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Ladies and gentlemen, may I have your attention for a moment? I don't want to stop you from eating. You will soon be served dessert. Keep eating. But I want to make sure that you have food for thought as well as food for your physical sustenance. And so it's my pleasure to introduce our lunchtime speaker, one of our major speakers for the day. So I hope you will join me in welcoming. We have Professor Tim Besley. Jim Besley is a school professor at the lse, which is our highest rank of professor, in recognition both of his extraordinarily distinguished work as an economist and his work that connects across the whole school. He's been one of the leaders in establishing our public administration and public policy programs and in many other ways around the school. He's also an economist of exceptionally broad outlook as well as very deep research. And he's going to, I think, bring these together in speaking about the issue of leveraging Asia's success and telling us a bit about how the rest of the world understands and draws lessons from Asian economic success. Tim.
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Thank you very much. Craig, thank you particularly for that very kind introduction. It's one of those occasions where if my parents had been in the room, my father would have been proud and my mother would have believed you. So I have the unenviable job of being a lunchtime speaker. You've had lots of food for thought so far and you've now had food in the literal sense. So I'm going to talk for a few minutes on this topic, which probably appears slightly cryptic, I have to say I'm at a disadvantage in a number of respects that I only flew in yesterday and I Woke up at 4am Trying to fret about what I would talk about now. And what I really want to talk about is what I would call the intellectual, not the financial leverage that Asia has to offer. And I'm going to set that in context a little bit in a few minutes. But really what I want to talk about is how to see Asia's success in a broad context and how that's influencing thinking in other parts of the world. Because I don't regard myself in any respect as an Asia specialist, but I do encounter quite a bit in the work that I do interest in what has gone on here and what the lessons are, what we should be drawing as lessons. I want to locate that both in the context of some policy discussions I've been involved in, but also in the context of some debates that economists are having about what drives long run development and how Asia allows us to reflect upon that. Now, of course we can. There's a number of different ways to look at Asia's success. I've got to say on the very long plane journey from London, I was armed to the teeth with a laptop and loaded with data. So I thought I'll take a fresh look at different dimensions of Asia's success from a statistical point of view. And I thought the one that kind of crystallizes, I think what a lot of people view as a measure of success is that Asia has grown in the period for which we have good and reliable data at about 1.5% per year, more than what you might say are the natural comparators. The other emerging markets in the world. Now you might say one and a half percent doesn't sound like a lot. Well, Lewis Hamilton recently won the Malaysian Grand Prix going half a second a lap faster than his competition. One and a half percent growth actually over 50 years amounts to about 225% higher GDP at the end of a 50 year period. It's one of these wondrous features of compounding that you don't need much of a growth premium to discover that over a prolonged period you, you've actually raised your income level quite significantly. So asia over that 50 year period has grown away from the rest of the, most of the emerging market world, away from Latin America, away from particularly Africa, and has shown a growth premium relative to those parts of the world. Of course, to talk about Asia is itself not entirely fair to do. I mean, within Asia there's plenty of variation, just as within all of the other parts of the world there is variability. But by and large people look to Asia from the outside as a place which has delivered a certain level of economic success. And in terms of, in global terms, of course, that means that in terms of the Millennium Development Goals, particularly the goal on absolute poverty reduction, Asia is more or less delivered for the rest of the world. In part because of course within Asia you have India and China, both of whom have had very, very significant reductions in absolute poverty. In fact, probably in the last 20 or so years, they're some of the biggest reductions in absolute poverty we've seen in the history of our planet. So very significantly, Asia has contributed to a notion that there is a model, or potentially a model out there of successful economic development. And that's really what I want to talk about. As I say, the most obvious comparator for Asia's success are other countries which started 50 or 60 years ago with comparable levels of GDP per capita. And as I said, Asia has grown very significantly relative to those. When it comes to catching up, though, with the rich countries of the world, it's less impressive. And indeed, there's a debate that goes on, and some of you may have encountered it in some context, about the possibility that Asia has hit something called a middle, middle income trap, that relatively few countries have emerged from middle income to high income. And the question is that really a sensible way to think? And I want to talk about that again in a moment. But before I talk about that, I actually want to pick up on a theme which sort of has come up two or three times already in this forum, and that's the theme of. Of politics now. And particularly I want to talk about changes in the way economics is done. And you kind of know you're getting old at a point when you can look on your career and see discernible trends in the way in which your discipline has evolved. And I remember when I was a freshly minted assistant professor and I was at Princeton as my first job, I