prize, you basically say what you want to have accomplished, but you don't have to say how they do it or who does it. So anybody who achieves that accomplishment can get the prize money. And that's a more open competitive process than grants, where the grant giver has to decide who has a promising approach and who they believe has a chance of doing it and then they hand out money according to their judgment, to their friends, basically. Prizes would be better, but I actually have a more elaborate solution to academic problems. That's also one that you might think is less likely to be adopted, but that's the trade off we talked about before.
Tobi: Yeah. Yeah. So please tell me.
Robin: Okay. So, I am perhaps most famous for my work on prediction markets - betting markets for things - and that's the basis of the Futarchy governance mechanism we talked about a few minutes ago. And from the very beginning, my first motivation for thinking about prediction markets was how to reform academia. And over the years, I've thought a lot about different ways to do that and I've realised that the initial ideas that I had, and most people have when they come to the topic, just probably aren't going to work. And so initially I just thought if we just had betting markets and most scientific questions, that would be great and then we'd have a better consensus about it. But in fact, most academics just don't want to bet on their stuff. And so there's very little energy and interest in that.
Secondly, I thought, well, we could have betting markets on scientific questions and then you could subsidise those markets as a mechanism of funding so that people who figured out the answer to scientific questions first would then be able to trade in the market and make profit from their trades, and that would be how they would fund their research. But that would require that the people giving money change how they give money, but they don't want to, because the people giving money are in the same equilibrium game as everybody else. They're also just trying to gain prestige by affiliation with impressive people in the same way everybody else in the game is. So the problem is that the game as it's set up encourages people to do things to win personally, but that doesn't encourage the system as a whole to make more intellectual progress. So these approaches don't seem to work.
The approach I think that more plausibly would work relies on the following claim, the assumption that the one thing people will not give up as academics is the claim that the people they most celebrate today as the most prestigious academics are, in fact, the same people that historians looking centuries later back at this era will say were in fact the most important academics. Academics are not willing to say, oh yeah, we're just playing this game and later on none of us will seem very important but, hey, we just like to play this game. They are not willing to say that. They are going to continue to claim that the people that they give the most prestigious jobs, funding, journal article publications to, those people are in fact the people that, when you look back on this era from later on, will in fact have seemed to have been the most important. The people who had the most influence and who were doing the stuff that should have been looked at the most, that should have been paid the most attention to. So that's the thing I'm going to hold with. That's my lever to influence the system.
How am I going to influence the system? Well, simply, I want to create betting markets on what those distant evaluations will be. I want to create a futures market in the reputation of each academic. So centuries later, I want to have panels of historians go back and look at current academics and rank them according to who should have been listened to the most and they can use all their knowledge of the future to know which research programs petered out, which had promise, which led to important, interesting results. They use all of that to go back and say who should have been listened to the most in order to best produce more of the progress that had happened. So now we would have betting markets in those future numbers so that every academic would have some score, some current market price that represented the market consensus - evaluation of their potential to be somebody that the future would say, yeah, that person should have been listened to a lot. And now when academics make choices like hiring someone or publishing them or giving them a grant, we can all compare those choices to these market prices. So when Harvard sociology department hires somebody, we can say, okay, the guy you hired is now ranked 372 out of all the people who might be judged to be as important as the guy you hired. And why did you pick number 372? You had a lot more higher ranked people to pick. And now they'll face a choice. They can either make their choices more consistent with the market so there's less of an embarrassing question to ask. Or they can deny the market knows anything they can say: that's stupid market, why would you listen to that? We're the Harvard sociology department. We know better. But then you could say, well, how come you aren't betting in these markets if you know better? And they should be a little embarrassed not to be betting in the markets if they know better. And so that embarrassment they're not wanting to be too obviously differing from the market estimates would be a pressure that would make these market prices influential and therefore, academic choices would move more toward the choices that are actually the better choices about who should be getting funding and attention and resources and jobs because they, in fact, do have the better shot at having important long term influence.
Tobi: Hmm. That's deep.
Robin: That's that's my idea.
Tobi: That's deep. I'm still struggling to wrap my head around that. I mean, we are still in governance territory here. I want to speak a bit about the rise of philanthropic organisations who also do some funding and in some cases fund science, again, basically through grants. But generally philanthropy has risen in status. Most prominently, the Effective Altruism movement has done quite a lot to influence this. Another one of your papers, Showing That You Care, where you argue that much of what looked like altruistic policy say, paternalistic health regulation or support for universal health insurance may actually be driven by an urge to help and signal loyalty to our allies and shaped by our ancestral environment. We genuinely care about others, but we subconsciously choose ways of caring that also broadcast our good intentions to observers. You argue that this perspective can explain puzzles like why medical spending often have very low marginal health benefits, because the social role might be more about showing concern than improving health. So do you think organisations like Effective Altruism are trying to truly break free of our primitive signalling drives to do good more rationally? Or do you suspect that status or image and these things you've written about still quietly shape a lot of these newer, quote and unquote, altruistic efforts?
Robin: So I'm not the first person by a long shot to have noticed that humans often don't live up to their ideals. People talk a good talk about their grand goals and their grand ideals, and they talk as if they are trying to achieve their grand ideals, and they often don't. Their behaviour deviates from that. Now, the fact that many people have observed that then induces people often to say, well, we're different. We, this organisation over here is actually really going to be idealistic. So if many religious organisations don't achieve religious ideals but we're different, we're the religion that's actually going to do it. There are charities that aren't actually very effective at charity, and people notice that. Then another charity shows up and says, ah, but we're going to be better. And this is just a common feature of human behaviour forever. Like, a government that says we are here as a government for the people. Often people notice, well, you're not actually working so much for these people. Then another government shows up for another political party, says, hey, we're going to actually, we're actually going to help the people, right? So this just keeps going on and on. Why? Because when somebody claims that they're actually going to do better, the question is how carefully does anybody look to see if they do do better? Often it's enough just to make the claim. It's enough to make the claim that your political party actually cares more about the country and the people and whatever else it is. And the other political party, they're corrupt, they don't care. But it's often enough for your supporters to just make the claim. And then people are willing to assume you must be right because you're one of them, you're a friend of theirs, you think like them, you feel like them. You live in the same places they do. They're going to assume, okay, yeah, you're like me. So you must actually want to live up to your ideals. Not like those other hypocrites out there. But you can see that if we're allowed to just make the claim that we're better without anybody checking on it for better. We're not actually going to be better, right?
The way in which people will actually be pushed to live up to their ideals is if somebody's checking, looking at the difference between their actions and their ideals, right? That's the only way that people are actually going to be pushed more to live up to their ideals is to to be checked, to be on it. So, um, that's of course, the key question is who does the checking? Now, of course, some people will say, we'll do the checking. Trust us. Like, you know, there are people out there who say, we will tell you what politicians to vote for. Just trust us. And we'll send you a list of who to vote for. And then you'll vote for those people, and then everything will be better because we're doing the checking. You don't need to check us. We're just going to check for you. But of course, if you don't check them, they'll just claim they're doing better but not actually do better. And then it won't be any better, right? So this is always the problem: is can you make a process that people can inspect to see that you're actually doing better?
In the early days of Effective Altruism, one of the main mechanisms was evaluation of charities. So one of the new things was we're going to have an independent organisation that evaluates charities and their claims and sees how they're doing. So we have such things in other parts of the world. We have, like, Consumer Reports; does evaluations of business products. We have bond rating agencies that rate the risk of bonds. In many other parts of the world, our world, we have independent organisations that are offering independent evaluations of things. And often you can tell by their independence and their efforts that they are actually telling you more information than you were going to get from these sources themselves about the quality of their product. So I think that is, in fact, a great way to make people offer higher quality products of all sort, is to have independent evaluators, who are not funded by or getting kickbacks from the people they're evaluating. You're paying them separately to do the evaluation, and then they, in fact, tell you different ratings, and they show you the process they use to do that rating so that you can see they didn't just making up numbers. They are, in fact, looking at something real in order to evaluate the things they're rating. So I thought it was very promising in the early days of Effective Altruism that this was a solution. They're saying, well, how do you know which charities to trust? They're all claiming to be great. We're going to offer you an independent evaluation, and we're going to show you how we're doing it. We're going to show you the process and the formulas we use to evaluate these charities, so that you can trust our independent evaluation. And one of the first big organisations like that was called GiveWell. And they got a lot of attention, and a lot of people donated money to them so that they could do evaluations to help the rest of us decide which charities to go to.
And I still think that's a great idea. Unfortunately, the field or the community of Effective Altruism, they decided after a while that that wasn't such a good idea because that was too indirect. They wanted to just have the money and just do the stuff they thought was good. So now most Effective Altruism organisations, they're just getting money from someone and doing the things they think are good and they're not trying to, like, have independent evaluations of what they're doing in order to prove that it's good. You're just supposed to trust them. Hey, we have a good heart, so just trust us. We're doing the right thing. Which means they're just in the same boat as all the other charities everywhere.
Tobi: Especially with the whole FTX thing and some of the negative publicity that Effective Altruism got in the last two years, it makes me think about signalling generally. Do you think that it would be more efficient for us to just lean into it. I mean, kind of like education and Bryan Caplan's argument, even if that were true, that most of education is signalling, education is not a net negative and I don't see it going away anytime soon. So regarding altruism, charity and all the other feel good things that we do, should we just lean into it? I mean, should policymakers just create ways where we can visibly demonstrate how we care rather than trying to optimise for what is rational or not?
Robin: So it comes down to what it is you're showing off when you're showing off. See, if you're trying to signal that you were effective, then you'd have to show credible evidence that you were effective, and then people wouldn't actually support you or praise you until you were actually effective. The problem is, in a lot of these domains, we're satisfied with signals of other things. So for example, in medicine, we're satisfied with signals that show somebody they care about you, even if they're not very effective in how they care. With education, we're satisfied with signals that show somebody is smart and conscientious, even if they didn't learn anything at school and in charity, we're often satisfied with showing that somebody sacrificed and therefore cares without actually seeing how effective their efforts are. So it's not about whether there's signalling going on, it's what you're signalling and which signals you will accept as a sufficient signal. If all you want to know is that somebody cares enough to sacrifice and to, say, give up some money to donate it to a charitable cause, if you were willing to say you're a good person because you sacrificed and we don't care where the money went or what happened to it, all we care is to see that you sacrificed it. Then you'll continue to have people throwing money at random things that don't work because nobody cares about that. It's only if we care about how effective your donations were, as a reading of you, that we will then want you to show us how effective your donations were in order to judge you. But that requires that we change what we care about in you. And so that's unfortunately a problem. So a lot of these signalling games are driven by the things that people actually care about. And they would go better if people cared about other things. But of course that's the problem. People care about what they care about.
Tobi: Mm-Hmm. Let's drift back to culture drift, which is your... except I'm not current anymore, which is your latest big idea. And you touched on it earlier. Uh, basically, culture is evolving, you argue, I should say, in potentially maladaptive directions. And you talked about fertility, especially in wealthy societies where they are not even coming close to replacement rates. I mean, future generations might look back with amazement at how we squandered our abundance by failing to reproduce. How serious is this cultural drift, in your view? I should ask first.
Robin: The one thing that most distinguishes humans from all the other animals is that we have been driven by cultural evolution. We have some other distinctions, like, you know, we stand on two feet and we have bare skin instead of fur. But those other distinctions are just not remotely as important as this one key distinction that we are driven by cultural evolution, that's our superpower. So if we broke it, that's really important. If we broke our superpower, it means we're not going to be super very long unless we fix our superpower. Our superness is going to fade away and decay into collapse and death and destruction until we fix it. It might be a slow decay that takes centuries, but still, this is our superpower. So it's hard to exaggerate just how important this is. An analogy I'd like to have you imagine is driving down a road in a car, say, there's a control problem in controlling the car to stay on the road, and there's a bunch of control parameters of the process you use to control the car that need to be in the right sort of a range to make this feasible. So if the car is going slowly, you can see the road really clearly. The road only changes slowly. You're awake. You're not drunk. You can clearly see the road. You can think clearly and make a decision to turn the wheel. And the wheels just strongly connected to the car tires themselves to move the car. The car driving process will work. Those parameters are in the range that you can effectively see the road turn a little, you think about it a bit, you turn your steering wheel a little, the tires turn a little. The car stays on the road. You don't go off the road.
But if we turn these parameters to the other extreme, if you're driving really fast, the road is changing really fast. You can hardly see the road. It's really dark and rainy. The wheel is floppy. Your mind is slow. The tires are wobbly. You can see that as these parameters get bad enough, you're not going to stay on the road. You're just going to drift off the road. And depending on what's next to the road, you might well crash. Our superpower, this cultural evolution is a system that has parameters like this. It's a system where basically there's a set of points in a space, and somewhere in the space is the adaptive region and the points in the adaptive regions, they grow and they multiply and they do well. And points away from this adaptive region: they decay, they die, they disappear. And this adaptive region moves around in the space. And so if you have enough points near the adaptive region, then even if the adaptive region moves, some of the points will be there. And so those points can grow. And the cloud of points can be a lot of points near that adaptive region, even with the region moving around, or even if these points actually wiggle around randomly and drift around. Still, if there's enough points strong enough selection pressure of the points near the good region increasing, and the other ones going away, this whole process works, and it's worked for a million years. And 300 years ago, we had basically hundreds of thousands of little peasant cultures in the world, all of which [were] near the edge of survival. They were poor. They had famines, they had wars, they had disease. So if they made bad choices, they would just disappear and be replaced by neighbouring cultures. So we had large variation, strong selection, and the world was changing only slowly, and these cultures were very conservative. They didn't want to change very much. So this system worked. A control system to drive the car of human cultures had worked because the parameters were in the right regime.
But in the last few centuries, we've taken these hundreds of thousands of peasant cultures, and we smash them down into 100 or so national cultures, and then we smash those together into a shared world monoculture, and these cultures that are remaining much fewer of them, they face much weaker selection pressures in terms of disease and war and famine. They basically don't die anymore. And the world they're trying to track is changing much more rapidly. Technology and other changes are making the kinds of things they need to track to be adaptive, changing fast. And in addition, rather than being conservative and being reluctant to change our cultures, we've become eager to change our cultures. Cultural activists have become our biggest heroes, and we love to celebrate the people who tried to cause cultural change, even if it wasn't obviously adaptive. That's not an important feature of the cultural activists we celebrate. So these are four different parameters that are all gone wrong in the last 300 years. And plausibly what that means is this cloud of cultures that we have remaining is not tracking the adaptive region of cultural space. It's drifting away. And that means our cultures are becoming maladaptive. That's the key problem.
Now, I want to be clear. There's two levels of culture. There's the kind of things that can vary individually easier, as we talked about before. And those things go fine. So an analogy is biological species. In biology you can have habitats that are fragmented with lots of little species or habitats that are big and integrated with a few big species. In the first sort of place, evolution within species doesn't work as well because each species has fewer members, but evolution of the species of the features that species share, that does much better. In the big habitat place, the evolution in species does better because each species is larger. So in our world today, within cultures, the things that can change within cultures, because we have a few big cultures, that's going great. We have better evolution of business practices and technologies and all sorts of things that can vary within cultures. The thing we have less of is evolution of the things that define our cultures, that it's hard to vary within a culture like, marriage norms, education norms, medicine norms, things about war, things about community, things about patriotism, a lot of cultural attitudes that are hard to vary within a culture because you'll be punished if you deviate, those are the things that we have very little variation of now and those are plausibly drifting into maladaption.
Tobi: So I guess the big puzzle for me, though the culture drift argument is very Robin Hanson, Hansonian in that sense. You're not the only one talking about fertility. It's become quite a huge topic in the West.
Robin: Yes.
Tobi: And again, some other people, scholars, public intellectuals, whatever, also give cultural diagnosis, uh, the collapse of religion, or marriage, you know, and things like that. But my big puzzle or question is, can cultural trends really be reversed? What is the solution really?
Robin: So first, I think I mentioned this before, but when you're talking about cultural trends and which directions do we want culture to go? That's actually the most prestigious people we have in our intellectual world. The people we most celebrate and give the most attention to and love the most are the people who comment on cultural directions, what's happening and which directions they favour. So there's no lack of discussion of cultural evolution from the inside, which direction do we want to push for, for culture to change? Cultural activism is really popular. What's rare is to stand outside the system of culture and to see it as a system, and to think about how that system could go wrong even when the individuals in it are doing things they feel are good. That's the hard part to see. And that's plausibly what we need to think more about, because that's where the system’s going wrong. We're going wrong in just having a system like this where we make such huge changes and we have such little variation and weak selection pressures. So many people do see fertility as a thing happening, but whether they think it's a problem we're solving depends on how they frame it culturally. Many people say, oh, look, it's not such a bad thing if population declines, we have a huge world. We could, you know, go on for thousands of years before we went extinct, that probably won't happen. So, you know, what's to worry about? We'll have less environmental impact. We'll be happier. You know, just let the population decline. Because those people see the alternative policies that might make population no longer decline as much as their cultural enemies. That is, they're pushing for culture to go one way, and they see the people who are opposing their pushes on the other side, and they think those people will win more if we let, you know, this fertility argument go forward. And then the more people do about fertility then those people will win. For example, religious people tend to be more fertile. So one way to promote fertility is promote religion. And a lot of people just hate the idea of promoting religion. They exactly want to stop that. Or say gender equality. Gender equality has, in fact, been something that's been reducing fertility, and many people are so eager to promote gender equality that they don't want to risk at all any sort of weakening of that by acknowledging that fertility might be a problem.
Tobi: One last area I would like to touch on is your personal intellectual journey. You studied physics, computer science, and then you transition into economics, and you've become known for exploring big, really, really big ideas. What were the pivotal influences or moments in your life that set you on this, I would say, unique intellectual journey?
Robin: Well, uh, first of all, I just became someone who wanted to be an intellectual. That is when I first came to college, I was inspired by some lecturers who made this grand vision of some people who figure things out that are important, and I wanted to be one of those people who figured out important things. Now, that doesn't make me especially unique, lots of people bought into that, but that was my vision. And for many people, like wanting to be a professor and academic is about being respected person who has a nice office and who gets to give lectures and other people invite to give keynote addresses and they're distinguished and they're thought highly of. And for that sort of a future, then they just should like follow the standard path and do what they're told and get the proper credentials. And then they are successful in their eyes because they have become a respected person who's doing respected things. But that wasn't my vision because I was sold on being a person who figures important things out. And that was kind of random, I guess, I could have been sold on the other vision, but because I was sold on the vision of figuring important things out, it wasn't enough for me to just collect some credentials and, you know, be thought of as a respectful person. I wanted to figure important things out, so I relatively early on tried to dig into everything that I could to ask - what's the fundamental here? What's the deeper underlying thing here? What are the key questions? How can we figure them out? So, that's the first part of I guess my life is to pick that as my framing.
So everybody in some sense, early in life picks their image of status, their ideal, and they pursue that. And they often assume everybody else must have the same ideal. But they don't. And people often don't realise the choice they're making about what to set up as their ideal. But that's where I fell into. I fell into this ideal. I'm going to be the person who figures out big, important things. That was the game to me. That was the whole point of everything. And then through school, I kept thinking about things and figuring things out. And it was a long time before I could realise, oh, I should, like, have a career plan or something. I was just so focused on reading things and thinking about them and figuring them out, and then taking whatever excuse I could do that, that I didn't actually realise, oh, well, if I want to be one of these big thinking and important people, I'll have to, like, get a job somewhere and I'll have to have credentials to support that. And so it took a long time for me to realise that I should have a plan like that.
And basically, I'd been out of school and I had some things I thought were interesting ideas, including prediction markets. And then I thought, okay, how am I going to do this? Oh, I need to go back to school and get a degree. And at that point I was more focused on, okay, I'm going to have to make compromises here. I can't just study what I'm interested in. I'm going to have to also accommodate what other people are interested in in order for me to get credentials and, you know, institutional backing so that I could continue in this world. And so I returned to school at an old age of 34 to start my PhD. And I had at that point two kids aged zero and two. So it was a big disruption to my family to go back to school and get my PhD. And then for the duration of my PhD and then a postdoc and the first few years of a tenure track position, I did lots of fun stuff on the side, which I thought was interesting, but then I constrained my main intellectual activity to be close enough to what the establishment wants, that I could, you know, get a PhD, get a tenure track job, and eventually get tenure. And then when I finally got tenure, I could go wild again, ignoring what everybody else wanted and just doing what I thought was interesting and important.
Tobi: You've explored brilliant, uh, sometimes even eccentric ideas from prediction markets to ancestral psychology to far future brain emulations. You've also had to play the contrarian at times in academia and public discourse. How have you handled scepticism or controversy around your ideas? Have you ever had a moment of doubt or personal crisis, so to speak?
