Podcast Summary: Turnaround: Third World Lessons for First World Growth

Podcast: LSE: Public Lectures and Events
Host: LSE Film and Audio Team (Craig Calhoun, Director of LSE)
Speaker: Peter Blair Henry, Dean of NYU Stern School of Business
Date: September 5, 2013

Episode Overview

This episode features Peter Blair Henry, discussing his book "Turnaround: Third World Lessons for First World Growth." Drawing on decades of economic history, Henry argues that advanced economies can—and must—learn from the successful growth strategies of today’s emerging markets. The talk is structured around three central principles: discipline, clarity, and trust. Through analysis of policies, historical episodes, and market responses, Henry highlights actionable lessons for both the developed and developing world.

Key Topics and Discussion Points

1. The Context: Growth Slowdown and the Need for Lessons (03:47)

• Global growth has slowed: From 2002–2007, the world economy grew at 4.9% annually, the fastest on record, but since then, growth has decelerated (~3% in 2012–2013).
• The main premise: Advanced economies are operating below potential. The post-crisis period presents an opportunity to revisit and adopt lessons from the formerly called “Third World” (now emerging markets).
• “GDP growth means jobs, it means higher incomes, opportunity and dignity for people… there's a lot that we can learn from the history of countries… now known as emerging markets in order to start growing more quickly again." — Peter Henry (05:30)

2. The Three Pillars for Growth: Discipline, Clarity, Trust (09:00)

Discipline (09:20)

• Not simply fiscal austerity but a “sustained commitment to a pragmatic growth strategy that values what’s good for the country as a whole.”

• Historical example: In the 1980s, developing countries faced debt crises, with suggested market reforms later embodied in the “Washington Consensus.”

• Controversy over the Washington Consensus:

  • Joseph Stiglitz: It was a disaster, imposed inappropriate policies.
  • Anne Krueger: The problem wasn't the policies but the failure to implement them fully.

• Henry’s approach: Let the market’s reaction (esp. stock markets) serve as an impartial guide.

  • When developing countries adopted market-friendly policies appropriate to their circumstances, stock markets responded positively.

• Fiscal austerity:

  • Effective in periods of high/hyperinflation—stock markets rise (e.g., +60% in high inflation cases).
  • Harmful when inflation is moderate—stock markets fall (e.g., –30%), indicating austerity is not one-size-fits-all.
  • “Disciplined fiscal policy is no more complicated than the story of the ant and the grasshopper.” (23:30)

• Case Studies:

  • United States (early 2000s): Chose tax cuts over saving surplus, resulting in fiscal vulnerability when shocks (wars, crises) arrived.
  • Chile (2007): Ran surpluses despite public protest, enabling counter-cyclical measures when the financial crisis hit.

Clarity (28:00)

• Governments must signal a clear and credible change in direction for markets to respond positively.
• Barbados (1992–93):
  • On the brink of crisis, government chose to cut wages instead of devaluing its currency.
  • Despite massive protests (12% of population marched), unions, business, and government achieved agreement.
  • Result: Economic recovery, rising stock market, but political cost as the government lost re-election.
  • “The price I paid was a small price to save the country.” — Erskine Sandiford, former PM of Barbados (32:40)
• Latin America (1980s–90s):
  • As reforms became credible, price/earnings ratios and investment surged, fueling growth and wage increases.

Trust (37:00)

• Global trust deficit: Despite emerging markets adopting reforms, advanced economies and institutions (IMF, World Bank) haven’t reciprocated with greater governance inclusion.
• Example:
  • G20 agreed IMF reform would shift representation to dynamic emerging markets, but U.S. congressional gridlock blocked ratification.
  • Mistrust leads to fragmentation, e.g. BRICS forming a regional development bank.
  • “The bigger problem in many ways right now is what I call the global trust deficit.” (38:40)

Notable Quotes & Memorable Moments

• On discipline:
  “Discipline does not mean fiscal austerity. Discipline means a sustained commitment to a pragmatic growth strategy that values what’s good for the country as a whole…” — Peter Henry (09:40)

• Washington Consensus debate:
  “If you want to understand what disciplined policies are… don’t listen to Ann or Joe, look at how markets, in particular the stock market… responded at moments in time when they implemented key elements of the Washington Consensus.” — Peter Henry (17:00)

• On clarity:
  “That’s clarity: the willingness to pay a political price in order to save the nation.” — Peter Henry (32:35)

• Global trust deficit:
  “The bigger problem in many ways right now is what I call the global trust deficit.” — Peter Henry (38:40)

Audience Q&A: Key Exchanges and Insights

Pragmatism in China (43:37)

• Question: What lessons can be learned from China’s fiscal discipline?
• Henry:
  • China’s success stems from pragmatism—doing what works, not what’s ideologically pure.
  • “I don’t care whether a cat is black or white, I care whether a cat can catch mice,” referencing Deng Xiaoping. (44:20)
  • Western economies could benefit from adopting a similar pragmatic, experimental approach.

