How can Nigeria expand her economy and lift her citizens out of poverty?
Similar question was tackled by a guest on Bloomber Radio on Masters in Business, New York University Stern School of Business economics professor and Nobel laureate Michael Spence.
At the request of the World Bank, Spence managed a commission that examined all of the contemporary research on poverty. Spence started by looking at countries that had grown 7% annually for 25 years.
There were only 13, including China, Brazil, Korea, Japan, Taiwan, and Botswana. All had consistently embraced effectively the same growth model: High levels of investment funded domestically, openness to foreign direct investment and accessing global markets.
The findings were included in "The Growth Report: Strategies for Sustained Growth and Inclusive Development," published in 2008.
Three years later, in "The Next Convergence: The Future of Economic Growth in a Multispeed World," Spence described how the Industrial Revolution led to a handful of countries getting rich.
But since World War II, growth in emerging markets has taken off, leading to a convergence with the developed nations.
As Spence sees it, between 1945 and 2045 another 60% of the world’s population will join the affluent.
Spence won his Nobel for his work on the dynamics of information signaling and market structures. He is also an adviser to General Atlantic, a $35 billion private-equity firm.
Below is part of trascript from ''Masters in business with Barry Ritholtz on Bloomberg Radio with Michael Spence, Nobel Laureate.
SPENCE: And tell the markets get deep information. You don’t see all the differences. So, they tend to be averaged, right? When you average a bunch of diverse entities that are in one of these silos that are distinguishable from other silos by what’s visible or detectable, then you basically get the people at the upper end of some quality spectrum, get treated as the average and that’s not good. And at the lower end, they get treated as the average and that’s great for them. So, your discriminating against the high-quality end of the spectrum and you’re favoring the low quality.
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RITHOLTZ: So, this has to have huge implications for people looking at — let’s say, making investments in either private or public companies.
SPENCE: Absolutely. Yes. So, then — but then it gets complicated, I mean, for sure. So, what — the phenomenon that this gives rise to end markets is the one George Akerlof wrote about a lot of the insurance people have known it for years. It’s called adverse selection.
And what happens in that context is basically what I just described. This quality spectrum that has the unfortunate properties. You can’t tell the difference between the entities. It’s things for sale and differing in quality. Used cars is the example he used.
So, what happens in a market like that is that the price reflects the average quality and the people at the top end of the quality spectrum say, that’s not a very good price for me, right, and they take their product out of the market from the top end.
And then the average quality falls and eventually people figure that out and the price goes down and then the people at the top end of the remaining spectrum say, that’s not a very good price, I’ll take mine out, right?
So, that’s the origin of the term adverse selection. People are selecting in and out of the market and it’s adverse because the top end of the quality spectrum leaves first.
RITHOLTZ: Let’s talk about your book, “The Next Convergence” because it’s such a fascinating application of information flows. There’s a quote in the beginning that I just found absolutely mind-boggling. From 1750 to 1950, the average income of people living in countries that underwent the Industrial Revolution saw their incomes rise 20 to 40 times versus the non-industrialized countries and this was only 15 percent of the world’s population. Is that about right?
SPENCE: That’s about right.
RITHOLTZ: Twenty to 40X. That’s amazing.
SPENCE: Yes. So, the growth rates were breathtaking. Probably on the neighborhood of two percent in real terms. This is on a per capita basis. But if you do it for 200 years, you get a fairly big …
RITHOLTZ: The magic of compounding for sure.
SPENCE: Exactly. So, that was basically it. And then the other 85 percent are living in countries that we now call emerging economies, most of them, some of them haven’t emerged very much.
RITHOLTZ: Right.
SPENCE: But that’s the other group and they were held back by essentially in a global economy that wasn’t really open and the colonial structure as the governance.
RITHOLTZ: So, the rest of the book, you basically say, well, 1750 to 1950 was the Industrial Revolution. The next hundred years, I think you referenced 1945 to 2045, 60 percent of the world’s population will join the affluent.
That’s a big bold number. We’re about halfway through that process, maybe a little more. How accurate was that forecast and how is this actually happening?
SPENCE: So, I think it’s well underway. I mean, I may have been a bit optimistic but China looks like it’s well on the way. It’s a high-middle-income country with a very good chance of being a high-income country admittedly at the low end of the spectrum and then another 10 to 15 years.
