By Ben Balint-Kurti
The “Transforming the Global Economy” panel took on some of the biggest economic challenges the world faces. It featured Haroon Bhorat, Professor of Economics at the University of Capetown; Marcela Esleva, Professor of Economics at Universidad de Los Andes and President of the Latin American and the Caribbean Economic Association; Amir Lebdioui, Associate Professor of the Political Economy of Development at Oxford University; Raghuram Rajan, Katherine Dusak Miller Distinguished Service Professor of Finance at the Chicago Booth School of Business; and Célestin Monga, Adjunct Professor of Public Policy at the Harvard Kennedy School, and was moderated by Faculty Co-Director Gordon Hanson.
A just green transition must support workers in replaced industries
Bhorat spoke about the economic problems involved in the transition away from coal energy. A central issue is that coal is spatially concentrated, so job loss among coal miners will also be very locally concentrated and intense. In a coal-producing region – like the single South African province that houses 80% of the country’s coal workers – the intensity of decline in the local coal industry can then spillover to the entire local economy.
Secondly, this is not easily remedied by coal workers moving into employment in renewable energy: there is a mismatch between where coal jobs are lost and where renewable investment happens. And perhaps more crucially, employment in renewable energy is not long-term: labor is in high demand during construction, but jobs fall off a cliff once the project is built – distinct from the long-term labor intensity of coal extraction.
A path forward requires policy tools that can be precisely timed to ease the transition. “If a coal worker is 63 years of age and he, and 90% of them are male, is then going to be facing coal market closure, the policy instrument you have, because you've identified their age, is in fact early retirement and the whole series of options available. But if they're semi-skilled, maybe you need to think of education and training.” Bhorat has developed a framework and app to make this possible for policymakers.
Policymakers must consider formal and informal sectors to avoid “jobless growth” in low-income countries
Esleva said that “we should be thinking about, not only productivity growth…but also about the joblessness of that growth.” An issue for Latin American countries is that when economic growth happens, it is channeled through formal firms – but for various reasons, many people are self-employed or work in the informal sector, so do not see their jobs improved by this growth.
Esleva’s prescription was to focus on building general skills at the bottom of the income distribution, with the idea of allowing more of these workers to fill the roles being demanded by firms in the formal sector. The reduction of labor market frictions and regulatory barriers to employment can also help.
Said Esleva: “The largest part has to do with (resolving) the mismatch between human capital and the abilities needed.”
Industrial policy must flexibly adapt to new information and changing conditions
Lebdioui adopted a sports theme to discuss how governments could do industrial policy more flexibly. First, to demonstrate the perils of only charting a single course, he invoked boxing: “the great Mike Tyson once said that ‘everyone has a plan until they get punched in the mouth.’” He then used the metaphor of curling – where “sweepers” can adjust the trajectory of the stone even after it is thrown – to model a better approach to industrial policy when these “punches” do occur. For Lebdioui, this ability to adjust the plan is “precisely the institutional arrangement that has often been missing in industrial policy strategies when things go wrong.”
For instance, if a plan is too rigid, it cannot adapt to a new battery technology becoming much more efficient and switch production over. China is an example of weathering shocks like these particularly well: “You can see that there is a plan B, plan C, and they're not just betting on one technology, but they're actually expecting shocks and counterattacks,” whether these shocks be technology, market shifts due to tariffs, or regulatory changes.
The last sports metaphor Lebdioui employed was “football” (which is to say, soccer). Countries come in different sizes, just like soccer players, and within the global economy there are also different roles to be filled, as in a soccer team. Using game theory, Lebdioui has modelled how governments can react to developments to target available niches and regionally coordinate their industrial policy.
Capabilities lead growth
Rajan continued with this theme of adaptability. An issue for developing countries is that following an established playbook of development may not work because the landscape has changed. While China succeeded by first manufacturing low-tech goods cheaply, their market dominance renders this space no longer feasible for developing countries – not to mention the fact that it dominates high-tech manufacturing now too, and that much manufacturing is now done with machines rather than human workers. “When we talk about manufacturing-led growth, where is it?...There's not a huge amount of scope for that anymore.”
For this reason, India and other nations, if they are to develop economically, have to find a lane which doesn’t directly compete with China. Rajan detailed how India since 1991 has used services instead of traditional manufacturing as a growth path. India is well suited to this for a few reasons: India is mostly urbanized, which creates more demand and decreases the cost of supplying services, from plumbing and carpentry to Rajan’s example of a custom lensware company which takes measurements in the customer’s home.
But most importantly, India’s high “human capital” – broadly, skills and know-how, especially in technology – allows it to trade in high-tech services that are “embedded in manufacturing” like computer chip design. Rajan’s suggestion for countries hoping to emulate India’s service-led growth success is to invest in “enhancing capabilities,” broadly defined, which will allow national economies to gradually begin to provide higher value services for economic growth.
All policy is (either good or bad) industrial policy
Monga concluded the presentations by inviting the audience to think more broadly about what “industrial policy” actually means. Examples that come to mind are subsidies for certain technologies, or investing in production for specific markets. But Monga suggested that, insofar as the definitional goal of industrial policy is merely to “change the structure of the economy,” this encompasses all government policy in one way or another.
“If you work in the central bank, you know that whatever monetary policy you choose will favor some people and have winners and losers, will favor particular industries…(or) firms. When you choose an exchange rate, you know that it will change the structure of the economy.” And Monga claimed this applies also to “every single item in the national budget.”
Regarding his focus on Africa’s economic development, this means that loyalty to any single domain of industrial policy may be misguided. Pushing back somewhat on previous speakers’ emphases on service-led growth over manufacturing, Monga concluded “I would not even use those categories too strongly, because a lot of services are actually linked to industries and manufacturing, including AI. A lot of agriculture, if you want to raise productivity, it has to be agro-industry, it has to be industrialized. So the boundaries between the sectors are shifting, and we need to take that into account.”