Robin: See how I frame this? I see the whole point of everything here as figuring out big, important things. And it's what we're trying to find is news. You're trying to find things that are surprising. So a lot of academic work actually tries to show that the usual conventional view is exactly right. And people find that as prestigious and important, and they give people, you know, big accolades for that. But it's not really news if you thought this was true and then you check and it's still true. To me, it's the thing you're looking for, is the news. Things that you didn't expect to see that are surprising. And so you should expect good work to be surprising, i.e. a priori unexpected. That is, people should not believe you until they see your arguments for your conclusions. That's what news and surprising stuff is, right? So I'm completely happy with having news, having results that people, upon hearing the claims I'm making saying that can't be right. That's what news is. Unfortunately, many people, upon hearing what you say and thinking, that can't be right. That's where they stop. And they're not willing to actually listen to the arguments and evidence you've collected for this surprising view. If we're going to be looking for surprises, you've got to be ready to hear something that's claimed to be a surprise and then consider if it actually is a surprise. Okay.
And then there's a separate effect, which is basically I've been focused on looking for the most important neglected problems where I can find an angle. And it turns out humans just have a bunch of blind spots. And so there are just more important neglected things near the blind spots than elsewhere. So that made me interested in those blind spots. That is, wherever it is that other people have been neglecting stuff that's important that I could make progress on then, yeah, I want to go there. So, for example, I was initially in physics and computer science, and I would say in those areas, if you find something that's unusual, there's usually been a lot of other people near there looking for the same sort of stuff. And so it's hard to find a big advance in computer science or physics exactly because so many people have been looking around for advances.
Tobi: Yeah.
Robin: You're competing with all these other people who would love to find a new, important neglected thing because the world is really eager to find all those things. The world's really eager for new physical materials or physical processes, or new computer science algorithms or devices. The world loves that stuff, and they're eager for it. They pay a lot for it. So there's a lot of people eagerly looking for all that stuff.
And then I started to dabble in social science, and it seemed to me that in social science, it was much easier to come up with surprising results. And so that's why I switched into social science. Wow. Now, I thought, I must be really good at this, but not so much. The problem is, in social science, people just have a bunch of opinions about what they want to believe about the social world, and they're not so open to hearing that they're wrong. Humans don't actually fundamentally care about computer science or physics. They have induced interest in those areas because they're practically useful, but they don't fundamentally care. So there's not so much resistance to a new idea in those areas because we don't really care so much about which particular theories we believe or things like that, we more care about what we can do with them. But in social science, people care about particular opinions on medicine or education or politics, etc. And because they have pre-existing opinions that they are working to support, that's an obstacle to them thinking clearly, which means that they often leave important neglected problems unattended because of those obstacles.
So I went, okay, great. There are these important and neglected questions, but that's also an obstacle to convincing people that you found an answer to something. That is, you can go past the obstacles that block other people because they have pre-existing opinions. You can think about it fresh. You can figure out new answers. You can get evidence for those answers and arguments. You can bring them back to people, and then they just won't listen. That's what I didn't realise about social science is the reason why it's so much easier to find new, important stuff there is because the world's not listening. The world's not so eager to get that stuff. And so, um, you know, by the time I figured that out, it's kind of too late. I'd made my commitment to social science. I'm still happy that I'm able to make a lot of surprising, important insights and advances. But I see the problem here is that the reason that it's so easy is other people just aren't trying that so much. There's not so much demand for that, because if you find something, the world shrugs and goes, nah, we don't believe you.
Tobi: Final question for you. Um, this is a bit of a tradition on the podcast. What's the one idea that you would like to see gain more status, influence, and be more widely held, adopted even? You're not allowed to say culture adrift, by the way...[Laughs]
Robin: So can I say Futarchy? Look, if my intellectual strategy is to find important, neglected things, I'm likely to think that the things I found are in fact important and neglected. If you ask me, what are the important neglected things I'm going to say? Well, the ones I've been working on, of course, that was my whole point in picking them.
Tobi: Yeah, I agree, I agree, but I mean, can you give me something new?
Robin: I mean, so for example, there are institutional ideas that I didn't invent that I still think have a lot of potential. I think, for example, we could change democracy in big ways to make voters more likely to be informed either through tests or for random selection or other incentives. We could switch from first-past-the-post to proportional representation. We could do Harberger taxes - self-assessed property taxes, that's a better solution to an eminent domain. And so we wouldn't need government to overrule individual property rights if we had Harberger taxes as a way to create large chunk projects. There is a world full of interesting institutional ideas that I didn't invent, that the world should be more eager. So if you want me to generalise it, I think I said this before, which is if we just gave more status and attention to trying out new ideas, we would just make a lot more progress in the world than if we argue more about politics. So people are eager for new ideas and technology in physics or computer science, they're just not very eager for new ideas in institutional arrangements. And they mostly want to fight over who's in control of institutions, not about the structure of institutions. So if we could just try more variations on the structures of institutions, see what works well, then we could just make a lot more progress on institutional change, and that would be a huge value to the world.
Tobi: I've been doing these podcasts for close to six years. I think that's the most meta answer I've gotten on that question.
Robin: I like to be meta.
Tobi: Yeah, that's very Robin. Thank you so much. You're listening to Ideas Untrapped Podcast, and my guest today is Robin Hanson, economics professor and an all-around intellectual giant. Thank you so much.
Robin: Books.
Tobi: Author of two books, actually, The Age of Em and Hidden Elephants in the Human Brain. I'll put up links to his books and some of his most important essays and articles in the show notes. Thank you so much, Robin, for joining me.
Robin: Thank you for talking to me, Tobi.
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Power to the People
Tuesday, May 27, 2025 • Duration 52:07
Welcome to Ideas Untrapped podcast. In this episode, I speak with economist Sugandha Srivastav about the hidden political economy of electricity in developing countries. Using examples from her study of Pakistan's electricity market, we explored how opaque power purchase agreements, regulatory capture, and poor procurement practices drive high costs and unreliable supply in many developing countries that are in desperate need of energy. Sugandha also shares bold insights on how competitive markets and renewable energy, especially solar, can transform the power sector and deliver affordable electricity for all. Dr Sugandha Srivastav is a Lecturer in Environmental Economics and a Senior Research Associate at the University of Oxford - and a Fellow at Energy for Growth Hub.
Transcript
Tobi: Welcome to Ideas Untrapped. It's nice to have you on the show. I've been looking forward to this, so thank you so much for doing this with me.
Sugandha: Yeah, thanks for having me, Tobi.
Tobi: Yeah. So, why I wanted us to have this conversation was I read your paper on power. By power, I mean electricity, and the corruption, and basically surrounding power purchasing agreements in Pakistan last year. So briefly, can you just summarise what that paper was about, what you found, and what were the general lessons that we can draw from that?
Sugandha: Yeah, sure, so basically about two years ago, we started looking into contracts in the power sector. And as all of your listeners know, electricity is so important to all of our lives. It's very important for businesses. It is hard to overstate how critical electricity is to our lives, so we were just really curious about how is electricity being procured by the government? What are the contracts that underpin this electricity? And, um, can we learn something about how much we are paying for electricity? So we wanted to dig into these power purchase agreements, which is what the contracts are called, but we very quickly realised that they're not disclosed most of the time. So even though this is government money, which is going towards paying for something as basic as electricity. The public has very, very little information on what these contracts are and one of the few places in the world where we could find information about power purchase agreements was Pakistan because they actually released a law which said that tariff agreements have to be disclosed. So what we then did was we spent, many, many months actually downloading all of these agreements and contracts and, in the end, I think it was over 6000 PDFs with very detailed contract information and we put together a database. And that's when we started discovering a lot of very interesting things. It became very obvious to us that some of these contracts seemed extremely generous and that raised some questions on why electricity is being procured with these particularly generous terms and conditions. And whether that means that the electricity sector is enabling transfers from the public to a certain groups of vested interests. So the long and short of it is that we think that these contracts are really important to study, and what we found from our investigative work is that a lot of these contracts are extremely lopsided and, you know, there isn't any competitive procurement, and we know when there isn't competitive procurement, you have no idea whether you're getting value for money, whether you're getting the best product. They're just being solicited bilaterally through these very, very opaque contracts.
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Free Markets in Africa
Thursday, March 20, 2025 • Duration 46:40
Hello, everyone, and this is Ideas Untrapped podcast. In this episode, I explored the challenges of acceptance of free market ideas in Africa with my guest, Tinashe Murapata. We talked about how the struggles of free market ideas can be traced back to historical misinterpretations that link capitalism with colonial oppression. We also discussed the weaknesses of Africa’s electoral politics in prioritizing economic issues and emphasised the need for cultural change to embed economic freedom in public discourse. The conversation concludes with a vision for localized, community-driven solutions to reduce state dependency and encourage market-driven development. Tinashe Murapata is the Chief Executive Officer of Leon Africa, an investment holding company in Zimbabwe. he is also a former executive at Barclays Bank and host of a popular Youtube show called Friday Drinks about economics and policy.
Episode Summary
Introduction
Tobi:Welcome to Ideas Untrapped. It's fantastic to speak to you. I love what you do so much—I’m a huge follower of your YouTube channel. It's nice to speak to a fellow ideas merchant on the continent. So, welcome to the show.
Tinashe:Thank you very much. I really appreciate this.
The Paradox of Free Markets in Africa
Tobi:A couple of weeks ago, I was speaking to an Indian economist on the show, and he said something fascinating. He observed that in America, when he speaks to his colleagues about free markets, they claim the U.S. doesn’t have free markets. Instead, he tells them, “Come to Africa—where you can be in traffic for five minutes, and there are vendors all around trying to sell you one thing or another. That’s the real free market.”
I found that interesting. But later that day, ironically—or unironically—I saw a news report that Nigeria’s communication agency was petitioning Elon Musk’s Starlink for increasing prices without government approval. And I laughed—so much for free markets!
This got me thinking. Price control and general illiberalism in economic policy are deeply embedded across Africa. You’re from Zimbabwe, I’m from Nigeria, and we see this pattern across the continent.
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America's New Deal
Friday, March 7, 2025 • Duration 38:41
Welcome to another episode of Ideas Untrapped podcast. My guest on this episode is Raymond Fisman, who is the Slater Family Professor in Behavioural Economics at Boston University. He is one of the foremost researchers on corruption and institutional behaviour in the last three decades, and I have been looking forward to talking to him. The main theme of our conversation was the re-election of Donald Trump as the new U.S president and his swift embrace of corporate oligarchs as his new inner circle and power proxies. We also discussed why corporate America is rushing to fall in line and "kiss the ring". This was an enlightening conversation for me, and I do hope you find it useful as well. I also hope to have Raymond back on the podcast for a more global exploration of the topics he covered.
Transcript
Tobi: Hi, everybody. This is Ideas Untrapped Podcast.
My guest today is Professor Raymond Fisman. He's the Slater Family Professor in Behavioral Economics at Boston University. He's a brilliant, brilliant economist that I've been looking forward to talking to for a while. It's a pleasure to have you, Raymond.
Raymond Fisman: It's a pleasure to be here. I'll tell my children that someone said I was brilliant. They'll find that very funny.
Tobi: I think the interesting place I would say to start is what was your reaction to the inauguration two days ago? [This conversation was recorded on January 22, 2025 two days after Donald Trump was inauguarated for a second time as the President of the United States of America] I mean, in some kind of mildly amusing horror, like, I would say I was at the open blatant embrace of the core of American government of oligarchy and downstream of that, corruption. What were your thoughts?
Raymond Fisman: Yeah, I think it's a little hard to know where to begin because there is so much to say and literally relevant news and so far as self-dealing is concerned, as well as obsequiousness of business elites in the U.S. is coming so quickly that if we had this conversation six hours from now, there'd probably be yet more to say about it.
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Global Value Chains
Saturday, February 8, 2025 • Duration 47:44
Happy New Year to our listeners. This is the first episode of the year, and I had a conversation with Oliver Harman about global value chains (GVCs), foreign direct investment (FDI), and regional governance in economic development. Oliver and I discussed how GVCs have evolved, the crucial role of multinational enterprises in knowledge transfer, and why regional governments—rather than national ones—are often better positioned to shape policies that maximize benefits from global trade. The conversation highlights the importance of GVC-sensitive policies, investment promotion agencies, and upgrading strategies to help economies move up the value chain and develop their economy. Oliver Harman is an economist. He specialises in spatial economics and economic geography. He is a Senior Policy Economist for the International Growth Centre at the London School of Economics and Political Science. He is also a Research Associate at the Blavatnik School of Government, University of Oxford. His book with Ricardo Crescenzi, which was the subject of this podcast, can be found here.
Transcript
Introduction
Tobi:Welcome, Oliver, to Ideas Untrapped Podcast. It's wonderful to have you here. I have to say that your work, along with Riccardo Crescenzi, is one of the most refreshing things I've read in the last couple of years on global value chains. It's a wonderful book. I'll put up links to how people can access it in the show notes, and I think everyone should read it.
I want to start with the basics. The phrase global value chain is frequently used in economic discourse, particularly in discussions about geopolitics. But what exactly are global value chains? How would you describe them?
What are Global Value Chains?
Oliver:Thank you for having me, Tobi, and for your kind words on the book—it is much appreciated. I can provide you with an open-access overview of the book for your listeners who may not be ready to purchase the e-book but want a taste of its content.
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Moving from Promise to Progress
Friday, November 29, 2024 • Duration 01:12:17
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
(00:00:33):
college education and how young people may have been shortchanged by the promises
(00:00:40):
and what the evidence suggests.
(00:00:43):
So briefly,
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Learning from East Asia
Monday, November 25, 2024 • Duration 46:27
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.
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Trade-offs and Tensions
Wednesday, September 11, 2024 • Duration 50:58
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.”
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The Case for Parliamentarianism
Friday, June 28, 2024 • Duration 48:16
Tiago Santos joins Tobi on this episode of the podcast to discuss Parliamentarianism. Tiago believes that if African countries had adopted parliamentary systems during their democratization wave, they would have likely seen better development outcomes, citing the success of Botswana and the economic growth seen in parliamentary countries. He also highlights four main flaws in presidential systems according to political scientist Juan Linz: lack of clarity in authority, rigidity, winner-takes-all nature, and personalism. These issues often lead to ineffective governance, coups, and excessive polarization, which hinder development and political stability. Tiago further argues that better governance structures, like those provided by parliamentary systems, are crucial for economic development. He emphasizes that parliamentary systems lead to greater political stability and more inclusive decision-making, essential for fostering long-term growth and escaping the "Malthusian Trap."
Tiago Ribeiro dos Santos has been a Brazilian career diplomat since 2007. He has a law degree from Pontifícia Universidade Católica in Rio de Janeiro, a professional degree from Instituto Rio Branco (Brazil’s national diplomatic academy), and a master’s degree from the University of Chicago Harris School of Public Policy. He is the author of the excellent bookWhy Not Parliamentarianism.
None of the opinions in the interview reflect the views of any institution he has been associated with - and you can find the full transcript of the conversation below.
Transcript
Tobi;
You're, I would say, a strong advocate of parliamentarianism. I wouldn't call myself a strong advocate, but I'm fairly biased towards your point of view and became even more convinced when I read your book. Particularly in Africa, a couple of countries went through long periods of military dictatorship. And around 20, 25 years ago, there came another wave of widespread democratisation on the continent. What happened was, maybe due to the influence of American foreign policy or some other global forces, a lot of these countries opted for the American-style presidential system. And in my own observation, maybe I'm wrong empirically, a lot of these countries, my country, Nigeria included, struggled with the workings of this presidential system, such that there had been constant agitation for a kind of return to the parliamentary system that Nigeria had immediately after independence. My question to you then is that, are you willing to say or assert that perhaps if a bunch of these countries around 20, 25 years ago had opted for parliamentary system, would they have done better development-wise?
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Beyond GDP
Friday, May 10, 2024 • Duration 01:03:48
In this episode, Tobi talks to David Pilling, Africa editor for the Financial Times. They discussed his book "The Growth Delusion", exploring the significance and limitations of economic growth, particularly in poor countries. David challenges the conventional reliance on GDP to measure economic success, proposing a more nuanced approach that considers wealth distribution, environmental impacts, and overall well-being. He argues for a balanced view that recognises the necessity of growth for development while advocating for policies that prioritise human and environmental health. The conversation also touches on broader development issues in Africa, including the misuse of resources and the political challenges hindering effective governance and equitable progress.
The transcript of the conversation is below, and many thanks to David for coming on the podcast.
Tobi;
This is Ideas Untrapped podcast, of course, and my guest today doesn't need much of an introduction, anybody who reads the Financial Times knows David Pilling. He is currently the Africa editor of the Financial Times newspaper, he used to be the former Asia editor of the newspaper, and he has written many fantastic columns and essays covering a wide range of subjects. And recently he's been writing a lot about Africa, especially stories on development and other related matters. It's a pleasure to welcome David Pilling today.
Welcome, David.
David;
Thank you so much. It's a pleasure to be here.
Tobi;
I want to talk about your book for a bit and one question that keeps popping into my mind as I kept reading, that was a couple of months back last year, the general tone of the book, which is called The Growth Illusion was, you know, one of skepticism, right?Also, the impression that jumps at me from reading your economics-focused stories about Africa is that growth is important. So has your work in Africa forced you a bit to reconsider some of the positions you take in the book?
David;
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Tobi: So, I mean, in that situation, and reading through your paper. After going through all the details and all, did you find out whether that was specific to Pakistan or is there a pattern across poor countries who have no power generally.
Sugandha: It's definitely a pattern. So one of the striking things is that across so many parts of the world electricity is not procured competitively and by competitively I just mean the normal process of firms submitting bids and choosing the least cost bid.
You know, that seems like an obvious way to do this, but that isn't what's happening. To give examples of countries where there are these very opaque power purchase agreements, um, Indonesia has them. Ghana has them. I think Nigeria, by the way, also has them. Mozambique has had them. And till date, we have just had very limited evidence. So what typically happens is that some journalist goes out there and finds a very specific scandal related to this power purchase agreement. And they report that.
So, for example, in Pakistan, journalists have said that the cost of coal being used by these power plants is much more than the market rate. Sometimes it's 50% higher than the market rate. And that's a very strange thing to observe. You know, why aren't power plants using cheaper coal? It turns out that power plants get reimbursed for the cost of coal. So if they say it's more expensive, they get a bigger reimbursement and that is the incentive behind lying. We've also seen that happen in India. So, to answer your question, this type of rent-seeking behaviour in the power sector is not unique to one country. We have seen it across the developing world. And one of the reasons it's there is that there isn't competitive procurement and a symptom is that the price of electricity becomes higher. And it also becomes more unreliable. And in general, you have this situation where public money is not being used efficiently. Unfortunately, yeah, it is a common story.
Tobi: Yeah. to use Nigeria example, not that I want you to respond to that specifically. Um, so in Nigeria, all sides of the bargain in the electricity market is complaining. Uh, the government complained about the fiscal burden of the subsidies. Consumers, citizens complaining because the electricity supply is not stable and the power companies do complain that they are not charging market rates, they are not making money, they are heavily indebted. What is it about the structure of the electricity market that creates this kind of dysfunction?
So, for example, some will argue that power purchase agreements are so structured because electricity is capital incentive and hence you need these lopsided contracts as an incentive for people who are willing to invest that kind of money. So what is it about the structure of that market broadly?
Sugandha: Yeah, so you do need risk reduction to incentivise entry in developing countries. I mean, that is a feature of developing countries. The question is how much risk reduction do you need? So you want enough so that people invest in your electricity sector, but if you give too much, then you'll create a debt crisis. And so there's a sweet spot in the middle where you allow entry into your electricity sector, but you're not going to create a debt crisis which creates havoc for your government.
This is where we think that some of these power contracts have gone too far on the other side. They're creating way too much burden on the government, and to put some numbers here, you know, often like the return on equity that is offered in these contracts, at least in Pakistan, we've seen can be up to 30%. But when you account for the corruption and cheating, so for example, as I mentioned before, power producers can get reimbursed for input costs. So sometimes they lie about their input costs and say that they're higher than in reality because they get reimbursed. So once you factor that in, we've seen some power plants making a return on equity of 83%. Which is much, much higher than the contracted value of 30%. So in that case, what we're documenting is actually explicit cheating.
Now to go back to your question of why this causes dysfunction in the entire power sector? If you think about it, essentially each step of the system is breaking and you know, so the power producers are making super normal profits in some cases. Then the utility, which is in between the power producer and the customers, they often can't charge higher tariffs because they're politically constrained. So they are buying this expensive electricity, but at the same time they can't pass on the higher cost. So they're making a loss. Then because they're making a loss, what they do is that they cut off power. So, because they make a loss per unit, they don't want their total losses to go above a certain threshold. So then their option is to simply switch off the power. That's something called economic load shedding.