India is a bit further behind but they’re humming along. You had them — those two together and you’ve got two point — I think it’s seven billion people, which is a significant fraction of the world.
RITHOLTZ: Sure. That’s half of your 60 percent, right?
SPENCE: Yes. That’s half of my 60 percent. And then you’ve got the rest of Asia that some of it came earlier, some of it came later and so on. So, it’s — I think this convergent process is going to be very hard to stop because people — because the structures are there to enable it and because people have gotten the hang of it that is actually possible.
RITHOLTZ: You discussed in the book that post-World War II, Japan was a very unusual example compared to other so-called developing nations. What made Japan so unique especially over that 1750 to 1950 era?
SPENCE: Yes. So, Japan is a kind of hybrid. So, most of Asia — by the way, in the — right after World War II, Asia was by far the poorest part of the world.
RITHOLTZ: Worse than Africa.
SPENCE: Worse than Africa. Yes. And the economists at that time when asked — development economists, when asked where was the real trouble going to be, they said Asia, many of them said Asia because Asia doesn’t have natural resource wealth on balance and Africa is by far the richest country.
RITHOLTZ: Minerals, oil and everything. Yes.
SPENCE: Minerals, oil, diamonds, you name it. And that turned out not to be a good guess because it turns out that the kind of real capital that enables this growth is people, provided they’re educated and so on, and not just mineral wealth.
Yes. So, basically, I think the situation was Japan was a hybrid because it had gotten to middle-income status and the reason it got there is that in 1868, the Meiji Restoration, it abandoned the policy of isolationism.
RITHOLTZ: So, they embraced trade and …
SPENCE: Embraced trade, embraced openness and they had started to modernize. Then, of course, World War II was in it and they were an imperial power …
RITHOLTZ: All over Asia, right?
SPENCE: All over Asia, you have China, Korea, et cetera. So, the World War II was a huge setback. But basically, they got back on track.
RITHOLTZ: So, over the same period, that postindustrial period, pre-war postindustrial period, how come China fared so much worse than Japan?
SPENCE: So, there’s two kind of crucial ingredients in the postwar growth that we’ve seen. And by the way, this is growth that we’ve never seen before. I mean, we’re talking about extended periods like two and a half decades of five, six, seven percent growth.
RITHOLTZ: Right.
SPENCE: Even higher in China. Just never happened before. So, one of the things I was trying to do in the book is explain how you could do that, right, how could you have a max of two percent before that or two and a half.
RITHOLTZ: Right, in real terms.
SPENCE: How could you have — yes, in real terms. How could you have advanced countries growing at max three in real terms and these people are growing at seven, eight, nine.
RITHOLTZ: Right.
SPENCE: And the answer is they’re catching up, right? All of that technology that you need to drive growth in the long run, the solo insight, was already developed. So, it just had to be brought in and adapted.
RITHOLTZ: In other words, this isn’t one country amongst many that are all emerging at once. When you take an emerging economy and they’re surrounded by developed economies, that’s an accelerant.
SPENCE: Provided they’re open. Yes. And provided they’re investing at high enough rates.
RITHOLTZ: Well, clearly, China is making massive investments. Do you consider them open enough to continue taking full advantage of what the rest of the globe can do for their growth?
SPENCE: At the moment, yes, and certainly historically once they decided to open in 1978 under Deng Xiaoping. Now, is it logically possible that they can close themselves off enough to put a major dent in their growth? Yes. It’s unlikely I think but it’s possible.
You asked about the history of China. So, China had a revolution in 1949, the Communists took over. The Communists on the positive side probably had the intention of making everybody better off, right, that you can find a lot of governing structures in the developing world where the governing elite, whoever they are and however they got there, are doing something other than trying to make people better off, right?
RITHOLTZ: Right. Lots of corruption …
SPENCE: Lots of corruption.
RITHOLTZ: … especially where there’s mineral resources royal.
SPENCE: Yes. All that kind of thing. So, if they’re doing that, nothing good is going to happen. The Chinese weren’t (ph) doing that and they did put a hell of a lot of resources given the low levels of income and the economy and the education. What they didn’t do is run a market economy.
So, for the first 29 years, they basically got nowhere but they built assets that were useful and when they changed the development model, the growth model to opening up and using markets initially selectively, then it just took off like a rocket.