Fiscal Vulnerability and War (47:08)

• Question: Wasn’t America’s fiscal situation post-9/11 shaped mainly by war spending?
• Henry:
  • The lack of earlier fiscal prudence made the U.S. more vulnerable to such shocks.
  • Highlights the importance of “countercyclical fiscal policy.”

Limits to Growth (48:54)

• Question: With current resources and technology, what’s the world’s sustainable growth rate?
• Henry:
  • “Potential” growth: ~3% for developed, ~5.5% for developing, overall ~4% for the world. (49:00)

Populism in Brazil (50:07)

• Question: Is Brazil at risk by prioritizing populism over discipline?
• Henry:
  • Cites Jamaica’s experience with populist economic policies leading to collapse.
  • The need for disciplined, tough choices to maintain growth and stability.

BRICS Development Bank & Zero Sum Thinking (54:53)

• Question: Is the BRICS Bank genuinely a sign of mistrust or just advancing mutual interests?
• Henry:
  • Regional banks are not inherently bad, but ideally, existing institutions would fully include new powers.
  • “We need to live in an ‘and’ world, not an ‘or’ world.”

Can We Rely on the Markets? (56:36)

• Question: Can stock markets always be trusted as barometers of policy success?
• Henry:
  • Markets are not perfect, but provide useful, forward-looking information when tectonic policy shifts occur.
  • Looks at both market reactions and longer-term economic outcomes for confirmation.

Why Aren’t Western Countries Adopting These Lessons? (59:38)

• Henry:
  • The answer is “politics.” Vested interests, political economy, and lack of courage or leadership often block needed changes.
  • Highlights particular examples—Barbados and Brazil—where courageous political leadership overcame obstacles.

Can Democracies Implement Hard Choices? (62:29)

• Question: Are the turnaround lessons transferable to democracies?
• Henry:
  • Challenges the notion that only autocracies can make tough reforms.
  • Points to examples like Barbados, Brazil, and Indonesia where democracies have implemented difficult policies.

Trust Between Governments and Citizens (65:20)

• Question: How can growth strategies address poverty and social needs in the Third World?
• Henry:
  • Emphasizes trust not only between nations but between governments and citizens, especially in a connected, informed world.
  • Technology can help hold leaders accountable but does not guarantee lasting change.

Is Fast Growth Desirable if it's Fueled by Bubbles? (68:23)

• Question: Was the 2002-2007 growth bubble-fueled and how to avoid this?
• Henry:
  • Not all strong growth was bubble-driven, but buildup of excessive debt was a structural flaw.
  • Advocates for reforms to correct the financial system's “debt bias,” encouraging more equity-based investment to avoid instability.

Key Timestamps

• 03:47 — Start of Peter Henry’s talk, framing the discussion
• 09:00 — Three core lessons for growth: discipline, clarity, trust
• 15:30 — The Washington Consensus: controversies and interpretation
• 23:30 — Discipline illustrated: the ant and the grasshopper (US vs. Chile)
• 28:00 — Clarity: The case of Barbados’ wage cut vs. currency devaluation
• 37:00 — Trust: The “global trust deficit” and the failure of IMF reform
• 43:37 — China’s lesson of pragmatism for the West
• 49:00 — Trend/potential global growth rates explained
• 54:53 — BRICS Bank and “zero sum” vs. “and” world institutions
• 56:36 — Can we trust markets as policy guides?
• 59:38 — Why don’t Western nations learn the lessons? The role of politics
• 65:20 — Trust between governments and their citizens in achieving growth

Tone and Style

• Conversational, analytical, anecdote-rich, engaging with direct application to contemporary debates in economics and global policy.
• Henry combines academic rigor with accessible storytelling, often using analogies (e.g., ant and grasshopper) or vivid case studies.

Summary

Peter Henry’s lecture argues that discipline, clarity, and trust underpin the turnarounds in emerging markets, and these are precisely the qualities needed for renewed growth in the advanced economies. Through historical data and case studies, he dispels myths about "one-size-fits-all" solutions, showing instead that pragmatic adaptation, credible reform signals, and reciprocal international trust are crucial. As he stresses throughout, the lessons are not only for the “First World” to adopt but for emerging markets to continue embracing—because global prosperity depends on the ability to apply these principles universally.