Global Landscape: Nations' Performance & Leaders' Success

1. THE PERFORMANCE OF NATIONS AND THE LEADERS OF TOMORROW Joseph Stiglitz Athens March 2006

2. NEW GLOBAL LANDSCAPE • INTEGRATION OF 2.5 BILLION PEOPLE IN INDIA, CHINA, AND ELSEWHERE IN ASIA • Who were formerly excluded and marginalized, legacy of colonialism • INTO GLOBAL ECONOMY IS AN EVENT OF HISTORICAL PROPORTIONS • AND SO IS THEIR UNPRECEDENTED SUCCESS

3. Global success • Previous economic revolutions—like the industrial revolution of the nineteenth century—had seen growth rates peak at around 2 to 3% • The golden age of growth in America in the fifties and sixties saw similar growth rates • China’s growth has been three times these numbers • Even faster than Asia miracle countries • Success not only in increasing GDP • The fraction of the Chinese population living on less than $1 a day has fallen from 63.8% in 1981 to 16.6% twenty years later • What has led to such unprecedented success?

4. BUT CHINA IS NOT ALONE • India’s enormous success • More than two decades of growth of 5 to 6%, now approaching 8% • Outsourcing of high tech jobs to India • Recognition of new global landscape • What does this new global landscape look like? • And again how do we explain this success

5. There are other successes… • Ireland • Botswana • Viet nam

6. But there are many more failures • Russia and the other countries • In spite of the fact that the transition was supposed to bring unprecedented prosperity • Instead it brought unprecedented poverty • Latin America • Where reforms were supposed to enhance growth • But instead lead to growth half of what it had been in earlier decades • And Africa • which has seen incomes decline

7. Narrowing of disparity between successes and advanced industrial countries But growing disparities between failures and advanced industrial countries • Even after NAFTA, gap between Mexico and U.S. has increase Again, key question, explaining successes and interpreting new global landscape

8. Changing Global Landscape • Thomas Friedman has suggested that “the world is flat”—for first time in human history, poor countries are competing on a level playing field • But the world is not flat • Disparities between the haves and have nots have increased • Power of entrenched monopolies, like Micro-soft, is probably greater than ever before • Importance of research gives enormous advantage to those who have the resources and skills to undertake it • The Uruguay Round made the world less flat • Especially TRIPs • But the nature of competition is enormously changed • Cannot simply rest on laurels • And there may be a high price for success • THESE CHANGES WILL AFFECT EVERYONE

9. India’s success • In spite of weaknesses in infrastructure • Including electricity • Better infrastructure would have led to even more growth • In spite of absence of natural resources • Or perhaps because • The “natural resource curse” • Growth occurred before trade liberalization • And, like China, there is still not full capital market liberalization

10. China’s success • IN SPITE OF IT NOT FOLLOWING MOST OF DICTATES OF “CONVENTIONAL WISDOM” (WASHINGTON CONSENSUS) • Not even clear property rights • But clearer property rights might have led to even more impressive growth! • Large role of government • Including Industrial policy • No free trade in earlier high growth period • No free capital market liberalization—even today • SUCCESS BECAUSE THEY FOLLOWED A DIFFERENT AGENDA • Appropriate to their circumstances and history • MUCH OF CONVENTIONAL WISDOM IF OFF THE MARK

11. THE MEANING OF SUCCESS We need to be careful in assessing what we mean by success • US: GDP increasing, but • Increased poverty • And even those in the middle worse off—as real median incomes falling • Real wages stagnating—incomes would have fallen even more were it not that Americans are working more and more • Imposing costs to the family • Huge social costs • Perhaps partially reflected in high level of violence and crime—ten times higher

12. Meaning of success (2) • Poor performance in other indicators—health • Spends more, poorer results • Lower ranking on HDI • Growing problem: rich countries with poor people? • U.S. and elsewhere, GDP increasing, but environment worsening • Will growth be sustainable? • Not only environmentally, but socially and economically • Especially with huge deficits • Important not to be misled by using wrong measures of success • What we measure affects behavior • Importance of information systems, accounting

13. Key Ingredients of Success • Technology and education • Leadership • Broader concerns for society/organization

14. 1. Technology and education • SUCCESS OF CHINA IN MANUFACTURING AND INDIA IN SOFTWARE NOT JUST A MATTER OF UNSKILLED LABOR • Combining skilled and unskilled • Even in textiles and automobile assembly • Labor costs in textiles actually higher than many other developing countries • Chengdu becoming software center • Jilin, Wuhan –example of how to deal with “rust belt problems

15. Changes the competitive position of the United States and EU • MODERN ECONOMY BASED ON TECHNOLOGY • BUT NUMBER OF GRADUATES IN SCIENCE AND ENGINEERING NOW DWARFED BY THOSE IN ASIA

16. SOME STATISTICS • Of 2.8 1st university degrees in science and engineering • 1.2 million in Asia • 830,000 in Europe • 400,000 in U.S. • In engineering, Asia produces 8 times U.S. • since 1993, the number of American citizens in graduate science programs has fallen from 55,000 to under 42,000 while the global supply of Ph.D. in science has increased by 25%--mostly in Asia • Just under half of all doctorate degrees in engineering and computer science in the United States are earned by foreign students • Serious visa problems since 9/11

17. PROBLEMS START EARLIER • PROBLEMS START EARLIER IN ELEMENTARY AND SECONDARY SCHOOLS • EVIDENCED BY PERFORMANCE IN STANDARDIZED TESTS IN SCIENCE AND MATH. For example, at 8th grade • 44% of Singapore performed at highest level • 38% of Taiwan • 7% U.S.