So to your listeners, you can have load shedding for many reasons. Sometimes it's because of technical losses. Sometimes it's because you don't have electricity supply. But other times it can be just because your utility turns it off. Because they're not making a profit or in fact they're probably making a loss per unit of power, so they just turn it off. And that's a very under-appreciated reason why electricity is unreliable because it has nothing to do with supply. It has to do with the economics of it. And then you go to the government side because now that the utility is making a loss, eventually this utility has to be bailed out and the government does the bailing out. So then the government fiscally is in a bad position. This is how the entire system starts basically breaking down and the solution is simple. I mean, we need to have a meritocratic electricity system. So if an electricity generator can provide good quality, low cost electricity, they should be able to enter the market, sell and outcompete the old generation. It's as simple as that. And if that's risky, then you can provide risk hedging mechanisms that don't fundamentally distort the market the way they are doing now. Because right now it's a broken market, which is happening over and over again across the world.
Tobi: Yeah, so suppose I'm a developing country that is democratic. And I happen to inherit these contracts, uh, as problematic as they are. We also know that they are also notoriously long term. And sometimes the efficient or should I say fiscally responsible thing to do is to cancel some of these contracts. But again, as a poor country, you can bear at the reputational costs and economic costs for that. You're viewed as unreliable, there's no private property protection and not investment friendly. So how do you deal with this dilemma of handling inefficient corrupt contracts that are also very, very expensive?
Sugandha: Yeah, I'm gonna give a couple of examples. So, for example, In Indonesia, one of the very first independent power producers was called Python. And it emerged through really good investigative work that this independent power producer had such a generous contract and they were overcharging for electricity. And then it turned out that they were connected to the president of the country. They were connected to Suharto. And so what happened was that this actually went to court. Because there was all this evidence that emerged and because it was very clear that this was a case of corruption and using the electricity sector to benefit people in political office. One route is to use the judicial system and to go to court and say: these power purchase agreements are supporting incumbents or they're supporting politically connected individuals that they haven't been negotiated on a fair basis Because part of the legal system is to enshrine these protections and part of contract law is to ensure that a contract is fair and is a fair value to both sides.
So that is one option, you know, where you find very clear evidence of corruption and rent-seeking and the misuse of public funds to benefit certain interest groups you can use the judicial system. Now there's another side to it. If you don't find evidence of explicit corruption, but you're just worried about the fact that this contract is thirty years long, there was no competitive procurement, the tariff is three times the market rate for electricity, but you can't point to any specific corruption, it just seems like they signed a bad contract. In that case, it might call for renegotiation. So you get both parties on the table and you see what you can renegotiate because one of the other principles of contract law is if you're going to sign things that will last for thirty years, then reality might evolve, right? There could be very fundamental changes. And another principle of contract law is renegotiation - the ability to kind of meet and see what you can renegotiate.
So for example, Pakistan had a very, very big round of renegotiations. And one of the elements that they renegotiated was payment in U.S. dollar. So many IPPs were getting paid in U.S. dollar. But of course, Pakistan was collecting its electricity bills in rupees. And whenever there was an exchange rate issue, sometimes the price of electricity could double or triple because the rupee depreciated relative to the dollar. So the simple fix, they said, the government said, look: this is crippling our economy, this is putting too much pressure on our foreign exchange reserves, can you come to the table? Can we have a conversation and can we change these contracts from US dollars to rupees? And a bunch of independent power producers agreed, right? They could see that the country was in a very debt distressed state and that there was a lot of pressure on foreign exchange reserves and so they agreed.
And the good thing about a structured renegotiation process is that it doesn't decline your credit rating because in this case you have consulted with the other party. You have brought them to the table. You've talked it out. Now, that's assuming that they're willing to renegotiate. There can always be a situation where you think the contract is very lopsided, you think you're paying too much for electricity, and when you try to bring them to renegotiate, they decline. So now to give you an example of that situation, that is all the Chinese contracts in Pakistan. So in 2015, China built eight gigawatts of coal in Pakistan. This is now providing some of the most expensive electricity in the country. The coal plants are only used 20% of the time, which for a coal plant, if you don't use it 75% of the time, you're in big trouble. Because it is a high capex investment. You need the utilization rate to recover costs. But in this case, the Chinese coal plants get a fixed payment on a monthly basis, even if they're not used at all. These are called capacity payments, which are very common in power purchase agreements. So it means that in an ordinary situation, they would have gone out of business, but because of the generosity of the power purchase agreement, they're not going out of business. And these Chinese power contracts account for one-fifth of total Pakistani power sector debt, so there are really key piece of the equation when it comes to fixing that. Now this is a very tricky domain right because if you don't find outright corruption, you know, you can't litigate. You try to call them to the table, they refuse to renegotiate. And you're stuck. And it's a huge, huge, huge part of your debt.
This is where I think the international system needs to restructure, because this is when you have a really systemic issue and it goes like this: Pakistan gets bailed out by the right? It's on its fifth IMF bailout package. An investor from China can come and say we can write whatever contract we want and Pakistan will sign and ultimately the debt will be repaid by the IMF through the IMF bailout package. That creates a moral hazard. Because the investor ultimately knows that there's the IMF backstop. So one option is you take this to the international court of arbitration and Pakistan says we have to get out of these contracts. They're not fair. They don't reflect good value. The International Court of Arbitration hasn't been functioning well at all because there's something called the Energy Charter Treaty, and it is very biased in favour of power generators. And there's been a lot of criticism in the academic community about how the Energy Charter Treaty is being misused to prolong the lifetime of fossil fuels that are uneconomic. You know, if we had a normal market where you just have meritocracy, these assets would have been out of the system. so that's where I think we need structural change. And the final point I will say is going forward, looking into the future, developing countries have to do a couple of things. They absolutely, 100%, need to procure power competitively. You know, if there isn't an auction, a sort of beauty contest to see which power plants reflect the best value of money, citizens should ask questions because then you're always wondering, are you giving this contract to your cousin, to a friend, to, you know, I mean, there has to be competitive procurement. By the way, both in letter and in implementation, many of these countries have competitive procurement laws, but they don't follow them in practice.
And I think the second point is actually introduce a market for electricity, because even after the procurement stage, power producers should always feel the pressure. To deliver low cost energy. And that is what the market is for. The market creates the incentive to do that. Whereas if you just have long term contracts, they can sit back in their chair and say, ok, we won the first round, now we're here for thirty years, no one can kick us out. And that's not the right incentive. The incentive should always be that if we don't deliver efficiently, we can be out. You need that incentive. Otherwise, you won't have good quality energy.
Tobi: So, two-part questions, maybe I'll take them one after the other. First one is that there seemed to be some regulatory capture going on because I recall the last privatisation round that Nigeria did in 2013. It was not competitive. It was opaque. And of course we ended up with a mess and a lot of those power companies and contracts and assets ended up with government cronies. So, in terms of regulatory capture, what really can be done and is it unique to the electricity market or it is usually reflective of the general institutional and governance environment?
Sugandha: Yeah, I love that question so much because if I back up and give some context. Um, you know, in the 1990s, the Washington consensus was the rage, you know, everyone was like privatise, privatise, privatise. This will make you more efficient. That was the main recommendation coming out of Washington. And that's why a lot of developing countries started this whole endeavour of bringing private sector investment. But here's the thing. Privatisation only works if it has its key partner, and its key partner is governance reforms, because if you don't have governance reforms, then the privatisation can be misused and abused in the ways you just described. It can result in regulatory capture. And this can be across many sectors of the economy, right? It can be procurement related to construction. It can be related to sourcing materials. It can be related to sourcing electricity. But essentially, whatever type of procurement there is can be massively misused. And so the issue that happens for a lot of developing countries in the nineties, you know, for Asia, a lot of this privatisation of electricity really kicked off in the early nineties. I know for some parts, um, I'm not sure when it happened for Nigeria. What was the year you said?
Tobi: 2013.
Sugandha: So, so for a lot of Sub-Saharan African countries, it happened a decade, sort of a decade and a decade and a half later. Um, but, the key thing is you need these governance reforms and by that I mean you need to have a protocol of transparency. You need to have a protocol of competitive procurement and establish a clear rules-based system that has to be followed. And you also need to have monitoring and enforcement because, of course, things will still go wrong, but there should be fines, penalties, potentially jail terms associated with any type of misconduct and fraudulent activity. So those three pieces are so critical because without those, you can absolutely have the regulatory capture. And that is the other side of the story, right? Some of these contracts, when I looked at them in Pakistan's case, when they are signed in the 90s, any economist looking at that could actually say, oh, my God, if we honour this contract for the next thirty years, there is a risk this will cause massive pressure on foreign exchange reserves. There is a risk that this will lead to a debt crisis. And that would have been the time to turn back and say to the IPP, no, no, no. Let's sit down again at this table. Let's renegotiate, some of these terms need to be softer. Right. But one of the reasons that typically isn't done is because there is a regulatory capture. So I think that those norms of transparency, the rules-based system, the auctions and then the monitoring and enforcement, those are such critical aspects of institutional capacity and they go hand in hand with privatisation. They're compliments. You can't just do one without the other.
Tobi: So the second part of that question, uh, speaking on the electricity market specifically, so if you have to have private sector participation which is a position that most developing countries have found themselves. What are the core principles that should guide the relationship between, say, state-owned utilities and private power producers to ensure a balance between investment security and public interest protection.
Sugandha: Yeah, absolutely. Well, one of the key principles is don't just copy and paste old contracts. I mean, you'll be surprised, but some of these contracts do not change much. And in fact, You know, there's no reason why a contract that had to be very generous in the 90s looks exactly the same ten years later, because in that time there's obviously been development, there's been de-risking, etc. So one thing is really to treat everything on a sort of case by case basis to do a proper negotiation and not to just copy paste and this I think, you know, it sounds so simple and it sounds so intuitive, but when we looked at these contracts, what ends up happening is just the opposite. For example, if you're an independent power producer and I give you dollar indexation, then everyone who comes after you asks for it too. And I basically keep writing the same contract over and over again, even though the macroeconomic situation in the future may not warrant dollar indexation. So I think that's really important. The other structural change, which is something that you start seeing in advanced markets, is to have a place where you can actually bargain for power purchase agreements via a platform. So the UK has a platform for power purchase agreements. Uh, you know, the UK doesn't have a state owned utility. It has many, many different retailers. It has a retail competition, but what happens in this is that the independent power producer can suggest its contract terms and then the utility on the other side can look at this and it can look at other options of other independent power producers that suggest their own contract terms. And in this case you know as the independent power producer that if you ask too much, then someone else will win out over you and will get the contract. So it creates this incentive to basically discover the optimal contract just so that it's enough to cover your costs, it's enough to cover the risk of entering and the risk of participating in the electricity sector, but it doesn't result in super normal profits. And I think that's a really clever design.
Um, you know, one of my colleagues at Energy for Growth Hub says, why aren't power purchase agreements like mortgage agreements? You know, they should be very competitive. It should be very transparent. There should be a rules-based system. The information should be all out there. And we know mortgage agreements change over time depending on the economic situation, why are PPAs shrouded in secrecy, you know, this should be as standard as your typical mortgage contract. And I agree with that.
Tobi: So I'll ask you a question that I'm pretty certain that everybody that's gonna listen to this episode is dying to find out. To sort of like set the scene for that question, if you ask any power producer in Nigeria, for example, why electricity is unstable, it's always about tariff. You know, there seem to be no ceiling on tariffs. It's always tariff, tariff, tariff. We need to charge market reflective tariffs. It's why you don't have power. And it's a source of constant tension because the government then has to subsidise, you know, keeping an eye on energy costs. I mean, the cost of living crisis that the country is currently going through is mainly due to a surge in the price of energy. So what is the right approach to tariffs and pricing electricity generally? And can you give us a formula that you economists use to determine the market rate for electricity? Because like you said in your earlier answer, some of these contracts and the actual economics of it are above market rate and yet there's no electricity. So how do you determine the actual market rate for electricity?
Sugandha: Well, basically, if it becomes a very structured market, the goalpost, like, where Nigeria would want to get you is a situation where, for example, every day, you have a bunch of power generators line up and submit bids. Okay. And one of them says, okay, it's going to cost twelve cents per kilowatt hour for me to give you power. Another one will say, okay, I can do it for ten cents. Another one will say, oh, I can do it for two cents. By the way, the two cents will be the solar power, right? Because solar power is cheapest form of electricity because there is no fuel, right? So in terms of submitting your marginal cost, the marginal cost is zero because sunshine is free. Whereas for other things, the marginal cost of gas, et cetera, there's a fuel that you need to combust. So it typically is higher. And then on the supply side, the utility will check, okay, what is going to be the demand in Nigeria today? You know, is it a very hot day? Is everyone going to turn on their air conditioners? And they will basically move up those bids. So they'll start with the cheapest ones and they'll say, okay, okay, you know, you who said you can do it for two cents per kilowatt hour we'll get all of your electricity first. If that's enough to meet demand, good, you're done. But if it's not, then you'll go to the one who can do it for five cents per kilowatt hour. If that's not enough, then you'll go up to the one that does ten cents per kilowatt hour. And in the end, the price that people pay is a weighted average of all of those different generation costs. But remember in the system which repeats, let's say, every day on a daily basis, you work your way upwards towards the most expensive. So you start with the cheapest and then you work towards the top. And sometimes if you have something super expensive that is… you know, this is called the merit order when you rank things from cheapest to most expensive in the electricity system. If you have something like a gas generator that really, really cannot compete because it's offering very expensive gas, then ultimately that will get pushed out of the system because it's consistently the most expensive. Right? Because you order things.
Now this is the opposite of what's happening in power purchase agreements. In power purchase agreements, the price is fixed for thirty years and you're locked in. It's very, very different. So, when people say that electricity is super expensive and I do know enough about Nigeria to know it's very sunny, but there's really not enough solar being installed at the utility scale level. And let's be clear, right, I know there's domestic reasons because there's indigenous resources in Nigeria, but when we consider this kind of merit order ranking, solar can often put a lot of downward pressure on prices. And that's just because of the very, very intuitive reason that with solar, the cost is just about building the solar farm. But once you have paid that, sunshine as a fuel source, quote unquote, as a fuel source is free. It's a God given fuel. Right. And so that means that it is always amongst the most competitive in the merit order and then it puts downward pressure on prices.
I can give you the numbers from India. So India has a lot of domestic coal, you know, it's one of the biggest, it's the second biggest coal combusting country in the entire world after China. And guess what solar in India is three times cheaper than the coal. But the solar in India cannot generate as much as it should be. So India is installing a lot of solar, but if it wasn't for the power purchase agreements, it would be even faster and even bigger in solar because If we had this proper system of the merit order, which covered the entire Indian electricity market, then solar would be beating fossil fuels all the time. The reason the fossil fuels are not being beaten is because they're kind of hiding under their power purchase agreements and they don't want to let go of their power purchase agreements. So, we have a very funny situation in India that even when the utilities like hey it's been twenty-five years, I've been buying your coal, can I please finish my power purchase agreement. The coal generator says, no, no, no, we're going to extend this for another ten years. Right. And these utilities are like, no, please, please let us switch to solar because that's going to reduce costs. Um, so that's my kind of simple answer. So you want a situation which is really driven by plant level economics. It is dynamic and with every day you have this kind of beauty contest. Who can do it for the cheapest? And on the utility side, they're going to work their way up from the cheapest to the most expensive. I think that is, um, yeah, that is where we eventually want to go to.
Obviously, that kind of reform takes time.
Tobi: I mean, speaking of solar, um, in Nigeria, usually when you hear solar or think solar these days, there's really not much happening at scale. It's usually households and solar solutions has almost been stereotyped for rural electrification, which is weird. But you recently published something on Substack about solar in Chile. Tell me what's been happening in the market in Chile, especially on solar and what's the cool thing that we can learn?
Sugandha: Oh, well, um, so Chile had a big problem. So in Chile, um, just for your listeners, you know, Chile is a very skinny, long country. The capital, Santiago, where most people live, is down south. And in the north, you have the Atacama Desert, which is very sunny. It's actually one of the sunniest places in the world. Now, ironically, in Chile and, you know, in the south of the country where most people live, electricity was very expensive. I mean, it cost around $200 per megawatt hour at its highest. These were the types of really severely high prices that were being paid. And it was being generated through coal. Um, there was quite a bit of coal generation. And it was a very odd situation because people kind of just were like, well, there's a desert. There's so much space and it's very, very sunny up there. The problem was there was no way to bring the electricity from the north to the south. There were no power lines that went that way. So the government decided that they're going to invest in a massive power line that will connect the Atacama desert all the way down to cities like Santiago. And the moment the government announced that plan, a lot of private players suddenly started entering into the Atacama Desert and building solar because suddenly they knew they will have a way to sell the electricity to the biggest markets, right? Because before the power line, who cares if you build solar there. There's no way to transport the electrons. So this was super interesting. Suddenly private investment in solar boomed. Now the interesting thing after that is that once the line was completed, and the solar power turned on. And by the way, these are big solar farms. So normally with solar, if you go bigger, you can actually reduce your costs because of economies of scale. These are fairly large [solar farms]. And the moment the solar started generating, you know, your electricity prices went down from a high of $200 per megawatt hour to a low of $20 per megawatt hour. This was basically very, very transformative for the country and many coal power plants went out of business.
Now, the difference in Chile, by the way, is that the power market is competitive. So once a better technology comes on the block, that mechanism that I described before of always prioritising least cost and doing that on a dynamic basis kicked in immediately in Chile. So that's why you saw solar was supplying for all of the daylight hours, right? Solar was winning. Solar was supplying daytime energy. And then at night, yeah, some of these fossil fuels ran at night, but that wasn't enough for them to stick around or for them to make enough of a profit. And so the upshot was that Chile started pivoting to this very interesting mix which became cleaner and cleaner. It was solar. They're doing a bit of batteries now. I think they also have other energy generation sources that help balance. And for the normal person, it has made a big difference to their bills. But the best part is that the cost of building that power line was paid back in eight years because of the savings. The savings were so huge that even though the government had to build this kind of big piece of infrastructure, it was all worth it and eight years is a fairly short amount of time to recover the fixed costs of such a large investment.
So in terms of the takeaways we can learn from this, right, one of them is - there are strategic investments that government can make that can really unlock benefits, and that is something that countries should be doing if there is a place which has lots of solar potential but it's not currently well connected to where people live and where cities are. Building those transmission lines is going to be a critical piece of the puzzle. And then the second is to also fight the narrative that solar doesn't work. I mean, it's a narrative that exists in many places because like any good competition, you kind of want to talk down the other team and you want to kind of play them down and say, no, no, but they actually can't do this. But to be honest, I mean, I don't think we need to believe opinions and narratives, we can just look at the costs and the numbers and then it's a different story. And I think that with Chile, that's what it shows. Like, here's a global south country that reduced electricity prices so significantly because of solar. That's helping firms. It's helping households. And it's a way to combat that narrative with data and statistics, which is why like that. And I have kind of similar stories from India as well, where you really see it has made such a big difference to people's livelihoods. And the bigger picture here is that, look, we care about electricity. We care about electrons. It doesn't matter whether that comes from a lump of coal or from solar, like, the electricity is the same. Ultimately, we want it to be affordable. And so whatever does it in an affordable way, is what we should turn towards and the truth now with the numbers is that that is solar. I mean, it's quite unambiguously solar.
Tobi: I have two more questions for you to go. The first one is that recently, this goes back a few years actually, uh, a lot of developing countries have been pushing back on rich country led climate agenda basically on the reason that it deals developing countries a very poor hand in terms of energy needed for development and prosperity. Some of it I have a problem with. Some of it actually can come up as political signaling and sometimes a way to get generous deals so that some of these leaders can just embezzle money from carbon exchange agreements or whatever. But generally, what do you think? What's your take? Because another problem that I have that makes me uncomfortable is that climate change is indeed a global problem. There's no region of the world that won't be affected and the solutions to it, there's no statute of limitation on its deference. So what do you think? What do you make of all of this?
Sugandha: Yeah, I would say that in some ways the side of climate change that gets the most media attention in popular press is these COP conferences and diplomats and fighting and negotiating and it's like a game of hot potato. It's like, no, I won't do it ,you do it, no and you know, and they just pass around this hot potato. And I think that to me that's a shame because climate change to me is not a diplomatic game. That's the wrong way to frame this. I think it's actually a game of science and technology and engineers and it's not the playground of diplomats and I think the politicisation of it has actually been very, very damaging. Because it's taken something that should have been a technical challenge for innovation and scientists, and they've made a farce and a joke out of it. And I think if we look at this another way, like, if we just reframe it and say: this is the next big industrial revolution. This is the time in human history where we need to pivot towards another mode of production, something that is more efficient, something that utilises renewable resources rather than exhaustible resources, right? Because if you think of fossil fuels, these are very old paradigms, right? The fossil fuel paradigm started with the industrial revolution in Britain, the steam engine. And if you think about it, it's very simple: you dig up something from the ground, you burn it. The burning creates heat. Which boils water, which creates steam, and that steam moves a turbine. It's a very old, basic concept. There's nothing particularly inspiring about it.