rolled up, as one does, sort of full of beans and enthusiasm, and spoke to one of my senior colleagues who, someone who's been a friend for life and I respect a great deal. And he said, what are you interested in? I said, I'm interested in economic development. And he sort of shook his head and said, well, you know, I used to be interested in economic development, but I decided all the problems of development were political. And therefore I decided as an economist, I had nothing to contribute. I think the good news is, the good news is that we've changed the discipline of economics, that if you studied economics today, and particularly if you studied economic development today, the discussion of development would be infused in equal measure by discussion of what you might call traditional economic issues and the study of political economy. And that's right at the core of the debates that we now have about what goes on in the process of economic development, what determines the levels of economic development. I mean, another way to put it is that if you said to me now what's the bigger problem of development? Is it that we don't know what to do, or we can't get the things that we know what to do to happen, I would say it's very much the latter. Whereas if you look in the early period of economic development, it was much more around. If you only had the right technocratic resources, the right advice and the right knowledge, then the rest would happen. But we discovered to our cost, it's actually making things happen that's comparatively More difficult than knowing what the right thing to do is. And that's really what's transformed the discipline of economics in the way we think about this. And it's taken economists into territory that they were traditionally very suspicious of and well beyond the study of politics, as I'll come to in a moment. And it's blurring the borders of disciplines. As an ardent football fan, I like to think of the analogy with what the Dutch team did to transform football. They had this notion of total football in their high era. Everybody could play in every position and play equally well. Well, I have this sort of dream of what I call total social science, which is the idea that we don't need to confine ourselves to any particular field. We want to study problems and we need to bring to bear on the study of those problems whatever knowledge is most suited to studying that. I am reminded also that of course as an economist the one thing you're meant to be able to do is mathematics. That sort of slightly distinguishes economics from other branches of the social sciences. And I was actually taught as a PhD student by an economist called Terence Gorman, who actually was originally at the LSE and had moved to Oxford. I was a graduate student at Oxford, Although I am reminded when I think of Terence making the move from London to Oxford of the story of when Paderewski became Prime Minister of Poland having been a concert pianist. Someone said what a come down. And I sort of reminded of that. But Terence once said to me, I think because he understood I wasn't a particularly gifted mathematician and he was, he said the great thing about being a good mathematician and being an economist is that you can spend all your time reading history. You don't have to read economics very much because as a mathematician you can read the economics very quickly. And I've come to sort of believe that actually there's a great value in economists reading history. And we've really reintegrated our discipline in recent years. In particular our study of the long run drivers of development and the way we think about that with a better appreciation of the role of history. Now I'm just going to briefly return to where every economist does who has any pretense towards history. And with Adam Smith and say, what did Adam Smith say in the wealth of nations was the key to understanding long run economic success? Well, he had a simple sentence to state that, and that was peace, easy taxes and a tolerable administration of justice. And that was all you needed. And as long as you had that, then development was assured. Actually, I don't think he was like 100 degrees wrong there. But I'm going to come back to the sense in which I think we've reinvented some of those ideas in a moment. So let me now introduce three letters. Three letters that are going to sort of be the focal point of the next few minutes. Igc. Now, IGC of the LSE stands for International Growth Center. Some of you may or may not know that we started a new institution at the LSE and it's a joint venture actually between us and Oxford University, funded by the Department for International Development. We have a significant presence in Asia, but mainly in South Asia and Bangladesh, Pakistan and India. And the role of the IGC is to try and learn the lessons of other countries and to spread knowledge and best practice across the world. In particular, we're very active in Africa to understand how it is that we can leverage the knowledge of successful parts of the world to provide lessons for other parts of the world. So that was what. So that's one use of the term igc. But I also realized that if you look at the core debate that goes on in the study of economic development, that also at this point could be summarized as igc. There are three core views about what drives long run economic institutions, geography and culture, which also spells igc. It turns out fortuitously to draw that link. And I would say that the debate that's now going on in economics, which is infused, as I said, with the kinds of themes that are in other social sciences, has really transformed our understanding. And I think some of us rather grandiosely believe that we're involved in the search for the equivalent of the double helix. But in economics, really, what is it? What are those fundamental drivers? What is it that lies behind economic success? Now, within that, the institutionalists are a big camp. And, and some of you may have read Darren Acemoglu and Jim Robinson's book why Nations Fail, which has become a big success in pushing the view that it's all about