RITHOLTZ: That was the post-Nixon era.
SPENCE: That was the post-Nixon era. So, it was — they date — the Chinese date, the reform process from 1978.
RITHOLTZ: Let’s talk a little bit about job market signaling. We discussed some of that before. You’ve done a lot of work on this. Tell us about the origins of job market signaling and how it’s evolved over time.
SPENCE: So, the origin of it was that discussion that we had earlier that had to do with informational gaps. So, the adverse selection problem is basically what happens in markets if you can’t close the gaps.
And then we talked about brands as a way of closing, what do markets do? They’re going to try to close the gaps. That’s one of the things that …
RITHOLTZ: Between buyers and sellers.
SPENCE: Between buyers and sellers is the best way to think about it. That second thing is signaling, the things that the sellers can do to convey actually accurate information in the market.
The third thing that we do collectively is regulate, right? So, financial markets have enormously large gaps in principle. So, it isn’t a great surprise that every set of financial markets in the world has disclosure requirements and they’re pretty stringent and the penalties are pretty high for violating it and when those disclosure requirements are not there or not enforced, then you get bad misbehavior in the markets, which you see in the developing world all the time.
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RITHOLTZ: So, there’s — that’s interesting you bring that up because it makes me think of the way we approach regulation in some areas is to prevent a behavior and say, this behavior …
SPENCE: Right.
RITHOLTZ: … we’re not going to allow. There are other aspects where we say, well, we’re going to let you do what you want but you have to make these disclosures so buyers know.
Most people don’t read the fine print. They’re not reading the credit card disclosures. They’re not reading their brokerage account disclosures. Given that, how does that information make its way into the marketplace? Is the signal still there if 90 percent of us don’t read the disclosures? Maybe it’s 98 percent of us don’t read it.
SPENCE: Yes. No. The answer is no. It’s not. And then you need — it’s important to close that informational gap then you — and you can’t close it then you have to do something else.
So, we do all kinds of things. So, we assume that there are classes of investors who are not capable of understanding the risk characteristics of certain kind of asset classes and they’re simply precluded from it and …
RITHOLTZ: Meaning, if you’re not an accredited investor …
SPENCE: You’re not accredited …
RITHOLTZ: … you can’t go into a hedge fund or a venture capital.
SPENCE: Right. Don’t have assets of a certain size.
RITHOLTZ: Right.
SPENCE: We assume you can’t withstand the kind of risk characteristics of that asset class. So, regulation in that sense has multiple avenues and they done properly, they tend to be pragmatic response to real human behavior as opposed to some kind of theory about it. Yes.
RITHOLTZ: Quite interesting. What about the impact of technology on both signaling in the job market and the impact of regulation?
SPENCE: Yes. So, this — when the Internet was sort of in its early stages, meaning a kind of public property, let’s call it the mid-’90s, people had all kinds of theories about what its impact was going to be and I got asked a lot of questions and the gist of which were, is this going to close informational gaps?
And my answer then is the same now but I underestimated something. So, my answer was it’s not going to eliminate private information, meaning information that I have because it’s me that you’re only going to get if I somehow transmitted to you.
But what the Internet does is it gives you so many — access it at very low cost to so much information that’s correlated with this kind of thing that I actually think it does close informational gaps. And the best example of that I think is what we see now in fintech.
So, in like Ant Financial and for example in Alibaba, you have a massive amount of data because they — basically, they’re half the mobile payment system in China. They can use that data to issue credit to little tiny businesses. There’s a partially owned subsidiary called MYbank that just won an award for this.
RITHOLTZ: Right.
SPENCE: Using this data to make credit assessments and price the credit appropriately and these people are otherwise blocked away, I mean, they can only borrow from family and friends if bank can either assess the risk and/or it’s way too costly to assess.
RITHOLTZ: So, this day on this information effectively creates a whole new market.
SPENCE: It creates a whole new market. I mean, we’re talking — I mean, this — MYbank has 17 million small business customers. Average number of employees is five. No collateral. Nothing.
RITHOLTZ: They just look at their credit history, their transaction history …
SPENCE: Their transaction history, their payments history, and their online activity.
RITHOLTZ: So, let’s talk a little bit about growth and trade and I want to start with the project you did for the World Bank. Tell us a little bit about that. It was quite fascinating.