18. DECLINING RESEARCH • EXPENDITURES ON RESEARCH DECLINING • As percent of GDP, 37% decline in federal funding since 1970 • Reflected in part in patents • Since 1980, Japan’s share world wide increased from 12% to 21%, mostly at expense of U.S. (which has decline 8 percentage points)

19. CHINA AND INDIA UNDERSTAND… • That what separates developed from less developed countries is not only a gap in resources but a gap in knowledge • And are working hard—and successfully—to narrow that gap • Education and technology also basis of success of Ireland and Brazil • Brazil’s Embraer airplane • Energy independence through research • Huge growth of exports

20. Two weeks, China adopted its 11th 5 year plan • Comprehensive approach to development • Emphasis on problems of inequality, and especially in the rural area • Emphasis on the environment • And emphasis on science and technology, maintaining competitiveness • Including establishing global class universities • A basis of independent innovation • Are Europe and America responding effectively? • America has squandered huge amounts on Iraq War, with costs now CONSERVATIVELY estimated between $1 to 2 TRILLION

21. 2. LEADERSHIP • Sustained growth requires sustained leadership • Avoiding “cult of personality” • Recognizing fallibility of individuals • Checks and balances • Reducing the dependence for success on particular individuals • Importance of accountability

22. Leadership (2) • Key role of succession • Without successful succession, gains can easily be eroded • Knowing when to leave • Pragmatism versus ideology • Recognizing that “one size fits all prescriptions won’t work • Changing times require changing policies • What worked in the past may not work in the future

23. Leadership (3) • Setting goals and aspirations • Stretches • But attainable • Examples • Clinton: creating 8 million new jobs in 4 years • More than succeeded • Fox (Mexico): 7% growth: unrealistic—actual growth 1% • And by middle of term, seemed content with just 1 or 2% • China—set high growth targets (7,8%) • But in every plan exceeded targets

24. Leadership (4) • Consensus building • Participation in decision making • Even in China • Inclusiveness and fairness • Countries cannot succeed if some are doing well, and others are being left behind • Sense of unfairness behind unrest in France • Sense of cohesion behind success of Sweden, Finland, Norway • Just as good growth • Companies cannot succeed if some are doing well, and others being left behind • Increasing problem in American style capitalism • Growing disparities between CEO and ordinary workers

25. 3. A focus on broader concerns for society/organization • Social cohesion • Especially difficult in new world of globalization • Which is putting strong downward pressures on wages, especially of unskilled workers • Reflected in increase in measures of inequality • Except in most of the most successful countries • Reinforcing need for “upskilling,” education

26. A focus on the long run • Beyond quarterly reports, or the next election cycle • In U.S.—problems of environment and increasing indebtedness being ignored • Risk to long term living standards • And sustainability of growth • Especially as debt is “crowding out” expenditures on research and education

27. Pragmatism and balance • Success requires “balance” • For countries—a balanced role of government and the market • Market is at the center of the economy • But in every successful economy the government has played a large role • In science and technology (internet) • In making markets work (sound banking and securities market regulation • In protecting the environment • In maintaining social cohesion (income distribution, safety nets)

28. Helps explain why Nordic countries have been so successful, not only in growth, but in broader measures of success • Readjusted their “welfare state” model to new realities • But still retained model—including high taxes • With better safety net, there can be more risk taking, entrepreneurship • Success in modern technology based economies requires risk taking

29. Has the rest of Europe achieved balance? • Cannot have growth without Macro-balance, but • European Central Bank focuses exclusively on inflation, not on growth or employment • Focus on “labor market flexibility”—increasing insecurity • Without commensurate increases in safety nets, job training programs, adequate investments in education, adequate job growth • Need to accompany with a whole portfolio of micro-policies • Productivity increases cannot offset large exchange rate changes

30. For companies, a set of values • Not just a focus on the bottom line, shareholder value • Even modern economic theory says that that is wrong • Recognizing the companies are “communities” and are located in communities • Treat each other with respect • Concern for each others problems and concerns • Reflected in growing important of movement for corporate social responsibility

31. Concluding Remarks • There are huge differences in the performance of companies and countries • It is important to learn the “lessons” of successes and failures • Not simply a matter of imitating “best practices” • But understanding the principles that underlay their success

32. SUCCESS IS NOT JUST A MATTER OF LUCK • BUT IT IS BASED ON THE EFFORTS AND CONTRIBUTIONS OF INDIVIDUALS WORKING TOGETHER • THE WHOLE IS GREATER THAN THE SUM OF THE PARTS • THIS ENTAILS DESIGNING POLICIES AND PRACTICES THAT ELICIT THE BEST AND MOST THOUGHTFUL EFFORTS OF ALL AND COORDINATING THOSE EFFORTS • SUSTAINED LEADERSHIP IS ESSENTIAL I HOPE I HAVE PROVIDED SOME INSIGHTS INTO WHAT IS ENTAILED TO INCREASE THE LIKELIHOOD OF TRUE AND SUSTAINABLE SUCCESS—HIGH PERFORMANCE IN EVERY DIMENSION-- BOTH FOR COUNTRIES AND COMPANIES