institutions. Indeed, I tease them and call them institutional fundamentalists when I discuss these issues with them. They believe that the core to understanding the different patterns of development that we see around the world is essentially which countries acquired functional institutions and which countries for one reason or another have failed to make that transition. I should add, by the way, that, well, as a saying, I want someone heard making this rather uncharitable comment about economists. They say because you say in London you're never more than five feet from a rat. Well, the equivalent is in intellectual debates on the economy, you're never more than a few meters away from the work of LSE economists. And that's actually true in the case of why Nations Failed. Jim Robinson was an undergraduate at LSE and Darren Asimogli was a PhD student. So there's an immediate connection back to LSE there. So what they're arguing is that the real, if you like, the DNA, the thing that we should be focusing on when we understand economic success is the institutional structures, the political, the social and cultural institutions that lie behind development. Now, the tendency, when mapping that into an account of what matters, and I'll come back to the Asia story in a moment, is to think that you should be mapping the formal rules of the game. So what's become very popular in the political economy of development is to look at the institutional rules for politics. So what kind of political institutions do you have? How do you categorize those? You could look at the extent of checks and balances. Is there proper parliamentary oversight? Is there other elections? Are there other kinds of institutions, free press, the kinds of things that we think might be fundamental political institutions that have a bearing on the way the economy works. And it's become quite formalistic in the sense you can go out and do your best to measure those things, and then you try, as you might, to draw some evidence from the differences that different countries have. Now, the one thing you see is if you look within Asia, there is a very wide variety of pictures of the kinds of political institutions that appear to accompany economic success. So you'd be hard pressed, for example, to look at China and believe that China conformed to some standardized notion of what you might say are good institutions. So, of course, what do Acemogli and Robinson say about that? Well, they're actually China's pessimists. They actually believe that the sustainability of Chinese growth will be severely compromised in the end by the absence of good institutions. And they have a wonderful example, actually, from probably what was the most famous textbook in all of economics, which was Paul Samuelson's textbook that went through many, many different editions. And inside the front cover of Samuelson's book, right from the first edition, were projections at the point at which the income per capita of the Soviet Union would overtake the United States. And in the early editions, it was just 25 years away, eventually only a short period. And as different editions of Samuelson were issued, the date at which the Soviet Union was going to overtake the United States became further and further into the future. And of course, by the end, I assume by the last editions of Samuelson, that picture had entirely disappeared. And they draw that analogy, say, well, that's exactly the kind of thing that people are drawing these relationships these days without thinking about what are the fundamental and potential issues that could arise if you try and grow and develop with a particular configuration of institutions. And there is one important fact here, which I'll just table as part of some recent research I'm doing, which is to point out that the really distinguishing factor between countries that have a certain level of institutional development, particularly checks and balances on the executive, is not so much the level of growth, but actually the volatility that if you look at the countries in the world with some of the worst growth performances as well as the best growth performances, they tend to be drawn from the distribution of countries that actually have the weakest political institutions. So China on one hand and places like Zimbabwe would be on the other end. And so what you're exposing yourself to in many ways is a high level of risk, political risk and economic risk if you have institutions that perform that don't allow you to deal systematically with many issues. And I think that, to be fair, I think the Chinese leadership understands these issues very well. They understand some of the frailties, the potential frailties and shocks that could hit the Chinese economy that within the existing institutional framework, would be quite difficult to deal with. So what are the big questions? And I only have a very few minutes left, so unfortunately, you're not going to get the double helix in the time I have available. I mean, the big questions are, which institutional structures matter and why? Well, I've already hinted at that. What are the conduits and mechanisms? Well, the conduits and mechanisms are going to be things which we regard as better quality policy. And if you look at Asia across a whole series of metrics, Asia is delivered on the policy front, has higher levels of human capital and education. More generally, it has lower levels of corruption than comparable countries. And of course, at the moment, that's a major challenge for a number of countries in Asia, but they're aware of that challenge. Many other parts of the world that have high levels of corruption, I would say, are even in denial about the nature of the challenge. So there are indicators like that. Other indicators on infrastructure would also show that Asia, above all the other parts, emerging parts of the world, has delivered. So I think at the center of all this is the fact that Asia has, by and large, developed effective states. It's developed effective states with different institutional arrangements. If you look at actually what's gone on in China, it's remarkable how much