But now, look at where we are. We have discovered that actually if the sun shines on certain materials, electrons can jump and that can automatically in a one step process generate electricity that was the discovery of the photovoltaic effect, and now we know how to harness it at scale. And if you look all around us, the entire earth has been using the sun's energy. Everything that's green is a type of solar panel. That should be very inspiring to us because it's taken humanity a long time to figure that out, but now we're aligning with this ultimate source of power. And just to say fossil fuels are ancient solar energy, right? We're just mining biomatter that's been condensed over millions of years. So if we reframe this, it takes it from burden to opportunity because it creates the idea of a green race. You can have winners in this. This is a new industrial paradigm. This is a growth sector. This is something that is advancing the old paradigm because technologically, it is far, far superior. You're not just digging and burning. It is actually a very sophisticated paradigm which connects to smart meters, the internet of things, batteries. So what I would say to your listeners is that the whole miscategorisation of climate in this political domain. Has done a great injustice to the technological side and the technological framing is what I think is much more appropriate for this. Because then suddenly the way any developing country wants to be technologically advanced, well, why not do it for energy, right? Energy is the backbone of your entire economy. Why do you want to be an 18th and 19th century energy paradigm? It's a very weird way to think about it, right? Like, if someone told you, hey, if you want to expand your transport sector, You should go with 18th century horse carriages because that's how Britain did it. You would laugh, right? You would say that's ridiculous. Why would I do a horse carriage? We have much better technologies today. It's the same thing with a lump of coal or gas, like, honestly, there's a new horizon. Why would we go to old centuries technologies? So that's kind of my response to that. I just think it's a whole circus over there and it's distracting. It's missing the point.
Tobi: Yeah. My final question for you, and this is a bit of a tradition on the show. What's the one idea? It could be your idea. It could be something you've read or seen or heard as elsewhere. What's that one idea you like to see spread everywhere? You’ll like to see people believe it. You'll like to see people live it. You'll like to see people be inspired by it. What is that one idea?
Sugandha: Well, I mean, one thing that I find very inspiring is the fact that sunshine and wind are free. When was the last time anyone ever paid for a ray of sunshine or for a beautiful gust of wind? And sure, we need to build wind turbines, we need to build solar panels, but once you do that, the rest is essentially free. You don't need to dig up more of anything. You don't need to drill wells. You don't need to do these kind of very complex ancillary processes. It's kind of a one step process. You build and then you utilise this abundant free fuel. And to me that's so inspiring. I think that the idea that we live in a world that is already solar powered and, you know, we've had millions of years of evolution and the energy source that evolution has prioritised has been the sun's energy. You know, I take a walk outside and I see a green planet and I'm like, well, you know, chlorophyll is green because that's what taps into the sun's rays effectively. And I think that that is just really inspiring because it's already hinting at this kind of bigger, deeper future. And it's something that I think is very aligned. And I do think that that is something where humanity will go. And in some ways, it's almost like there's always been energy around us, right? Every gust of wind is energy. Every ray of sunshine is energy. We just haven't known how to harness it. So yeah, that's kind of the main idea I would want people to take away with, which is that sunshine and wind are free. You know, why don't we use them more because that is the logical next step in my mind.
Tobi: Yeah, that's a fantastic idea. We'll be sure to help you spread it.
Sugandha: Great.
Tobi: So I mean, it's been wonderful and insightful talking to you. Thank you very much.
Sugandha: Yeah, thanks so much for having me. I've had a lot of fun talking to you.
So, my first broad question is: What do you think is holding back the acceptance—or even tolerance—of free market ideas, particularly among the elites and economic policymakers?
Historical Misconceptions and African Economic Thought
Tinashe:That’s a very good question, Tobi. And thank you again for having me.
The answer, I believe, predates us. It’s rooted in Africa’s transition from colonialism to independence. There were two ideological sides at play—the West and the East. Colonialism was associated with the West, which championed capitalism. Meanwhile, the East, which supported African independence, was viewed as the antithesis of capitalism, embracing socialism and communism.
This led to the flawed perception that capitalism was the ideology of the colonizer, while socialism was the ideology of liberation. However, this is historically inaccurate. Both socialism and capitalism originated in the West. Karl Marx himself was European, and socialism predates him—it was fervently supported by Europeans.
Unfortunately, the narrative that communism and socialism “freed” Africa while capitalism “oppressed” it became ingrained in our political and intellectual culture. That misconception remains a significant obstacle today.
To move forward, we need to disentangle ourselves from these historical misinterpretations and critically evaluate which economic system actually leads to human flourishing. And without a doubt, capitalism—particularly from the 18th and 19th centuries—played a key role in advancing global civilisation.
The Role of Economics in African Elections
Tobi:My next two questions are related.
Sometimes, it feels like the economic well-being of Africans isn’t a central issue in electoral politics. Electoral competition on the continent is still more about politics in the traditional sense—identity, ethnicity, and power struggles—rather than economic policies that affect people's lives.
For example, look at the recent U.S. elections. Donald Trump won, and all post-mortem analyses suggest it was largely due to voters' perceptions of inflation. People didn’t feel the economic boom in their pockets, so they voted for change.
Now, in Nigeria, we are suffering from high inflation—especially food inflation, which has reached over 40%. People complain about it, yet when it comes to elections, they don’t express the same anger at the polls. Economic issues do not seem to drive political competition the way they do elsewhere.
So, is this part of the problem? And does the way Africa’s economic challenges are portrayed in international media—where we are always framed as victims—affect how we think about holding our leaders accountable?
Understanding Africa’s Young Democracies
Tinashe:I see your point, but I think we need to be kinder to African nations.
We are young democracies. Zimbabwe has been independent for just 44 years; Nigeria, around 60 years. In the life of nations, that is still infancy. Meanwhile, colonialism lasted much longer. In South Africa, it was close to 400 years.
Our democratic institutions and political culture are still evolving. Many of our governance systems were built within a history of disenfranchisement, where political competition wasn’t based on broad economic accountability. That legacy lingers.
This is not to excuse bad policies. Inflation is effectively a tax on the poor, and we should demand better governance. But we must recognize that political maturity takes time. Sometimes, societies learn through bad policies.
There are two ways to build a great society:
* The Meritocratic Approach – You start with the best people in leadership, ensuring competence from the outset.
* The Competitive Ideas Approach – You allow different ideas to compete over time, and eventually, society discards what doesn’t work.
Africa has largely followed the latter path. Socialist and paternalistic ideas are seductive, so people are often drawn to them. But over time, as failures become evident, they start to reconsider.
This means free-market ideas may take longer to gain traction. But our job is to keep advocating and ensuring these ideas are in the public square. Even if we don’t see the change in our lifetime, it will happen eventually.
The Free Market and the Battle of Ideas
Tobi:I view politics as a battle of ideas. Even identity-based politics is ultimately a form of idea competition. Political actors present their vision, and electorates choose.
Yet, in Africa, the marketplace of ideas seems weak when it comes to free markets. Civil society is filled with advocates for democracy and governance reforms, but very few champion economic freedom. Even in academia, free-market thought is largely absent.
Why is this? Is it just a matter of being “too young,” as you said, or has our education and civic discourse gone astray?
Changing the Culture, Not Just the Politics
Tinashe:This is a crucial issue. Politics is downstream from culture. Politicians do not create ideas—they simply pick up what is already popular in society.
If free-market ideas are not resonating in the culture, politicians will not advocate them. So, our focus should not be on convincing politicians. Instead, we must embed these ideas in the culture—in conversations, in media, and in everyday interactions.
Historically, ideas spread not through institutions but through cultural discourse. That’s why platforms like Ideas Untrapped are important. We need to ensure these ideas are part of the public conversation. Over time, as they gain traction, politicians will naturally follow.
Final Thought: A Vision for Localised Solutions
Tobi:One final question—it's a tradition on the podcast.
What is the one idea you’d love to see spread everywhere?
Tinashe:Local provision of essential goods and services—such as water, streetlights, and electricity—organised at the community level rather than by the state.
If communities own their schools, manage their waste collection, and control basic infrastructure, they become self-reliant. This reduces dependence on government and proves that the state is not always necessary for progress. If this idea spreads, more people will recognise the power of markets and decentralised decision-making..
On the one hand, I would say that it was horror, not mildly amused, except that it does almost transcend satire, what's going on, like, you can't make it up sort of thing. But something that I want to be very careful to emphasise throughout is that I really don't want to pin this on a particular party or make this about partisanship, as opposed to we have an individual who has been elected to the highest office in the land, that I think is doing a lot that runs counter to good government. And those are the issues I want to emphasise.
And I do think that we've seen a lot of troubling signs. I did not watch the inauguration. I'm following the advice of my friend, Marianne, who said that to stay sane, she just reads the news in a physical newspaper. Otherwise, it just comes at you too often and too fast.
But some of the things that have emerged in recent days that are really quite troubling are signals that the U.S. is moving towards a much more, if you like, personalistic approach to policymaking. And there's always been a role for connections in the way the U.S. is governed. But it does feel like it's just going to a different scale.
The most recent and high profile example is that of TikTok, where Trump had been in favour of a ban of the app, he met with the CEO and before that, a billionaire Republican mega donor, and he flipped his position on it. Now he is going to be TikTok's saviour. So that's on the one side. On the other side, you see TikTok entirely aware that they need to engage in flattery. So, you know, they personally thanked Trump for his intervention Monday morning after it was brought back from a very brief ban and now has a 90 day extension. But again, Trump has sworn to save it.
So it's this kind of very personalised, very public favour trading is clearly sending a message to business that they need to fall in line in order to remain profitable in Trump's America. And you can easily, or I shouldn't say easily, you can imagine sliding into a system in which we have something closer to what's termed competitive authoritarianism, where you do hold elections, but the media, as well as the levers of government, are so commanded by the party in power that oppositions are playing from such a disadvantage. We've seen this emerge to some degree in India. We've seen it emerge in Hungary. We've seen it with X. We've seen it with other sites. We've seen it, to some extent, with Facebook very recently. You can see it potentially emerging in the U.S.
So I do see a lot of troubling signs, and it is certainly a collective project to push back against these trends.
Tobi: One thing that I was surprised, you might not be, given that do work in this area is how quickly people fell in line once Trump won or it looked like he was going to be the next president and you know you had this scrambling for people to get face time in Mar-a-lago to book hotels and to basically make deals and then it does make me wonder that, yeah, like you said, the U.S. is shifting to a more personalistic type of governance. But do you think that the quickness or the way that this shift is rapidly happening before our eyes has something to do with perhaps grievances in whatever form with good governance generally or impersonal bureaucracies? You know, because there's so much gripe about the elites or the deep states and how they have failed. And this is how the people are getting the power back. But of course, we know that's not what it really is. But what exactly about the status quo stopped working to give us this shift we are seeing to a new equilibrium?
Raymond Fisman: I'm sure there are many things and one always runs the risk of naming the thing that you think is most important, or even worse, the first thing that comes to mind, and presenting kind of a monocausal case. So I'll say that I'm going to name the thing that I think is most important. It's the first thing that comes to my mind. I'm sure there are many factors that are pushing in this direction, including what you described, people being perhaps dismayed - that it's going to be related to what I say, including what you say about the seeming gridlock of the U.S. government.
But what troubles me most and what I think is perhaps enabling the most is increased polarisation, which is more extreme in America than elsewhere, but is also a global phenomenon. It shows up very clearly in the data. The extent to which people identify as left versus right has been steadily widening over the past few decades. And somehow it tinges everything, including people's views of good governance, with a partisan lens.
So somehow all that has come to matter is, is he my guy or is he not my guy? As opposed to, is this an honest, competent guy or a dishonest, incompetent one? So somehow people's views, people's attention is entirely drawn to partisan questions, rather than good versus bad government questions.
The fact that businesses fell in line so quickly, it is kind of hard to fault them, given the opening example of TikTok. That seems to have already reaped tremendous dividends for the company. If I take at face value, the stock price of Tesla as some summary measure of how valuable it is to have the president's sympathies. It went up by around 30% in the week following the election. There are lots of companies that appreciated in value for reasons that can easily be tied to policies. For-profit prison companies went up by a lot. That's because of anticipated immigration policies. Other carmakers, and especially electric carmakers, did not do so well. So what's special about Tesla, that's not like a big secret. It's that its biggest shareholder, Elon Musk, was a tremendous financial and personal backer of Trump. So if you say, well, being well-connected to this government is worth 30%, that's a pretty good incentive to fall in line.
I will note as an aside, or maybe not as an aside, something that's very directly related. So my PhD thesis was on the value of political connections in Suharto's Indonesia in the mid-1990s. And my thesis looked at what happened to the value of well-connected companies when there were threats to Suharto's health. And if you take the results of my PhD thesis at face value, connections in America now are worth something comparable to what they were worth back in mid-90s Indonesia, which at the time was viewed as one of the most corrupt countries in the world.
Tobi: I mean, a recent example in Nigeria is a particular oil company that was in trouble for a while, running to about five years, was on the edge of bankruptcy and could not even publish its annual reports. And after the the last election, we've had a new government now for 18 months. After the last election, due to the perceived closeness - I mean, it's an open secret - of this same company to the new president, it's recovered tremendously. Its financial fortunes have recovered tremendously to the point that during the Christmas party last December, this same nearly bankrupt company hosted the three biggest musical artists in Nigeria to its annual Christmas party.
So I read the Indonesia paper a long time ago, and one thing I want to draw your attention to, maybe with a bit more of an international lens, is the role of ideas here. I know you talked about partisanship, and I hope we'll get to unpack that a little later. So there is a general acceptance now, especially in the subfield of what we call development economics or international development scholarship generally, that some form of corruption is not so bad, right?
Since you… I don't know how much you followed that field, but a lot has happened since your paper. You know, there's this subfield of political science meshed with economics that talks about political settlements. Scholars like Mushtaq Khan have said that, well, some corruption can be beneficial to growth and not all corruptions are bad. You can see the flavour of that with what is happening with Donald Trump, right? Because, I mean, again, a couple of weeks ago, I read an article in The Economist's which I consider to be embarrassing, was more or less making the same point that, hey, listen, folks, corruption is not as bad as you think, because there are evidence to some exceptions. So do you think that these situations where you have economies that are sufficiently big to challenge traditionally big Western economies, like China, like India, like Brazil, who we might describe as, you know, relatively more corrupt than Western countries, but who seem to be doing so well, you know, because when you talk to a lot of Silicon Valley guys, they talk about China and how they get things done and how it is impossible to build or do anything in the U.S. because of bureaucracy.
So, are we seeing the influence of ideas here that, well, corruption might not be the worst thing in the world as long as we can get some growth, we can build new nuclear reactors and build new roads and have high-speed railways? So is that a bit of what we are witnessing here?
Raymond Fisman: Yeah, I mean, there's an awful lot in that question. So at the risk of taking a bit of time to respond to Let me make a few observations. So first of all, you're absolutely right that the idea of efficient corruption has been floating around in the literature and out there in the so-called real world for some time. There's the classic article by Nathaniel Leff that refers to Brazil specifically and contrasts it with Chile. And that's, I think, a useful starting point for this view; which is precisely as you described, that you have “bad” government policies, bad in quotes here, but bad for growth, and thank goodness for corruption because it affords some workaround.
Now, the most standard response to that view, which I think also has some legitimacy, the grease-the-wheels view of corruption, is the so-called endogenous regulation perspective, which is definitely worth mentioning in this broader discussion; which is that once bureaucrats and politicians know that the way that they can extract payments is by creating onerous and burdensome rules, they just make more and more rules because that's the way they extract their side payments.
So you can end up with hopeless amount of red tape where businesses spend even more time dealing with bureaucrats and still pay bribes than in a corruption-free world. So this is a debate that remains in progress 30, 40 years after the Nathaniel, more than 40, a half century maybe after the Nathaniel Leff article. And you can easily marshal evidence on either side of this view.
The second point, you mentioned China. I think just empirically, it is worth observing that, you know, I give the case of Indonesia. I can even within Indonesia say, well, here's the good and here's the bad of it. Suharto took over in the mid-60s. He was a brutal dictator. So what I'm about to say is just about the economy. It's not about human rights abuses or torture or other horrors that took place under Suharto. The country grew very fast for 30 years under his rule. And if I take as my main overall view that, yeah, all else equal, less corruption is better than more corruption, we do have to confront these uncomfortable case studies of Indonesia under Suharto. It is also worth noting that he put in place a system such that when the regime fell in 1998, it had a GDP drop of 15% in a single year.
So in some sense, it was a fragile foundation that the economy was built on. Going to China, you see the same thing. Whatever you think of the country's most recent anti-corruption crackdown dating back to the early 2010s, from the 80s to the present, the country has grown tremendously in a system that was widely viewed to be quite corrupt. We definitely want to understand, and there's been a lot written on what might make China corruption different, from, say, Haiti corruption.
I pick Haiti not at random. There was this devastating anecdote. I believe it's Baby Doc, not Papa Doc, who at some point there was a railway that connected Port-au-Prince to the second largest city in the country whose name is escaping me. This is a productive asset for the economy, but for long-term prosperity. But for short-term gain, Papa Doc sold the railway ties to a multinational company that boxed up the metal and shipped it overseas.
That's like the ultimate short-termist thinking that a so-called roving bandit in the economics literature, someone who's not thinking about harvesting benefits year after year after year. So the question of, broadly speaking, is corruption good or bad, I feel like there are relatively few people who will say, all else equal, I want more corruption. I think there are relatively few people when they take the broader view of here's the evidence on Brazil versus Chile, China versus Sweden, etc., say, yeah, we want to add some corruption to the system.
But we're not really taking all else equal, are we? We're saying, well, we have this system in Indonesia, that The system in China, again, whatever you think about their social or other policies, have grown tremendously. China's brought an enormous number of people out of poverty. We need to understand what worked in that system. Now, the last thing I'll say on this is if we come back to the U.S. So, first of all, there's some of what you're describing in what seems to be going on with Elon Musk where he seems to be actively lobbying to have government litigation against him dismissed for environmental violations and so on.
So whether you think that the rules are set too tight, such that, oh, great that we can be unshackled from all of this pointless red tape, or whether you think, oh, now he's free to kill us all with whatever he's releasing into the atmosphere for the sake of greater financial return, that I'm not going to take on. But it does fit with your broader narrative of the trade-offs. I think what troubles a lot of people is when you get into a system of personalistic policymaking where profits are determined and part of a longer conversation would involve how this might fit in with the China model especially. When the system is set up such that profits are dictated by favour-seeking and personal connections, that's what companies invest in.
You don't invest in building the best electric car. You invest in making the best connections to government. And if you want to link to the larger economics literature, in a way, this is what the Nobel Prize was awarded for this past year on the role of extractive institutions and development. Sorry for that long answer, but what you asked, there's really many pieces to it. I've tried to give just the briefest of surveys of a response.
Tobi: Yeah. And one thing that does worry me, and maybe this is not a direct question, but I would like your reaction to it. What does worry me is the overseas effect. I know that, yes, Americans have a lot to be worried about. But, you know, in situations where some of the domestic rules against corruption in places like the United States and the UK have also helped to fight or, at least ,keep corruption at bay in many economies, Nigeria included.
There are many laws in the U.S. that prevent American companies working in Nigeria from, I mean, engaging in certain things and certain practices, whether it's environment or bribery and so many other things that they are used to doing in the 80s and 90s. And if we have a situation where companies can leverage personal relationships with executive to sidestep those rules. I fear they will also be unshackled internationally and we just might be back to some bad old days.
Yeah.
Raymond Fisman: So again, there's a lot that is embodied in this question, but I'll still try to be brief. So what you are describing, I think very legitimately, is the fact that, okay, Swedish companies don't pay bribes in Sweden. But what's Skanska doing when they're operating overseas, which they do a great deal? And for a while, Transparency International tried to produce a bribe-payers index, which was meant to evaluate the extent that companies based in particular countries felt more empowered to pay off public officials outside of their own countries. That proved to be hard to do for reasons I won't get into. It didn't last very long. But I do think this question of what is the role of multinationals operating in Nigeria, operating in Brazil, operating in Colombia, what is their role in promoting or enabling a corrupt system is really an important and understudied one.
On the very specific question of US companies, i was very concerned in 2016, as I think many people were. Enforcement of these foreign anti-bribery laws, I think the sense is mixed. So we do have some very high profile cases, Siemens being the biggest. But as I said, I don't think this is extremely well studied, so it's hard to kind of give an overall well or less well enforced. We do know that Foreign Practices Act enforcement in the U.S. did ramp up in the 2000s.