SPENCE: Yes. So, I’ve kind of stumbled into this because I had not been a specialist in development — growth related to developing economies. So, around about 2000 — in the early 2000, so, I got a call from some folks at the World Bank who become good friends and they said, would you come and give a lecture on investment and growth at one of the spring conferences, the Poverty Reduction And Economic Management, and I said, why me?
And they said, well, you’re sort of kind of a microeconomic focus and pay attention to these things. And so, I thought to myself, this is signaling your screening and I thought, okay. So, here you have …
RITHOLTZ: Meaning that you’re — they saw the Nobel and said, let’s have him talk about this. Is that what you mean by signaling?
SPENCE: No. No. No. It was the decision I made. So, I made the following decision, Barry. I said, I’m going to do this and there’s one of two outcomes, either it will be a disaster in which I’ll learn something that I shouldn’t be mucking around with the 10,000 people who are the experts in development in the world …
RITHOLTZ: Right.
SPENCE: … or I’ll go, okay, and then I’ll learn something else, right? So, it was deliberately a screening device and it seemed to go okay and from that came a Commission on Growth and Development and the idea behind that commission wasn’t to do original research. It was approximately 15 years since the Washington Consensus had been enunciated.
RITHOLTZ: Which was?
SPENCE: It came out of Washington — I’ve temporarily forgotten that. John Williamson wrote it. It’s been much maligned and unfairly to be honest with you. The Washington Consensus is a perfectly sensible assessment of what it takes to kind of grow and develop in a developing growth.
RITHOLTZ: What was that assessment?
SPENCE: Well, there’s a list of things. There’s about 13 things that are crucial components. Some people interpret it as a kind of turnkey system. You can’t do that. Every country has idiosyncratic characteristics.
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RITHOLTZ: Sure.
SPENCE: But the thing that gave the Washington Consensus a bad name is it was taken especially in Latin America and stripped down to liberalize, privatize, et cetera, and that gave rise to kind of excesses and not terribly good results.
So, we decided this — it was a good time. We had a lot of experience that have been accumulated in countries like China and India and others. Brazil had come out of its 25-year funk and looked like it was starting to grow, et cetera.
It was a good time to try to figure out what research, what experience and so on had taught us about — that was useful and could we kind of summarize it and give it back. So, that was the exercise. We wrote a 75-page report based on kind of two years of listening to people and thinking about it and it was meant to be an — none of these things are ever kind of definitive, right?
RITHOLTZ: Right.
SPENCE: It was an update, right? Now, we know this that we didn’t know before. In the course of doing that work, we went and look for countries that are grown for — at seven percent or more for 25 years or more, not every year but on average, and there’s 13 countries.
RITHOLTZ: Really? Because that’s a giant number, seven percent.
SPENCE: Seven — but you double every decade at seven percent. And there’s 13 countries that have done that at various points. China is one. Brazil in the early postwar period was one. Korea, they won’t be surprise you.
RITHOLTZ: Right.
SPENCE: The Taiwanese economy. Japan was in that group. There were some surprises. Botswana …
RITHOLTZ: Really?
SPENCE: … is a member of that group. Yes. So, different sizes, different government structures. It was pretty interesting.
RITHOLTZ: Were there any consistencies across all 13 of those countries.
SPENCE: Yes. They’re basically all the same growth model which has come to be called the Asian growth model. So, it’s high levels of investment funded domestically openness, including especially foreign direct investment which is the one of the principal channels for inbound technology transfer and leveraging the big global marketplace.
If you try to do this on a standalone basis …
RITHOLTZ: It doesn’t work.
SPENCE: … it just doesn’t work. I mean, look at the demand in a country with a per capita income of $500. It’s kind of food, shelter, energy and not much else.
RITHOLTZ: Right.
SPENCE: So, everything we know, specialization in the Adam Smith sense, taking advantage of comparative advantage, none of that works on a standalone basis. But even a country with the size of China, in the early stages …
RITHOLTZ: Right.
SPENCE: … it’s a small relatively global economy.
RITHOLTZ: Small economy meaning.
SPENCE: Yes. Small economy. Not small number of people but small economy. So, they can grow at very high rates without really becoming a major presence in the market and starting to turn the prices against themselves.
