Summer School | Keynote Lecture Brief of Celestin Monga

Keynote Lecture Brief

Speaker：Celestin Monga

Topic：New Structural Economics: How it Can Foster International Development

Summary

Dr. Monga raised two basic ideas of New Structural Economics: look at the big picture and work from the evidence. Then he introduced three waves of international development thinking: focusing on market failures, government failures and donator failures, respectively. He pointed out that New Structural Economics is a practical and advanced theory that can realistically solve economic development problems in developing countries.

Detail

Dr. Monga started with two interesting stories as the prelude and introduction of new structural economics: Kofi Annan, former Secretary General of the United Nations, who grew up in a small African village. When he was in primary school, one day, his teacher brought a big white sheet with a little black dot. The teacher asked the students what it was. Students answered it was a black dot, only few of them said it’s a white sheet. The teacher told them to look at the big picture, not the small dot. It’s the same as life, you should focus on the big picture not small dots. The other story was about Thomas Edison, the greatest inventor of all time. It’s about the way he recruit engineers in his company. He asked the candidates to a restaurant they had never been, and observe their react when eating food. If they put salt and pepper in to their dishes without taste it, Edison will not recruit them, because they don’t behave based on evidence. So the ideas are: let’s avoid the wrong target, look at the big picture and work from the evidence.

International development: the identity crisis

After WWⅠ, people have a common notion of united nations, so the creation of UN, is philosophical, not economical or military need. People believe that the world would be better if everybody achieve prosperity.

In WWⅡ, America dropped two bombs in Japan, because somebody decided that best way to stop the war was to kill millions innocent people. But I consider it as a failure, no one wins a war. After WWⅡ, it’s needed to bring all nations together, not only political but also economic, to stimulate global economic to grow. So in 1945, IMF and World Bank was established to help every single country to achieve prosperity. But who receive loans? The first loan was given to French, and then Netherlands and Denmark, to rebuild the West Europe. At that time, World Bank was not bank for the world, it was to develop the West Europe, as we knew “the Marshall plan”. The beneficiary countries were because political reasons.

Three waves of international development thinking

NSE learn from former theories and useful ideas from these thinking.

The 1st wave is leaded by Paul Rosentein-Rodan, the first people who argue that countries shouldn’t do the same as they have specific issues. New Classical Economics let supply and demand meet and then set the price, but in certain countries and situation may not work. Therefore, market is not always the best mechanism, market can fail. Paul focused on when market fails about 20 years, his theory was called as structure economies. Latin America had the notion of market failure, as they emerged from colonialism. Governments had big responsibilities to formulate economic policies. Unfortunately, the problems didn’t resolve. So Paul thought that poor economies should only invest in big complexes, which will result in social benefits exceeding social costs. Because they can achieve economic scale and maximize the benefits.

The 2nd wave is about government failure. A well-known formula put as: Economic Prosperity = Macro Stabilization + Structure and Institutional Reform. IMF helps to do this formula. Scholars from MIT and Boston University, write that poor countries are poor because they lack of capital, savings and investment. Incremental capital ratio is important. For example, you have 100 million and generate 10 million extra benefit next year, the ratio is 10%. The more capital they have, they can invest and earn more. Little investment, little outcome. So World Bank try to complement domestic saving in developing countries. In 1980s, increasing price and interest rate caused many people in poverty. And government made mistakes, like Somali’s debt crises. Some people argue that government should stay away and leave everything to private sector.

What should government do? Increase taxes rate or cut expenditure. Fiscal discipline is that government should not spend too much and get into deficit. Budget should be really constrained. Policy making, central bank should not create too much money, it’s create inflation. Decrease interest rate, people will borrow money to buy things, price would go up. Zimbabwe had inflation of 100 trillion times, a piece of bread can cost billions. Many poor countries grow into trouble and deficit, because poor management. In my home country, some companies don’t earn money. But people have jobs and don’t go on streets are good for social stable. Government use taxes to support enterprises, give subsidies. It’s not fair to rural area and poor people, as famers, flower vendor and newspaper stands all taxed.