I think there was a lot of concern that in 2016 it would fall off a cliff. And it didn't really. So despite any worries we might have had about Trump meddling in the Justice Department, that one didn't really seem to come to pass. Am I worried again in 2025? A hundred percent. And I guess we'll have to see. As with many instances in which there are legal constraints, but also, I guess I might say moral constraints, this is my excuse to say that some of the responsibility rests not with the U.S. government, but rests with U.S. business people. And dare I say, even the institutions like Boston University or Columbia University, where I used to work at the business school, in educating people who will run the businesses that operate in Nigeria or Colombia or Brazil. And that, again... business education and whether we can and should try to inculcate a sense of business principles is probably for another conversation.
Tobi: So I want to return to the partisanship question, which is, I think it's generally accepted that some contest is necessary, if not perhaps mandatory in a democracy. But what are the ways in which partisanship drive polarisation. Because for me personally, I worry about this too. I mean, the last elections we had in Nigeria was super online and hyper-partisan, right? It's not so clearly ideological as it is in the US in the case of right versus left. In our own case, it's usually ethnic, which I would argue is even far more dangerous because there may be violence. There's threats of that in the U.S. as well.
Raymond Fisman: Yes, I was going to say. And also, I will say that it feels almost tribal in the U.S. in terms of people just like aligning themselves or identifying, that's the right word, they identify with one group or the other. So I'm not sure how different it is. As you were describing it, that's what I was thinking. It feels very identity based.
Tobi: Yeah, so I want to learn from you. I know that there might not be a simple answer to this. There rarely ever is in social science anyways. So how does something as necessary and even essential, you know, having a viable, active opposition, you know, partisanship generally, then drive polarisation to the point where people are unable to agree on certain basic rules of how a government should work. I mean, something that really shouldn't be up for debate.
Raymond Fisman: So I'm going to give more of a descriptive commentary than say anything about what we could hope to do. I think it's actually quite important to recognise that if you go back a half century, exactly, again, as you described, the hand-wringing and concerns went in the opposite direction. There's a great essay by an eminent political scientist from the 70s talking about how these concerns, these worries since the 1950s, that the two parties were just becoming too much alike. So people didn't actually have viable options. There was just one option, which was the dead center. And in a way, it's easy to see how something like the median voter theorem, which describes this force that drives parties to the average voter preference, how it could emerge in that world.
Since then, people have amended the median voter model to account for the fact that we can also have this splitting apart. I want to actually mainly just make one observation that comes from an economist who was a politician for some period of time and worked in politics, or maybe two observations, which is one of his great frustrations was that issues are not valuable unless in a polarised system. And this just drives further polarisation. You can think about this as all feeding on itself. An issue is only valuable politically if it's a wedge issue. So, for example, if everyone can agree that we need better science education in schools, then no party is going to take that up as their cause. Whereas more religion in schools, that's something for which it can be us versus them, a means of differentiation. It is also not a bad thing for the parties themselves. Think about a model of monopoly. You really love to have your captured market because then you can lead the quiet life of the monopolist. You can be lazy and stupid because they're going to vote for you anyway. So it's in the party's interest to do this. So we do see, tempted to say, absurd versions of this in U.S. politics recently, which is the Democratic Party funding to extreme Republicans to try to get extreme candidates to into the general election because that way they're sure to win. They don't have to try to get voters because the opposition is so far to the extreme that it makes it easier to win the election.
And so how we got here and how we will escape from it, I'm tempted to say either that's not my department. I'm really focused on good government issues as opposed to understanding polarisations, or it's above my pay grade, like this is, as far as I'm concerned, the great challenge facing U.S. society. But I also do see it as essential precisely because it's distracting us. It's getting us to focus on religion in school rather than science in school.
Tobi: Two questions before I let you go. One is, yeah, I know that you are Canadian also, But I was reading Joseph Wallace's paper a while back, talking about the distinction between venal and systematic corruption and using America as a case study.
Raymond Fisman: Sorry, I missed the first one. Something in systematic?
Tobi: Yeah, venal and systematic.
Raymond Fisman: That's what I thought you said.
Tobi: Yeah. So this isn't particularly a new territory for the U.S., as historians would say. So what can you say that America can learn from its history to deal with what is happening now?
Raymond Fisman: Yeah, I'm going to try to end on an optimistic note, which is that I think this is something that people were concerned about in 2016 as well, and it really never came to pass. And so I do think we just have to remain alert to these concerns. As an American or a Canadian I can still say whatever I want, I can still write whatever I want, I can still try to persuade whomever I want that my perspective has merit and there are many places in the world where I cannot do that. And so in a world or in a country where we still maintain these civil liberties, it still feels more possible to find our way back to a system of constructive exchange on what really matters.
I do think what concerns me, and this brings us back to the very beginning, is if we are moving towards what some have called competitive authoritarianism, what Sergei Guriev and Dan Treisman call spin dictatorships, I think of those as being not entirely different from one another we're potentially moving to a system where, again, like, I can say whatever I want to say but no one's listening. They're tuned into whatever Elon Musk or Donald Trump is saying. So we'll see, there's still a long way to go before America loses its democratic processes and institutions but it's entirely possible that we can stumble down that path.
Tobi: My final question, please feel free to answer as long as you want. A couple of weeks ago, you wrote an essay in the New York Times about the Department of Government efficiency that will be run by Elon Musk. And generally, the attitude amongst a lot of people that might not even be hyper-partisan has been one of optimism that, oh yeah, the government can use some efficiency. A lot of my friends, even here in Nigeria, mostly work in tech, are also optimistic that, oh yeah, this would be a model that is presumably exportable as a governance model for other parts of the world. What's your central critique, especially drawn from that piece? What is the flaw, central flaw, in the idea of running a government like a private business?
Raymond Fisman: To be clear, I'm all in favour of government efficiency. I don't want to equate that to, as you described, and as it's too often equated to, running government like a business. Because a business, its primary purpose is to maximise profits for some residual claimant on that profit, shareholders or the owners. Whereas a government has a much more complicated, job, which is, for example, catching terrorists, setting up schools, building roads that serve everyone, to benefit entire communities. And in general, the jobs that businesses do are relatively simple because there's generally a clearer mapping from action to desired outcome, which is higher profits. The jobs that governments take on tend to be a lot more complicated and harder to measure the outcome and give incentives for success.
And so if we decide, oh, we're going to run the U.S. government the way we run Tesla, which involves measurable outcomes for every action we might take, it's a standard problem in business as well, you end up distorting efforts to achieve something you can measure rather than something that you want. Part got cut out of that article was I wanted to mention Boeing, that this sort of thing happens in businesses as well. You're in the business of building really great planes, which is a complicated thing. Do involves lots of, again, relationships and long-term planning. And you bring in a CEO that's really just focused on shareholder profits. You stop focusing on the more complicated long-term agenda, and all you do is focus on this single, easy to measure, but not necessarily most important thing.
I'm not sure that I gave the best description of that. I guess I would refer your listeners to the New York Times article, where I had lots of time to sit down and spell out with care the argument here.
Tobi: Yeah, I'll put up a link to that article in the show notes. So final question, which is a bit of a tradition and maybe some upbeat ending to the overall gloomy tone of this podcast is what's the one idea that you are excited about at the moment that you would like to see spread everywhere? You like to see other people get excited to be your idea, maybe from someone else you admire or any other source.
Raymond Fisman: Oh, goodness me. I wish you had prepped me for that so I don't have to answer off the top of my head. So I'm going to end up giving an answer which isn't necessarily like this is the thing as opposed to this is the thing that I was thinking about this morning, which is that I do think people need to feel more empowered to influence organisations in the direction they want them to go in. And so what makes me think of this is, as reading this morning about shareholder democracy, if we all want ExxonMobil to behave differently as a company, if we all want Siemens to behave differently as a company, who gets to decide, if it's the owners, then I get a little voice. And just as I vote in every election, I really should take much more seriously my job as a steward of ExxonMobil and Siemens. And hopefully all of our little voices will add up to something bigger. And maybe that's the larger point, is we need to take more seriously our little voices and how they impact some larger societal outcome.
Tobi: Thank you so much, Raymond. It's been fantastic talking to you. Any other thing you would like to share that you'd like us to know that you've been thinking about lately?
Raymond Fisman: No, thank you very much. This last one relates to… I've been working on a book on whether business will save the world or destroy it. The answer obviously being neither. And yet there are people who believe very strongly in one of these two views. And so I'm excited to try to communicate to the world how these two different groups come to these very different conclusions and what we might do if our objective is to make business the greatest force for good.
And that's partly where my answer to what's your big, important idea, that's partly where that comes from.
Tobi: I mean, when your book is out, maybe I'll get you on for another episode.
Raymond Fisman: It would be a pleasure.
Tobi: I did enjoy the last one I read, which was the one with Tim Sullivan, The Org. I did enjoy that very much.
To answer your question, global value chains (GVCs) have gained prominence academically since the 2000s. Before then, there was little academic literature on them, and even less in policy discussions. This book emerged from that gap.
A useful way to conceptualize GVCs is through an evolution of economic thought. Traditionally, economists described trade in terms of final goods—like the classic example of England producing cloth and France producing wine, and then trading them. GVCs, however, break down final goods into intermediate parts.
Take the bicycle as an example. Many think of it as a single product, but a Canadian photographer once disassembled one and found 571 intermediate components, all researched, designed, produced, packaged, and marketed in different regions across the world. The same applies to more complex products like smartphones, where an iPhone or Samsung device contains thousands of parts sourced globally.
GVCs have completely reshaped how we think about trade—moving beyond final goods to the intricate networks of intermediate goods and services that contribute to production.
Evolution of Global Value Chains
Tobi:How have global value chains evolved over time? What key events have shaped their trajectory over the past 20 to 30 years?
Oliver:That’s a great question. GVCs have gone through different stages of transformation.
* 1990s-2000s Boom: Trade became more fragmented, and participation in GVCs surged. Nearly every industry saw increased participation, with 40-50% of trade occurring through GVCs.
* Post-2008 Financial Crisis: GVC expansion plateaued. The crisis led to economic restructuring, stabilizing GVC participation at previous levels.
* Recent Trends (COVID-19 and Beyond): The pandemic disrupted global supply chains, causing temporary shocks. While GVCs held steady, they are now evolving in response to technological advancements and geopolitical changes.
This makes it more critical for economies to find the right GVC for their development, rather than just benefiting from an overall expansion of trade.
Multinational Enterprises and Governance in GVCs
Tobi:Your book highlights three key aspects of GVCs:
* Multinational Enterprises (MNEs)
* Foreign Direct Investment (FDI)
* Regional Governance
As a Nigerian, I’m particularly interested in MNEs. We've seen many multinationals exit the country in the past six or seven years. Some policymakers argue that local investors can replace them, so it's not a big deal. But can you elaborate on the governance role that MNEs play in GVCs?
Oliver:Absolutely. Multinationals are the governing arm of GVCs. They control and structure value chains by determining how production and trade flow across different regions.
For regional policymakers, engaging with MNEs is crucial. They are at the frontier of technology and knowledge, and when properly integrated, they can transfer expertise to local firms. This is particularly important for emerging economies—it allows them to leapfrog to higher-value production.
However, MNEs can also be extractive if not managed properly. So, it’s important for governments to structure policies that maximize benefits while minimizing exploitative practices.
Governance Policies for Maximizing Benefits from GVCs
Tobi:How can governments and policymakers structure governance around MNEs to ensure they enhance local economic growth?
Oliver:We argue for Global Value Chain-Sensitive Policies, which explicitly consider how policies interact with GVCs. Some examples:
* Investment Promotion Agencies (IPAs):
* These agencies attract the right investors suited for the local economy.
* Evidence shows that subnational IPAs (e.g., at the state level) are often more effective than national ones.
* Skills Development Aligned with GVCs:
* Training programs should be customized based on industry needs.
* Example: The Penang Skills Development Centre in Indonesia worked with MNEs to align workforce skills with global industry demands, leading to economic transformation.
Foreign Direct Investment (FDI) and Upgrading in GVCs
Tobi:Some countries like Vietnam, Poland, and Malaysia have effectively used FDI to upgrade their economies. What are the general lessons from their success?
Oliver:The key takeaway is that quality of FDI matters more than quantity.
* Traditional Thinking: Measure FDI by the sheer amount of money coming in.
* More Effective Thinking: Assess what type of FDI is being attracted.
For example:
* $100 million in basic assembly work adds less value than
* $10 million in high-tech R&D investment, which has long-term benefits.
Upgrading within GVCs involves moving from low-value tasks (e.g., assembling phones) to higher-value tasks (e.g., designing microchips). This is the essence of economic transformation.
Regional Governments and GVC Policy
Tobi:You emphasize regional (subnational) governments as key players in GVC policy. Why focus on regional rather than national governments?
Oliver:There are two reasons:
* Granularity of Data:
* National policies aggregate data, ignoring local variations.
* For instance, a port city has different needs from an inland capital city.
* Local Expertise:
* The people of Lagos understand their economic strengths better than the national government in Abuja.
Empowering subnational governments allows for more tailored, effective policies.
Challenges in GVC Data Collection
Tobi:How can regional governments access reliable data to guide policy?
Oliver:Data is crucial but often lacking in emerging markets. Solutions include:
* GVC Mapping Exercises: Identify key industries and their global connections.
* Global Datasets:
* Inter-Country Input-Output Tables
* OECD’s Trade in Value Added (TiVA) database
* Firm-to-firm transaction data
Final Question: One Idea Worth Spreading
Tobi:What is one idea you’d like to see widely adopted?
Oliver:The value of global trade and specialization.
Many policymakers today are pushing for economic nationalism—wanting everything made domestically. But different regions have comparative advantages, and trade creates mutual benefits.
We must resist mercantilist policies and embrace efficient global cooperation.
Closing Remarks
Tobi:That’s a fantastic idea. Hopefully, we move past the current mercantilist mindset. Thank you, Oliver, for being on Ideas Untrapped.
Oliver:Thank you, Tobi. I appreciate the opportunity to discuss these ideas with you and your listeners
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.
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.
I don't think anybody can say for sure, but I'm convinced that they would probably, very likely, had done better. With respect to Africa, I think, yes, there is a strong influence from the American model because it's obviously a very successful country. So it's very easy to model after them. But I think that there is something else also in the choice of presidentialism by African countries. I've read a paper by James Robinson and Ragnar Torvik that argues that there is a tendency for endogenous presidentialism, which is that exactly because in presidentialism the leader has more chances to exert their powers without much resistance. So back in the 60s, a bunch of countries in Africa, I think most of them, had a parliamentary constitution, not only Nigeria, but many other countries had a parliamentary constitution and basically all of them switched to presidentialism at some point. If you look at Botswana, the economic performance that they had since the 1960s is very impressive. I wish Brazil had the rate of growth that Botswana has been experiencing consistently. So looking at the countries in Africa that have adopted parliamentary constitution, I think that it would be the case, yes, that had these countries adopted a parliamentary constitution back when they democratised again, they would probably have done better.
Tobi;
I mean, Nigeria is so loud. that the word restructuring, which is a shorthand for reconstituting the political system, is so common in political parlance and, you know, we kept shouting restructuring, restructuring, and it never really comes to pass.
But given the ubiquity and the allure of presidentialism, at what point, particularly historically, did you become convinced enough to write this book about the superiority of parliamentary systems?
Tiago;
It wasn't something that particularly interested me during the first 40 years of my life, before writing the book. So I wrote a book on the economic effects of the Brazilian Constitution. So the idea was to make this research and check every article of the Constitution, what economic effects we could expect to have in Brazil with my then boss, Otaviano Canuto, in the Brazilian constituency in the Board of Directors of the World Bank. And one of the things that I started researching on was exactly the difference between presidentialism and parliamentarianism. And I started to find some striking results. This was too big to go into the article, so we don't mention it in the article that we published. We mentioned other aspects of the Brazilian constitution, but then I couldn't stop researching this. And I was always also checking myself, trying to push my good economist friends. I was trying to also get comments from many people that have thought about this problem very well and to check that I wasn't thinking something that was completely out of base. And I was increasingly convinced because of the feedback that I got, the continuation of my research, it was then when I combined all the elements that I think are in favour of parliamentarianism that if we just look at countries that are parliamentary or countries that are presidential, you see that parliamentary countries perform better in just about any indicator.
If you look at the history, if you look at the informal theory, if you look at formal theory from economics, if you look at the evidence that people try to do with studies that are not just correlational, but that introduced good statistical controls for things, If you look at complementary evidence from companies - so companies can adopt a parliamentary model, which is having a board of directors and this board of directors can control the CEO. And no company elects a CEO by the shareholders directly. And this CEO will have a checks and balances relationship with the board of directors. This figure doesn't exist. And I think the market is in a very good position to choose the best arrangement. And finally, the council management system in the U.S. that I learned when I was doing this research is a system that is very similar to parliamentarianism. And cities that adopt the council management system perform much better than cities that adopt a strong mayor system, which is similar to the presidential system.
Tobi;
So what are the key flaws that you mention in the book? Perhaps there's more now since you wrote the book. What are the key flaws in presidentialism that you think a parliamentary system addresses effectively?
Tiago;
We were discussing before you started recording. I don't try to be original in my book. I try only to convey the knowledge that's already there. And in this, the most influential thinker is by far Juan Linz, a political scientist. And I think that he has the best frame for this. And he talks about four main flaws in presidentialism that parliamentarians doesn't suffer from. So these flaws are in presidential countries, you don't have a clarity of where the authority lies. So what happens in the end is if you like the policy that Congress is trying to push, then you will stand on the side of Congress and if you like the policy that the president is trying to push, then you will stand on the side of the president. And there will be lots of undermining of initiatives by both the Congress and the president. They won't agree on many things and it will be difficult to have a coherent proposal. Daniel Diermeier has an article on this, on how parliamentary systems are more cohesive.
So the second thing I think is a big problem, also from Juan Linz, is the rigidity. So if a country is presidential and the president is working badly, there's nothing we can do. We just have to wait for the mandate to end. And if this is bad enough, if some sectors of society perceive this to be bad enough, you have often coups that derive from a perception that there's no way that the president can stay in place. And then a majority of the powerful actors in a society will install a coup. So that's why the prominence to coups in presidentialism is so much greater than in parliamentarianism.
Then you have a winner-take-all situation. So if you win the presidency, you have so much power that you will be able to implement so many things and you have almost complete control over so much of government. Whereas if you are the losing side of a presidential election, then you are out of government completely. So there's too much at stake. And this incentivises the kind of polarisation that we see in many presidential countries, a type of politics that is very visceral, that is very combative. That's not the kind of politics that we would hope for. And lastly, it's personalism. The presidential system focuses way too much on the figure of one person instead of different institutions in society, different sectors and different voices. And it's often the case that in many presidential countries, people don't love the candidate that they see. They would never support that candidate if not for the reason that they hate the other candidate that will have so much power. And then they try to minimize the flaws that they would never accept in a normal situation on the candidate they support. And this leads to a race to the bottom sometimes. So the personalism is a disastrous characteristic of presidentialism, too. So I think the Linz framework is still the best description.
Tobi;
Yeah. Two common pushbacks that I get when I try to discuss parliamentarian systems whether amongst friends and other people so i want you to help me respond to them is that first is the issue of capture of the political system. So most presidential system have what we call term limits. In Nigeria, in the U.S., and some other places, you say, oh, a president can only serve two fixed terms concurrently. And after that, it becomes unconstitutional. Even though some countries, their president have successfully overturned constitutional time limits to become de facto dictators. But, I mean, let's leave those aside. Whereas in parliamentary system, it's possible to have the same party, the same ruling coalition in government sometimes for decades, right? So what is the nuance between something like presidential term limits in the presidential system and the prospect of having the same, basically, the same government in power for decades? How do those two systems compare in that regard?
And the second pushback I get is stability. The recent case that comes to mind is the Netherlands, for example. They had an election recently where a controversial candidate and party basically won the election. But at the end of the day, it became impossible to form a government, which is what you don't get in a presidential system. The system is such that there is the emergence of a clear winner who then forms a government and then proceeds to govern. Whereas in some parliamentary systems, in some cases, you can have this persistent chaos for a while, like in the UK now where they've had at least three prime ministers in about six years. So those two push back, how do you respond?
Tiago;
With respect to the first, I think there's a strong consensus in political science that term limits actually are a negative quality for an institutional system, because if you recall in the book, I discuss a model by Persson and Tabellini, two economists that studied this question. And they are the only model that I know of. For the only model that thinks that presidentialism is superior to parliamentarianism, one of the most important characteristics is that there are no term limits. Because the idea is that if there are term limits, then a president will try to grab everything that he can before he loses power. Or try to stay in power forever by demolishing the democracy completely. Because he knows that he will never get a chance to be in power once again.