Continue reading the conversation here
Similar question was tackled by a guest on Bloomber Radio on Masters in Business, New York University Stern School of Business economics professor and Nobel laureate Michael Spence.
At the request of the World Bank, Spence managed a commission that examined all of the contemporary research on poverty. Spence started by looking at countries that had grown 7% annually for 25 years.
There were only 13, including China, Brazil, Korea, Japan, Taiwan, and Botswana. All had consistently embraced effectively the same growth model: High levels of investment funded domestically, openness to foreign direct investment and accessing global markets.
The findings were included in "The Growth Report: Strategies for Sustained Growth and Inclusive Development," published in 2008.
Three years later, in "The Next Convergence: The Future of Economic Growth in a Multispeed World," Spence described how the Industrial Revolution led to a handful of countries getting rich.
But since World War II, growth in emerging markets has taken off, leading to a convergence with the developed nations.
As Spence sees it, between 1945 and 2045 another 60% of the world’s population will join the affluent.
Spence won his Nobel for his work on the dynamics of information signaling and market structures. He is also an adviser to General Atlantic, a $35 billion private-equity firm.
Below is part of trascript from ''Masters in business with Barry Ritholtz on Bloomberg Radio with Michael Spence, Nobel Laureate.
SPENCE: And tell the markets get deep information. You don’t see all the differences. So, they tend to be averaged, right? When you average a bunch of diverse entities that are in one of these silos that are distinguishable from other silos by what’s visible or detectable, then you basically get the people at the upper end of some quality spectrum, get treated as the average and that’s not good. And at the lower end, they get treated as the average and that’s great for them. So, your discriminating against the high-quality end of the spectrum and you’re favoring the low quality.
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RITHOLTZ: So, this has to have huge implications for people looking at — let’s say, making investments in either private or public companies.
SPENCE: Absolutely. Yes. So, then — but then it gets complicated, I mean, for sure. So, what — the phenomenon that this gives rise to end markets is the one George Akerlof wrote about a lot of the insurance people have known it for years. It’s called adverse selection.
And what happens in that context is basically what I just described. This quality spectrum that has the unfortunate properties. You can’t tell the difference between the entities. It’s things for sale and differing in quality. Used cars is the example he used.
So, what happens in a market like that is that the price reflects the average quality and the people at the top end of the quality spectrum say, that’s not a very good price for me, right, and they take their product out of the market from the top end.
And then the average quality falls and eventually people figure that out and the price goes down and then the people at the top end of the remaining spectrum say, that’s not a very good price, I’ll take mine out, right?
So, that’s the origin of the term adverse selection. People are selecting in and out of the market and it’s adverse because the top end of the quality spectrum leaves first.
RITHOLTZ: Let’s talk about your book, “The Next Convergence” because it’s such a fascinating application of information flows. There’s a quote in the beginning that I just found absolutely mind-boggling. From 1750 to 1950, the average income of people living in countries that underwent the Industrial Revolution saw their incomes rise 20 to 40 times versus the non-industrialized countries and this was only 15 percent of the world’s population. Is that about right?
SPENCE: That’s about right.
RITHOLTZ: Twenty to 40X. That’s amazing.
SPENCE: Yes. So, the growth rates were breathtaking. Probably on the neighborhood of two percent in real terms. This is on a per capita basis. But if you do it for 200 years, you get a fairly big …
RITHOLTZ: The magic of compounding for sure.
SPENCE: Exactly. So, that was basically it. And then the other 85 percent are living in countries that we now call emerging economies, most of them, some of them haven’t emerged very much.
RITHOLTZ: Right.
SPENCE: But that’s the other group and they were held back by essentially in a global economy that wasn’t really open and the colonial structure as the governance.
RITHOLTZ: So, the rest of the book, you basically say, well, 1750 to 1950 was the Industrial Revolution. The next hundred years, I think you referenced 1945 to 2045, 60 percent of the world’s population will join the affluent.
That’s a big bold number. We’re about halfway through that process, maybe a little more. How accurate was that forecast and how is this actually happening?
SPENCE: So, I think it’s well underway. I mean, I may have been a bit optimistic but China looks like it’s well on the way. It’s a high-middle-income country with a very good chance of being a high-income country admittedly at the low end of the spectrum and then another 10 to 15 years.
India is a bit further behind but they’re humming along. You had them — those two together and you’ve got two point — I think it’s seven billion people, which is a significant fraction of the world.
