On May 25, 2011, Charlie Rose interviewed Michael Spence, Nobel Prize winner in Economic Sciences and former Dean of the Stanford Business School, regarding his new book, The Next Convergence - The Future of Economic Growth in a Multi-Speed World. The interview offered many insights into how the world of business will change over the next twenty years.
By the "next convergence", Spence means that a good chunk of the emerging world will be like us in the near future. China and India emerging economies are now large enough to sustain their own growth. In 2050 China will catch up with us in per capita income. China's per capita income is now about $4,000/year. When they pass us in population (about 2025 or 2027) their per capita income will have risen to about $12,000 per year.
By "multi-speed world", the author means that while we're still struggling and will continue to have a period of slow growth and difficult unemployment, China and India have returned to pre-crisis growth rates of about 9 or 10%. China, India and Brazil, in that order, will be leading global economic growth. Eventually they will slow down to our normal growth rates of 2.5-3% An advanced country doesn’t grow at these speeds.
The global economy over the next 20 years will at least triple. That presents a lot of problems about whether the planet's natural resources can withstand it. But in a global economy like that there's lots of room for both them and us, and if we're on our game, we'll remain technological leaders, but what we won't be is dominant like we do now.
Our main challenges over the next ten years or so lie in our declining opportunities for our middle-income group. Some of the things we need to be doing to fix this problem such as fixing the investment in the parts of education that are failing, infrastructure, simplifying the tax law, energy policy, etc. are likely to be kicked aside as long as we remain in our current fiscal situation. It will take the government and the private sector, as well as Republicans and Democrats working together to solve the problem. If one side wants no revenue increase in the form of tax increases, then all future-oriented investment has to come out of some current program or redistributed part of the government’s operation, and those are declining choices. Spence argues that we should temporarily increase taxes now over the next 2-5 years in order to get beyond the deficits that we have created while at the same time not destroying the fragile recovery that is under way now.
We will continue to lose jobs to globalization. In an emerging economy structural change and growth are the same thing. So, you cannot keep the jobs that you had 5 years ago. Even in China the middle-income transition is letting the labor-intensive jobs go to Vietnam, Bangladesh and even India. That’s what we have to do, too, and then we've got to do the best we can in investing in people and the knowledge and technology base of our economy to create alternatives that are both rewarding and decent in terms of income in a very wide range of education.
We're exiting a crisis where the recovery is a little fragile, and it would be a lot easier to invest in the future if we hadn't dug ourselves into this hole fiscally. We did it because we didn't realize that our economy was on an unsustainable path. We had built-in employment in government and healthcare which probably won't keep going, and in terms of growth we drove it with consumption based on inflated asset values fueled by debt, and that consumption is gone - permanently.
Spence believes we will eventually stabilize ourselves both here and in Europe. Then, the great debate needs to be, "How do we run this behemoth where the power is increasingly decentralized?" We have demonstrated that unregulated markets with no real oversight occasionally produce bad results or unsustainable paths, but it's a great challenge for a generation to build the regulatory and governance structures that match the level of integration in the global economy.
Attendant with the rise of the middle class in China and India will be the serious risk of water, food and fuel scarcities. We're worried about the stress on our environment at our current size, so we have much work to do to create a sustainable planet as the global population and economy grow. Asia now represents 60% of the world population. They are starting to realize that they will be the lion's share of the growth that will take us to 3 or 4 times the current economy. What we think of as a global issue is for Asia a long-term growth strategy issue. They can't finish the journey if they follow the path we and all the predecessors in the developed world followed in terms of pollution and energy consumption. Spence believes that, surprisingly, Asia will, in their own self interest, will try to find a new model that's less energy intensive and less damaging to the natural resources.
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Until next time,