Whereas in the parliamentary system, there is no ending to what he can do. He can stay in Congress, in Parliament, for as long as the people want him there or her there. So what I would say is that even though there are some countries where you see that happening, that some parties stay in power for decades, they are pretty rare. It's not a very common situation in parliamentarianism. And one thing that I stress in the book is that you cannot expect there to be a guarantee that it will be better, you just have to have an expectation that it will be better. So you have Japan, you have Botswana, they are countries that have parties that stay in power for long. You see that even though these parties stayed in power for long, there was not that much repression of the opposition. And in many cases, at some point, the opposition did win an election.
Whereas in presidentialism, you also have cases where parties have remained in power for very long, like in Mexico. So this particular problem that you point to, I don't think presidentialism solves. And the other thing is that sometimes for the opposition to gain power, they subvert completely the regime. They change the constitution. They get into power by force. So even though there was a change in power, it wasn't a desirable one. So for that, I think one of the advantages of parliamentarianism is exactly that it doesn't need to have term limits because any presidential country will have term limits, at least on the president. Because if you do not have term limits on the president, the chances that they will stay in power, be reelected indefinitely, and thereby destroying the democracy are very high.
So since it was invented, presidentialism, you have that problem. With respect to stability, I think that we need to look to what kind of stability that we want. So I think that presidentialism has an illusory stability often. Because you have the very clear legal mandate for the president and the president has a very clear legal mandate to name whoever he wants to government. And of course, one person will always be able to name a cabinet. You have the illusion that there is a functioning government. But this functioning government will be very often completely disconnected from the true forces of society that want to move in a different direction. Whereas in parliamentary governments when there is disconnect, when there is this fight, it becomes apparent and sometimes you have shuffling of cabinets, very frequent. Sometimes they are not frequent at all. You can have Angela Merkel in Germany that stayed in power for some 20 years, and then she left like nothing happened. It was a very smooth transition. And so parliamentary has this flexibility. If something is working, then they stay in power for very long. If something is not working, they don't stay in power.
And you mentioned the Netherlands. I don't know about the Dutch situation right now, but I recall that Belgium also was without a government for a while. And when we say without a government, we really mean without a cabinet. It's not that there is no government in Belgium. They're still doing all the things. There's still police, there's still courts, there's still schools. So I think that if there is not enough consensus in a society, then not having a cabinet pushing for policies might be a good thing. And if you look at the Netherlands right now, I don't think it's chaos, right? I think it works very well, as Belgium did, still worked very well, even when it didn't have a cabinet. If you look at the Netherlands is one of the most successful societies in history and is still one of the most successful societies right now. So I would never describe their situation as chaos. So what I would say is that, well, if we have to deal with situations where there's no cabinets, then fine. I'm not as bothered by that as I am by a lack of basic sanitation or a lack of economic growth or a lack of health services or a lack of safety in streets, that sort of thing, which presidential countries have much less than the Netherlands.
Tobi;
I would like to stretch that point a little bit. So perhaps it's a good thing that the Netherlands has a parliamentary system and that they are in their current equilibrium because the party that won the election and the individual vying to be prime minister is controversial, is internationally disliked and has some positions that are quite disagreeable. But it's also easy to imagine the opposite. where his party his platform his ideas and his policies might actually turn out to be excellent for the country and for the region and perhaps influential enough for the world but here you are in a system that prevents that person from getting to power. So i'm trying to gauge how earlier, many three systems respond to the good leader, bad leader argument because some would say one of the strengths of the presidential system is if you're lucky enough to get a good leader, he or she can then use all that power, all that legitimacy to then drive transformation and growth and all the good things to the maximum and transform the country within a few years.
What's your response to that?
Tiago;
First of all, I don't think countries have been lucky enough that we would still bet on that. If we look at the history of presidential systems, the evidence shows very clearly that this hope for a very good leader, it's like playing the lotto, I think. The chances are very small. And I think that even if you had a person that had all the vision and the capacity to implement very good policies, if he doesn't command enough support in his society, there will be sabotaging, there will be opposition, there will be people that have capacity to interfere with society, trying to undermine his efforts. Even with this great leader, you wouldn't have the great outcomes that one would expect. So I think the crucial thing, and I think it's central to democracy, is exactly that there is a wide consensus. The thing is that presidential elections do not create wide consensus. They create two rival candidates, two rival sides, and then at the end of the day, one of them wins. And this goes to late[r] part [of the book], which stressed the importance of consensus, the capacity to take into consideration the interests of different sectors of society at once. So this is why I still like parliamentarianism better.
Tobi;
So for the benefits of people that haven't read the book, I'll go through perhaps a few more questions that you should explicate on before I go into what actually interests me, which is how you then relate your argument on parliamentary systems to development or economic development more broadly. So one thing I also want you to clear up is you talked about corporate governance and how they are better under parliamentary system. Can you elaborate on that a bit?
Tiago;
So corporate governance, we usually think of governments and companies as completely different walks of life, completely different situations. But in fact, they are not. So governance is not a word that came about by chance. It does come from the same principles. And when you look at how boards make decisions, they use something called parliamentary procedure. They use some books like Robert's Rules of Order, which is taken by, I think it was a colonel, it was someone in the military that was very frustrated by how meetings were being used and then he used exactly the sort of decision that was being taken in the United States Congress to take these decisions. And we see, I forgot the name of the author right now, but this book, Shareholder Democracies, he explains how the modern public company takes a lot of how it's governed from the evolution of government, particularly because there was a time that the modern company was started in England.
And there was a time when you would need to have authorisation by the government to create one of them. And then the board members would be often people from government as well. So there was this very intense relationship and this very intense exchange of methods of approaches to problems. And then they had tried many things, many approaches, boards with lots of members, boards with very few members and all sorts of ideas until they ended up with the model that is replicated in basically every public company that we have now, which is the shareholders elect a board of directors, the number may vary, and this board will choose the management of the company, particularly the CEO, which will be kind of like the prime minister, but maybe different from the UK, because in the UK, the prime minister must be from parliament. But in the Netherlands, for example, it doesn't have to. But the board elects the CEO and then they can fire the CEO at any time as well. So this is something that allows for a much more efficient handling of the affairs of the company than the situation where you would have the shareholders elect the CEO themselves. I wrote to one of these authors about this parallel, and he thought it was perfectly applicable… “And yes, yes, I completely understand what you're saying about the presidentialism.” He couldn't think that it had ever been tried by any company, the exact presidential system. One thing that was tried is the shareholders choosing some people in management already. And this didn't work. So I think that this is very strong evidence for that because markets, they have the greatest incentive to perfect their governance systems.
Tobi;
What is the attenuation bias and how does this bias feed into our common understanding of presidential and parliamentary systems?
Tiago;
So attenuation bias is something that I put in there because when I was discussing this during the process of writing the book, I got a lot of pushback by people. And recently I also had one pushback by people saying, well, but it's hard to classify countries in presidential or parliamentary forms because there are many types of intermediate situations. So you have semi-presidential countries in Africa. We have lots of semi-presidential countries where the president has power, but the prime minister does have power too. So there is this combination where not everyone agrees about which countries should be considered parliamentary or presidential. And also many other political scientists first need to decide if a country is a democracy or not and then classify it as presidential or parliamentary, because they say if it's not a democracy, then it doesn't matter what the Constitution says. The dictatorship can do anything it wants. The Constitution doesn't have any bite.
I disagree with that view. I think that constitutions matter even in situations where you don't have a full democracy. But in any case, people would be saying that this would make the results in terms of stability, political stability, in terms of economic growth, less strong. And then I argue the exact opposite, which is the attenuation bias is the mathematical fact that when you have noise in the explanatory variable, the effect that you see will be smaller than the real effect. Whereas if you have noise in the explained variable, the dependent variable, there's less precision, but the size of the effect is in expectation the same as the real effect. So what I argue is that, yes, there are debates about what countries are parliamentary, what countries are presidential. And if this is hard to classify, then we should expect the effects to be even larger. Many people criticize academics and scholars that raise the issue of attenuation bias because people often raise the issue of attenuation bias even before they convincingly demonstrate that there is a relationship in the first place. But I think that at the point where I make the point about attenuation bias in the page that I make that, I think that I was able to demonstrate that the relationship does exist. So if it does exist and we do have difficulty classifying countries in parliamentary or presidential, then we should have attenuation bias and we should expect the effects to be even larger.
Tobi;
I would say how your research, your writing, your argument does relate to economic development, or maybe development for shorthand, is what I found most interesting in your book and most relevant to my passion. Because I don't know if you caught this yesterday, Jishnu Das, I don't know if I'm saying that correctly, wrote an essay titled, let me quickly check, "Did Development Economics Lose Its Moral Compass?" Yeah, you're not making similar arguments, but how I see them connected is the fact that development, the field or the development industry has more or less given up on governance. And now everybody is obsessed with whatever tiny interventions you can make that get people from $1.90 to $2.90, and then we can sing hallelujah that we've ended poverty. Whereas I, and I imagine yourself and some other people that we both admire, like Lant Pritchett, are interested in changes that we can make in Nigeria, in Chad, in Ethiopia, that can get those countries to middle-income status and possibly greater than that. So how do you see the relationship between economic development and the system of governance or the political system generally? How does this tie in your head when you were writing the book?
Tiago;
Okay, so I think that in theory, we should expect this to happen. When we look at the institutional school of economics, they say that the central aspect for growth is institutions. So you go back to Douglas North, you go to Acemoglu and Roderick and those people, and Douglas North in particular. Not all institutionalism put the emphasis that North puts on parliament and he puts because he sees that as protecting property rights, specifically. And I think he goes for too narrow an approach. But if you look at the consensus that there is around institutions being central to economic development, and the consensus that there is in political science that parliamentarism is central for political stability, and if you just connect the dots and say, well, political stability must be important for institutions to work well, right? If you just connect these dots and think that also, if institutions are key and a country doesn't even have political stability, will it have capacity, which is something that Pritchett talks about too, about state capacity for many other things. So if it isn't even able to have stability, will it have the capacity for development to be promoted? And I think not.
And then, going back to Pritchett once again, one thing that I talk about in the book is the Pritchett test. I learned this from Paul Romer in a blog post. He mentions that urbanization passes the Pritchett test. And this is a series of requirements that don't seem to be very stringent, but that Pritchett proposes that any policy that you say will have development should pass this test. And this was relating to the frustration that you were talking about that you have and that I share. And I think that he is the person that talks about this best, which is we are promoting very modest, very unambitious proposals that we don't think would possibly have an effect. And then the test is this. In a cross-sectional comparison of levels, do countries that are more developed have more X? And this is easy. I showed this in the beginning of the book, that parliamentarism does have many more developed countries than presidentialism. There are much fewer presidential countries that are rich or developing in any way.
And then he goes in a cross-sectional comparison of growth rates. Do countries that have rapid growth also tend to experience a rapid increase in standards of living? And I present evidence that we do have that. In my blog, I have a post on how parliamentarism passes the Pritchett test. When we look at the few countries for which we have long historical records, do the ones that become much more developed also acquire much more access? And then we see, this is very interesting, that it's exactly in the two countries that first parliamentarize in Europe that we see the end of the Malthusian Trap, the escape from the Malthusian Trap. So it's the Netherlands and the UK, in England. And then this parliamentarianism spreads around Europe and then Europe itself becomes much richer. A very parliamentary tradition establishes in the U.S., so we tend to think of the U.S. as much less parliamentary than it really is. And you have Canada, you have Australia, you have New Zealand, they are countries that for more than 200 years have had this sort of constitution and also have done very well.
And lastly, if we look for countries that switch from a regime of slow economic development to a regime of rapid development, we see a prior shift. So this is for us to think of this just conceptually. And then we have some studies that show a very strong connection of growth and parliamentarianism. So we have Gehring and other authors from 2009 that shows stronger growth in parliamentarianism. And we have one specific study by Richard McManus and Ozkan from 2019 that shows much stronger growth in parliamentary countries from 0.6 to 1.2 percentage points per year, which is huge. And it would explain a country being developed. If a country did grow 1.2 percentage points per year in its per capita GDP, it would become developed over time, of course, but it would be enough. So that's why I think that the connection between parliamentarianism and development is very strong.
Tobi;
I guess what I'm trying to get a sense of from you, you're a career diplomat, you've been in some of the rooms where some of these decisions are made, what has become so broken about development in general that we've stopped being ambitious in the sense that trying to change your political system can actually get you more benefits development-wise than whatever tiny little cash transfer you're doing in whatever village in Kenya or Nigeria or… how did development become so unambitious?
Because one of the points you touched on in the book is this fallacy of having tried everything, you know, and, oh, so this is what we have… because the state of particularly development economics for me, the state of things are so terrible in my view. The so-called evidence landscape has become so broad that you can find evidence for anything. For example, if I'm the president or the chairman of a local government in Nigeria and I choose to not fix the road, for example, or choose not to build a power station, I would rather take a fraction of that money and do a cash transfer program. I will find evidence and possibly researchers that will tell me that that is a good thing. So how did development become unambitious from your vantage point?
Tiago;
I think that's hard. That's something that I will speak with, but without as much conviction as the other things that I'm saying here. But I think there are some different processes going on. One is the idea that there have been some, we haven't tried everything, but we have tried some things. And these things, these specific things that we've tried, the big push theory and some other things like that, did not work out as expected. And then there was this too quick giving up on trying other things. I think there is a fear of being perceived as a failure on part of policymakers, so they would rather be unambitious than being perceived as a failure. And I think that has been married to an academic predilection for precision. So academics are more preoccupied by doing the randomised trial and getting the precise estimate of the effect of something. And then they only care about it being significant in the statistical sense and not on the practical sense. “Oh, this is statistically significant. It makes a difference. Then let's do this.” So I think that these two tendencies have worked.
And lastly, one thing that hopefully I'm not being too centered in parliamentarianism, I think that the fact that we have forgotten key benefits of parliamentarianism has made us look basically anywhere else instead of here and this has consequences because I think that a society that does not have the correct, the best institutions for it to develop will have a very hard time and then any policy that is tried will be perceived as a failure because they don't have the conditions that allow the society to really develop.
Tobi;
I don't want to dump all my frustration about development on you. So let me move on from that.
So practically speaking, now, suppose you get a few elites, leaders in your country that are ambitious and courageous enough to want to make a change from a dysfunctional presidential system to the parliamentary one. What are the useful key elements steps that can be started without tearing their political system apart? Because a lot of the fear also comes from not causing too much political turmoil or alienate an influential group that can then go ahead and form chaos in society. So what are the useful first steps you can take towards parliamentary governance?
Tiago;
So I talk a little about in the book what one can do. And as I said on the last part, these are things that I'm not as sure as I am that parliamentarianism is better. On the how we implement it, I have much more doubts, but I still have some suggestions. And I think that we should try to make the proposal of parliamentarianism similar to the proposal for democracy. Because when you ask for more democracy in a country, it's very rare that anybody will push back. “Oh, this will rock the boat here. Our country doesn't have a strong tradition of democracy, so we should just keep without tradition.” These are not arguments that are accepted by someone that's promoting democracy. They say, “no, no, this is a better situation because this will be able to really convey it the will of the people, so it's not a matter of tradition or not.” So what I would do is try to make this conversation within academic circles, with journalists, with policy makers, and that type of person, because I think the things that do get implemented, they are downstream from these people. I don't know if you read the Stefan Dercon book, Gambling on Development?
Tobi;
Yes, he was also a guest.
Tiago;
He was a guest too?
Tobi;
Yeah.
Tiago;
Oh, that's great. I’m in very good company. So he talks about the importance of an elite bargain for a country to find development. In this sense, I would mention the book to convey the importance of trying to convey this through the elite. I don't think it's as disruptive as we make it to be, because if you think about it, think the issue with presidentialism, the winner-take-all. In the winner-take-all, it means that for a presidential candidate that loses the election, it might very well be the case that losing the election has more negative consequences for them than actually switching to the parliamentary system. So he will expect to have a better participation in the political system of his country if they switch than if he loses the election. And I think this is very true. And I see politicians in many countries are favorable to parliamentarianism. In my country, I see that the politicians are the easiest class to convince. I think that because they live it, they know how dysfunctional presidentialism is, and because they perceive that they would themselves benefit. So they are the easiest class. I think that the journalists and the academics in many of these countries are much harder to convince.
In Brazil, it's definitely the case that this happens. So even though there is this strong consensus regarding the superiority of parliamentarianism in political science in the US and in Europe. In Brazil, we don't see anything like that. The political scientists in Brazil are very skeptical of Linz and other authors and there's specifically a Brazilian scholar that's very influential that tries to undermine Linz's arguments. I think that he doesn't do it satisfactorily. But this is how I would do it. And then, I don't know, I think that we should try to do the things that we do for other causes that we see. So climate change, what do people do for climate change when they try to fight climate change? They create think tanks, they create campaigns online, that sort of thing. That's what I miss.
Tobi;
So, I mean, if you look at the world today, especially the trend in global politics with the rise of populism, nationalism, trade wars, the state of global governance generally at institutions like the UN and the prospects of cooperation between the EU, the US, China, Russia, and what is called multi-polarity generally, do you think that parliamentary systems put global diplomacy on a better, steady footing?
Tiago;
I definitely do, yes. And this makes me sound like, oh, I think it's a panacea. It's a problem solver for all things. And anticipating that, I would argue that it's actually presidentialism, personalism is really bad. And when something is really bad, it can harm you in every area of your life. So parliamentarianism solves the problems that presidentialism causes. And with respect to diplomacy, we see that the democratic peace theory is one of the most, I think, the single most established empirical fact in international relations, that democracies don't fight each other. And there are some attempts at trying to make this look not as solid as it is, but it's widely perceived as the most important empirical fact in international relations. And if we think that parliamentarism is so central for democracy, for the democracy level, for democracy duration, then I think that it becomes very clear that parliamentarism will have this effect.
And I think of a book written by Chris Blattman, a professor at UChicago [University of Chicago], Why We Fight. And then he explains the few reasons why countries will fight, because he argues very convincingly that conflict is much rarer than we try to make it to be because the news cycle is so prone to publishing on conflict. But conflict is rare. And then there are several failures that are related to countries fighting. And many of them relate to a country being presidential. So one of the failures is that the government does not reflect enough the will of the people. So the utility function, more or less, the interests that the government is taking into account is not the interests of the population as a whole. So it may make sense for the government to fight a war, even though it will be disastrous for it’s own people. And parliamentarianism is supposed to better convey the interests of the people of a country into government much better than presidentialism does. So this is just one example. And just a better functioning government also will help in diplomacy.
Tobi;
I'm curious, as a way of steel manning your argument, what is the one critique of parliamentary systems that you find persuasive?
Tiago;
Many people ask me that. I have a hard time thinking of something. So the one thing I really think is that it's very counterintuitive. It's something that people just have a very hard time accepting that might be true. People would like to have a good leader and they would like presidentialism to work. So it's very unpopular. It's very hard to convince people that this is indeed the case. I think that it's a lot like, I don't know, like markets in general. I think that people are suspicious of markets in general when they shouldn't be. And I think that parliamentarianism has this flaw. But on a performance level, I really can't think of anything. I know this makes me look like more of a radical than not. But I've looked for it and I couldn't find it.
Tobi;
Final question. This is also a bit of a tradition on the podcast. By the way, you're not allowed to say parliamentarianism. What's the one idea that you would like to see spread everywhere? It might be your idea. It might be from something else. It might be from someone else. What's that one idea you like to see spread around the world? You like to see people get passionate about?
Tiago;
Opening borders. That's one thing that I think would have a huge effect.
Tobi;
So you're very much a card-carrying member of the open borders movement.
Tiago;
I am. I think that, yes, as I said, I'm a fan of Pritchett and others too, Bryan Caplan, Alex Nowrsteh. There are many people, Michael Clemens, there are many people that are working on this. The economic effects of opening borders would be just transformative, double GDP, according to the Clemens estimate. And that would happen exactly by helping the people that are the poorest. So it would also have a great distribution effect. So I think that it's a policy that I would definitely like to see being more discussed on high levels.
Tobi;
Thank you so much, Tiago Ribeiro Santos, for talking to me. It's been wonderful.
Tiago;
I thank you, Tobi, for the opportunity to talk about these ideas and congratulations on your work. And let's hope for more ambitious developing ideas.
Yes and no. I mean, the book never said growth isn't important. It is called The Growth Delusion. It's true. And that is a, you know, deliberately, I suppose, provocative title to some extent modelled after The God Delusion by Richard Dawkins. So it was a kind of an echo of that. So, yes, you're right. It was a sceptical title and journalists ought to be sceptical. And what I was doing was I was prodding at the concept of growth, what it is that we measure, how we measure an economy's success.