The 3rd wave focus on donator failure. It’s difficult for developing countries to implement Washington Consensus. Trade unions have higher political status. Many developing countries got loans from IMF, but didn’t get out of poverty. Politically, it would be a disaster. China didn’t do any of these things. If Deng Xiaoping joined the IMF programs, China would not like this. Many African countries been in structure reform from IMF program, after 20 years, they became worse. The IMF may blame on the countries, for didn’t use the money to invest. But this strategy itself was bad, implementation should be part of strategy, which means that your strategy should take executive process into consideration. NGOs launch projects in India to teach women how to read, some of them succeed but some failed. If you go to the villages to analyze why these strategies fail, you see their behaviors and results. Not because particular educational program fails in one particular village can prove it’s a bad strategy, you need to learn after the fact, why would something work or not work here.

What is really the things need to do is to identify the most binding constrain. Product space means to look at the goods you are producing, what China will produce in 5 or 10 years. What if, your goods should not produce in the future. Countries should produce based on their reality. On the changing trend, labor quality, capital, focus on existence endowment where the comparative advantage lies. NSE (New Structural Economic) brings really the right answers: have the big picture, forgot the political leader should do. In South Korea, the president decided to move the slum in Seoul to other side of the city and built a bridge in that place in the 1970s. The same place looks not bad in 1980s with more infrastructure, but in 2005, another president removed the highway and recovered the riverfront, the environment got better. Shenzhen was a fishing village of several thousand near Guangzhou, but it became city of 11.4 million permanent residents in 2015, specializing in electronic manufacturing.

I went to Harvard and other universities, but they did not teach me the use of economics. Professor Lin’s theory helps my own country practically. In much African remote villages, it’s easier to have a bottle of beer than safe water. We have priorities of our own. Beer is more difficult to produce that water, but people like beer more. African countries have many issues, the most important issue is jobs. Jobs can promote personal buy, jobs give them dignity. But most people don’t have a wage paying job, like farmers. About only 20 % people has wages, most African workers are trapped in low productivity agriculture. So the number one policy should be to boost industry and service to have more productivity. Deng Xiaoping’s open and reform were about industry, Singapore focused on service. Lin’s economic theory can be applied in viability. Young people in Africa trying to flee their country, due to political reasons, but most economic reasons. They pass through desert or ocean, they may be sold as slaves and other dangers, but they see dying is less bad than stay in home country.

Some people say let’s jump to service because they are tradable. Industrialization started two centuries ago, and service is new. The issue for services to work is that you need skills. Like IT, insurance, not selling tomatoes on streets just for survival. Labor force in African like Tanzania: half them could not read English. But industries use labors with low skills, in 1980s Deng Xiaoping developed China without sufficient skilled labor. How many jobs create by IT industry in India? 2 million jobs created directly because IT and 9 million related to IT industry, but the total population is over 1 billion. Only when most of the workforce have jobs, can modern society be achieved.

Not country is poor because corruption. We can see from the research results that corruption and growth don’t correlate. Fast growth countries may have higher corruption perceptions index.

Effective policy framework and principles: Avoid copying the wrong reference, wrong model economy: low-income countries need not launch same industries as high-income countries and ignore the so-called preconditions, factor improvements are endogenous to growth; Identify sectors with talent comparative advantage (agri-business, light manufacturing, tourism, some modern services…); and industrial upgrading.

Q&A1Will countries achieve growth equality?

It’s human noble, morally, philosophically very ideal. As economist, policy maker and citizen, it’s not to emphasize equality in growth. The son of one of my friends graduated from Harvard, went to Africa as a member in a NGO to help illness people. They paid thousands of dollars on education, but their son didn’t want to make money. Not everyone work for meals. But what important is equality of opportunities. Everyone should have the equal access to high education. Give citizen equal education opportunities. After the education, you can choose the way you live, but first providing equality of opportunities.

2Should implement same policies in Africa as a whole, or solve different issues with their own decision?

NSE (new structural economics) focus on big picture. Particular project fail in one particular village does not mean it’s bad. It’s not applied in another situation. Nothing random about randomness. Countries should make policies according to their endowments and comparative advantage. Get out of comfort zone, formulate your strategies. As Prof. Lin said yesterday, continues growth can be 8% if focus on advantage could become the best you can be. Also mentioned in question2, by giving opportunities to people equal access to higher education

3You compared Shenzhen’s past and today, it’s a great change. Deng is a socialist, so is Marxism in NSE?

Deng has said: Black or white, the cat who can catch mouse is good cat. Don’t care about Marxism or capitalism. Lin worked in World Bank, the colleagues said, wow, he was communist in China, and ignored Lin got PhD in Chicago University (laugh). But his theory be applied in different countries.

Written by: Ziwei Guo 

Proofread by:  Zuoxiang Zhao

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