RITHOLTZ: Sure. That’s half of your 60 percent, right?
SPENCE: Yes. That’s half of my 60 percent. And then you’ve got the rest of Asia that some of it came earlier, some of it came later and so on. So, it’s — I think this convergent process is going to be very hard to stop because people — because the structures are there to enable it and because people have gotten the hang of it that is actually possible.
RITHOLTZ: You discussed in the book that post-World War II, Japan was a very unusual example compared to other so-called developing nations. What made Japan so unique especially over that 1750 to 1950 era?
SPENCE: Yes. So, Japan is a kind of hybrid. So, most of Asia — by the way, in the — right after World War II, Asia was by far the poorest part of the world.
RITHOLTZ: Worse than Africa.
SPENCE: Worse than Africa. Yes. And the economists at that time when asked — development economists, when asked where was the real trouble going to be, they said Asia, many of them said Asia because Asia doesn’t have natural resource wealth on balance and Africa is by far the richest country.
RITHOLTZ: Minerals, oil and everything. Yes.
SPENCE: Minerals, oil, diamonds, you name it. And that turned out not to be a good guess because it turns out that the kind of real capital that enables this growth is people, provided they’re educated and so on, and not just mineral wealth.
Yes. So, basically, I think the situation was Japan was a hybrid because it had gotten to middle-income status and the reason it got there is that in 1868, the Meiji Restoration, it abandoned the policy of isolationism.
RITHOLTZ: So, they embraced trade and …
SPENCE: Embraced trade, embraced openness and they had started to modernize. Then, of course, World War II was in it and they were an imperial power …
RITHOLTZ: All over Asia, right?
SPENCE: All over Asia, you have China, Korea, et cetera. So, the World War II was a huge setback. But basically, they got back on track.
RITHOLTZ: So, over the same period, that postindustrial period, pre-war postindustrial period, how come China fared so much worse than Japan?
SPENCE: So, there’s two kind of crucial ingredients in the postwar growth that we’ve seen. And by the way, this is growth that we’ve never seen before. I mean, we’re talking about extended periods like two and a half decades of five, six, seven percent growth.
RITHOLTZ: Right.
SPENCE: Even higher in China. Just never happened before. So, one of the things I was trying to do in the book is explain how you could do that, right, how could you have a max of two percent before that or two and a half.
RITHOLTZ: Right, in real terms.
SPENCE: How could you have — yes, in real terms. How could you have advanced countries growing at max three in real terms and these people are growing at seven, eight, nine.
RITHOLTZ: Right.
SPENCE: And the answer is they’re catching up, right? All of that technology that you need to drive growth in the long run, the solo insight, was already developed. So, it just had to be brought in and adapted.
RITHOLTZ: In other words, this isn’t one country amongst many that are all emerging at once. When you take an emerging economy and they’re surrounded by developed economies, that’s an accelerant.
SPENCE: Provided they’re open. Yes. And provided they’re investing at high enough rates.
RITHOLTZ: Well, clearly, China is making massive investments. Do you consider them open enough to continue taking full advantage of what the rest of the globe can do for their growth?
SPENCE: At the moment, yes, and certainly historically once they decided to open in 1978 under Deng Xiaoping. Now, is it logically possible that they can close themselves off enough to put a major dent in their growth? Yes. It’s unlikely I think but it’s possible.
You asked about the history of China. So, China had a revolution in 1949, the Communists took over. The Communists on the positive side probably had the intention of making everybody better off, right, that you can find a lot of governing structures in the developing world where the governing elite, whoever they are and however they got there, are doing something other than trying to make people better off, right?
RITHOLTZ: Right. Lots of corruption …
SPENCE: Lots of corruption.
RITHOLTZ: … especially where there’s mineral resources royal.
SPENCE: Yes. All that kind of thing. So, if they’re doing that, nothing good is going to happen. The Chinese weren’t (ph) doing that and they did put a hell of a lot of resources given the low levels of income and the economy and the education. What they didn’t do is run a market economy.
So, for the first 29 years, they basically got nowhere but they built assets that were useful and when they changed the development model, the growth model to opening up and using markets initially selectively, then it just took off like a rocket.
RITHOLTZ: That was the post-Nixon era.
SPENCE: That was the post-Nixon era. So, it was — they date — the Chinese date, the reform process from 1978.