What I was not saying is that growth is not important. And I think growth is particularly important for poor countries. You know, we can put richer countries aside for one second, but in a poor country where there are not enough resources for people to have what Amartya Sen, the Nobel winning economist, calls sort of what we now know as agency, really. You know, choices over their lives, where they live, what work they do. And those choices can be denied by very simple things. Lack of food, lack of a roof over your head, lack of work, lack of safety and security. Unless those things are satisfied, then I believe that people aren't able to live their full potential. And for that, you need an economy that's firing at a certain level. In other words, you need to go from an economy that isn't firing to one that is. Then, of course, many other things need to happen, including the wealth that is therefore generated to be, you know, relatively equitably shared, for people have to have access to economic opportunities.
But my book was never saying, you know, growth is bad. We need degrowth, which I know is a trend of thought out there. But my book, despite the title, was really looking at other things, which I'm happy to go into if you'd like more of a discussion. But just to make it clear, I was absolutely not saying that if you have an economy where people lack what I would consider the absolute sort of basic minimum to live a fulfilled life, you know, those economies absolutely need to grow and they need to grow fast as the experience of Asia shows with the rapid growth in places like China, which has transformed hundreds of millions of people's lives and opportunities.
Just occurs to me that what just happened, you know, the power going out is in a sense a tiny example of what I'm talking about. You know, there you are making a podcast that you want to be a world class podcast and it's interrupted. I mean, in the end, it's not such a big deal and we are able to carry on. But it's just a little window into, you know, if Nigeria had a decent power system. then you and millions, in fact, tens of millions of other people would have much easier lives, would have much higher productivity, would be able to worry about other stuff. I mean worry in a good way. And, you know, we could call a better power station growth or a better power system, if you want. The money, the resources, the expertise, the systems to produce a good power system for all Nigerians so that all Nigerians can just rely on it and forget about the lights ever going out will make an enormous difference to people's lives. We can call that growth. And so I'm not against growth. I'm for growth.
Tobi;
Especially for the benefit of listeners who haven't read the book that perhaps I didn't frame that first question very well. The book not in any way suggested that growth is bad. And, of course, I urge everyone to read. It's a fantastic book. So what I'm trying to get at is there seems to be a big debate, even in the subfield of development in economics, about the appropriate measure for growth. The measure that best captures what makes a difference in people's lives, what people value, and you do a little bit of that also in the book, particularly in your discussion around GDP. So please just walk me through the history of the GDP, your critique of it, where it falls short, and what are the things, what are the other dimensions of well-being that it doesn't capture, and why is the field or policy reluctant to expand what we mean by growth?
David;
Yes. Okay. That's this very big subject when I wrote 250 pages on it. But let me try to encapsulate a few things. So GDP was invented, if I remember right, invented is probably the right word, in the 1930s, 40s by a guy called Simon Kuznets. And the aim, in a sense, was trying to encapsulate what was happening to an economy. And as hard as it is to believe before the invention of GDP, which really sort of measures all the products and services that an economy produces in a given period, before that invention, a single number to encapsulate what an economy is doing, there was no such number. So you could say, well, things feel good, people have work, the stock market is going up, there seems to be a lot of delivery of coal or whatever.
But there was no single number that said, you know, GDP is this and it grew by this. So the first thing to acknowledge, I think, is that this is a very clever number and it's an important number. And if you only have one number, it maybe is even the best one. Although somebody said in Mozambique, a finance minister, that he used to watch the May Day Parade and he judged the quality of people's shoes. And if people were wearing decent shoes, then he thought things were getting better. And if they weren't, he thought things were getting worse. But clearly, that's a very crude measure. So GDP, I'm saying, is not a bad measure, but it misses an awful lot and it distorts an awful lot. Let me give you a few examples. So the first thing to know about what we call growth, what we call GDP, is that it's a measure of what you might call flow. It measures what an economy produces, let's say, every year. It doesn't tell you anything about the wealth, which is the assets of that economy.
So let's take Nigeria as you're in Nigeria. If you take oil, which is an asset, and you take it out of the ground, you can turn that into GDP, into a flow of wealth. But eventually that oil is going to run out. So if you keep just taking out oil, selling it, spending it, take it out, sell it, spend it, eventually you've got no oil and you've got no money. And you could argue that maybe that's in part what Nigeria has been doing. The best thing to do with wealth like natural capital as it's called, is you turn that into other forms of capital. So you turn it into productive capital, which means infrastructure. So you'd build with those billions of dollars that have come out of the ground in Nigeria, a world class health system, world class transport, world class airports, world class universities, and you'd build human capital. Some of the same things with healthy, well-educated people who can then go on when your oil has run out and do many other things.
Now, it doesn't take a genius to work out that Nigeria hasn't done particularly well in that. Of course, there are brilliantly educated Nigerians and there are some lucky Nigerians in the elites that have access to good healthcare and good education, but often outside the system, sometimes indeed outside Nigeria. But what I would argue that Nigeria and many other countries have failed to do is to move that wealth into different sorts of wealth that will produce GDP again going forward. Because otherwise what your GDP has measured is a kind of a one shot. We took oil, we sold it, it's gone. So that's the first important thing about GDP is it's a flow, it's not the wealth.
Let me give you another example, and this moves into the environment. If you have a forest from the perspective of GDP, the absolute best thing you can do with that forest is chop it down as quickly possible and turn it into something else like a table. Turn your wood into a table or burn it or do something to produce energy or goods that you can sell and forget the forest. The forest is worth zero as far as GDP is concerned. But of course, the forest has its own value and once the forest is gone, it's gone. And our measures of economic progress take no account at all of the environment around us that I would argue has been a perverse incentive that has enabled us to think that we're doing extremely well producing all this growth, all this economic activity, but forgetting that there's a cost to that, which is the environment that we've been ransacking and polluting and degradating. And that can come back to bite us as we're seeing in global heating and in all sorts of other ways. Let me go to just a third thing and then I'll stop. So you can produce GDP and for all its limitations, it does tell you an awful lot. If you're growing at 10% a year, your economy is doing well, as China found out. China grew at 10% a year for 30 years, more or less and it transformed China from a poor country to a middle income one. However, how you distribute that income is also very important. There's a joke that economists tell, which I think is in the book, about Bill Gates, who walks into a bar. On average, everybody in the bar is a billionaire. But of course, the averages don't tell you anything. So you could have very fast growth in an economy.
Let's take Equatorial Guinea [which] grew very fast on the back of oil but most of the population continues to live in poverty. There's really been no attempt to spread that wealth. So no attempt to reinvest that wealth in the health and education that will produce more wealth, like science and development and all of that that will produce more wealth going forward. And also very little attempt to spread it equitably. So again, GDP doesn't tell you really much about that. And so these are three, I would say, fundamental limitations and fundamental different ways that we need to think about, you know, what is it that we're producing? If you say an economy is growing at 10% a year or 0% a year, what lies underneath those numbers? And what are they telling us about how people are living in those countries and the opportunities they have, which after all is the objective of growth. We don't want growth for its own sake, that's pointless. What we ought to want, I think, is to improve people's lives and opportunities. That's what we should be really measuring. And growth tells you part of the story, GDP tells you part of the story, but certainly not the whole thing.
Tobi;
These are important things you've raised. It's an important critique. I would not say that a lot of people who work on policy or who study these things are not aware of some of these things and the illusion of averages around GDP and what it captures, what it doesn't. My question then is, isn't this more of a critique of the politics or should I say the priority of the political class of a particular country as opposed to a critique of the measure itself, because the limitations are well known and how it falls short is known. So if you then persist with this measure that you know does not quite capture the wealth of the country, does not tell you anything about how income is distributed in the country, it does not tell you how much you are destroying the environment, and thus possibly future growth of the country, isn't that then a political problem?
David;
Yes, a very astute observation. Martin Wolf, a very sort of gifted, a brilliant, actually, economist at the FT, in a sense thinks my book is nonsense. I mean, I don't think he would go quite that far, but he would say, look, the problem isn't the measure. The problem is what you do with it. And to some extent, I absolutely agree with that. However, I do think that what you measure in a sense is what you get. If you set up, you know, we want the economy to grow by X amount, let's say, and you're going to be judged by that politically and to some extent you'll miss out on the other things, let's say the impact on carbon emissions, which clearly we have missed for 150 years. I mean, it's not as though we've managed to do both at the same time. We have missed this.
Now, in the end, you're absolutely right. It's a political decision. But I think if you took a political decision that we're going to do things slightly differently, you would probably want to measure different things as well. A lot of these things are measured, actually. If you go to the Office of Statistics in Britain, you'll find that they measure a ton of what I'm talking about. So I'm not after alternative measures or fancy indexes or whatever. In a sense, I'm after slightly different political priorities. So in a rich country, for example, I mean, even in a poor country, it doesn't really matter. You know one thing you might target is life expectancy. Not just life expectancy, I would argue, but healthy life expectancy.
So you might say, look, we think that it's reasonable in a country of our wealth and prosperity for people to live on average, and clearly it's going to be an average, 75 healthy years. And sure, the last couple of years, they're going to be unhealthy. That's just nature. And that's just what happens. But we're going to aim for 75 healthy years. And if that became your political target, lots of other things might change. You might start pumping more money into your health sector. You might start thinking more about primary health care, about preventative medicine, all sorts of things. Because you've tilted what you're measuring and your priorities, as it were, you then begin to tilt how you organise this.
And again, look at Nigeria. I'm bringing it back to Nigeria. If you take the GDP per capita of Nigeria and the GDP per capita of Ghana, I know this is a tetchy, tetchy subject to compare these two countries.
Tobi;
Go ahead.
David;
You know, I think I'm right in saying that the life expectancy of Nigerians on average is 11 years lower than Ghana. So I would say, well, what on earth is happening there? What does that tell you about the priorities of successive Nigerian governments? Now, it's obviously true, tweaking your measure here and there is not going to solve that. I think the life expectancy on average is 54. A lot of that will be because of very high child mortality. So a lot of kids not making it until the age of five. So, you know, you could have a government that says, right, by the end of our term, we're going to raise that to 60 as a start. A big country like Nigeria with all this oil wealth, this incredible talent pool, and anybody who goes to Nigeria knows that, you know, with doctors and nurses who, unfortunately, are all around the world helping other people. We can pull ourselves together and push life expectancy, let's say, to 60 as a starting point, not as a final point. And you could see then government policies shifting potentially in that direction.
So you can kind of see that measurements can lead to policy changes. Maybe they just focus the mind or maybe they're just a shared ambition. The public and the politicians who have entered into a contract, which is what an election is, “we’ll vote for you on the basis that you'll try and do A, B and C. If we don't like you, we'll kick you out.” That's kind of a highly crude definition of democracy. So you can see, potentially, you might say I'm being idealist or unrealistic, or maybe I am, but you can see how that could work as a guiding principle. So how you leave the confines of GDP to push another priority right up your list of what you're going to do politically, and then you're judged against that. That's where politics and measurement kind of meets.
Tobi;
With due respect to my Ghanaian brothers and sisters, there might also be a little bit of statistics going on there because the life expectancy in some parts of Nigeria may actually be higher than Ghana because Nigeria is quite a big area. But your answer, let me pull you into another debate from that answer, which is income versus, should I say, the rest of other measures of well-being. As you've written about, you're familiar with the SDGs and the predecessor - Millennium Development Goals. And I've had guests on the show, maybe someone like Andrew Nevin, who would say that poor countries can do better with alternative measures like what you have on the SDGs, zero hunger, this and that, as opposed to the annual churning out of GDP statistics.
But a different class of economists or thinkers will tell you that what really makes a difference is for the income of the population to grow and that higher income is highly correlated with all of these things that you say, including life expectancy. If you have more money, you will be able to eat better, afford better quality care, and your life expectancy will go up. It also pulls into what some in the economic subdiscipline and some global charities have been doing, which is interventions - deworming, cash transfers, bed nets, and so many ways that they measure that. But again, some economists will insist that, yes, you can do that and it's not a bad thing to do. But if you have the policies that are able, like you mentioned the example of China and some other countries that have been able to transform radically in just decades, South Korea is a fantastic example, then all this other things that we use as a critique of economic statistics become irrelevant once the majority of the population are able to increase their average income. So what's your reaction to that?
David;
Well, I agree with when you were saying there's some economists. So the second half. So if you have to choose between however many SDGs there are, all these different multiple complicated targets versus let's increase the income of each of our people. I'm definitely on the latter side. And in that sense, income, I think, is absolutely key. You'll find a curve when people go from a couple of thousand dollars per capita income towards 15,000, 20,000, things get better along that curve. Of course, you can blow it. You can have terrible policies. But assuming that you have reasonable policies and reasonably equitable distribution of that income, then there's a pretty good correlation. And you're absolutely right. You will move up that curve. Your health will get better. Your opportunities will get better. Your education will get better. Probably you'll have fewer kids. You'll put more money into each of those kids. They'll do better, et cetera, et cetera. And you'll get into an upward spiral. And in that sense, you're absolutely right. Yeah, then, you know, your bed nets become irrelevant because you've got middle income, educated people who know what they need to do and besides, you probably don't have stagnant pools of water. And besides, you probably have enough money to have a mosquito eradication thing. And, you know, a well-organised policy, which is producing that kind of growth is likely to, in a sense, be kind of self-fulfilling.
So absolutely. In that sense, I don't have a beef at all with income as a measure of the potential to improve people's lives. And I think I can hold the two ideas in my head simultaneously. I think I can prod the measure of GDP, particularly, I would argue, or wealthier countries, as well as saying it's probably the best measure, particularly as you go from the poverty, let's say, of a country like, it's invidious in a sense to name countries, but let's say Democratic Republic of Congo, you know, up through middle income, you know, your kind of Malaysias or whatever, there you'll find that rising income. And I keep saying, reasonably, equitably shared among the population, which is important, of course, then that will have your number one transformative effect. I have no argument with that at all.
Tobi;
Maybe I've been, I don't know, unfair to you by putting your book in the context of poorer countries, because certainly that wasn't the primary cohort of the analysis of the book. So, I mean, you talked about healthcare. You cited the American example, which was such a big, big, big talking point until Obamacare, and it still continues to be. For example, if you compare the American healthcare system with the Canadian healthcare system, and I know so many public policy analysts and other forms of thinkers look at Canada and say, oh, that's what we should be when they talk about America. But there are lots of Canadians and other people from countries with fantastic healthcare system who wants to move to America, who would move to the United States in an instant. So, again, does that tell you that a lot of these things that we worry about is not what people care about on average?
David;
Well, this is a very different question, I think. I mean, look, the American health care system, I would call inefficient, unequal and at its best, excellent. And it can be all of those things. So if you're a wealthy American or if you're an American with good health insurance, you probably have among the best health care systems in the world. The problem is if you're not wealthy, you don't have good insurance, then you have a pretty average, even a bad health system. The Canadian health system is probably more equal and certainly more efficient. The Americans also spend too much money for what they get. So they spend, I think, 20% of a very big GDP per capita on healthcare or of their entire GDP on healthcare. And that's quite inefficient. A lot of that is kind of litigation, it's profits, it's insurance and all of that. So it works for a good proportion of the population. As I say, if you're middle class, upper middle class, you probably have the best or among the best health care systems in the world. And that will figure in all sorts of things. Healthy life expectancy, for example, a very crude measure, but worth looking at. But if you're not in that category of people, then you probably have a pretty average health care experience.
And again, averages can tell you something. You know, life expectancy in the US has dropped for 20 years. Tiny, tiny, tiny amount. But what's going on? The economy has been growing, you know, with a few bumps, but it has been growing. There are wealth being created and yet that's not transferring into better life expectancy. You know, there are things like the whole OxyContin issue, et cetera, that begin to explain that. There's what people call lives of despair [Deaths of Despair], you know, suicide and people who just feel pushed out of the middle class. So it's affecting a subset of the American population, but that's enough to kind of bring the average down. So I think you have an unequal system. And that's how I would compare it with the Canadian system. I'm not familiar with the Canadian system at all, but I can imagine it's sort of like a UK style, free at the point of service, roughly like that. And the UK system has all sorts of huge problems. But again, if you have a health emergency, it's probably going to be a pretty good system. It's less good at dealing with sort of preempting health problems and preventing health problems. But again, I think this is possibly leading a little bit off the subject of GDP, but that's how I would explain the differences in different health systems.
Tobi;
Yeah, so my question then is, but a lot of people still want to move to countries where they think they can get rich really fast, where they think their skills can be better compensated and more often than not, that is usually the United States, despite the inefficiencies and inequalities of the health care system at the lower end. So, now does that mean that people do not know what they want or they value growing their personal income better than a lot of these other things that we talk about?
David;
I mean, America is still the biggest economy in the world, measured in dollar terms, not in PPP terms. So it's the biggest economy in the world. It's clearly very dynamic. If you're in tech or IT or AI, this world leading technology, world leading universities. You know, if you're making it in America, you're making it pretty big. And immigrants tend to be people who are ambitious. They're driven. That's why they picked up and left their country and gone somewhere else. You know, America can seem quite attractive. You kind of think if I'm going to roll the dice somewhere, I'll roll it in America. Now, if you're American, social mobility actually is not as good as it has been in the past. And it's not as good as in some European countries. That's quite a counterintuitive. But I've read a number of papers and data to suggest that. But still, you've got a big, powerful, high-tech economy that kind of sucks up labor, that's bounced back much quicker from the global financial crisis, that's bounced back quicker from COVID than most other equivalent economies.
You know, if you're thinking, where am I going to go? Where have I got my best chance of making it? You know, it's not irrational to think, well, America's big enough for me, you know? So I don't see the two in contradiction. I don't think people are saying, I'm going to go to America because on balance, it has the most rational healthcare system that's the best use of resources. People don't think like that. They think like, where am I going to go, fit in, have a chance? So I would say that's what attracts people to the US.
Tobi;
Yeah. Let's talk about the environment a bit. I don't know if I have the right phrase here, but it seems to me, as recently demonstrated by the recent spat on BBC between the host and the president of Guyana, by some countries, again, on the poorer end of the global wealth spectrum sort of fighting for their right to pollute, i would call it, Which is that you cannot tell us now to care about the environment, sustainability, low-carbon green economy, when you've had 150 years to basically do what you want, which sort of then got us into this problem. I don't necessarily agree with that argument and I do think that there's no part of the world that is insulated from some of the big, terrible changes we are going to see from global warming. But what's your reaction generally to that argument?
David;
OK, well, I do have some sympathy with that argument, but again, like most things that are worth talking about, it's complicated. So let's just start with a few basic facts. And, you know, I've never really written about the environment as a core subject, although I have written about it quite a lot both from Asia and increasingly actually from Africa. So bear that in mind. But let's take the per capita carbon emissions of Uganda. When I last looked, I think there was 0.1 tonnes per capita per year. And compare that with America which I think is 20 tons per capita per year. Now, if you say to a Ugandan, you have to be really careful because the world's on the brink of catastrophe so you guys need to cut your carbon emissions. I would agree with people who say, well, that's nonsense. I'm not cutting my carbon emissions. What Uganda needs to do, I would argue quite strongly, is to increase its carbon emissions.
Now, of course, that doesn't mean to say Uganda's ideal path of development is to copy in its entirety everything that went on in the West, which would be massive, crazy pollution with coal-fired power stations and whatever destruction of the environment, followed by a kind of, oh, my God, what have we done moment, drawing back and then are trying to kind of address the problems. Often, by the way, outsourcing your pollution to some other poor country. But anyway, I'm not saying that that is the path to go. But I am saying that from per capita carbon emissions of 0.1 tonnes, then yes, the only way is up for a bit. Because I don't believe that you're going to be able to get out of poverty without increasing those carbon emissions a bit.
Albeit that we have solar power, we have wind power, we have all of this. And clearly one doesn't need to emulate the old fossil fuel model in its entirety. But I think that it's reasonable to assume that, say, in Mali, where per capita people use the same as British people use to boil their kettle. So that's the power consumption in Mali, what we in Britain use to make our tea, basically. And you're saying to a Malian, sorry, that's all you've got. Now, that I think is totally unfair and is unsustainable politically and rightly so. So I think that the Malis and the Ugandas of this world will have to increase their carbon emissions a bit as they become wealthier.
But as soon as possible and wherever possible, they ought to embrace new technologies, green technologies, which in some cases will be cheaper and more efficient anyway. But, you know, we still don't really know, for example, how to make cement using green technologies. It's there or thereabouts, I believe, but it's not really proven technology at scale. And we can't say to Uganda, sorry, you missed out on concrete. You know, that one that one passed you by. Clearly this is ridiculous and unsustainable. So I do have sympathy with the view.