accountability there is in the system, in spite of the fact that the formal political institutions do not resemble what you might regard as the kind of classical democratic accountability. The system has evolved a system of accountability, and indeed there's some very interesting evidence on that. I've seen some work recently on looking at the promotion of provincial governors in China, and it's very clear that those promotions look to follow very much the fortunes of the areas in China which people preside over. So it looks very much like a model in which people are held to account for good or bad performance. But if you said, what are sort of the best odds to make this work, they do involve, in the end, having a more open system of accountability and having some kind of checks and balances that ensure institutional cohesion. Now, I only have about one minute left, and I want to say a word about geography, which I just basically want to say. I really don't think people who think geography is the key to understanding development have any chance of explaining what goes on. My favorite counter example to geography, it actually comes from Massimoglu and Robinson as well, is just look at a picture from space. Look at north and South Korea and at night, and essentially what you see are two countries divided by a line. Night light in South Korea is incredibly intense, and in North Korea is basically dark. And in a sense that's symptomatic of the fact that it cannot be a geographical difference. They share almost in every sense the same geographical attributes. And I'm not saying that nails the view that it's about institutions, but what we know is fundamentally they follow very different patterns of institutional development. The other thing that I'd say Asia has done, though, which is related to geography, it's avoided the problem of bad neighborhoods. I mean, if you look in Africa, it really does sometimes become the case that you have to worry who some of your neighbors are. Now, that's not to say there aren't some bad neighborhoods in Asia, but by and large, Asia's avoid that. One fact that we know, probably one of the most robust facts in all of international trade is that the elasticity of trade with respect to distance has an elasticity of a minus one. So what does that mean? That 10% further distance away from a country, you're going to trade with it 10% less. So you really do have to think about who your neighbors are and how your neighbors are behaving if you're going to have any measure of success in international trade. Final comment. And I think if There was such a thing as membership of the club of economists. I might actually have it revoked for saying this, although I'm not alone, is what about culture? Well, economists are coming at the moment big time into the topic of exploring culture, albeit in our own narrow minded way. I'm sure the people who've really worried about it for a long time would be utterly horrified. On the other hand, it's not a poor tradition in economics. George Akelloff, who of course was at the LSE and is a Nobel Laureate, was a pioneer of that work many, many years ago. First of all, wrote one of the first papers on caste in economics, wrote about the fact that part of the reason why employers don't pay minimum wages and they pay efficiency wages is because of cultural norms. And finally, in his recent book with Bob Shiller, who won the Nobel Prize even more recently on Animal Spirits, has a kind of cultural theory of the Great Recession. So it's not that the economists don't even get rewarded for talking about culture, but I think it's the next big topic in economics and in particular the interrelationship between culture and institutions. The way that you can take one thing, transplant it, and it works very differently in different places. And this really brought home to me. I had a brief, I'm tempted to call it sabbatical, but I think that's probably not the right term. I worked as a policy maker for three years on the interest rate setting committee of the bank of England. And I remember rolling up and saying, well, what do I actually have to do here? I mean, I knew you had to set interest rates, but what are the rules here? And so I said, can someone give me a copy of the act which gave bank of England independence, which describes the duties and responsibilities of the members of the bank of England Monetary Policy Committee. And I was shocked. Someone brought me out something that was less than a page long and basically said if you don't show up for three consecutive meetings, you might actually get fired. Of course, the idea that you would not show up to any meeting, and that included not just the interest rate setting meetings, but all the meetings, briefing and other meetings around that. In other words, I realized that there's a set of rules and then there are the cultural and social norms by which the institution really works. And they'd evolved incredibly rapidly. The bank had only been independent since 1997 and yet it had already evolved a set of very well established norms and cultural practices around that institution. And it brought home to me that you really cannot think about how a formal institutional arrangement, like central bank independence in this case, works without thinking about how it transplants. So Craig is giving my marching orders in terms of Asia's success. I haven't been able to say that I believe it's either institutions or culture, whatever. I have to leave that to your imagination, since I haven't really had time to speculate too much on that. But I do think that the framework of thinking, when you go through country experiences, how is it that the institutional framework is contributing or not? And also the interplay between culture and institutions is where this issue really lies. And we have a program called State Effectiveness in the International Growth center, and we're very much keen to learn the lessons of state effectiveness from Asia, because I'm absolutely convinced that's where we can learn something that can promote and leverage the success of Asia into the rest of the world. Thank you very much.