RITHOLTZ: Let’s talk a little bit about job market signaling. We discussed some of that before. You’ve done a lot of work on this. Tell us about the origins of job market signaling and how it’s evolved over time.
SPENCE: So, the origin of it was that discussion that we had earlier that had to do with informational gaps. So, the adverse selection problem is basically what happens in markets if you can’t close the gaps.
And then we talked about brands as a way of closing, what do markets do? They’re going to try to close the gaps. That’s one of the things that …
RITHOLTZ: Between buyers and sellers.
SPENCE: Between buyers and sellers is the best way to think about it. That second thing is signaling, the things that the sellers can do to convey actually accurate information in the market.
The third thing that we do collectively is regulate, right? So, financial markets have enormously large gaps in principle. So, it isn’t a great surprise that every set of financial markets in the world has disclosure requirements and they’re pretty stringent and the penalties are pretty high for violating it and when those disclosure requirements are not there or not enforced, then you get bad misbehavior in the markets, which you see in the developing world all the time.
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RITHOLTZ: So, there’s — that’s interesting you bring that up because it makes me think of the way we approach regulation in some areas is to prevent a behavior and say, this behavior …
SPENCE: Right.
RITHOLTZ: … we’re not going to allow. There are other aspects where we say, well, we’re going to let you do what you want but you have to make these disclosures so buyers know.
Most people don’t read the fine print. They’re not reading the credit card disclosures. They’re not reading their brokerage account disclosures. Given that, how does that information make its way into the marketplace? Is the signal still there if 90 percent of us don’t read the disclosures? Maybe it’s 98 percent of us don’t read it.
SPENCE: Yes. No. The answer is no. It’s not. And then you need — it’s important to close that informational gap then you — and you can’t close it then you have to do something else.
So, we do all kinds of things. So, we assume that there are classes of investors who are not capable of understanding the risk characteristics of certain kind of asset classes and they’re simply precluded from it and …
RITHOLTZ: Meaning, if you’re not an accredited investor …
SPENCE: You’re not accredited …
RITHOLTZ: … you can’t go into a hedge fund or a venture capital.
SPENCE: Right. Don’t have assets of a certain size.
RITHOLTZ: Right.
SPENCE: We assume you can’t withstand the kind of risk characteristics of that asset class. So, regulation in that sense has multiple avenues and they done properly, they tend to be pragmatic response to real human behavior as opposed to some kind of theory about it. Yes.
RITHOLTZ: Quite interesting. What about the impact of technology on both signaling in the job market and the impact of regulation?
SPENCE: Yes. So, this — when the Internet was sort of in its early stages, meaning a kind of public property, let’s call it the mid-’90s, people had all kinds of theories about what its impact was going to be and I got asked a lot of questions and the gist of which were, is this going to close informational gaps?
And my answer then is the same now but I underestimated something. So, my answer was it’s not going to eliminate private information, meaning information that I have because it’s me that you’re only going to get if I somehow transmitted to you.
But what the Internet does is it gives you so many — access it at very low cost to so much information that’s correlated with this kind of thing that I actually think it does close informational gaps. And the best example of that I think is what we see now in fintech.
So, in like Ant Financial and for example in Alibaba, you have a massive amount of data because they — basically, they’re half the mobile payment system in China. They can use that data to issue credit to little tiny businesses. There’s a partially owned subsidiary called MYbank that just won an award for this.
RITHOLTZ: Right.
SPENCE: Using this data to make credit assessments and price the credit appropriately and these people are otherwise blocked away, I mean, they can only borrow from family and friends if bank can either assess the risk and/or it’s way too costly to assess.
RITHOLTZ: So, this day on this information effectively creates a whole new market.
SPENCE: It creates a whole new market. I mean, we’re talking — I mean, this — MYbank has 17 million small business customers. Average number of employees is five. No collateral. Nothing.
RITHOLTZ: They just look at their credit history, their transaction history …
SPENCE: Their transaction history, their payments history, and their online activity.
RITHOLTZ: So, let’s talk a little bit about growth and trade and I want to start with the project you did for the World Bank. Tell us a little bit about that. It was quite fascinating.