Of course, you can abuse that view. You can say, you know, you polluted for 150 years. Therefore, we're going to just carry on recklessly as normal. Let's take the conversation back to Nigeria. There is a conversation in Nigeria, you know, how dare you tell us that we can't use our oil and gas? Now, I have some sympathy with that, but the corollary and the additional argument is we need to electrify. We need to bring power to 600 million people in Africa and to a 100 million people in Nigeria who don't have power. I completely agree. But I would say, what have you been doing the last 30 or 40 years? The oil's been pouring out of the ground the last 30, 40 years, and that did not translate into electricity for all Nigerians as it should have done.
So it doesn't follow that if you're allowed to follow this fossil fuel path, that all will be right with the world. Policies need to be intelligent. And intelligence means to the extent that you do use fossil fuels, you must use them efficiently and for the benefit of your people. And where possible, you stop using fossil fuels, you embrace new technology. South Africa has a ton of coal, for example, but it also has among the best solar and wind potential in the world. Its problem in transitioning, and of course, as you'll probably know, South Africa is having trouble keeping the lights on. Its problem in transitioning from coal to solar and wind has not been primarily a technical problem. It's been primarily a political problem with people trying to protect the coal industry. That is a mistake. But I don't think you can say to the Ugandans of this world, sorry, you missed the boat. We don't really know how you're going to prosper in this new green world, but good luck. I think that does not wash. So in that sense, I have sympathy with the Guyanas and the Malis and the Ugandas of this world, yeah.
Tobi;
But not Nigeria.
David;
But clearly, you know, you need governments that use their oil wealth better. I don't think you would find a Nigerian that would disagree.
Tobi;
I agree with you. Again, I'm not trying to frame this as a direct consequence of your work or what you've written, just trying to expand the scope a little bit. So I want to get your sense about where you think policy should go in trying to strike a balance. Because as you know, a lot of African countries are in financial distress from sovereign debts. The domestic investment environment is not that great so even if you want to keep insisting that, oh, we're gonna pollute we're going to do this we're going to do that, if the global investment appetite for fossil fuel continues to dwindle as policy in the West is forcing companies to divest, you might not have a choice, even if you want to pollute at the end of the day, because nobody would be willing to invest in that in the next 20 or 30 years. So my question to you then is that how do you think that the policy environment, especially around all these global gatherings and perhaps even some more pragmatic measures can strike the better balance between these two views.
David;
Okay. Well, again, a complicated question, but definitely one worth asking. There are a few things going on there. The first thing I'd say is that finance just sort of cutting off all carbon, all fossil fuels is almost certainly unfair. And the idea that gas, for example, could be a transition fuel is one worth considering. But there's a big caveat here. And the caveat is the following, really. I don't really believe that there are many governments in Africa that have a serious plan for development. I mean, that's quite a big, harsh thing to say. But, you know, you had Stefan Dercon on your program. Gambling on Development was the name of his book. You know, if you're going to use fossil fuels to improve the lives of your people, fine. But where is that being done? Maybe in Senegal, maybe in Ghana. You look around the continent and you struggle to find these success stories where people are saying, no, no, no, world, we're not listening to you, we're going to use our fossil fuels because right now we're in this fantastic phase of growth and development, and, you know, if you cut off our fossil fuels, you're going to stymie that. You've got a lot of countries that are hardly at the starting line, I would say. And again, that sounds quite harsh. But, you know, you take Ghana, which is a relatively successful African economy. But Ghana had the same GDP per capita. This is oft used. In fact, I think it has had a higher GDP per capita. But probably these measures are imperfect, as we’d suggested at the beginning of our discussion. But somehow it was not dissimilar from South Korea.
South Korea is now 20 or 30 times as rich as Ghana in per capita terms. South Korea has done something that Ghana never did. And Ghana is a relative success story. So South Korea has certainly done something that Democratic Republic of Congo or Niger or Angola or Liberia or Zambia have never done. It's managed to take off economically. Yes, using fossil fuels. Now what we're being told is, you know, you can't use fossil fuels. But I'm also asking, where is the plan for development? Where is that big transforming development happening on the continent? That's what's necessary. That's what I want to see. But you have to kind of look quite hard to find it. And you're going to be finding the kind of the beginnings of it. Let's say in Ghana, in Senegal, you know, maybe in Rwanda, maybe in Ethiopia before it blew up politically. But you do have to look quite hard to find it. So yes, the world's saying fossil fuels, you can't have them. We're not going to finance them. That's potentially a big obstacle to growth and development. But just as big an obstacle to growth and development is governments that don't seem to be there in the fight to produce growth and development. And I think this gets back to politics. There are too many governments who get to power And their reason for getting to power is to extract, extract wealth for, you know, themselves, their families, their regions, maybe, if you're lucky, but not for the whole country.
Tobi;
It's an interesting observation. I'm going to ask you a speculative question and trust me, I don't want to put you in any kind of trouble. So, I mean, if you look at a set of countries that I call the tragic trio, which is the three biggest economies on the African continent, Egypt, Nigeria, South Africa, it's a useful comparison to me because they sort of went through a major transition in terms of power right around the same time. Nigeria it was 2015 when we had the first opposition leader coming to power since democratic governance started in 1999. South Africa, I think, was 2014. And I think Egypt was around the same period. If you look at that decade for all these three economies, what you see, it's not a pretty picture, unemployment is quite high. Youth unemployment particularly is through the roof. All three economies are chronically indebted. Inflation and the general macroeconomic policy environment is just a terrible mess. So I'm asking you, as someone who has been on the ground a couple of times in some of these countries, what do you think from an outsider's perspective, has gone seriously wrong with the political class in countries that can actually pull their weight on the continent if they are doing better.
David;
Sure. You mentioned, obviously, the three biggest economies on the continent. Now, first thing I should say is I can't really talk about Egypt because I don't cover it. For whatever reason, the Financial Times' definition of Africa is sub-Saharan Africa. So I cannot really talk with any legitimacy about it. But Nigeria and South Africa, you know, I've been to, I don't know, 20 times each. I've thought about them both quite hard, I suppose. And I would first say that they're just very, very different cases. The overriding factor of South Africa was the apartheid regime and the liberation from this horrendous apartheid policy, which deliberately impoverished a section of the population, the non-white section of the population, particularly the black majority. And extricating South Africa out of that is proving extraordinarily difficult. And South Africa is failing at that. And I could go into that in much more detail if you want. Nigeria, I think, is a whole different case. Nigeria never really had, well, it didn't have an apartheid system. It had a colonial oppressor: Britain; colonial occupier: Britain; then Britain left. But Nigeria doesn't have the terrible racial legacies of apartheid that South Africa suffers from.
In that sense, I actually think Nigeria starts from a better position than South Africa, albeit that South Africa had much more sophisticated some kind of world-class industries, manufacturing base, etc. Still, I would argue that the politics in South Africa is so complicated that Nigeria weirdly starts in a better place. However, one of the things that I think has gone wrong in Nigeria, and again, I don't think there'd be many Nigerians that would disagree with me, is that you discovered oil and lots of it. So you discovered oil and lots of it, but weirdly not enough. So if you take a Qatar or a Kuwait, one of these rich Gulf states, they have huge quantities of oil and very few people. So it doesn't take a kind of genius government to be able to spread that wealth kind of around, you know, to bring in foreign labor if required, et cetera.
Nigeria has a lot of oil, but not enough oil for 200 million people. If you gave all that oil wealth to each of 200 million people, you wouldn't have very much, which creates an incentive to try and get your hands on it. So it creates a perverse incentive, I would say, and the resource curse sort of starts there and did start there. And so the point of government becomes to share oil wealth, get your hands on the oil wealth, share it, share it among the political class, keep out everybody else and use your political influence to get as much of that oil wealth as possible. One obvious sort of result of that is the highly logical thing to do if you have oil is you begin to move up the value-added chain. This is what you should do if you're trying to develop any economy. So what do you do with oil? Well, you turn it into petroleum products, into the fuel you put in your car, to heating, electricity, all of this stuff. And again, you don't need me to tell you that Nigeria has not done this. It has refineries that have not worked. Now, of course, you have the Dangote Refinery, And there's a lot of hope, some hope anyway, attached to the Dangote refinery.
But in the past, what the Nigerian elite, and I can only blame the elite because they've been the ones in charge, what they've done is they've taken that oil, they've sent it abroad for somebody else to add all the value, and then they've bought it back, spending all the money that you've earned from the oil in the first place to somebody else because they've got a refinery. I mean, this is crazy, crazy policy and crazy politics. And this, I think, has been the curse of Nigeria that has informed much else. Of course, there have been many, many other problems, some of which go all the way back to colonialism and the colonial legacy. The fact that Nigeria was kind of jammed together by Britain, that it's a nation state if you draw it on a map, but it struggles to be one in reality.
And you could argue that Nigeria has been successful in creating this kind of feeling that there is such a thing as Nigeria, that we're all in it together. But you can also say that the elites, those who reach and by that, I guess I mean those who reach political power and those who enable them to reach political power, they have not really treated Nigeria as a nation because otherwise there wouldn't be 10 million kids out of school. There wouldn't be these massive disparities between different states, some with very much better health outcomes, et cetera, some with much lower levels of people in school, some with much better infrastructure, some with much worse infrastructure. That wouldn't exist to the same extent if your elites had treated the country as a real state and the purpose of the oil being to fuel that state and to fuel its development. That has not been what's happened. You've had an elite that has, in a sense, followed a colonialist model, which is to extract wealth and sometimes to send it abroad, which is why a lot of people go for their health and their education abroad, because they haven't bothered building it to the extent that they ought to have done in Nigeria itself. So these are very different stories. They may lead to the same or similar positions. You started by asking about why these three big economies have not fulfilled their potential, let's say, to put it kindly. So I think the reasons are quite different, particularly in the case of Nigeria and South Africa. But your end point is similar, if not exactly the same.
Tobi;
I want you to talk a little bit about South Africa, and especially in the last 10 years, what has gone, maybe that's not fair, but what has gone really, really wrong? I mean, to paraphrase someone I listened to during the lecture, I'd rather not say his name, is that South African elites care more about making the elite structure blacker than making South Africans wealthier. How should you think that conforms to reality?
David;
Well, that is a controversial statement. I mean, I think the ANC has become increasingly a kind of a black South African party. And it's to some extent losing some of that kind of rainbow nation, colourblind, non-racialism that was kind of, in a sense, so inspiring in 1994. So there's a couple of ways of answering that question. I mean, you said the last 10 years have been bad. I mean, I know that some people think the following: It's been 30 years since apartheid they kind of compare it to a football match - first 15 years, first half, pretty good. Second half, pretty disastrous. Lots of own goals. And that's one way of looking at it. The cutoff point is Zuma. So you have Mandela, you have Mbeki, sort of technocrat, reasonable growth that's growing at 5%. You do have a commodities boom, it's true. Then the financial crisis hits and Mbeki is dislodged by his own party, only a year before he was due to leave anyway, but still dislodged. Zuma's put in and Zuma starts the process of state capture and the real kind of erosion of some of the institutions that South Africa had maintained for those first 15 years. So that's one way of looking at it.
I think there's another really sort of, in a sense, more interesting way of looking at it, which I first read, again, in a Martin Wolf column. And he talked about the concept, which was originally applied to Brazil, actually, of Belindia. And Belindia is a combination of Belgium and India, a small, in this case, white economy. It doesn't really matter what the colors are, but a small white economy surrounded by much, much poorer black economy. That's what South Africa looked like in 1994. It had been deliberately engineered by a white racist system. So that's what you got. The question is, what policies do you have to deal with that? Because you've got two economies.
If you think about the trouble that Europe had when Europe joined and you were trying to set interest rates across Europe for different economies, for Spain and Germany, let's say. Now you've got Belgium and India. What policies do you put in place to maximise the potential of both of those? Because one of the things that you obviously try to do is you basically raid Belgium. You redistribute from Belgium to India, which is what's been done. And that's, I think, perfectly fair and a perfectly rational thing to do. You redistribute from the wealthy part of your economy to the less wealthy part of the economy. But that's not all you can do, because if that's all you can do, then eventually you're going to just impoverish Belgium and you're just going to have an impoverished country. So you can't do that. You've got to somehow turn India into Belgium. And it's not really clear how you devise policies that can do that.
You know, if you're India, it's much easier. You're a poor country and you trade, in a sense, off your poverty like China did. You know, China moved people from the countryside in China into factories in the cities. So it transformed inefficient farmers into increasingly efficient players in the global supply chains. But it did that via low wages. It's not really possible in South Africa because of the political inheritance that it's had. So one of the policies, for example, that the ANC tried was black empowerment. Which is, again, rational and completely understandable. They wanted to create a black middle class and people like Cyril Ramaphosa, who was put on various boards and given shares in various companies. He became very wealthy through that. And a black middle class was created. But you can also see how there are problems there. One is that this can lead to corruption. You know, you get those opportunities based on who you know and who you know means knowing the ANC. So you can see how that reinforces or could reinforce bad politics and cronyism. And indeed, that is exactly what's happened, unfortunately.
And second, you can see how it can lead to inefficiencies. So a well-known example was that, you know, even the airline needed to buy its planes. you know, Boeings, et cetera, through a black empowerment business. So, of course, no planes are made in South Africa. So the only way of doing that is a black company is set up to buy planes and then they sell them to South African airways with a markup 10 or 20 percent. So immediately you have an airline that's 10 or 20 percent less efficient. And that's kind of mirrored in the rest of the economy. So in trying to adjust to the hundreds of years of historical injustices that you've had, you kind of fall into policies that are going to be counterproductive and make your economy inefficient. Having said that, the ANC has also just failed flat out, right, in some policies that it also have got right. The biggest of all being education. Under apartheid, you had an education system that was deliberately tailored to keep black people poor and to limit their education so that they could work in the mines and work as domestics in people's houses. A vile system.
That was the starting point. It ought to have been really easy to improve that by leaps and bounds. And South Africa has actually put quite a lot of money into its education system. But for one reason or another, some of which I don't fully understand, to be honest, it's failed. And the education system for most people is failing. And so it's failing to transform people's opportunities via education, which would be not a simple, not a salvo either, not a panacea, but certainly it ought to be a very important part of the ANC's armory in transforming that society. And it's failed.
Tobi;
That's deep. And I agree it's a complex problem. I mean, They have an election also this year, and in Nigeria we had ours last year. From the field currently and how the political dynamics is evolving, what do you think is the hope of turning some of this around, at least for the people?
David;
Sure. Well, there are a few things. I mean, like you often say with development, well, I wouldn't start from here. I mean, it's not a particularly good place to start from. That Belindia image, I think, is quite powerful. And you can't just wish that away. That's history. That's going to take a long time to overcome. What is going to happen in this election, what is likely to happen, is that for the first time, the ANC's majority, i.e. its 50% plus of the vote, is going to be challenged. So last time it got 57.5. In previous iterations under Mbeki, for example, it got, I think, in the high 60s, certainly in the mid 60s. So the ANC sort of was dominating politics. Now, I think disillusion with the state of the country is such that that majority will be challenged. So it's possible, it's not definite, but it is possible that the ANC will fall below 50%. That opens up all sorts of possibilities, some of them more promising and some of them less promising.
So if the ANC does very, very badly, let's say it gets 40%, I think this is unlikely, but possible, then it's It may go into coalition with a party like the Economic Freedom Fighters, Julius Malema, who's a breakaway, sort of a radical breakaway. They want to nationalise the commanding heights of the economy to expropriate a lot of the land without compensation, maybe nationalise the central bank and then sort of change central bank policy so that it's much more in favour of growth distribution than in sort of tackling inflation. Now, you know, maybe this will all go brilliantly well, but experience and history tells you that that's not likely to go very well, that project, and could impoverish South Africa further. So the loss of the ANC majority, while important and necessary, I think also sort of opens up the country to danger.
I think much more likely is the ANC will get in the mid 40s or high 40s and therefore will go into coalition with some of the smaller parties. And this, I think, is where the hope lies. So you have a number of smaller parties, some of which are pretty terrible, but some of which are really good. There's a party called RISE Mzanzi, for example. A former journalist, Songeso Zibi, has formed this party. A lot of people really think that this is a good guy, progressive, forward-thinking, not attached to the ANC, not attached to the DA, which is the right-of-centre kind of party that has tended to be a very white party and therefore is really not electable in the country as a whole. So I'm not saying that RISE Mzanzi is the great hope of South Africa. I'm not saying that at all. I don't really know that much about them. What I am saying is that you can see how the breakdown of this ANC monopoly could lead to new ideas, some of which will be bad and some of which could be much more hopeful and progressive. And, you know, come the next election in five years' time, you could see some of those parties that have established themselves now growing their support base and maybe changing the policies of South Africa for the better.
But I do think that the ANC, you know, as amazing a movement as it was and as necessary a movement as it was to overthrow apartheid, after 30 years of unchallenged power, it's hardly surprising, is a sort of a pale shadow of its former self. And it'd be difficult for it to reform within without losing power, or at least having its power seriously challenged.
Tobi;
For the sake of the millions of South Africans whose lives depend on their government getting things right, I hope they do. My final question before I let you go, David. So I'm going to ask you one big question and maybe a couple of two or three more rapid fire questions. And this is a bit of a tradition on the show, which is talk to me about one big idea. It may be yours, it may be an idea of someone else, but just one idea that you are excited about, that you love very much and that you would like the world to be excited about as well. Possibly could change the world.
David;
That is a… you should have warned me about that question type. So my mind's going blank. The thing I'm thinking about is so far from what we've been discussing that I don't know that it's relevant. I mean, let me name two things and they're quite different. What is very well established, but I think very important, and I'm not trying to be trendy here, but I think the idea that if you concentrate on giving women opportunity in society that a lot follows is very promising in development.
If you look around, women kind of hold families together, their kids' health and education, they are the guardians of that. If they're empowered, given opportunities, I think huge amounts can follow. And if you want to kind of a way of unlocking growth and development, you could do a lot worse than thinking, what are we doing for women at all levels of society? This doesn't mean women in boardrooms or women in this. Of course, it means that, too. But it means policies that enable women to take control of their finances, take control of their bodies, take control of their education, take control of their destiny. If you get that right, I think an awful lot follows.
Second, totally different and something I hardly know anything about, but I keep hearing about it. It's something called eDNA. This is a way of measuring biodiversity. As far as I understand it, you take a measurement from water or soil and rather than counting the number of animals or trying to count, you know, the number of bacteria or worms or whatever it is, you kind of have a baseline of the biodiversity of an area.
And given that baseline, you can then work out, are we improving this area or are we degrading it? And it may be the kind of the GDP of the environment, let's say, a one shot measure that enables you to say, let's leave this country, this wetland, this region, this forest in a better state for the next generation than we found it. I think that could be a very powerful idea.
Tobi;
Charter cities, which is something you've written about, are something with a big potential for change, especially in the context of Africa. Do you find it promising or a fad?
David;
I'm highly skeptical. You can see where it comes from. You know, Shenzhen in southern China, you could say it was a charter city. You could say Singapore kind of acted like a charter city, Hong Kong. If that's what you mean by a charter city, then maybe. But look, if you have policies that are good, then you should roll them out to the whole country. Why should they be in some isolated little part? I don't see why you need to start from scratch. You could say, yes, we could experiment. We could try Charter City A, Charter City B, Charter City C, see which does better and then roll that out to the country as a whole. Fine. Okay. But the idea that you can get around government, you know, outsource public goods to the private sector, start totally from scratch. I am quite skeptical of that idea. I find it intriguing and I've written about it in a way that may not necessarily show my skepticism. But if you ask me, do I think it's a great hope or a fad? I lean towards the faddish end of the spectrum.
Tobi;
Senegal, Nigeria or Ghana, who has the best jollof rice?
David;
Yeah, if you make me answer that, then I'll never be allowed back in Nigeria again. So the best jollof rice I've probably ever had was in Lagos, actually. Not meaning that there's not fantastic jello fries in the other two countries, but the best one that I happened to have had was in Lagos. Kind of spicy, pretty good.
Tobi;
Okay. Generally, from your travels across Africa, where to you has the best food scenes, the best restaurants, best coffee shops?
David;
South Africa is an obvious example that has good food. I like some of the food I came across in Madagascar, in Antananarivo. And in West Africa, I'm going to say Lagos and Accra draw, just to be diplomatic. But there are certainly some very cool places in both. And I've noticed that, I mean, clearly in Lagos, Some things happened in the last few years because there's been a kind of a mushrooming of places, some of them very high end, which, you know, have limited use for me. But, you know, there is clearly some interesting stuff happening.
Tobi;
Finally, Labour or the Tories, who do you think will win the next UK general elections?
David;
Labour.
Tobi;
Thank you, David Pilling. It has been a pleasure to have you on Ideas Untrapped.