SPENCE: Yes. So, I’ve kind of stumbled into this because I had not been a specialist in development — growth related to developing economies. So, around about 2000 — in the early 2000, so, I got a call from some folks at the World Bank who become good friends and they said, would you come and give a lecture on investment and growth at one of the spring conferences, the Poverty Reduction And Economic Management, and I said, why me?
And they said, well, you’re sort of kind of a microeconomic focus and pay attention to these things. And so, I thought to myself, this is signaling your screening and I thought, okay. So, here you have …
RITHOLTZ: Meaning that you’re — they saw the Nobel and said, let’s have him talk about this. Is that what you mean by signaling?
SPENCE: No. No. No. It was the decision I made. So, I made the following decision, Barry. I said, I’m going to do this and there’s one of two outcomes, either it will be a disaster in which I’ll learn something that I shouldn’t be mucking around with the 10,000 people who are the experts in development in the world …
RITHOLTZ: Right.
SPENCE: … or I’ll go, okay, and then I’ll learn something else, right? So, it was deliberately a screening device and it seemed to go okay and from that came a Commission on Growth and Development and the idea behind that commission wasn’t to do original research. It was approximately 15 years since the Washington Consensus had been enunciated.
RITHOLTZ: Which was?
SPENCE: It came out of Washington — I’ve temporarily forgotten that. John Williamson wrote it. It’s been much maligned and unfairly to be honest with you. The Washington Consensus is a perfectly sensible assessment of what it takes to kind of grow and develop in a developing growth.
RITHOLTZ: What was that assessment?
SPENCE: Well, there’s a list of things. There’s about 13 things that are crucial components. Some people interpret it as a kind of turnkey system. You can’t do that. Every country has idiosyncratic characteristics.
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RITHOLTZ: Sure.
SPENCE: But the thing that gave the Washington Consensus a bad name is it was taken especially in Latin America and stripped down to liberalize, privatize, et cetera, and that gave rise to kind of excesses and not terribly good results.
So, we decided this — it was a good time. We had a lot of experience that have been accumulated in countries like China and India and others. Brazil had come out of its 25-year funk and looked like it was starting to grow, et cetera.
It was a good time to try to figure out what research, what experience and so on had taught us about — that was useful and could we kind of summarize it and give it back. So, that was the exercise. We wrote a 75-page report based on kind of two years of listening to people and thinking about it and it was meant to be an — none of these things are ever kind of definitive, right?
RITHOLTZ: Right.
SPENCE: It was an update, right? Now, we know this that we didn’t know before. In the course of doing that work, we went and look for countries that are grown for — at seven percent or more for 25 years or more, not every year but on average, and there’s 13 countries.
RITHOLTZ: Really? Because that’s a giant number, seven percent.
SPENCE: Seven — but you double every decade at seven percent. And there’s 13 countries that have done that at various points. China is one. Brazil in the early postwar period was one. Korea, they won’t be surprise you.
RITHOLTZ: Right.
SPENCE: The Taiwanese economy. Japan was in that group. There were some surprises. Botswana …
RITHOLTZ: Really?
SPENCE: … is a member of that group. Yes. So, different sizes, different government structures. It was pretty interesting.
RITHOLTZ: Were there any consistencies across all 13 of those countries.
SPENCE: Yes. They’re basically all the same growth model which has come to be called the Asian growth model. So, it’s high levels of investment funded domestically openness, including especially foreign direct investment which is the one of the principal channels for inbound technology transfer and leveraging the big global marketplace.
If you try to do this on a standalone basis …
RITHOLTZ: It doesn’t work.
SPENCE: … it just doesn’t work. I mean, look at the demand in a country with a per capita income of $500. It’s kind of food, shelter, energy and not much else.
RITHOLTZ: Right.
SPENCE: So, everything we know, specialization in the Adam Smith sense, taking advantage of comparative advantage, none of that works on a standalone basis. But even a country with the size of China, in the early stages …
RITHOLTZ: Right.
SPENCE: … it’s a small relatively global economy.
RITHOLTZ: Small economy meaning.
SPENCE: Yes. Small economy. Not small number of people but small economy. So, they can grow at very high rates without really becoming a major presence in the market and starting to turn the prices against themselves.
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Nigeria Economic Growth Can Be Use to Fight Poverty
Reviewed by E.A Olatoye
on
October 30, 2019
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Reviewed by E.A Olatoye
on
October 30, 2019
Rating:
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